<PAGE>
<PAGE>
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED AUGUST 10, 1998)
$800,000,000
WMC MORTGAGE LOAN TRUST 1998-B
WMC SECURED ASSETS CORP.
COMPANY
WMC MORTGAGE CORP.
MASTER SERVICER AND SELLER
WMC MORTGAGE PASS-THROUGH CERTIFICATES, SERIES 1998-B
The Series 1998-B WMC Mortgage Pass-Through Certificates will consist of
the following ten classes: (i) Class A-1 Certificates (the "Class A-1
Certificates"), Class A-2 Certificates (the "Class A-2 Certificates") and Class
A-IO Certificates (the "Class A-IO Certificates"; together with the Class A-1
Certificates and Class A-2 Certificates, the "Class A Certificates"); (ii) Class
M-1 Certificates (the "Class M-1 Certificates") and Class M-2 Certificates (the
"Class M-2 Certificates"; together with the Class M-1 Certificates, the "Class M
Certificates"); (iii) Class B Certificates (the "Class B Certificates"; together
with the Class M Certificates, the "Subordinate Certificates"); (iv) Class C
Certificates (the "Class C Certificates") and (v) Class R-I Certificates, Class
R-II Certificates and Class R-III Certificates (together, the "Class R
Certificates" or the "Residual Certificates"). The Class A-IO Certificates will
be divided into three components (each, a "Component"): Class A-IO Component
(Continued on following page)
------------------------------------------------------
PROCEEDS OF THE ASSETS IN THE TRUST FUND ARE THE SOLE SOURCE OF PAYMENTS
ON THE OFFERED CERTIFICATES. THE OFFERED CERTIFICATES DO NOT REPRESENT AN
INTEREST IN OR OBLIGATION OF THE COMPANY, THE MASTER SERVICER, THE TRUSTEE OR
ANY OF THEIR AFFILIATES. NEITHER THE OFFERED CERTIFICATES NOR THE UNDERLYING
MORTGAGE LOANS ARE INSURED OR GUARANTEED BY ANY GOVERNMENTAL AGENCY OR
INSTRUMENTALITY OR BY THE COMPANY, THE MASTER SERVICER, THE TRUSTEE OR ANY OF
THEIR RESPECTIVE AFFILIATES.
------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------------------------------------
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR
ENDORSED THE MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS
UNLAWFUL.
------------------------------------------------------
PROSPECTIVE INVESTORS SHOULD REVIEW THE INFORMATION SET FORTH UNDER
"RISK FACTORS" COMMENCING ON PAGE S-21 HEREIN AND INFORMATION SET FORTH UNDER
"RISK FACTORS" IN THE PROSPECTUS COMMENCING ON PAGE 18 FOR A DISCUSSION OF
MATERIAL RISKS AFFECTING INVESTMENT IN THE OFFERED CERTIFICATES BEFORE
PURCHASING ANY OF THE OFFERED CERTIFICATES.
------------------------------------------------------
THE RIGHTS OF THE HOLDERS OF THE CLASS M-1, CLASS M-2 AND CLASS B
CERTIFICATES WITH RESPECT TO THE MORTGAGE LOANS WILL BE SUBORDINATE TO THE
RIGHTS OF THE HOLDERS OF THE CLASS A CERTIFICATES.
<TABLE>
<CAPTION>
==================================================================================================================================
INITIAL PRINCIPAL PASS-THROUGH PRICE TO UNDERWRITING PROCEEDS TO
BALANCE RATE PUBLIC DISCOUNT DEPOSITOR(3)
==================================================================================================================================
<S> <C> <C> <C> <C> <C>
Per Class A-IO Certificates.............. $ 80,000,000(1) (2) 9.93735% 0.0875% $7,879,880.00
- ----------------------------------------------------------------------------------------------------------------------------------
Per Class A-1 Certificates............... $400,000,000 Variable 100% 0.1500% $399,400,000.00
- ----------------------------------------------------------------------------------------------------------------------------------
Per Class A-2 Certificates............... $232,000,000 Variable 100% 0.2500% $231,420,000.00
- ----------------------------------------------------------------------------------------------------------------------------------
Per Class M-1 Certificates............... $64,000,000 Variable 100% 0.5000% $63,680,000.00
- ----------------------------------------------------------------------------------------------------------------------------------
Per Class M-2 Certificates............... $56,000,000 Variable 100% 0.6500% $55,636,000.00
- ----------------------------------------------------------------------------------------------------------------------------------
Per Class B Certificates................. $48,000,000 Variable 99.56428% 0.7000% $47,454,854.40
- ----------------------------------------------------------------------------------------------------------------------------------
Total.................................... $800,000,000 N/A $807,740,734.40 $2,270,000 $805,470,734.40
==================================================================================================================================
</TABLE>
(1) Notional Amount.
(2) The Class A-IO Certificates will consist of three Components each of which
will accrue interest at the related Pass-Through Rate on the Notional
Amount. The Components are not separately transferable.
(3) Before deducting expenses payable to the Company estimated to be $600,000.
The Offered Certificates are offered by the Underwriters subject to prior
sale, when, as and if delivered to and accepted by the Underwriters and subject
to certain other conditions. The Underwriters reserve the right to withdraw,
cancel or modify such offer and to reject any order in whole or in part. It is
expected that delivery of the Offered Certificates will be made only in
book-entry form through DTC, Cedel and Euroclear (each as defined herein) as
discussed herein, on or about September 4, 1998, against payment therefor in
immediately available funds.
BEAR, STEARNS & CO. INC. CREDIT SUISSE FIRST BOSTON
NATIONSBANC MONTGOMERY
SECURITIES LLC LEHMAN BROTHERS FIRST UNION CAPITAL MARKETS
AUGUST 28, 1998
<PAGE>
<PAGE>
(Continued from previous page)
A, Class A-IO Component B and Class A-IO Component C. Only the Class A
Certificates and the Subordinate Certificates (together, the "Offered
Certificates") are offered hereby. See "Index of Principal Definitions" in the
Prospectus for the meanings of capitalized terms not otherwise defined herein.
It is a condition of the issuance of the Class A Certificates (other than
the Class A-IO Certificates) that they be rated "AAA" by Standard & Poor's, a
division of The McGraw-Hill Companies, Inc. ("STANDARD & POOR'S") and Aaa by
Moody's Investors Service, Inc. ("MOODY'S). It is a condition to the issuance of
the Class A-IO Certificates that they be rated "AAAr" by Standard & Poor's and
Aaa by Moody's. It is a condition to the issuance of the Class M-1, Class M-2
and Class B Certificates that they be rated not lower than "AA", "A" and "BBB"
respectively, by Standard & Poor's, and Aa2, A2 and Baa3, respectively by
Moody's.
The Certificates in the aggregate will evidence the entire beneficial
ownership interest in a pool (the "MORTGAGE POOL") consisting primarily of a
pool of adjustable rate (having initial fixed rate periods of six months, two
years, three years or five years) closed end, sub-prime mortgage loans secured
by first lien mortgages on residential one- to four-family properties (the
"MORTGAGE LOANS") to be deposited by WMC Secured Assets Corp. (the "COMPANY")
into the WMC Mortgage Loan Trust 1998-B (the "TRUST FUND") to be formed pursuant
to a pooling and servicing agreement among the Company, the Master Servicer and
the Trustee (the "POOLING AGREEMENT"). The characteristics of the Initial
Mortgage Loans are described herein under "Description of The Mortgage Pool." On
or subsequent to the Closing Date, the Company will sell, and the Trust Fund
will be obligated to purchase from the Company, to the extent available,
approximately $200,000,000 of Additional Mortgage Loans and/or Subsequent
Mortgage Loans (each as defined herein).
The Offered Certificates (the "DTC REGISTERED CERTIFICATES") initially will
be represented by certificates registered in the name of Cede & Co., as nominee
of DTC, as further described herein. Investors in the DTC Registered
Certificates may elect to hold their Certificates through DTC, in the United
States, or Cedel or Euroclear, in Europe. Definitive certificates will be
available for the DTC Registered Certificates only under the limited
circumstances described herein. See "Description of Certificates-Book-Entry
Registration of the Offered Certificates" herein.
As described herein, two or more separate REMIC elections will be made with
respect to certain assets of the Trust Fund for federal income tax purposes.
Each class of Offered Certificates and the Class C Certificates will represent
ownership of "regular interests" in the related REMIC and each class of Residual
Certificates will constitute the sole class of "residual interests" in the
related REMIC. See "Certain Federal Income Tax Consequences" herein and "Federal
Income Tax Consequences" in the Prospectus.
Distributions on the Offered Certificates will be made on the 20th day of
each month or, if such day is not a business day, then on the next business day,
commencing in October 1998 (each, a "DISTRIBUTION DATE"). As described herein,
interest distributions on the Offered Certificates (other than the Class A-IO
Certificates) will be based on the Certificate Principal Balance thereof and the
applicable Pass-Through Rate thereof, which will adjust monthly based on
one-month LIBOR or as otherwise described herein for all classes of Offered
Certificates (other than the Class A-IO Certificates). Distributions in respect
of principal on the Offered Certificates (other than the Class A-IO
Certificates) will be made on each Distribution Date as described herein under
"Description of Certificates-Principal Distributions." The Components of the
Class A-IO Certificates have no Certificate Principal Balance and will accrue
interest at the related Pass-Through Rate on the Notional Amount. The rights of
the holders of the Subordinate Certificates, the Class C Certificates and the
Class R Certificates to receive distributions with respect to the Mortgage Loans
will be subordinate to the rights of the holders of the Class A Certificates to
the extent described herein and in the Prospectus.
There is currently no secondary market for the Offered Certificates. Bear,
Stearns & Co. Inc., Credit Suisse First Boston Corporation, NationsBanc
Montgomery Securities LLC, Lehman Brothers Inc., and First Union Capital
Markets, a division of Wheat First Securities, Inc. (the "UNDERWRITERS") intend
to make a secondary market in the Offered Certificates, but are not obligated to
do so. There can be no assurance that a secondary market for the Offered
Certificates
S-2
<PAGE>
<PAGE>
will develop or, if it does develop, that it will continue. The Offered
Certificates will not be listed on any securities exchange.
THE YIELD TO MATURITY ON THE OFFERED CERTIFICATES WILL DEPEND ON THE RATE
AND TIMING OF PRINCIPAL PAYMENTS (INCLUDING PREPAYMENTS, DEFAULTS AND
LIQUIDATIONS) ON THE MORTGAGE LOANS. IN GENERAL, DEFAULTS ON MORTGAGE LOANS ARE
EXPECTED TO OCCUR WITH GREATER FREQUENCY IN THEIR EARLY YEARS. SEE "RISK
FACTORS" HEREIN AND IN THE PROSPECTUS. THE MORTGAGE LOANS MAY BE PREPAID IN FULL
OR IN PART AT ANY TIME; HOWEVER A PREPAYMENT CHARGE GENERALLY WILL BE REQUIRED
WHERE PERMISSIBLE. INVESTORS IN THE CLASS A-IO CERTIFICATES SHOULD FULLY
CONSIDER THAT AN EXTREMELY RAPID RATE OF PRINCIPAL PREPAYMENTS ON THE MORTGAGE
LOANS COULD RESULT IN THE FAILURE OF SUCH INVESTORS TO RECOVER THEIR INITIAL
INVESTMENTS. THE YIELD TO INVESTORS IN THE OFFERED CERTIFICATES MAY ALSO BE
ADVERSELY AFFECTED BY THE UNCERTAINTY OF THE AVAILABILITY OF THE NET MONTHLY
EXCESS CASH FLOW (AS DEFINED HEREIN) TO COVER ANY UNPAID INTEREST SHORTFALLS AND
AVAILABLE FUNDS CAP CARRYOVER AMOUNTS (EACH AS DEFINED HEREIN), AND SUCH
SHORTFALLS MAY REMAIN UNPAID ON THE FINAL DISTRIBUTION DATE. IN ADDITION, THE
YIELD TO MATURITY OF EACH CLASS OF SUBORDINATE CERTIFICATES WILL BE EXTREMELY
SENSITIVE TO LOSSES DUE TO DEFAULTS ON THE MORTGAGE LOANS (AND THE TIMING
THEREOF), TO THE EXTENT THAT SUCH LOSSES ARE NOT COVERED BY THE
OVERCOLLATERALIZATION AMOUNT (AS DEFINED HEREIN) OR BY ANY CLASS OF SUBORDINATE
CERTIFICATES HAVING A LOWER PAYMENT PRIORITY, AS DESCRIBED HEREIN. SEE
"SUMMARY-SPECIAL PREPAYMENT CONSIDERATIONS" AND "-SPECIAL YIELD CONSIDERATIONS"
AND "CERTAIN YIELD AND PREPAYMENT CONSIDERATIONS" HEREIN AND "YIELD
CONSIDERATIONS" AND "MATURITY AND PREPAYMENT CONSIDERATIONS" IN THE PROSPECTUS.
-------------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT MAINTAIN OR OTHERWISE AFFECT THE MARKET PRICE OF THE OFFERED CERTIFICATES
OFFERED HEREBY, INCLUDING SYNDICATE SHORT COVERING TRANSACTIONS AND PENALTY
BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES SEE "METHOD OF DISTRIBUTION" HEREIN.
-------------------
Neither this Prospectus Supplement nor the Prospectus nor any other
document inviting applications or offers to purchase Offered Certificates or
offering Offered Certificates for purchase may be issued or passed on in the
United Kingdom to any person who is not of a kind described in Article 11(3) of
the Financial Services Act 1986 (Investment Advisements) (Exemptions) Order 1996
or who is not otherwise a person to whom the document may lawfully be issued or
passed on. No person who is an authorized person under Chapter III of the
Financial Services Act of 1986 of the United Kingdom ("FSA") may promote
(whether by the issuing or passing on of documents as referred to in the
foregoing restriction or otherwise) the scheme described in this Prospectus
Supplement and the Prospectus to a person in the United Kingdom unless that
person is of a kind described in section 76(2) of the FSA or as permitted by the
Financial Services (Promotion of Unregulated Schemes) Regulations 1991.
-------------------
THE CERTIFICATES OFFERED BY THIS PROSPECTUS SUPPLEMENT CONSTITUTE PART OF A
SEPARATE SERIES OF CERTIFICATES AND ARE BEING OFFERED PURSUANT TO THE COMPANY'S
PROSPECTUS DATED AUGUST 10, 1998, OF WHICH THIS PROSPECTUS SUPPLEMENT IS A PART
AND WHICH ACCOMPANIES THIS PROSPECTUS SUPPLEMENT. THE PROSPECTUS CONTAINS
IMPORTANT INFORMATION REGARDING THIS OFFERING NOT CONTAINED HEREIN, AND
PROSPECTIVE INVESTORS ARE URGED TO READ THE PROSPECTUS AND THIS PROSPECTUS
SUPPLEMENT IN FULL. SALES OF THE OFFERED CERTIFICATES MAY NOT BE CONSUMMATED
UNLESS THE PURCHASER HAS RECEIVED BOTH THIS PROSPECTUS SUPPLEMENT AND THE
PROSPECTUS.
-------------------------------
UNTIL NINETY DAYS AFTER THE DATE OF THIS PROSPECTUS SUPPLEMENT, ALL DEALERS
EFFECTING TRANSACTIONS IN THE OFFERED CERTIFICATES, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS SUPPLEMENT AND THE
PROSPECTUS TO WHICH IT RELATES. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE
OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS SUPPLEMENT AND PROSPECTUS WHEN
S-3
<PAGE>
<PAGE>
ACTING AS UNDERWRITER AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
S-4
<PAGE>
<PAGE>
SUMMARY OF PROSPECTUS SUPPLEMENT
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere herein and in the Prospectus.
Capitalized terms used herein and not otherwise defined herein have the meanings
assigned in the Prospectus. See "Index of Principal Definitions" in the
Prospectus.
<TABLE>
<S> <C>
Title of Securities.....................WMC Mortgage Pass-Through Certificates,
Series 1998-B.
Issuer..................................WMC Mortgage Loan Trust 1998-B.
Company.................................WMC Secured Assets Corp. See "The
Company" in the Prospectus.
Seller and Master Servicer..............WMC Mortgage Corp., a California
corporation.
Trustee.................................The First National Bank of Chicago, a
national banking association.
Closing Date............................On or about September 4, 1998.
Risk Factors............................There are material risks associated with
an investment in the Offered
Certificates. See "Risk Factors" herein.
Cut-off Date............................The close of business on September 1, 1998.
Assets of the Trust Fund................The assets of the Trust Fund will
consist primarily of a pool of
adjustable rate, closed-end, sub-prime
mortgage loans secured by first lien
mortgages on residential one- to
four-family properties transferred by
the Company to the Trust Fund on the
Closing Date (the "CLOSING DATE
MORTGAGE LOANS") and additional
adjustable rate, closed-end, sub-prime
mortgage loans secured by first lien
mortgages on residential one- to
four-family properties (the "SUBSEQUENT
MORTGAGE LOANS") transferred by the
Company to the Trust Fund from time to
time after the Closing Date and prior
to the end of the Pre-Funding Period
(as defined herein). The Closing Date
Mortgage Loans and the Subsequent
Mortgage Loans are referred to
collectively herein as the "MORTGAGE
LOANS." See "Description of The
Mortgage Pool" herein. The assets of
the Trust Fund will also include (i)
payments in respect of (x) the Closing
Date Mortgage Loans of interest due and
principal received after the Cut-off
Date and (y) the Subsequent Mortgage
Loans of interest due and principal
received after the applicable
Subsequent Cut-off Date (as defined
herein), (ii) amounts on deposit in the
Certificate Account, Distribution
Account, Pre-Funding Account,
Capitalized Interest Account and
Available Funds Cap Carryover Reserve
Account (each as defined herein) and
(iii) certain other ancillary or
incidental funds, rights and properties
related to the foregoing.
The Mortgage Pool.......................The statistical information presented in
this Prospectus Supplement reflects the
pool of Mortgage Loans (the "INITIAL
MORTGAGE LOANS") as of the close of
business on August 17, 1998 (the
"STATISTICAL CALCULATION DATE"). The
aggregate principal balance of the
Initial Mortgage Loans as of the
Statistical Calculation Date is
approximately $600,413,234.52 (the
"STATISTICAL CALCULATION DATE POOL
PRINCIPAL BALANCE"). The Closing Date
Mortgage Loans will also include
Additional Mortgage Loans (as defined
herein). With respect to the pool of
Initial Mortgage Loans as to which
statistical information is presented
herein, some amortization of the pool
will occur prior to the Closing Date.
Moreover, certain loans included in the
pool of Initial Mortgage Loans may
prepay in full, or may be determined
not to meet the eligibility
requirements for the final pool of
Closing Date Mortgage Loans, and may
not be included in the final
</TABLE>
S-5
<PAGE>
<PAGE>
<TABLE>
<S> <C>
pool of Closing Date Mortgage Loans. As
a result of the foregoing, the
statistical distribution of
characteristics as of the Closing Date
for the final pool of Closing Date
Mortgage Loans will vary somewhat from
the statistical distribution of such
characteristics as of the Statistical
Calculation Date as presented in this
Prospectus Supplement. Unless otherwise
noted, all statistical percentages in
this Prospectus Supplement are measured
by either the Statistical Calculation
Date Pool Principal Balance or the
number of Initial Mortgage Loans in the
pool as of the Statistical Calculation
Date.
The "STATED PRINCIPAL BALANCE" of any
Mortgage Loan as of any date of
determination is equal to the unpaid
principal balance thereof at the close
of business on the Cut-off Date or
Subsequent Cut-off Date, as applicable,
reduced by all amounts allocable to
principal that have been distributed to
Certificateholders with respect to such
Mortgage Loan, and as further reduced
to the extent of any Realized Loss
incurred with respect to such Mortgage
Loan on or before the last day of the
most recently ended Due Period. With
respect to any date, the "POOL
PRINCIPAL BALANCE" will be equal to the
aggregate Stated Principal Balance of
all Mortgage Loans included in the
Trust Fund as of such date.
The Mortgage Loans will consist of
adjustable rate, closed-end, sub- prime
mortgage loans evidenced by promissory
notes (the "MORTGAGE NOTES") secured by
first lien deeds of trust, security
deeds or mortgages (the "MORTGAGES").
The properties securing the Mortgage
Loans (the "MORTGAGED PROPERTIES") are
located in 50 states and the District
of Columbia and consist primarily of
single-family residences (which may be
attached, detached, part of a two- to
four-family dwelling, a condominium
unit or a unit in a planned unit
development). The Mortgaged Properties
may be owner-occupied or
non-owner-occupied second or investment
properties. No Loan-to- Value Ratio of
an Initial Mortgage Loan will exceed
90.00% as of the Statistical
Calculation Date. The Mortgage Loans
are not insured by either primary
mortgage or mortgage pool insurance
policies. The Mortgage Loans are not
guaranteed by the Company, the Master
Servicer, the Trustee or any affiliate
thereof. See "Description of The
Mortgage Pool" herein.
As of the Statistical Calculation Date,
the average principal balance of the
Initial Mortgage Loans is approximately
$102,407.17; the interest rates
applicable to the Initial Mortgage
Loans (the "MORTGAGE RATE") range from
6.75% to 15.75%, the weighted average
Loan-to-Value Ratio of the Initial
Mortgage Loans is 78.36%, the weighted
average Mortgage Rate on the Initial
Mortgage Loans is 10.14%, and the
weighted average remaining term to
maturity of the Initial Mortgage Loans
is 359.34 months. As of the Statistical
Calculation Date, the maximum principal
balance of the Initial Mortgage Loans
is $679,000.00. As of the Statistical
Calculation Date, no Initial Mortgage
Loan has a scheduled maturity date
later than September 1, 2028. As of the
Statistical Calculation Date, 81.16% of
the Initial Mortgage Loans by
Statistical Calculation Date Pool
Principal Balance are secured by
mortgages on single-family dwellings,
9.71% by mortgages on single-family
planned unit developments, 2.59% by
condominiums, and 6.54% by other types
of dwellings. See "Description of the
Mortgage Pool" herein.
</TABLE>
S-6
<PAGE>
<PAGE>
<TABLE>
<S> <C>
All of the Initial Mortgage Loans have
maximum Mortgage Rates. As of the
Statistical Calculation Date, the
weighted average maximum Mortgage Rate
of the Initial Mortgage Loans is
16.64%, with maximum Mortgage Rates
that range from approximately 10.40% to
22.25%. The Initial Mortgage Loans have
a weighted average gross margin as of
the Statistical Calculation Date of
6.74%. As of the Statistical
Calculation Date, the gross margins for
the Initial Mortgage Loans range from
4.25% to 15.88%.
Approximately $83,065,058.21 or 13.83%
of the Initial Mortgage Loans by
Statistical Calculation Date Pool
Principal Balance bear interest at
rates that adjust, along with the
related monthly payments, semiannually
based on Six-Month LIBOR (the
"SIX-MONTH LIBOR LOANS"). The Six-Month
LIBOR Loans have a periodic reset cap
of 1.00%.
Approximately $499,047,146.14 or 83.12%
of the Initial Mortgage Loans by
Statistical Calculation Date Pool
Principal Balance bear interest at a
fixed rate for two years after
origination and thereafter have
periodic adjustments at frequencies in
the same manner as the Six-Month LIBOR
Loans (as described above) (the "2/28
LOANS"). On the first adjustment date,
56.63% of the 2/28 Loans will have a
periodic reset cap of 1.50% and 43.37%
of the 2/28 Loans will have a periodic
reset cap of 3.00%. After the first
adjustment date, the 2/28 Loans will
have a periodic reset cap of 1.00%.
Approximately $17,986,089.28 or 3.00% of
the Initial Mortgage Loans by
Statistical Calculation Date Pool
Principal Balance bear interest at a
fixed rate for three years after
origination and thereafter have
periodic adjustments at frequencies in
the same manner as the Six- Month LIBOR
Loans (as described above) (the "3/27
LOANS"). On the first adjustment date,
the 3/27 Loans will have a periodic
reset cap of 3.00%. After the first
adjustment date, the 3/27 Loans will
have a periodic reset cap of 1.00%.
Approximately $314,940.89 or 0.05% of
the Initial Mortgage Loans by
Statistical Calculation Date Pool
Principal Balance bear interest at a
fixed rate for five years after
origination and thereafter have
periodic adjustments at frequencies in
the same manner as the Six-Month LIBOR
Loans (the "5/25 LOANS"). On the first
adjustment date, the 5/25 Loans will
have a periodic reset cap of 3.00%.
After the first adjustment date, the
5/25 Loans will have a periodic reset
cap of 1.00%.
As of the Statistical Calculation Date,
approximately 13.85% of the Initial
Mortgage Loans (by Statistical
Calculation Date Pool Principal
Balance) have Mortgage Rates that will
remain fixed for less than one year
from the Statistical Calculation Date
to the next adjustment, and
approximately 86.15% of the Initial
Mortgage Loans (by Statistical
Calculation Date Pool Principal
Balance) have Mortgage Rates that will
remain fixed for one year or more from
the Statistical Calculation Date to the
next adjustment.
Although none of the Initial Mortgage
Loans is more than 30 days
contractually past due as of the
Statistical Calculation Date,
approximately 90.85% of the Initial
Mortgage Loans, by Statistical
Calculation Date Pool Principal
Balance, did not have a first payment
date prior to August 1, 1998 and thus
could not be more than 30 days
</TABLE>
S-7
<PAGE>
<PAGE>
<TABLE>
<S> <C>
past due as of the Statistical
Calculation Date, and as of the
Statistical Calculation Date,
approximately 50.14% of the Initial
Mortgage Loans, by Statistical
Calculation Date Pool Principal
Balance, will not have a first payment
date earlier than September 1, 1998.
Additional Mortgage Loans...............Additional Mortgage Loans originated or
acquired by the Seller prior to the
Closing Date will also be included in
the assets of the Trust Fund (the
"ADDITIONAL MORTGAGE LOANS"). The
aggregate principal balance of the
Additional Mortgage Loans as of the
Cut-off Date will not exceed
$200,000,000. Any purchase of
Additional Mortgage Loans is subject to
the requirements described herein under
"Description of The Mortgage
Pool-Purchase of Additional Mortgage
Loans and Subsequent Mortgage Loans".
The Additional Mortgage Loans and the
Initial Mortgage Loans collectively
will be the Closing Date Mortgage
Loans. A Current Report on Form 8-K
will be filed on or prior to the
Closing Date containing detailed
information relating to the Additional
Mortgage Loans as of the Cut-off Date
to the extent such information is not
included in this Prospectus Supplement.
See "Description of The Mortgage
Pool-Additional Information" and "Risk
Factors-Additional Mortgage Loans and
Subsequent Mortgage Loans" herein.
Pre-Funding Feature.....................On the Closing Date, an amount equal to
the excess, if any, of (i) the
Aggregate Certificate Principal Balance
(as defined herein) of the Offered
Certificates over (ii) the Pool
Principal Balance of the Closing Date
Mortgage Loans as of the Cut-off Date
(the "ORIGINAL PRE-FUNDED AMOUNT")
will be deposited from proceeds of the
sale of the Offered Certificates with
the Trustee in the Pre-Funding Account
and used by the Trust Fund to purchase
the Subsequent Mortgage Loans during
the Pre-Funding Period. The Trust Fund
will be obligated, subject to the
satisfaction of certain conditions
described herein, to purchase the
Subsequent Mortgage Loans, subject to
the availability thereof, from time to
time during the Pre-Funding Period
defined below. In connection with each
purchase of a Subsequent Mortgage Loan,
the Trust Fund will be required to pay
to the Company a cash purchase price of
100% of the Stated Principal Balance
thereof as of the Subsequent Cut-off
Date from the Pre-Funding Account. The
Trust Fund may purchase the Subsequent
Mortgage Loans only from the Company
and not from any other person and the
Company may purchase the Subsequent
Mortgage Loans only from the Seller and
not from any other person. See
"Description of The Mortgage Pool"
herein.
The"PRE-FUNDING PERIOD" is the period
from the Closing Date until the
earliest of (i) the date after the
Subsequent Transfer Date (as defined
herein) on which the amount on deposit
in the Pre-Funding Account is less than
$50,000, (ii) the date on which an
Event of Default occurs under the
Pooling Agreement or (iii) December 4,
1998. The Original Pre-Funded Amount,
as reduced from time to time by the
amount thereof applied to the purchase
of Subsequent Mortgage Loans is
referred to herein as the "PRE-FUNDED
AMOUNT." Any Pre-Funded Amount
remaining in the Pre-Funding Account at
the end of the Pre- Funding Period will
be distributed to the Holders of the
Class A-1 Certificates as an additional
distribution of principal on the
Distribution Date which follows the end
of the Pre-Funding Period.
</TABLE>
S-8
<PAGE>
<PAGE>
<TABLE>
<S> <C>
Capitalized Interest Account............On the Closing Date, a cash amount, as
required by the Rating Agencies, will
be deposited from the proceeds of the
sale of the Offered Certificates in an
account (the "CAPITALIZED INTEREST
ACCOUNT") in the name of the Trustee on
behalf of the Trust Fund. The amount
deposited therein will be used, as
necessary, by the Trustee during the
Pre-Funding Period to fund the excess,
if any, of (i) interest accruing on the
excess of the aggregate Certificate
Principal Balances over the aggregate
Stated Principal Balances of the
Mortgage Loans, over (ii) reinvestment
income on the Pre-Funded Amount. Any
amounts remaining in the Capitalized
Interest Account on the Distribution
Date which follows the end of the
Pre-Funding Period and not used for
such purpose on such Distribution Date
are required to be paid directly to the
Company on such Distribution Date.
Distribution Date.......................The 20th day of each month or, if such
day is not a Business Day, then the
next succeeding Business Day,
commencing in October 1998 (each, a
"DISTRIBUTION DATE"). A "BUSINESS DAY"
is any day other than Saturday or
Sunday, or a day on which banking
institutions in the States of New York,
California or Illinois are authorized
or obligated by law or executive order
to be closed.
Determination Date......................The second Business Day prior to each
Distribution Date (each, a "DETERMINATION
DATE").
Due Period.............................."DUE PERIOD" means the period from and
including the second day of the month
preceding the month of such
Distribution Date to and including the
first day of the month of such
Distribution Date.
Record Date.............................With respect to the first Distribution
Date, the Closing Date, and with
respect to each Distribution Date
thereafter, the last Business Day of
the month immediately preceding the
month in which such Distribution Date
occurs (each, a "RECORD DATE").
The Offered Certificates................The Offered Certificates will be issued
pursuant to a Pooling and Servicing
Agreement, to be dated as of September
1, 1998, among the Company, the Master
Servicer, and the Trustee (the "POOLING
AGREEMENT"). The Offered Certificates
(other than the Class A-IO
Certificates) will be issued in the
following classes and will have the
pass-through rates (each, a
"PASS-THROUGH RATE") and initial
principal balances (each, a
"CERTIFICATE PRINCIPAL BALANCE") as set
forth below:
</TABLE>
<TABLE>
<CAPTION>
Initial Certificate
Class Pass-Through Rate Principal-Balance
----------------------- ----------------- --------------------
<S> <C> <C>
Class A-1 Certificates (1)(5) $ 400,000,000
Class A-2 Certificates (2)(5) $ 232,000,000
Class M-1 Certificates (3)(5) $ 64,000,000
Class M-2 Certificates (4)(5) $ 56,000,000
Class B Certificates (5)(5) $ 48,000,000
</TABLE>
<TABLE>
<S> <C>
(1) On each Distribution Date, the
Pass-Through Rate on the Class
A-1 Certificates will be equal to
the lesser of (x) with respect to
any Distribution Date which
occurs on or prior to the
Optional Termination Date (as
defined herein), LIBOR plus 0.06%
per annum, and for any
Distribution Date thereafter,
LIBOR plus
</TABLE>
S-9
<PAGE>
<PAGE>
<TABLE>
<S> <C>
0.12% per annum and (y) the
Available Funds Cap (as defined
below).
(2) On each Distribution Date, the
Pass-Through Rate on the Class
A-2 Certificates will be equal to
the lesser of (x) with respect to
any Distribution Date which
occurs on or prior to the
Optional Termination Date, LIBOR
plus 0.22% per annum, and for any
Distribution Date thereafter,
LIBOR plus 0.44% per annum and
(y) the Available Funds Cap.
(3) On each Distribution Date, the
Pass-Through Rate on the Class
M-1 Certificates will be equal to
the lesser of (x) with respect to
any Distribution Date which
occurs on or prior to the
Optional Termination Date, LIBOR
plus 0.34% per annum, and for any
Distribution Date thereafter,
LIBOR plus 0.51% per annum and
(y) the Available Funds Cap.
(4) On each Distribution Date, the
Pass-Through Rate on the Class
M-2 Certificates will be equal to
the lesser of (x) with respect to
any Distribution Date which
occurs on or prior to the
Optional Termination Date, LIBOR
plus 0.65% per annum, and for any
Distribution Date thereafter,
LIBOR plus 0.975% per annum and
(y) the Available Funds Cap.
(5) On each Distribution Date, the
Pass-Through Rate on the Class B
Certificates will be equal to the
lesser of (x) with respect to any
Distribution Date which occurs on
or prior to the Optional
Termination Date, LIBOR plus
1.30% per annum, and for any
Distribution Date thereafter,
LIBOR plus 1.95% per annum and
(y) the Available Funds Cap.
(6) The Pass-Through Rates for each
Class of Offered Certificates
(other than the Class A-IO
Certificates) generally will be
limited to the Available Funds
Cap. The "AVAILABLE FUNDS CAP"
will be, with respect to any
Distribution Date, the per annum
rate equal to the weighted
average of the Mortgage Rates of
the Mortgage Loans as of the
second day of the month preceding
the month of such Distribution
Date, weighted on the basis of
the related Stated Principal
Balances as of such date, minus
the sum of (i) the Servicing Fee
Rate and (ii) the Strip Effective
Rate multiplied by a fraction
equal to (a) the Notional Amount
for such Distribution Date
divided by (b) the sum of the
Pool Principal Balance and the
Pre-Funded Amount immediately
prior to such Distribution Date.
The "STRIP EFFECTIVE RATE" will
equal 5.50% for the first 12
Distribution Dates, 4.00% for the
13th through 24th Distribution
Dates, 2.50% for the 25th through
30th Distribution Dates, and
0.00% thereafter.
If on any Distribution Date, the
Pass-Through Rate for an Offered
Certificate (other than the Class A-IO
Certificates) is based on the Available
Funds Cap, holders of such Certificates
will be entitled to receive the
Available Funds Cap Carryover Amount
(as defined herein) on future
Distribution Dates, subject to
available funds on deposit in the
Available Funds Cap Carryover Reserve
Account as described herein. The
ratings assigned to the Offered
Certificates do not address the
likelihood of the payment of any
Available Funds Cap Carryover Amount.
See "Description of Certificates"
herein.
</TABLE>
S-10
<PAGE>
<PAGE>
<TABLE>
<S> <C>
The Class A-IO Certificates will consist
of three components (each, a
"Component"): Class A-IO Component A,
Class A-IO Component B and Class A-IO
Component C. The Components of the
Class A-IO Certificates have no
Certificate Principal Balance and will
accrue interest at the related
Pass-Through Rate on the Notional
Amount. On the Closing Date, the
Notional Amount for each Class A-IO
Component will be $80,000,000. On any
date of determination thereafter, the
"NOTIONAL AMOUNT" for each Class A-IO
Component will be the lesser of (i)
$80,000,000 and (ii) the sum of the
Pool Principal Balance and the
Pre-Funded Amount immediately prior to
the date of determination. The
Components of the Class A-IO
Certificates are not separately
transferable. The Pass-Through Rate for
the Class A-IO Component A will be
equal to 1.50% for the first 12
Distribution Dates, and 0.00%
thereafter. The Pass-Through Rate for
the Class A-IO Component B will be
equal to 1.50% for the first 24
Distribution Dates, and 0.00%
thereafter. The Pass-Through Rate for
the Class A-IO Component C will be
equal to 2.50% for the first 30
Distribution Dates, and 0.00%
thereafter.
The initial aggregate Certificate
Principal Balance of the Subordinate
Certificates will equal approximately
21.00% of the initial aggregate
Certificate Principal Balance of the
Offered Certificates. The initial
Certificate Principal Balance of the
Class B Certificates will be
approximately 6.00% of the initial
aggregate Certificate Principal Balance
of the Offered Certificates. The
Subordinate Certificates are
subordinate in right of distribution to
the Class A Certificates to the extent
described herein. The Class M-1
Certificates are subordinate to the
Class A Certificates to the extent
described herein. The Class M-2
Certificates are subordinate to the
Class A Certificates and the Class M-1
Certificates to the extent described
herein. The Class B Certificates are
subordinate to the Class A Certificates
and the Class M Certificates to the
extent described herein.
On any date after the Closing Date, the
"AGGREGATE CERTIFICATE PRINCIPAL
BALANCE" is the sum of the Certificate
Principal Balances of all classes of
the Offered Certificates.
Certificate Registration................The DTC Registered Certificates will be
represented by one or more certificates
registered in the name of Cede & Co.,
as nominee of DTC. No Beneficial Owner
will be entitled to receive a
Certificate of such class in fully
registered, certificated form (a
"DEFINITIVE CERTIFICATE"), except under
the limited circumstances described
herein. Investors in the DTC Registered
Certificates may elect to hold their
Certificates through DTC, in the United
States, or Cedel or Euroclear, in
Europe. Transfers within DTC, CEDEL or
Euroclear, as the case may be, will be
in accordance with the usual rules and
operating procedures of the relevant
system. For further registration
information and denomination amounts
see "Description of Certificates"
herein.
Interest Distributions..................Holders of each class of Offered
Certificates will be entitled to
receive interest distributions in an
amount equal to the Accrued Certificate
Interest (as defined herein) on such
class on each Distribution Date in the
manner and priority set forth herein.
With respect to any Distribution Date,
"ACCRUED CERTIFICATE INTEREST" will be
equal to, in respect of each class of
Offered Certificates, one month's
interest accrued during the related
Interest Accrual Period (as
</TABLE>
S-11
<PAGE>
<PAGE>
<TABLE>
<S> <C>
defined herein) on the related
Certificate Principal Balance (or
Notional Amount, in the case of the
Components of the Class A-IO
Certificates) immediately prior to such
Distribution Date at the related
Pass-Through Rate on such class, less
interest shortfalls incurred for the
corresponding period on the Mortgage
Loans relating to the Relief Act or
similar legislation or regulations;
provided that on any Distribution Date
on which the Interest Remittance Amount
(as defined herein) is insufficient to
pay Accrued Certificate Interest on any
class of Offered Certificates, the
amount of such shortfall with interest
thereon at the related Pass-Through
Rate (such amount, an "UNPAID INTEREST
SHORTFALL") will be payable on future
Distribution Dates in the priority set
forth herein, to the extent that funds
are available therefor. Interest on the
Offered Certificates, other than the
Class A-IO Certificates, will be
calculated on the basis of a 360-day
year and the actual number of days
elapsed during the related Interest
Accrual Period. Interest on the
Components of the Class A-IO
Certificates will be calculated on the
basis of a 360-day year consisting of
twelve 30-day months.
The "INTEREST ACCRUAL PERIOD" means, with
respect to each Distribution Date and
(i) each class of Offered Certificates
(other than the Class A- IO
Certificates), the period from the
Distribution Date in the month
preceding the month of such
Distribution Date (or, in the case of
the first Distribution Date, from the
Closing Date) through the day before
such Distribution Date and (ii) the
Class A-IO Certificates, the calendar
month preceding such Distribution Date.
See "Description of
Certificates-Interest Distributions"
herein.
Principal Distributions.................Holders of the Offered Certificates
(other than the Class A-IO
Certificates, which will not be
entitled to distributions with respect
to principal) will be entitled to
receive a distribution of principal on
each Distribution Date, in the manner
and priority set forth below and as
more fully described herein, to the
extent of the Principal Distribution
Amount (as defined herein).
On each Distribution Date (a) before the
Stepdown Date (as defined herein) or
(b) with respect to which a Trigger
Event (as defined herein) is in effect,
an amount equal to the Principal
Distribution Amount will be distributed
sequentially to the Class A-1, Class
A-2, Class M-1, Class M-2 and Class B
Certificates, in that order, until the
Certificate Principal Balance of each
such class has been reduced to zero.
Following the occurrence of the Stepdown
Date, and so long as no Trigger Event
is in effect, holders of the Class A-1
Certificates will be entitled to
receive a distribution of principal on
each Distribution Date equal to the
Principal Distribution Amount or a
portion thereof, in the manner and
priority set forth herein.
Following the earlier to occur of (i)
the Stepdown Date, so long as no
Trigger Event is in effect, or (ii) the
retirement of the Class A-1
Certificates, holders of the Class A-2
Certificates will be entitled to
receive a distribution of principal on
each Distribution Date in the manner
and priority set forth herein, to the
extent of the Principal Distribution
Amount remaining after distributions in
respect of principal to the holders of
the Class A-1 Certificates.
</TABLE>
S-12
<PAGE>
<PAGE>
<TABLE>
<S> <C>
Following the earlier to occur of (i)
the Stepdown Date, so long as no
Trigger Event is in effect, or (ii) the
retirement of the Class A Certificates
and any Class M Certificates senior
thereto, holders of the Class M
Certificates will be entitled to
receive a distribution of principal on
each Distribution Date, in the manner
and priority set forth herein, to the
extent of the portion of the Principal
Distribution Amount remaining after
distributions in respect of principal
to the holders of the Class A
Certificates and any class of Class M
Certificates having a higher payment
priority.
Following the earlier to occur of (i)
the Stepdown Date, so long as no
Trigger Event is in effect, or (ii) the
retirement of the Class A Certificates
and the Class M Certificates, holders
of the Class B Certificates will be
entitled to receive a distribution of
principal on each Distribution Date, in
the manner and priority set forth
herein, to the extent of the portion of
the Principal Distribution Amount
remaining after distributions in
respect of principal to the holders of
the Class A Certificates and the Class
M Certificates.
Notwithstanding the foregoing, on any
Distribution Date on which the sum of
(i) the aggregate Certificate Principal
Balance of the Subordinate Certificates
and (ii) the Overcollateralization
Amount for such Distribution Date is
equal to zero, any principal amounts
payable to the holders of the Class A-1
and Class A-2 Certificates will be
distributed pro rata.
See "Description of Certificates-
Principal Distributions" herein.
Net Monthly Excess Cash
Flow..................................Holders of the Offered Certificates
(other than the Class A-IO
Certificates) may be entitled to
receive additional distributions in
respect of principal (included in the
Principal Distribution Amount) on each
Distribution Date to the extent of Net
Monthly Excess Cash Flow. "NET MONTHLY
EXCESS CASH FLOW" will consist
primarily of the portion, if any, of
the Interest Remittance Amount not
required to pay Accrued Certificate
Interest on the Offered Certificates
and any Unpaid Interest Shortfall on
the Class A Certificates. The Net
Monthly Excess Cash Flow generally will
be used as follows: (i) first, to pay
any Unpaid Interest Shortfall on the
Class A Certificates; (ii) second, as
payments in respect of principal on the
Offered Certificates to create
overcollateralization until the
Overcollateralization Amount (as
defined herein) has reached the
Required Overcollateralization Amount
(as defined herein); (iii) third, to
pay any Unpaid Interest Shortfall on
the Subordinate Certificates and to
reimburse the Subordinate Certificates
for any Realized Losses (as defined
herein) previously allocated thereto,
in the order of priority described
herein; (iv) fourth, to deposit into
the Available Funds Cap Carryover
Reserve Account the Available Funds Cap
Carryover Amount, to the extent
described herein; (v) fifth, to make
payments to the Class C Certificates as
described herein; and (vi) sixth, to
pay any remaining amounts to the Class
R Certificates.
See"Description of the Certificates --
Net Monthly Excess Cash Flow
Distributions" herein.
Credit Enhancement......................Neither the Offered Certificates nor the
Mortgage Loans are insured or
guaranteed by any governmental agency
or instrumentality or by the Company,
the Master Servicer, the Trustee, or
any affiliate thereof.
</TABLE>
S-13
<PAGE>
<PAGE>
<TABLE>
<S> <C>
The credit enhancement provided for the
benefit of the Offered
Certificateholders consists of (i) the
subordination provisions provided
herein, and (ii) overcollateralization
provisions described below.
Subordination: The rights of the holders
of the Class M-1 Certificates to
receive distributions with respect to
the Mortgage Loans will be subordinate
to the rights of the holders of the
Class A Certificates, the rights of the
holders of the Class M-2 Certificates
to receive distributions with respect
to the Mortgage Loans will be
subordinate to the rights of the
holders of the Class A Certificates and
the Class M-1 Certificates, and the
rights of the holders of the Class B
Certificates to receive distributions
with respect to the Mortgage Loans will
be subordinate to the rights of the
holders of the Class A Certificates,
the Class M-1 Certificates and the
Class M-2 Certificates, in each case to
the extent described herein and in the
Prospectus.
Overcollateralization: The subordination
and cash flow provisions of the Trust
Fund result in a limited acceleration
of the Offered Certificates (other than
Class A-IO Certificates) relative to
the amortization of the Mortgage Loans.
This acceleration feature creates
overcollateralization which results
from the excess of the aggregate
principal balance of the Mortgage Loans
over the Aggregate Certificate
Principal Balance. Once the required
level of overcollateralization is
reached, the acceleration feature will
cease, unless necessary to maintain the
required level of
overcollateralization.
The actual level of overcollateralization
may increase or decrease over time as
described herein. If the actual level
of overcollateralization is less than
the required level of
overcollateralization, a temporary
period of accelerated amortization of
the Offered Certificates would result
in order to increase the actual level
of overcollateralization to its
required level; if the actual level of
overcollateralization is greater than
the required level, a temporary period
of decelerated amortization would
result in order to reduce the actual
level of overcollateralization to its
required level. See "Description of
Certificates-Overcollateralization
Provisions" herein.
Monthly Advances,
Servicing Advances and
Compensating Interest...................The Master Servicer will be obligated to
make Monthly Advances (as defined
below) on a Mortgage Loan unless it
determines in accordance with accepted
servicing practices that the amount of
such Monthly Advance will ultimately
not be recoverable from either payments
to be made by the related mortgagor
(exclusive of any possibility of a
deficiency judgment) or proceeds from
the related Mortgaged Property. Monthly
Advances may be funded by the Master
Servicer from subsequent collections on
the Mortgage Loans generally, and are
reimbursable from late collections of
interest on any Mortgage Loan and from
Liquidation Proceeds and Insurance
Proceeds on the related Mortgage Loan.
"MONTHLY ADVANCES" are amounts
deposited in the Certificate Account by
the Master Servicer equal to the sum of
the interest portion (net of the
Servicing Fee) of scheduled payments
with respect to delinquent Mortgage
Loans due during the related Due Period
but not collected prior to the related
Determination Date. Notwithstanding the
Master Servicer's
</TABLE>
S-14
<PAGE>
<PAGE>
<TABLE>
<S> <C>
determination at the time such Monthly
Advance was made that it would not be a
nonrecoverable Monthly Advance, in the
event such Monthly Advance becomes a
nonrecoverable Monthly Advance, the
Master Servicer will be entitled to
reimbursement therefor from the Trust
Fund prior to distributions in respect
of the Offered Certificates.
Subject to the Master Servicer's good
faith determination that such action
would not constitute a nonrecoverable
Servicing Advance and that a prudent
mortgage lender would make a like
advance if it or an affiliate owned the
Mortgage Loan, the Master Servicer is
required to advance amounts with
respect to the Mortgage Loans
("SERVICING ADVANCES") constituting
"out-of-pocket" costs and expenses
relating to (a) the preservation and
restoration of the Mortgaged Property,
(b) enforcement proceedings, including
foreclosures and (c) certain other
customary amounts described in the
Pooling Agreement. Such Servicing
Advances by the Master Servicer are
reimbursable to the Master Servicer
subject to certain conditions and
restrictions. In the event that,
notwithstanding the Master Servicer's
good faith determination at the time
such Servicing Advance was made, that
it would not be a nonrecoverable
Servicing Advance, such Servicing
Advance becomes a nonrecoverable
Servicing Advance, the Master Servicer
will be entitled to reimbursement
therefor from the Trust Fund prior to
distributions in respect of the Offered
Certificates. See "Pooling Agreement"
herein.
In addition, the Master Servicer will
also be required to deposit
Compensating Interest (as defined
below) in the Certificate Account with
respect to any full prepayment received
on a Mortgage Loan during the related
Due Period, out of its own funds
without any right of reimbursement
therefor. "COMPENSATING INTEREST" is an
amount equal to the difference between
(x) 30 days' interest at the Mortgage
Rate (or at such lower rate as may be
in effect for such Mortgage Loan
because of application of the Relief
Act, or as a result of any Debt Service
Reduction (as defined herein) and net
of the Servicing Fee Rate (as defined
herein) on the Stated Principal Balance
of such Mortgage Loan as of the first
day of the related Due Period and (y)
to the extent not previously advanced,
the interest paid by the related
mortgagor with respect to the Mortgage
Loan during such Due Period.
Notwithstanding the foregoing, the
Master Servicer will not be required to
pay Compensating Interest with respect
to any Due Period in an amount in
excess of the aggregate Servicing Fee
received by the Master Servicer for
such Due Period and any resulting
shortfall will be borne by the
Certificateholders to the extent not
covered by Net Monthly Excess Cashflow
amounts.
Monthly Servicing Fee...................The Master Servicer is entitled to a fee
equal to a per annum rate (the
"SERVICING FEE RATE"), payable monthly
at one-twelfth the annual rate, on the
then outstanding principal amount of
each Mortgage Loan as of the first day
of the related Due Period (the
"SERVICING FEE").
Allocation of Losses;
Subordination.........................On each Distribution Date following the
application of all amounts
distributable on such date, to the
extent the aggregate Stated Principal
Balance of the Mortgage Loans is less
than the Aggregate Certificate
Principal Balance due to Realized
Losses, the Certificate Principal
Balances of the Class B Certificates
and Class M Certificates shall be
reduced as follows, until such
deficiency is fully allocated: first,
the
</TABLE>
S-15
<PAGE>
<PAGE>
<TABLE>
<S> <C>
Certificate Principal Balance of the
Class B Certificates shall be reduced,
until the Certificate Principal Balance
thereof has been reduced to zero;
second, the Certificate Principal
Balance of the Class M-2 Certificates
shall be reduced, until the Certificate
Principal Balance thereof has been
reduced to zero; and third, the
Certificate Principal Balance of the
Class M-1 Certificates shall be
reduced, until the Certificate
Principal Balance thereof has been
reduced to zero. The Certificate
Principal Balances of the Class A
Certificates will not be so reduced and
such Certificates will continue to be
entitled to receive Accrued Certificate
Interest on their respective
Certificate Principal Balances, subject
to available funds. Any such reduction
of the Certificate Principal Balance of
a Subordinate Certificate will not be
reversed or reinstated and the amount
of such reduction will no longer bear
interest. However, any loss allocated
to a Subordinate Certificate may be
repaid through the mechanics of the
payment of the Net Monthly Excess Cash
Flow as described herein.
Optional Termination....................At its option, on any Distribution Date
when the aggregate Stated Principal
Balance of the Mortgage Loans is less
than 10% of the sum of the Pool
Principal Balance of the Closing Date
Mortgage Loans as of the Cut-off Date
and the Original Pre-Funded Amount, the
Master Servicer may purchase from the
Trust Fund all remaining Mortgage Loans
and other assets thereof, and thereby
effect early retirement of the
Certificates. In addition, if the
Master Servicer does not exercise its
option to terminate the Pooling
Agreement within two Distribution Dates
after such option vests, the holders of
the Class C or Class R Certificates
will have the right to terminate the
Pooling Agreement at the price
described herein under "Pooling
Agreement-Termination; Purchase of
Mortgage Loans" herein. See "Pooling
Agreement" herein and "The
Agreements-Termination; Retirement of
Securities" in the Prospectus.
Special Prepayment
Considerations........................The rate and timing of principal
payments on the Offered Certificates
(other than the Class A-IO
Certificates) will depend on, among
other things, the rate and timing of
principal payments (including
prepayments, defaults, liquidations and
repurchases of Mortgage Loans due to a
breach of a representation and
warranty) on the Mortgage Loans. The
Offered Certificates are subject to
substantial inherent cash flow
uncertainties. The Mortgage Loans may
be prepaid at any time; however, a
prepayment charge generally will be
required where permissible. The rate of
prepayments on the Mortgage Loans is
sensitive to the credit standing of the
borrower, which may improve and thereby
allow the borrower to refinance on more
favorable terms, or may decline and
thereby limit the borrower's ability to
refinance. The rate of prepayments on
mortgage loans that are 2/28 Loans,
3/27 Loans or 5/25 Loans and are in the
initial fixed rate period, is sensitive
to prevailing interest rates. The
prepayment behavior of the 2/28 Loans,
3/27 Loans and 5/25 Loans may differ
from that of the other Mortgage Loans.
As a 2/28 Loan, 3/27 Loan or 5/25 Loan
approaches its initial adjustment 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. Generally, when prevailing
interest rates increase, prepayment
rates on mortgage loans tend to
decrease, resulting in a slower return
of principal to investors
</TABLE>
S-16
<PAGE>
<PAGE>
<TABLE>
<S> <C>
at a time when reinvestment at such
higher prevailing rates would be
desirable. Conversely, when prevailing
interest rates decline, prepayment
rates on mortgage loans tend to
increase, resulting in a faster return
of principal to investors at a time
when reinvestment at comparable yields
may not be possible.
See "Certain Yield and Prepayment
Considerations - General" herein.
Certificates with Subordination
Features: As described herein, during
certain periods all or a
disproportionately large percentage of
principal payments on the Mortgage
Loans will be allocated to the Class A
Certificates (other than the Class A-IO
Certificates) and during certain
periods no principal payments will be
distributed to the Subordinate
Certificates. Unless the Certificate
Principal Balance of the Class A
Certificates has been reduced to zero,
the Subordinate Certificates will not
be entitled to receive distributions of
principal until the Stepdown Date.
Furthermore, if a Trigger Event is in
effect on or after the Stepdown Date,
the Subordinate Certificates will not
be entitled to receive distributions in
respect of principal until the
Certificate Principal Balance of the
Class A-1 and Class A-2 Certificates is
reduced to zero. To the extent that no
principal payments are distributed on
the Subordinate Certificates, the
Subordination (as defined herein)
afforded the Class A Certificates by
the Subordinate Certificates (together
with the Overcollateralization Amount),
in the absence of offsetting Realized
Losses allocated thereto, will be
increased, and the weighted average
lives of the Subordinate Certificates
will be extended.
See "Description of Certificates--
Principal Distributions" and "Certain
Yield and Prepayment Considerations"
herein and "Yield Considerations" and
"Maturity and Prepayment
Considerations" in the Prospectus. For
further information regarding the
effect of principal prepayments on the
weighted average lives of the Offered
Certificates, see the tables entitled
"Percent of Initial Certificate
Principal Balance Outstanding at the
Following Percentages of CPR" herein.
Special Yield Considerations...........The yield to maturity on a class of
Offered Certificates will depend on,
among other things, the rate and timing
of principal payments (including
prepayments, defaults, liquidations and
repurchases of Mortgage Loans due to a
breach of a representation and
warranty) on the Mortgage Loans and the
allocation thereof to reduce the
Certificate Principal Balance of such
class. The yield to maturity on a class
of Offered Certificates will also
depend on the related Pass- Through
Rate and the purchase price for such
Certificates. Prepayment Interest
Shortfalls (as defined herein)
resulting from principal prepayments in
any calendar month will adversely
affect the yield to investors in the
Offered Certificates to the extent the
Interest Remittance Amount (which
includes Compensating Interest) is
insufficient to pay Accrued Certificate
Interest on the Offered Certificates.
See "Description of
Certificates--Distributions" herein.
In general, if Offered Certificates are
purchased at a premium and principal
distributions thereon occur at a rate
faster than that assumed at the time of
purchase, the related investor's actual
yield to maturity will be lower than
that anticipated at the time of
purchase. Conversely, if Offered
Certificates are purchased at a
discount and principal distributions
thereon occur at a rate slower than
assumed at the time
</TABLE>
S-17
<PAGE>
<PAGE>
<TABLE>
<S> <C>
of purchase, the investor's actual
yield to maturity will be lower than
anticipated at the time of purchase.
The Offered Certificates were structured
assuming, among other things, a
Prepayment Assumption of 25% CPR (as
defined herein) and corresponding
weighted average lives as described
herein. The prepayment, yield and other
assumptions to be used for pricing
purposes for the respective Offered
Certificates may vary as determined at
the time of sale.
The multiple class structure of the
Offered Certificates causes the yield
of certain classes to be particularly
sensitive to changes in the rates of
prepayment of the Mortgage Loans and
other factors, as follows:
Sequentially Paying Classes: The Offered
Certificates (other than the Class A-IO
Certificates) are subject to various
priorities for payment of principal as
described herein. Distributions of
principal on Classes having an earlier
priority of payment will be affected by
the rate of prepayment on the Mortgage
Loans early in the life of the Mortgage
Pool. The timing of commencement of
principal distributions and the
weighted average lives of Classes of
Certificates with a later priority of
payment will be affected by the rate of
prepayment experienced both before and
after the commencement of principal
distributions on such Classes.
Certificates with Subordination
Features: The yield to investors on
each class of Subordinate Certificates,
and particularly on those classes of
Subordinate Certificates with lower
payment priorities, will be extremely
sensitive to losses due to defaults on
the Mortgage Loans (and the timing
thereof), to the extent such losses are
not covered by the
Overcollateralization Amount (including
overcollateralization created by the
Net Monthly Excess Cash Flow) or by any
other class of Subordinate Certificates
having a lower payment priority,
because the entire amount of such
losses will be allocable to such class
or classes of Subordinate Certificates,
as described herein.
Investors in each class of Subordinate
Certificates should also be aware that
on any Distribution Date prior to the
Stepdown Date or if on or after the
Stepdown Date a Trigger Event is in
effect, such class of Subordinate
Certificates will not be entitled to
distributions of principal until the
Certificate Principal Balances of the
Class A Certificates and each class of
Subordinate Certificates senior thereto
have been reduced to zero.
Class A-IO Certificates: Investors in
the Class A-IO Certificates should
fully consider that an extremely rapid
rate of principal prepayments on the
Mortgage Loans could result in the
failure of such investors to recover
their initial investments.
See"Certain Yield and Prepayment
Considerations" herein and "Yield
Considerations" in the Prospectus.
Certain Federal Income Tax
Consequences..........................Three separate REMIC elections ("REMIC
I", "REMIC II" and "REMIC III") will be
made with respect to the Trust Fund
(exclusive of the Pre-Funding Account,
the Capitalized Interest Account and
the Available Funds Cap Carryover
Reserve Account) for federal income tax
purposes. Upon the issuance of the
Offered Certificates, Thacher Proffitt
& Wood, counsel to the Company, will
deliver its opinion generally to the
effect that, assuming compliance with
all provisions
</TABLE>
S-18
<PAGE>
<PAGE>
<TABLE>
<S> <C>
of the Pooling Agreement, for federal
income tax purposes, REMIC I, REMIC II
and REMIC III will each qualify as a
REMIC under Sections 860A through 860G
of the Code.
For federal income tax purposes, (a) the
Class R-I Certificates will be the sole
class of "residual interests" in REMIC
I, (b) the Class R-II Certificates will
be the sole class of "residual
interests" in REMIC II, (c) each class
of Offered Certificates (exclusive of
the right of the Offered Certificates
to receive amounts in respect of the
Available Funds Cap Carryover Amount
from the Available Funds Cap Carryover
Reserve Account) and the Class C
Certificates will represent ownership
of "regular interests" in REMIC II and
REMIC III and will generally be treated
as representing ownership of debt
instruments of REMIC II and REMIC III,
and (d) the Class R-III Certificates
will constitute the sole class of
"residual interests" in REMIC III.
The holders of the Offered Certificates
will be required to include in income
interest on such Certificates in
accordance with the accrual method of
accounting. Each holder of an Offered
Certificate (other than the Class A-IO
Certificates) will be required to
allocate a portion of the purchase
price paid for such Offered Certificate
to the right to receive payments from
the Available Funds Cap Carryover
Reserve Account in respect of the
Available Funds Cap Carryover Amount.
The value of the right to receive any
such Available Funds Cap Carryover
Amount is a question of fact which
could be subject to differing
interpretations. Because the Available
Funds Cap Carryover Amount is treated
as a separate right of the Offered
Certificates (other than the Class A-IO
Certificates) not payable by the
REMICs, such right will not be treated
as a qualifying asset for any
Certificateholder that is a mutual
savings bank, domestic building and
loan association, real estate
investment trust, or real estate
mortgage investment conduit, and any
amounts received from the Available
Funds Cap Carryover Reserve Account
will not be qualifying real estate
income for real estate investment
trusts.
For further information regarding the
federal income tax consequences of
investing in the Offered Certificates,
see "Certain Federal Income Tax
Consequences" herein and "Federal
Income Tax Consequences" in the
Prospectus; provided, however, that any
reference therein to "regular interest"
in a REMIC or to REMIC Regular
Certificates shall be exclusive of the
right to receive payments from the
Available Funds Cap Carryover Reserve
Account.
Legal Investment........................THE CLASS M-2 AND CLASS B CERTIFICATES
WILL NOT CONSTITUTE "MORTGAGE RELATED
SECURITIES" FOR PURPOSES OF SMMEA. The
Class A and Class M-1 Certificates will
not constitute "mortgage related
securities" for purposes of SMMEA until
such time as the balance of the
Pre-Funding Account is reduced to zero.
At such time, the Class A and Class M-1
Certificates will constitute "mortgage
related securities" for purposes of
SMMEA for so long as they are rated in
one of the two highest rating
categories by one or more nationally
recognized statistical rating
organizations. As such, the Class A
Certificates and the Class M-1
Certificates, provided the above
conditions are satisfied, will be legal
investments for certain entities to the
extent provided in SMMEA, subject to
certain state laws overriding the legal
investment provisions of SMMEA.
Institutions
</TABLE>
S-19
<PAGE>
<PAGE>
<TABLE>
<S> <C>
whose investment activities are subject
to legal investment laws and
regulations or to review by regulatory
authorities should consult with their
legal advisors in determining whether
and to what extent the Offered
Certificates are subject to
restrictions on investment, capital
requirements or otherwise. All
investors whose investment authority is
subject to legal restrictions should
consult their own legal advisors to
determine whether, and to what extent,
the Offered Certificates will
constitute legal investments for them.
See "Legal Investment" herein and
"Legal Investment Matters" in the
Prospectus.
ERISA Considerations....................Subject to the considerations discussed
under "ERISA Considerations" herein and
in the Prospectus, (i) Class A
Certificates may be purchased by an
employee benefit plan or other
retirement arrangement (a "PLAN")
subject to the Employee Retirement
Income Security Act of 1974, as amended
("ERISA") or Section 4975 of the
Internal Revenue Code of 1986, as
amended (the "CODE") or a person acting
on behalf of a Plan and (ii)
Subordinate Certificates may be
purchased by a Plan or a person acting
on behalf of a Plan if such person or
Plan provides certain certifications or
opinions of counsel, or, for purchasers
of a DTC Registered Certificate, is
deemed to provide certain
representations. A fiduciary of a Plan
should consider whether the purchase of
an Offered Certificate by such Plan is
consistent with its fiduciary duties
under ERISA and does not result in a
nonexempt prohibited transaction as
defined in Section 406 of ERISA or
Section 4975 of the Code. See "ERISA
Considerations" herein and in the
Prospectus.
Ratings.................................It is a condition to the issuance of the
Class A Certificates (other than the
Class A-IO Certificates) that they be
rated "AAA" by Standard & Poor's and
Aaa by Moody's (Standard & Poor's and
Moody's are collectively referred to
herein as the "RATING AGENCIES"). It is
a condition to the issuance of the
Class A-IO Certificates that they be
rated "AAAr" by Standard & Poor's and
Aaa by Moody's. It is a condition to
the issuance of the Class M-1, Class
M-2 and Class B Certificates that they
be rated not lower than "AA", "A" and
"BBB", respectively, by Standard &
Poor's and Aa2, A2 and Baa3,
respectively, by Moody's. A security
rating is not a recommendation to buy,
sell or hold securities and may be
subject to revision or withdrawal at
any time by the assigning rating
organization. A security rating does
not address the frequency of
prepayments of Mortgage Loans or the
corresponding effect on yield to
investors. The ratings do not address
the likelihood of the payment of any
Available Funds Cap Carryover Amount.
See "Certain Yield and Prepayment
Considerations" and "Ratings" herein
and "Yield Considerations" and
"Maturity and Prepayment
Considerations" in the Prospectus.
</TABLE>
S-20
<PAGE>
<PAGE>
RISK FACTORS
Prospective Certificateholders should consider, among other things, the
items discussed under "Risk Factors" in the Prospectus and the following factors
in connection with the purchase of the Offered Certificates:
SUBORDINATION
As described herein, during certain periods all or a disproportionately
large percentage of principal payments on the Mortgage Loans will be allocated
to the Class A Certificates (other than the Class A-IO Certificates) and, during
certain periods, no principal payments will be distributed to the Subordinate
Certificates. Unless the Certificate Principal Balance of the Class A
Certificates has been reduced to zero, the Subordinate Certificates will not be
entitled to receive distributions of principal until the Stepdown Date.
Furthermore, on or after the Stepdown Date, if a Trigger Event is in effect, no
class of Subordinate Certificates will be entitled to receive distributions in
respect of principal until the Certificate Principal Balance of the Class A
Certificates and each class of Subordinate Certificates senior thereto have been
reduced to zero. To the extent that no principal payments are distributed on the
Subordinate Certificates, the Subordination afforded the Class A Certificates by
the Subordinate Certificates (together with the Overcollateralization Amount
(including overcollateralization created by the Net Monthly Excess Cash Flow)),
in the absence of offsetting Realized Losses allocated thereto, will be
increased, and the weighted average lives of the Subordinate Certificates will
be extended.
The yield to investors on each class of Subordinate Certificates, and
particularly on those classes of Subordinate Certificates with lower payment
priorities, will be extremely sensitive to losses due to defaults on the
Mortgage Loans (and the timing thereof), to the extent such losses are not
covered by the Overcollateralization Amount (including overcollateralization
created by the Net Monthly Excess Cash Flow) or by any other class of
Subordinate Certificates having a lower payment priority, because the entire
amount of such losses that are covered by Subordination will be allocable to
such class or classes of Subordinate Certificates, as described herein.
Furthermore, as described herein, the timing of receipt of principal and
interest by any class of Subordinate Certificates may be adversely affected by
losses even if such class does not ultimately bear such loss.
MORTGAGE RATES REDUCING THE PASS-THROUGH RATE ON THE OFFERED CERTIFICATES
The calculation of the Pass-Through Rate on the Offered Certificates is
based upon (i) the value of an index (the London interbank offered rate for
one-month deposits of U.S. dollars, "LIBOR") which is different from the rate
applicable to the Mortgage Loans as described under "Description of The Mortgage
Pool" (either as a result of the use of a fixed rate for an initial period of
six months, two years, three years or five years or a different index, rate
determination date or rate adjustment date on the Mortgage Loans) and (ii) the
weighted average of the Mortgage Rates of the Mortgage Loans, which are subject
to periodic reset caps, maximum Mortgage Rates and minimum Mortgage Rates.
13.83% of the Initial Mortgage Loans by Statistical Calculation Date Pool
Principal Balance adjust semi-annually based upon the London interbank offered
rate for six-month United States dollar deposits ("SIX-MONTH LIBOR"). 83.12% of
the Initial Mortgage Loans by Statistical Calculation Date Pool Principal
Balance are 2/28 Loans that provide for a fixed interest rate for a period of
approximately two years following origination, 3.00% of the Initial Mortgage
Loans by Statistical Calculation Date Pool Principal Balance are 3/27 Loans that
provide for a fixed interest rate for a period of approximately three years
following origination and 0.05% of the Initial Mortgage Loans by Statistical
Calculation Date Pool Principal Balance are 5/25 Loans that provide for a fixed
interest rate for a period of approximately five years following origination,
and in each case, adjust thereafter based on Six-Month LIBOR subject to the
limitations described herein. However, the Pass-Through Rates on the Offered
Certificates (other than the Class A-IO Certificates) adjust monthly based upon
LIBOR as described under "Description of Certificates-Interest Distributions"
herein, subject to the Available Funds Cap. Consequently, the interest which
becomes due on the Mortgage Loans (net of the Servicing Fee) during any Due
Period may not equal the amount of interest that would accrue at LIBOR plus the
Certificate Margin (as defined herein) on the Offered Certificates during (other
than the Class A-IO Certificates) the related Interest Accrual Period.
In particular, the Pass-Through Rates on the Offered Certificates
(other than the Class A-IO Certificates) adjust monthly, while the Mortgage
Rates of the Mortgage Loans adjust less frequently with the result that in a
rising interest rate environment, (i) collections on the Mortgage Loans in
respect of interest may be less than would be the case if the interest rates on
the Mortgage Loans were adjusted monthly and (ii) the Available Funds Cap may
limit increases in the
S-21
<PAGE>
<PAGE>
Pass-Through Rate on the Offered Certificates (other than the Class A-IO
Certificates) for extended periods. In addition, LIBOR and Six-Month LIBOR may
respond to different economic and market factors, and there is not necessarily a
correlation between them. Thus, it is possible, for example, that LIBOR may rise
during periods in which Six-Month LIBOR is stable or is falling or that, even if
both LIBOR and Six-Month LIBOR rise during the same period, LIBOR may rise more
rapidly than Six-Month LIBOR. Furthermore, if the Available Funds Cap determines
the Pass-Through Rate on the Offered Certificates for a Distribution Date, the
value of the Offered Certificates will be temporarily or permanently reduced.
NATURE OF COLLATERAL
Even assuming that the Mortgaged Properties provide adequate security
for the Mortgage Loans, substantial delays could be encountered in connection
with the liquidation of Mortgage Loans that are delinquent and resulting
shortfalls in distributions to Offered Certificateholders could occur. Further,
liquidation expenses (such as legal fees, real estate taxes, and maintenance and
preservation expenses) will reduce the proceeds payable to Certificateholders
and thereby reduce the security for the Mortgage Loans. In the event any of the
Mortgaged Properties fails to provide adequate security for the related Mortgage
Loans, holders of Offered Certificates could experience a loss.
EARLY DEFAULTS
Substantially all of the Mortgage Loans were originated on or after
June 1998. The weighted average remaining term to stated maturity of the Initial
Mortgage Loans (by Statistical Calculation Date Pool Principal Balance) is
approximately 359.34 months. Although little data is available, defaults on
mortgage loans, including mortgage loans similar to the Mortgage Loans, are
generally expected to occur with greater frequency in the early years of the
terms of mortgage loans.
PREPAYMENT CONSIDERATIONS
All of the Mortgage Loans may be prepaid in whole or in part at any
time. Where permitted by law and the related loan documentation program, the
borrower under the Mortgage Loan generally will be required to pay a prepayment
charge in connection with any voluntary prepayment. Mortgage loans, such as the
Mortgage Loans, have been originated in significant volume only during the past
few years and neither the Company nor the Seller is aware of any publicly
available studies or statistics on the rate of prepayment of such loans.
Prepayments on the Mortgage Loans may be affected by a wide variety of factors,
including general economic conditions, interest rates, the availability of
alternative financing and homeowner mobility. In addition, all of the Mortgage
Loans contain due-on-sale provisions and the Master Servicer will be required by
the Pooling Agreement to enforce such provisions unless (i) such enforcement is
not permitted by applicable law or (ii) the Master Servicer, in a manner
consistent with reasonable commercial practice, permits the purchaser of the
related Mortgaged Property to assume the Mortgage Loan. To the extent permitted
by applicable law, such assumption will not release the original borrower from
its obligation under any such Mortgage Loan. See "Certain Legal Aspects of
Mortgage Loans -- Enforceability of Certain Provisions" in the Prospectus.
The rate of prepayments on the Mortgage Loans is sensitive to the
credit standing of the borrower, which may improve and thereby allow the
borrower to refinance on more favorable terms, or may decline and thereby limit
the borrower's ability to refinance. The rate of prepayments on mortgage loans
that are 2/28 Loans, 3/27 Loans or 5/25 Loans and are in the initial fixed rate
period, is sensitive to prevailing interest rates. The prepayment behavior of
the 2/28 Loans, 3/27 Loans and 5/25 Loans may differ from that of the other
Mortgage Loans. As a 2/28 Loan, 3/27 Loan or 5/25 Loan approaches its initial
adjustment 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 existence of the applicable periodic reset cap, maximum
Mortgage Rate and minimum Mortgage Rate also may affect the likelihood of
prepayments resulting from refinancings. Generally, if prevailing interest rates
fall significantly below the interest rates on the Mortgage Loans, the Mortgage
Loans are likely to be subject to higher prepayment rates than if prevailing
rates remain at or above the interest rates on the Mortgage Loans. Conversely,
if prevailing interest rates rise significantly above the interest rates on the
Mortgage Loans, the rate of prepayments is likely to decrease. The average life
of the Offered Certificates and, if purchased at other than par, the yields
realized by holders of the Offered Certificates will be sensitive to levels of
payment on the Mortgage Loans. In general, the yield on an Offered Certificate
that is purchased at a premium from the outstanding
S-22
<PAGE>
<PAGE>
principal amount thereof may be adversely affected by a higher than anticipated
level of prepayments of the Mortgage Loans. Conversely, the yield on an Offered
Certificate that is purchased at a discount from the outstanding principal
amount thereof may be adversely affected by a lower than anticipated level of
prepayments. Investors in the Class A-IO Certificates should fully consider that
an extremely rapid rate of principal prepayments on the Mortgage Loans could
result in the failure of such investors to recover their initial investments.
See "Certain Yield and Prepayment Considerations" herein.
LIMITATIONS ON CREDIT ENHANCEMENT
Credit enhancement will be provided for the Class A Certificates by the
Overcollateralization Amount (including overcollateralization created by the Net
Monthly Excess Cash Flow) and the Subordination provided by the Subordinate
Certificates as described herein. Credit enhancement will be provided for the
Subordinate Certificates by the Overcollateralization Amount (including
overcollateralization created by the Net Monthly Excess Cash Flow) and the
Subordination provided by any class of Subordinate Certificates subordinate
thereto. In addition, credit enhancement for the Subordinate Certificates
includes the limited availability of Net Monthly Excess Cash Flow to pay amounts
related to Realized Losses allocated to the Subordinate Certificates, in the
manner and to the extent described herein. None of the Company, the Master
Servicer, the Trustee, the Seller nor any of their affiliates will have any
obligation to replace or supplement such credit enhancement, or to take any
other action to maintain any rating of the Offered Certificates.
UNDERWRITING STANDARDS OF THE MORTGAGE LOANS
All of the Mortgage Loans are sub-prime mortgage loans and were
underwritten generally in accordance with underwriting standards described under
"WMC Mortgage Corp.'s Loan Program" herein, which are less stringent than
guidelines for "A" or prime quality borrowers. Such borrowers may have a record
of credit write-offs, outstanding judgments, prior bankruptcies and other credit
items that do not satisfy the guidelines for "A" or prime quality borrowers.
Accordingly, sub-prime mortgage loans are likely to experience rates of
delinquency, foreclosure and loss that are higher, and may be substantially
higher, than mortgage loans originated in accordance with "A" or prime quality
underwriting guidelines. Any such losses, to the extent not covered by the
Subordination, may affect the yield to maturity of the Offered Certificates.
In addition, the principal balances of a number of the Mortgage Loans
exceed the amount of a mortgage loan eligible for purchase by FNMA or FHLMC.
Because such Mortgage Loans have larger balances, the amount of losses on such
Mortgage Loans may be greater than on Mortgage Loans with smaller balances such
as those eligible for purchase by FNMA or FHLMC.
LIMITED SUB-PRIME SERVICING EXPERIENCE
Prior to June 1997, the Master Servicer sold all of its sub-prime
mortgage loans in whole loan transactions on a servicing released basis and
consequently, there is currently very limited historical loss and delinquency
data relating to its sub-prime mortgage loan portfolio. The Master Servicer has
significant prior experience in servicing prime mortgage loans, but it has
serviced sub-prime mortgage loans on a servicing retained basis only since
August 1997. While the Master Servicer believes that its historical experience
in servicing prime mortgage loans will be helpful in servicing its sub-prime
mortgage loan portfolio, the servicing of sub-prime mortgage loans requires
special skill and diligence. Holders of the Offered Certificates, in general,
and the Subordinate Certificates, in particular, will be relying on the ability
of the Master Servicer to adequately service sub-prime mortgage loans and the
risk of any failure by the Master Servicer to adequately service the Mortgage
Loans will be borne by the holders of the Offered Certificates.
GEOGRAPHIC CONCENTRATION MAY AFFECT PERFORMANCE
Approximately 24.97%, 5.63%, 5.06% and 4.94% (by Statistical
Calculation Date Pool Principal Balance) of the Initial Mortgage Loans are
secured by Mortgaged Properties in California, Washington, Texas and Arizona,
respectively. To the extent that the related region has experienced or may
experience in the future weaker economic conditions or greater rates of decline
in real estate values than the United States generally, such a concentration of
the Mortgage Loans may be expected to exacerbate the foregoing risks. The Seller
and the Company can neither quantify the impact of any recent property value
declines on the Mortgage Loans nor predict whether, to what extent or for how
long such declines may continue.
S-23
<PAGE>
<PAGE>
In addition, of the 5.06% of the Initial Mortgage Loans which are
secured by Mortgaged Properties in Texas, a significant number of such Mortgage
Loans are home equity loans ("TEXAS HOME EQUITY LOANS"). The Texas Constitution
was recently amended to legalize Texas Home Equity Loans, but significant
limitations were imposed on permitted terms, conditions and practices incident
to their creation. For example, Texas Home Equity Loans must be made without
recourse for personal liability against the homestead owner(s) or their
spouse(s) (except in the case of actual fraud on their part in obtaining the
loan) and may be foreclosed upon only by court order. Further, holders of Texas
Home Equity Loans face unique legal risks and uncertainties that they do not
customarily confront with equity take-out mortgages in other states. For
example, if any of the requirements that are addressed in the amendment to the
Texas Constitution (such as limitations on fees charged to the borrower,
disclosures to the borrower or matters to be provided for in the closing
documents) are not met, the lien may be invalid. There are also similar risks
involved in servicing Texas Home Equity Loans (such as the failure to comply
with an obligation to the borrower within a reasonable time after receiving
notification from the borrower) that can result in the forfeiture of all
principal and interest due on the mortgage loan.
CERTAIN ORIGINATION FEES
Fees earned on the origination 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 businesses, originators of mortgage loans,
including the Seller, have been named in legal actions brought by mortgagors
challenging the amount or method of imposing or disclosing such fees. To date,
no such action has been decided against the Seller or any of its affiliates, and
the Seller represents that any pending litigation will not have a materially
adverse effect on the Seller's ability to perform its obligations under the
Purchase Agreement and the Pooling Agreement. If such an action against the
Seller with respect to any Mortgage Loan were successful, a court might require
that the principal balances of the related Mortgage Loans be reduced by the
amount of contested fees or charges. Any such reductions could result in
substantial Realized Losses during one or more Due Periods, and may result in
losses on one or more classes of the Offered Certificates.
ADDITIONAL MORTGAGE LOANS AND SUBSEQUENT MORTGAGE LOANS
Following the transfer of Additional Mortgage Loans and/or Subsequent
Mortgage Loans to the Trust Fund, the Company anticipates that the statistical
characteristics of the Mortgage Loans will vary somewhat from those of the
Initial Mortgage Loans measured as of the Statistical Calculation Date and
presented herein. Any purchase of Additional Mortgage Loans and Subsequent
Mortgage Loans by the Trust Fund is subject to the following conditions, among
others: (i) each such Mortgage Loan must satisfy the representations and
warranties specified in the Purchase Agreement and in the Pooling Agreement;
(ii) the Seller will not select such Mortgage Loans in a manner that it believes
is adverse to the interests of the Certificateholders; and (iii) as of the
Closing Date or Subsequent Cut-off Date, as applicable, the Mortgage Loans will
satisfy the criteria described herein under "Description of The Mortgage
Pool--Purchase of Additional Mortgage Loans and Subsequent Mortgage Loans."
MANDATORY PREPAYMENT OF THE CLASS A CERTIFICATES
If the principal amount of eligible Subsequent Mortgage Loans available
during the Pre-Funding Period and sold by the Company to the Trust Fund is less
than 100% of the Original Pre-Funded Amount, a prepayment of principal to the
holders of the Class A-1 Certificates will occur as described herein. Although
no assurances can be given, the Seller expects that the principal amount of
Subsequent Mortgage Loans will require the application of substantially all
amounts on deposit in the Pre-Funding Account and that there will be no material
principal prepayment to the holders of the Class A-1 Certificates from the
Pre-Funding Account. See "Description of The Mortgage Pool -- Purchase of
Additional Mortgages Loans and Subsequent Mortgage Loans" herein and
"Description of the Securities -- Pre-Funding Account" in the Prospectus.
CERTAIN TRUTH-IN-LENDING CONSIDERATIONS
It is possible that some Mortgage Loans included in the Mortgage Pool
will be subject to the Riegle Community Development and Regulatory Improvement
Act of 1994 (the "RIEGLE ACT") which incorporates the Home Ownership and Equity
Protection Act of 1994. The Riegle Act adds certain additional provisions to
Regulation Z, the implementing regulation of the Federal Truth-In-Lending Act.
These provisions impose additional disclosure and other requirements on
creditors with respect to owner-occupied non-purchase money mortgage loans with
high interest rates or high up-
S-24
<PAGE>
<PAGE>
front fees and charges. In general, mortgage loans within the purview of the
Riegle Act have annual percentage rates over 10 percentage points greater than
the yield on Treasury Securities of comparable maturity and/or fees and points
which exceed the greater of 8% of the total loan amount or $400 (the $400 amount
is adjusted annually based on changes in the Consumer Price Index for the prior
year). 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. The Seller will
represent and warrant in the Purchase Agreement that each of the Mortgage Loans
was originated in compliance with all applicable laws, including the Federal
Truth-In-Lending Act as amended. The Seller, upon breaching any such
representation and warranty, will be required by the Purchase Agreement to
repurchase the related Mortgage Loan at a price equal to the principal amount
thereof plus accrued interest thereon or to substitute a qualified mortgage loan
for such Mortgage Loan. The amount of such purchase price will be treated as a
principal prepayment of the related Mortgage Loan.
DESCRIPTION OF THE MORTGAGE POOL
GENERAL
The Mortgage Loans were originated directly or indirectly by the Seller
in accordance with the policies set forth under "WMC Mortgage Corp.'s Loan
Program." All of the Mortgage Loans are mortgage loans bearing adjustable
interest rates (having initial fixed rate periods of six months, two years,
three years or five years) (the "MORTGAGE RATES") and evidenced by promissory
notes (the "MORTGAGE NOTES") secured by first deeds of trust or mortgages on
Mortgaged Properties.
The statistical information presented in this Prospectus Supplement
reflects the pool of Mortgage Loans as of the Statistical Calculation Date (the
"INITIAL MORTGAGE LOANS"). As of the Statistical Calculation Date, the aggregate
principal balance of the Initial Mortgage Loans is $600,413,234.52 (the
"STATISTICAL CALCULATION DATE POOL PRINCIPAL BALANCE"). On or subsequent to the
Closing Date, the Trust Fund will also include, to the extent available,
approximately $200,000,000 of Additional Mortgage Loans and/or Subsequent
Mortgage Loans.
The Initial Mortgage Loans will have the characteristics set forth
below as of the Statistical Calculation Date. The Loan-to-Value Ratios shown
below were calculated based upon the lowest of (i) the appraised values of the
Mortgaged Properties at the time of origination, (ii) a review appraisal and
(iii) the purchase price of the Mortgaged Property.
No assurance can be given that the values of the Mortgaged Properties
have remained or will remain at their levels on the dates of origination of the
Mortgage Loans. If the residential real estate market has experienced or should
experience an overall decline in property values such that the outstanding
balance of any Mortgage Loan becomes equal to or greater than the value of the
Mortgaged Property, the actual rates of delinquencies, foreclosures and losses
could be higher than those now generally experienced in the mortgage lending
industry.
MORTGAGE LOANS
As of the Statistical Calculation Date, the Statistical Calculation
Date Pool Principal Balance of the Initial Mortgage Loans is $600,413,234.52;
the Mortgage Rates of the Initial Mortgage Loans range from 6.75% to 15.75%; the
weighted average LTV of the Initial Mortgage Loans is 78.36%; the weighted
average Mortgage Rate of the Initial Mortgage Loans is 10.14%; the weighted
average remaining term to maturity of the Initial Mortgage Loans is 359.34
months; and the weighted average original term to maturity of the Initial
Mortgage Loans is 359.94 months. The remaining terms to maturity of the Initial
Mortgage Loans as of the Statistical Calculation Date range from 180 months to
360 months. The original terms to maturity of the Initial Mortgage Loans range
from 180 months to 360 months. The principal balances of the Initial Mortgage
Loans at origination ranged from $14,300 to $679,000, and the principal balances
of the Initial Mortgage Loans as of the Statistical Calculation Date range from
$14,300.00 to $679,000.00 respectively. As of the Statistical Calculation Date,
no Initial Mortgage Loan has a scheduled maturity date later than September 1,
2028.
S-25
<PAGE>
<PAGE>
All of the Initial Mortgage Loans have maximum Mortgage Rates. As of
the Statistical Calculation Date, the weighted average maximum Mortgage Rate
of the Initial Mortgage Loans is 16.64% with maximum Mortgage Rates that range
from 10.40% to 22.25%. The Initial Mortgage Loans have a weighted average gross
margin as of the Statistical Calculation Date of 6.74%. As of the Statistical
Calculation Date, the gross margins for the Initial Mortgage Loans range from
4.25% to 15.88%.
Approximately $83,065,058.21 or 13.83% of the Initial Mortgage Loans by
Statistical Calculation Date Pool Principal Balance are Six-Month LIBOR Loans.
The Six-Month LIBOR Loans have a periodic reset cap of 1.00%.
Approximately $499,047,146.14 or 83.12% of the Initial Mortgage Loans
by Statistical Calculation Date Pool Principal Balance are 2/28 Loans. On the
first adjustment date, 56.63% of the 2/28 Loans will have a periodic reset cap
of 1.50% and 43.37% of the 2/28 Loans will have a periodic reset cap of 3.00%.
After the first adjustment, the 2/28 Loans will have a periodic reset cap of
1.00%.
Approximately $17,986,089.28 or 3.00% of the Initial Mortgage Loans by
Statistical Calculation Date Pool Principal Balance are 3/27 Loans. On the first
adjustment date the 3/27 Loans will have a periodic reset cap of 3.00%. After
the first adjustment, the 3/27 Loans will have a periodic reset cap of 1.00%.
Approximately $314,940.89 or 0.05% of the Initial Mortgage Loans by
Statistical Calculation Date Pool Principal Balance are 5/25 Loans. On the first
adjustment date the 5/25 Loans will have a periodic reset cap of 3.00%. After
the first adjustment, the 5/25 Loans will have a periodic reset cap of 1.00%.
Although none of the Initial Mortgage Loans will be more than 30 days
contractually past due as of the Statistical Calculation Date, approximately
90.85% of the Initial Mortgage Loans (by Statistical Calculation Date Pool
Principal Balance) did not have a first payment date prior to August 1, 1998 and
thus could not be more than 30 days past due as of the Statistical Calculation
Date, and as of the Statistical Calculation Date, approximately 50.14% of the
Initial Mortgage Loans (by Statistical Calculation Date Pool Principal Balance)
will not have a first payment date earlier than September 1, 1998.
The following information sets forth in tabular format certain
characteristics of the Initial Mortgage Loans as of the Statistical Calculation
Date. Due to rounding, percentages in the columns entitled "% of Statistical
Calculation Date Pool Principal Balance" may not total 100.00%.
S-26
<PAGE>
<PAGE>
PROPERTY TYPE
<TABLE>
<CAPTION>
% of Statistical
Calculation
Number of Statistical Date-Pool
Initial Mortgage Calculation Date Principal
Property Type Loans Principal Balance Balance
- ------------- -------------------- -------------------- ----------------
<S> <C> <C> <C>
3-4 Family ........................................... 47 $ 6,134,191.09 1.02%
Duplex................................................ 325 33,148,475.05 5.52
Low rise condo........................................ 173 15,536,969.29 2.59
PUD................................................... 389 58,304,241.18 9.71
Single Family Detached................................ 4,929 487,289,357.91 81.16
----- -------------- ------
Totals:........................................ 5,863 $600,413,234.52 100.00%
===== =============== ======
</TABLE>
OCCUPANCY TYPE (1)
<TABLE>
<CAPTION>
% of Statistical
Calculation
Number of Statistical Date-Pool
Initial Mortgage Calculation Date Principal
Occupancy Type Loans Principal Balance Balance
- ------------- -------------------- -------------------- ----------------
<S> <C> <C> <C>
Investor............................................... 392 $ 29,029,526.20 4.83%
Owner.................................................. 5,426 565,759,398.38 94.23
Second Home............................................ 45 5,624,309.94 0.94
----- -------------- ------
Totals:......................................... 5,863 $600,413,234.52 100.00%
===== =============== =======
</TABLE>
(1) Based upon representations made by the related mortgagors at the time of
origination of such Mortgage Loans.
S-27
<PAGE>
<PAGE>
LOAN-TO-VALUE RATIOS(1)
<TABLE>
<CAPTION>
% of Statistical
Calculation
Number of Statistical Date-Pool
Initial Mortgage Calculation Date Principal
Loan-to-Value Ratio Loans Principal Balance Balance
- ------------------- -------------------- -------------------- ----------------
<S> <C> <C> <C>
10.01% - 15.00%........................................ 2 $ 54,954.19 0.01%
15.01% - 20.00%........................................ 4 159,921.03 0.03
20.01% - 25.00%........................................ 7 282,433.82 0.05
25.01% - 30.00%........................................ 5 177,918.08 0.03
30.01% - 35.00%........................................ 10 462,263.29 0.08
35.01% - 40.00%........................................ 18 1,114,001.87 0.19
40.01% - 45.00%........................................ 33 2,256,827.96 0.38
45.01% - 50.00%........................................ 48 3,168,542.43 0.53
50.01% - 55.00%........................................ 58 4,904,909.46 0.82
55.01% - 60.00%........................................ 193 12,813,332.60 2.13
60.01% - 65.00%........................................ 577 45,216,607.79 7.53
65.01% - 70.00%........................................ 539 48,519,231.52 8.08
70.01% - 75.00%........................................ 1,041 96,607,637.08 16.09
75.01% - 80.00%........................................ 1,694 184,062,825.15 30.66
80.01% - 85.00%........................................ 902 99,903,456.18 16.64
85.01% - 90.00%........................................ 732 100,708,372.07 16.77
----- --------------- ------
Totals:......................................... 5,863 $600,413,234.52 100.00%
===== =============== ======
</TABLE>
(1) The Loan-to-Value Ratios ("LTVS") shown above are equal, with respect to
each Mortgage Loan, to (i) the original principal balance of such Mortgage Loan
at the date of origination divided by (ii) the lowest of (a) the value of the
related Mortgaged Property, based upon the appraisal made at the time of
origination of such Mortgage Loan, (b) a review appraisal and (c) the purchase
price of such Mortgaged Property.
S-28
<PAGE>
<PAGE>
STATISTICAL CALCULATION DATE PRINCIPAL BALANCES
<TABLE>
<CAPTION>
% of Statistical
Calculation
Number of Statistical Date-Pool
Initial Mortgage Calculation Date Principal
Principal Balances Loans Principal Balance Balance
- ------------------- -------------------- -------------------- ----------------
<S> <C> <C> <C>
$ 10,000.01 - $ 20,000.00............................ 35 $ 650,706.14 0.11%
20,000.01 - 30,000.00............................ 287 7,446,178.00 1.24
30,000.01 - 40,000.00............................ 513 18,317,187.32 3.05
40,000.01 - 50,000.00............................ 576 26,057,056.51 4.34
50,000.01 - 60,000.00............................ 611 33,767,820.68 5.62
60,000.01 - 70,000.00............................ 469 30,581,942.43 5.09
70,000.01 - 80,000.00............................ 473 35,455,805.15 5.91
80,000.01 - 90,000.00............................ 391 33,259,354.72 5.54
90,000.01 - 100,000.00............................ 341 32,591,996.52 5.43
100,000.01 - 110,000.00............................ 337 35,484,341.87 5.91
110,000.01 - 120,000.00............................ 267 30,722,398.36 5.12
120,000.01 - 130,000.00............................ 204 25,532,010.58 4.25
130,000.01 - 140,000.00............................ 201 27,144,244.55 4.52
140,000.01 - 150,000.00............................ 142 20,569,441.99 3.43
150,000.01 - 160,000.00............................ 118 18,311,271.72 3.05
160,000.01 - 170,000.00............................ 117 19,350,737.57 3.22
170,000.01 - 180,000.00............................ 79 13,846,589.15 2.31
180,000.01 - 190,000.00............................ 55 10,206,747.13 1.70
190,000.01 - 200,000.00............................ 94 18,394,600.23 3.06
200,000.01 - 250,000.00............................ 236 52,857,973.73 8.80
250,000.01 - 300,000.00............................ 121 33,214,596.98 5.53
300,000.01 - 350,000.00............................ 67 21,805,669.93 3.63
350,000.01 - 400,000.00............................ 56 20,880,884.90 3.48
400,000.01 - 450,000.00............................ 34 14,481,804.10 2.41
450,000.01 - 700,000.00............................ 39 19,481,874.26 3.24
------------ --------------- ------
Totals:......................................... 5,863 $600,413,234.52 100.00%
============ =============== ======
</TABLE>
S-29
<PAGE>
<PAGE>
GEOGRAPHIC DISTRIBUTION(1)
<TABLE>
<CAPTION>
% of Statistical
Calculation
Number of Statistical Date-Pool
Initial Mortgage Calculation Date Principal
Geographic Area Loans Principal Balance Balance
- ------------------- -------------------- -------------------- ----------------
<S> <C> <C> <C>
Alabama............................................... 81 $ 4,807,007.38 0.80%
Alaska................................................ 51 6,075,351.94 1.01
Arizona............................................... 267 29,652,268.13 4.94
Arkansas.............................................. 51 3,359,566.36 0.56
California............................................ 817 149,932,509.78 24.97
Colorado.............................................. 186 20,949,655.04 3.49
Connecticut........................................... 69 6,574,663.18 1.10
Delaware.............................................. 7 644,388.89 0.11
District of Columbia.................................. 13 1,315,438.35 0.22
Florida............................................... 280 23,742,987.48 3.95
Georgia............................................... 113 11,739,066.42 1.96
Hawaii................................................ 19 3,974,926.19 0.66
Idaho................................................. 74 6,682,107.77 1.11
Illinois.............................................. 280 24,089,400.77 4.01
Indiana............................................... 109 5,780,209.40 0.96
Iowa.................................................. 50 3,012,336.80 0.50
Kansas................................................ 57 3,837,259.97 0.64
Kentucky.............................................. 20 915,380.28 0.15
Louisiana............................................. 81 6,138,575.13 1.02
Maine................................................. 56 4,311,073.57 0.72
Maryland.............................................. 85 9,597,356.81 1.60
Massachusetts......................................... 72 7,153,903.56 1.19
Michigan.............................................. 140 8,584,170.85 1.43
Minnesota............................................. 135 11,059,771.27 1.84
Mississippi........................................... 115 6,866,506.15 1.14
Missouri.............................................. 295 16,753,879.38 2.79
Montana............................................... 32 2,128,502.67 0.35
Nebraska.............................................. 57 3,515,299.74 0.59
Nevada................................................ 111 12,608,358.25 2.10
New Hampshire......................................... 17 1,473,150.99 0.25
New Jersey............................................ 184 24,175,338.34 4.03
New Mexico............................................ 74 8,047,221.29 1.34
New York.............................................. 147 16,912,712.88 2.82
North Carolina........................................ 109 9,968,518.81 1.66
North Dakota.......................................... 4 157,918.50 0.03
Ohio.................................................. 125 7,642,854.24 1.27
Oklahoma.............................................. 51 3,550,545.79 0.59
Oregon................................................ 141 15,062,565.88 2.51
Pennsylvania.......................................... 180 12,072,541.72 2.01
Rhode Island.......................................... 7 469,025.75 0.08
South Carolina........................................ 48 4,261,211.37 0.71
South Dakota.......................................... 15 1,464,330.41 0.24
Tennessee............................................. 91 7,505,884.45 1.25
Texas................................................. 362 30,390,860.89 5.06
Utah.................................................. 98 10,925,075.89 1.82
Vermont............................................... 20 1,552,847.36 0.26
Virginia.............................................. 68 6,285,064.46 1.05
Washington............................................ 279 33,803,897.18 5.63
West Virginia......................................... 24 1,866,521.17 0.31
Wisconsin............................................. 90 6,447,546.04 1.07
Wyoming............................................... 6 575,679.60 0.10
----- --------------- ------
Totals:.......................................... 5,863 $600,413,234.52 100.00%
===== =============== ======
</TABLE>
(1) Determined by property address designated as such in the related Mortgage.
S-30
<PAGE>
<PAGE>
STATISTICAL CALCULATION DATE MORTGAGE RATES
<TABLE>
<CAPTION>
% of Statistical
Calculation
Number of Statistical Date-Pool
Initial Mortgage Calculation Date Principal
Mortgage Rates Loans Principal Balance Balance
- ------------------- -------------------- -------------------- ----------------
<S> <C> <C> <C>
6.501% - 6.750%................................ 2 $ 395,459.22 0.07%
6.751% - 7.000%................................ 5 619,948.71 0.10
7.001% - 7.250%................................ 5 1,624,120.93 0.27
7.251% - 7.500%................................ 10 1,379,791.29 0.23
7.501% - 7.750%................................ 17 3,636,777.77 0.61
7.751% - 8.000%................................ 56 9,244,023.85 1.54
8.001% - 8.250%................................ 52 7,507,106.96 1.25
8.251% - 8.500%................................ 117 17,418,142.07 2.90
8.501% - 8.750%................................ 137 19,457,989.07 3.24
8.751% - 9.000%................................ 253 36,861,934.87 6.14
9.001% - 9.250%................................ 241 31,905,751.47 5.31
9.251% - 9.500%................................ 304 39,752,290.09 6.62
9.501% - 9.750%................................ 488 57,292,806.64 9.54
9.751% - 10.000%................................ 589 74,046,476.52 12.33
10.001% - 10.250%................................ 364 36,838,702.41 6.14
10.251% - 10.500%................................ 520 52,161,973.86 8.69
10.501% - 10.750%................................ 923 69,745,341.35 11.62
10.751% - 11.000%................................ 600 54,369,956.66 9.06
11.001% - 11.250%................................ 317 25,460,669.83 4.24
11.251% - 11.500%................................ 312 21,245,613.16 3.54
11.501% - 11.750%................................ 211 15,079,075.85 2.51
11.751% - 12.000%................................ 140 10,381,496.66 1.73
12.001% - 12.250%................................ 84 6,108,193.95 1.02
12.251% - 12.500%................................ 55 3,875,731.21 0.65
12.501% - 12.750%................................ 21 1,311,233.52 0.22
12.751% - 13.000%................................ 9 995,562.49 0.17
13.001% - 13.250%................................ 23 1,313,015.83 0.22
13.251% - 13.500%................................ 3 132,464.21 0.02
13.501% - 13.750%................................ 1 39,184.07 0.01
13.751% - 14.000%................................ 1 45,750.00 0.01
14.251% - 14.500%................................ 2 127,050.00 0.02
15.501% - 15.750%................................ 1 39,600.00 0.01
------ -------------- ------
Totals:......................................... 5,863 $600,413,234.52 100.00%
====== =============== ======
</TABLE>
S-31
<PAGE>
<PAGE>
GROSS MARGINS
<TABLE>
<CAPTION>
% of Statistical
Calculation
Number of Statistical Date-Pool
Initial Mortgage Calculation Date Principal
Gross Margins Loans Principal Balance Balance
- ------------- -------------------- -------------------- ----------------
<S> <C> <C> <C>
0.000% - 5.000%................................ 12 $ 1,458,445.08 0.24%
5.001% - 5.250%................................ 2 238,390.00 0.04
5.251% - 5.500%................................ 26 3,847,436.44 0.64
5.501% - 5.750%................................ 33 4,835,093.48 0.81
5.751% - 6.000%................................ 149 17,242,536.97 2.87
6.001% - 6.250%................................ 818 100,235,847.45 16.69
6.251% - 6.500%................................ 852 90,565,446.19 15.08
6.501% - 6.750%................................ 1,447 117,322,102.46 19.54
6.751% - 7.000%................................ 1,464 147,349,671.27 24.54
7.001% - 7.250%................................ 763 93,004,837.64 15.49
7.251% - 7.500%................................ 214 17,189,416.48 2.86
7.501% - 7.750%................................ 54 4,436,952.41 0.74
7.751% - 8.000%................................ 18 1,655,063.71 0.28
8.001% - 8.250%................................ 4 446,837.95 0.07
8.501% - 8.750%................................ 2 202,154.98 0.03
8.751% - 9.000%................................ 3 293,778.00 0.05
10.001% - 10.250%................................ 1 30,574.01 0.01
15.751% - 16.000%................................ 1 58,650.00 0.01
----- --------------- ------
Totals:......................................... 5,863 $600,413,234.52 100.00%
===== =============== ======
</TABLE>
S-32
<PAGE>
<PAGE>
MAXIMUM MORTGAGE RATES
<TABLE>
<CAPTION>
% of Statistical
Calculation
Number of Statistical Date-Pool
Initial Mortgage Calculation Date Principal
Maximum Mortgage Rates Loans Principal Balance Balance
- ---------------------- -------------------- -------------------- ----------------
<S> <C> <C> <C>
10.001% - 11.000%................................ 2 $ 203,538.41 0.03%
12.001% - 13.000%................................ 1 95,950.23 0.02
13.001% - 14.000%................................ 22 3,996,634.23 0.67
14.001% - 15.000%................................ 241 37,813,256.39 6.30
15.001% - 16.000%................................ 927 127,397,410.83 21.22
16.001% - 17.000%................................ 1,968 220,242,525.76 36.68
17.001% - 18.000%................................ 2,149 171,051,914.55 28.49
18.001% - 19.000%................................ 491 35,517,190.92 5.92
19.001% - 20.000%................................ 56 3,812,655.12 0.64
20.001% - 21.000%................................ 5 242,558.08 0.04
22.001% - 23.000%................................ 1 39,600.00 0.01
----- --------------- ------
Totals:......................................... 5,863 $600,413,234.52 100.00%
===== =============== ======
</TABLE>
MINIMUM MORTGAGE RATES
<TABLE>
<CAPTION>
% of Statistical
Calculation
Number of Statistical Date-Pool
Initial Mortgage Calculation Date Principal
Minimum Mortgage Rates Loans Principal Balance Balance
- ---------------------- -------------------- -------------------- ----------------
<S> <C> <C> <C>
6.001% - 7.000%................................ 7 $ 1,015,407.93 0.17%
7.001% - 8.000%................................ 88 15,884,713.84 2.65
8.001% - 9.000%................................ 559 81,245,172.97 13.53
9.001% - 10.000%................................ 1,622 202,997,324.72 33.81
10.001% - 11.000%................................ 2,407 213,115,974.28 35.49
11.001% - 12.000%................................ 980 72,166,855.50 12.02
12.001% - 13.000%................................ 169 12,290,721.17 2.05
13.001% - 14.000%................................ 28 1,530,414.11 0.25
14.001% - 15.000%................................ 2 127,050.00 0.02
15.001% - 16.000%................................ 1 39,600.00 0.01
----- ------------------ ------
Totals:......................................... 5,863 $ 600,413,234.52 100.00%
===== ================== ======
</TABLE>
S-33
<PAGE>
<PAGE>
MONTH OF NEXT RATE ADJUSTMENT
<TABLE>
<CAPTION>
% of Statistical
Calculation
Number of Statistical Date-Pool
Initial Mortgage Calculation Date Principal
Month Loans Principal Balance Balance
- ----- -------------------- -------------------- ----------------
<S> <C> <C> <C>
October 1998........................................... 1 $ 122,805.79 0.02%
November 1998.......................................... 1 73,474.92 0.01
December 1998.......................................... 8 682,503.94 0.11
January 1999........................................... 50 6,130,145.53 1.02
February 1999.......................................... 292 5,641,547.19 5.94
March 1999............................................. 262 1,956,651.84 5.32
April 1999............................................. 72 8,503,127.41 1.42
June 1999.............................................. 1 69,225.09 0.01
October 1999........................................... 5 249,592.04 0.04
November 1999.......................................... 2 530,777.03 0.09
December 1999.......................................... 1 195,074.44 0.03
January 2000........................................... 5 317,403.65 0.05
February 2000.......................................... 26 2,268,403.10 0.38
March 2000............................................. 7 457,938.35 0.08
April 2000............................................. 34 3,742,988.01 0.62
May 2000............................................... 69 5,596,296.83 0.93
June 2000.............................................. 41 2,698,550.10 0.45
July 2000.............................................. 263 9,224,025.17 4.87
August 2000............................................ 2,025 200,938,217.66 33.47
September 2000......................................... 2,097 211,447,932.26 35.22
October 2000........................................... 474 41,265,524.00 6.87
May 2001............................................... 2 196,236.77 0.03
June 2001.............................................. 4 762,962.48 0.13
July 2001.............................................. 10 1,242,859.60 0.21
August 2001............................................ 52 7,852,857.90 1.31
September 2001......................................... 50 7,207,907.53 1.20
October 2001........................................... 7 723,265.00 0.12
February 2003.......................................... 2 314,940.89 0.05
----- --------------- ------
Totals:......................................... 5,863 $600,413,234.52 100.00%
===== ================ ======
</TABLE>
S-34
<PAGE>
<PAGE>
REMAINING MONTHS TO STATED MATURITY
<TABLE>
<CAPTION>
% of Statistical
Calculation
Number of Statistical Date-Pool
Initial Mortgage Calculation Date Principal
Remaining Months to Stated Maturity Loans Principal Balance Balance
- ----------------------------------- -------------------- -------------------- ----------------
<S> <C> <C> <C>
121 - 180.............................................. 3 $ 189,480.00 0.03%
344 - 354.............................................. 48 4,334,207.96 0.72
355 - 357.............................................. 155 13,207,789.85 2.20
358 - 360.............................................. 5,657 582,681,756.71 97.05
----- ---------------- ------
Totals:......................................... 5,863 $600,413,234.52 100.00%
===== ================ ======
</TABLE>
DOCUMENTATION TYPE
<TABLE>
<CAPTION>
% of Statistical
Calculation
Number of Statistical Date-Pool
Initial Mortgage Calculation Date Principal
Documentation Loans Principal Balance Balance
- ------------- -------------------- -------------------- ----------------
<S> <C> <C> <C>
Full................................................... 3,973 $411,754,646.91 68.58%
Full-Alternate......................................... 64 10,418,883.94 1.74
Lite................................................... 164 21,310,475.99 3.55
No documentation....................................... 16 2,434,589.17 0.41
Simple 65.............................................. 571 35,557,184.66 5.92
Stated................................................. 1,075 118,937,453.85 19.81
----- --------------- ------
Totals:......................................... 5,863 $600,413,234.52 100.00%
===== =============== ======
</TABLE>
LOAN TYPE
<TABLE>
<CAPTION>
% of Statistical
Calculation
Number of Statistical Date-Pool
Initial Mortgage Calculation Date Principal
Loan Type Loans Principal Balance Balance
- --------- -------------------- -------------------- ----------------
<S> <C> <C> <C>
2/28 6-month LIBOR..................................... 5,051 $499,047,146.14 83.12%
3/27 6-month LIBOR..................................... 125 17,986,089.28 3.00
5/25 6-month LIBOR..................................... 2 314,940.89 0.05
6-month LIBOR no negative amortization................. 685 83,065,058.21 13.83
------ ---------------- ------
Totals:......................................... 5,863 $600,413,234.52 100.00%
====== ================ ======
</TABLE>
S-35
<PAGE>
<PAGE>
CREDIT GRADE
<TABLE>
<CAPTION>
% of Statistical
Calculation
Number of Statistical Date-Pool
Initial Mortgage Calculation Date Principal
Risk Category Loans Principal Balance Balance
- ------------- -------------------- -------------------- ----------------
<S> <C> <C> <C>
A...................................................... 70 $ 10,804,029.31 1.80%
A-..................................................... 2,482 310,075,014.54 51.64
B...................................................... 2,155 189,987,034.39 31.64
C...................................................... 800 62,157,608.96 10.35
D...................................................... 356 27,389,547.32 4.56
----- --------------- -------
Totals:......................................... 5,683 $600,413,234.52 100.00%
===== =============== =======
</TABLE>
PURCHASE OF ADDITIONAL MORTGAGE LOANS AND SUBSEQUENT MORTGAGE LOANS
Additional Mortgage Loans originated prior to the Closing Date will be
included in the assets of the Trust Fund on the Closing Date. In addition to the
Closing Date Mortgage Loans, the Pooling Agreement will permit the Trust Fund to
acquire Subsequent Mortgage Loans with funds on deposit in an account (the
"Pre-Funding Account") established on the Closing Date in the name of the
Trustee on behalf of the Trust Fund. On the Closing Date, an amount equal to the
excess, if any, of (i) the sum of the Aggregate Certificate Principal Balance of
the Offered Certificates and the Overcollateralization Amount over (ii) the Pool
Principal Balance of the Closing Date Mortgage Loans as of the Cut-off Date (the
"ORIGINAL PRE-FUNDED AMOUNT") will be deposited in the Pre-Funding Account.
Accordingly, the statistical characteristics of the Mortgage Loans upon the
acquisition of Additional Mortgage Loans and Subsequent Mortgage Loans will vary
somewhat from the statistical characteristics of the Initial Mortgage Loans as
of the Statistical Calculation Date as presented in this Prospectus Supplement.
With respect to each Subsequent Mortgage Loan, the Company will designate the
later of (x) the close of business of the first day of the month in which such
Subsequent Mortgage Loan is transferred to the Trust Fund (such date, a
"SUBSEQUENT TRANSFER DATE") and (y) the date of origination if any such
Subsequent Mortgage Loan is originated in the month of the related Subsequent
Transfer Date, as the cut-off date (the "SUBSEQUENT CUT-OFF DATE") for such
Subsequent Mortgage Loan.
The obligation of the Trust Fund to purchase Additional Mortgage Loans
and Subsequent Mortgage Loans, as of the Closing Date or Subsequent Transfer
Date is subject to the following requirements, among others: (i) the Rating
Agency Condition (as defined herein) shall have been satisfied; (ii) such
Mortgage Loans may not be 30 or more days contractually delinquent; (iii) the
remaining term to maturity of such Mortgage Loans may not exceed 360 months; and
(iv) following the purchase of all such Mortgage Loans by the Trust Fund, such
Mortgage Loans, as a whole and by Pool Principal Balance, (a) will have a
weighted average LTV of not more than 79.00%; (b) will have a weighted average
gross margin that is not more than 25 basis points less than the weighted
average gross margin of the Initial Mortgage Loans as of the Cut-Off Date; (c)
will have no more than 1.00% of such Mortgage Loans with LTVs in excess of 90%;
(d) will not include more than 85.00%, by Pool Principal Balance, of 2/28 Loans,
4.00%, by Pool Principal Balance, of 3/27 Loans and .25%, by Pool Principal
Balance, of 5/25 Loans; (e) each of such Mortgage Loans will have a gross margin
which exceeds the sum of the highest Certificate Margin (as defined herein) on
any class of Certificates plus 0.55%; and (f) will have no more than 7.00%, by
Pool Principal Balance, that are non-owner-occupied properties. In addition, the
final Mortgage Pool, as of the end of the Pre-Funding Period, will include no
more than 26.00% of Mortgage Loans, by Pool Principal Balance, that are secured
by Mortgaged Properties located in the State of California and no more than
7.00% of Mortgage Loans, by Pool Principal Balance, that are secured by
Mortgaged Properties located in any other state. Moreover, the obligation of the
Trust Fund to purchase Subsequent Mortgage Loans will also be subject to the
requirements set forth in "Risk Factors--Additional Mortgage Loans and
Subsequent Mortgage Loans" above.
S-36
<PAGE>
<PAGE>
The "RATING AGENCY CONDITION" shall be satisfied if after five (5) days
prior written notice to each Rating Agency of the transfer of Additional
Mortgage Loans to the Trust Fund on the Closing Date and Subsequent Mortgage
Loans to the Trust Fund on the related Subsequent Transfer Date, as applicable,
no Rating Agency shall have notified any of the Seller, the Company or the
Trustee that the then-current ratings on any class of Offered Certificates is
subject to review or downgrade.
MANDATORY REPURCHASE OR SUBSTITUTION OF MORTGAGE LOANS
The Seller is required, with respect to Mortgage Loans that are found
by the Company or the Trustee to have defective documentation, or in respect of
which the Seller has breached a representation or warranty, to the extent set
forth in the Purchase Agreement between the Company and the Seller (in which the
Seller makes representations and warranties with respect to all of the Closing
Date Mortgage Loans as of the Closing Date and all of the Subsequent Mortgage
Loans as of the Subsequent Cut-off Date), to repurchase such Mortgage Loan or
substitute for such Mortgage Loan one or more Mortgage Loans having essentially
the same characteristics as the Mortgage Loan being replaced, using criteria set
forth in such Purchase Agreement. See "Description of the Purchase Agreements"
herein.
ADDITIONAL INFORMATION
The description in this Prospectus Supplement of the Mortgage Pool and
the Mortgaged Properties is based upon the Mortgage Pool as constituted at the
close of business on the Statistical Calculation Date. Prior to the issuance of
the Offered Certificates, Additional Mortgage Loans will be included in the pool
of Closing Date Mortgage Loans and Initial Mortgage Loans may be removed from
the Mortgage Pool as a result of incomplete documentation or otherwise, if the
Company deems such removal necessary or appropriate. A limited number of other
mortgage loans may be added to the Mortgage Pool prior to the issuance of the
Offered Certificates. The Company believes that the information set forth herein
will be substantially representative of the characteristics of the Mortgage Pool
as it will be constituted at the time the Offered Certificates are issued
although the range of Mortgage Rates and maturities and certain other
characteristics of the Mortgage Loans in the Mortgage Pool may vary. However,
the Company does not anticipate that more than 5% of the Mortgage Loans (by Pool
Principal Balance) as of the end of the Pre-Funding Period will deviate from the
characteristics of the Mortgage Loans set forth in this Prospectus Supplement.
A Current Report on Form 8-K will be available to purchasers of the
Offered Certificates and will be filed, together with the Pooling Agreement,
with the Securities and Exchange Commission within fifteen days after the
initial issuance of the Offered Certificates. An additional Current Report on
Form 8-K will also be filed on or prior to the Closing Date and will contain
detailed information relating to the Closing Date Mortgage Loans, including any
Additional Mortgage Loans, as of the Cut-off Date to the extent information is
not included in this Prospectus Supplement. In addition, a Current Report on
Form 8-K will be available to purchasers of the Offered Certificates and will be
filed and incorporated by reference to the Registration Statement with the
Securities and Exchange Commission within fifteen days after the end of the
Pre-Funding Period. In the event Mortgage Loans are removed from or added to the
Mortgage Pool as set forth in the preceding paragraph, such removal or addition
will be noted in the Current Report on Form 8-K.
THE SELLER AND THE MASTER SERVICER
The Initial Mortgage Loans will be acquired by the Company on the
Closing Date. WMC Mortgage Corp. ("WMC", the "SELLER" or the "MASTER SERVICER")
will be responsible for servicing the Mortgage Loans for the Trust Fund in
accordance with WMC's policies and procedures for servicing mortgage loans and
in accordance with the terms of the Pooling Agreement.
WMC is a mortgage banking company incorporated in the State of
California. Established in 1955, WMC has developed a national mortgage
origination franchise, with special emphasis on originating single-family,
sub-prime mortgage loans in each of the regions in which it competes. WMC
historically originated both prime-quality mortgage loans and sub-prime-quality
mortgage loans. WMC recently sold its prime mortgage loan origination business
and will originate prime mortgage loans only on a limited basis. WMC has
approximately 1,500 employees and operates both production support and loan
servicing platforms for its originations.
S-37
<PAGE>
<PAGE>
WMC was owned by a subsidiary of Weyerhaeuser Company until May 1997
when it was sold to WMC Finance Co., a company owned principally by affiliates
of Apollo Management, L.P. ("APOLLO"), a private investment firm.
WMC Equity Services ("EQUITY SERVICES"), a division of WMC formed in
April 1995, is the primary business unit responsible for the sub-prime
residential mortgage origination business. Equity Services' business is
headquartered in WMC's home office in Woodland Hills, California with
underwriting and closing centers in Hollywood, Florida; Honolulu, Hawaii;
Schaumburg, Illinois; Chantilly, Virginia; Santa Ana, California and San Jose,
California; the Woodland Hills, California headquarters; and Mesa, Arizona.
Equity Services' originations to date have come primarily through its
broker relationships. There are approximately 170 sub-prime loan officers who
are responsible for recruiting and managing the independent broker network. In
July 1996, Equity Services began a sub-prime retail origination effort by
placing a sub-prime loan officer in most of WMC's prime retail branches. In
conjunction with WMC's plans to sell its prime origination business, WMC began,
in January, 1998, opening retail branches devoted primarily to sub-prime
originations. Currently, 29 sub-prime retail branches have been opened. The
sub-prime mortgage loan production of Equity Services totaled approximately $446
million in 1996 and approximately $2 billion for the twelve months ending
December 31, 1997 (approximately $1.8 billion of which were wholesale and
approximately $200 million of which were retail) and approximately $1.8 billion
for the six months ending June 30, 1998 (approximately $1.65 billion of which
were wholesale and $122 million of which were retail).
WMC MORTGAGE CORP.'S LOAN PROGRAM
UNDERWRITING GUIDELINES
The Mortgage Loans will have been originated generally in accordance
with underwriting guidelines (the "WMC GUIDELINES") established by Equity
Services. The WMC Guidelines are primarily intended to (a) determine that the
borrower has the ability to repay the mortgage loan in accordance with its terms
and (b) determine that the related mortgaged property will provide sufficient
value to recover the investment if the borrower defaults. On a case-by-case
basis Equity Services may determine that, based upon compensating factors, a
prospective mortgagor not strictly qualifying under the underwriting risk
category or other guidelines described below warrants an underwriting exception.
Compensating factors may include, but are not limited to, low LTV, low
debt-to-income ratio ("DEBT RATIO"), good mortgage payment history, stable
employment and time in residence at the applicant's current address. It is
expected that a substantial number of the Mortgage Loans to be included in the
Trust Fund will represent such underwriting exceptions.
The Mortgage Loans in the Trust Fund will fall within the following six
documentation type categories established by Equity Services: Full
Documentation, Full-Alternative Documentation, Lite Documentation, Stated
Documentation, No Ratio Documentation and Simple 65 Documentation. Certain of
the Mortgage Loans will have been underwritten (in many cases, as described
above, subject to exceptions for compensating factors) in accordance with
programs established by Equity Services for the origination of mortgage loans
secured by mortgages on condominiums, vacation and second homes, manufactured
housing and two- to four-family properties. In addition, Equity Services has
established specific parameters for Super Jumbo Loans, which are designated in
the WMC Guidelines as mortgage loans with original principal balances of
$500,000 or more.
Under the WMC Guidelines, Equity Services or the applicable originating
broker reviews and verifies the loan applicant's eligible sources of income
(except under the Stated Documentation, No Ratio Documentation and Simple 65
Documentation categories), calculates the amount of income from eligible sources
indicated on the loan application, reviews the credit and mortgage payment
history of the applicant and calculates the Debt Ratio (except under the No
Ratio Documentation and Simple 65 Documentation categories) to determine the
applicant's ability to repay the loan, and reviews the mortgaged property for
compliance with the WMC Guidelines. The WMC Guidelines are applied in accordance
with a procedure which complies with applicable federal and state laws and
regulations and require, among other things, (i) an appraisal of the mortgaged
property which conforms to FHLMC and FNMA standards and (ii) a review of such
appraisal by a WMC-approved review appraiser or by WMC's in-house appraisal
staff, which review, depending upon the original principal balance and LTV of
the related mortgaged property, may consist of a second
S-38
<PAGE>
<PAGE>
appraisal, a field review or a desk review. The WMC Guidelines permit mortgage
loans with LTVs of up to 90% (lower in the case of (i) risk categories below
"A-", (ii) Lite Documentation, Stated Documentation, No Ratio Documentation and
Simple 65 Documentation categories, (iii) condominium, vacation and second home
and manufactured housing mortgaged property types and (iv) Super Jumbo Loans).
The WMC Guidelines permit combined LTVs of up to 100% first and second lien
mortgage loans (lower in the case of risk categories below "C", No Ratio
Documentation and Simple 65 Documentation categories), provided that mortgage
loans with LTVs of more than 90% are not eligible for second lien financing.
Under the WMC Guidelines, cash out on refinance mortgage loans is generally (i)
unlimited on Full Documentation mortgage loans with LTVs of up to 85%, Stated
Documentation and No Ratio Documentation mortgage loans with LTVs of up to 80%,
and Simple 65 Documentation mortgage loans with LTVs of up to 65%, (ii) limited
to 20% of the loan amount after payment of all revolving debt for mortgage loans
with LTVs over 85% and (iii) limited to $125,000 on mortgage loans in risk
category "D".
All mortgage loans originated or purchased under the WMC Guidelines are
based on loan application packages submitted through mortgage brokerage
companies or WMC's retail branches or on loan files (which include loan
application documentation) submitted by correspondents. Loan application
packages submitted through mortgage brokerage companies, containing in each case
relevant credit, property and underwriting information on the loan request, are
compiled by the applicable mortgage brokerage company and submitted to Equity
Services for approval and funding. The mortgage brokerage companies receive a
portion of the loan origination fee charged to the mortgagor at the time the
loan is made. No single mortgage brokerage company accounts for more than 2%,
measured by outstanding principal balance, of the sub-prime mortgage loans
originated by WMC.
The WMC Guidelines require that the documentation accompanying each
mortgage loan application include, among other things, a credit report on the
related applicant from a credit reporting company. The report typically contains
information relating to such matters as credit history with local and national
merchants and lenders, installment debt payments and any record of defaults,
bankruptcy, repossession, suits or judgments. In the case of purchase money
mortgage loans, WMC generally verifies the source of funds for the downpayment
(except in the case of owner-occupied properties with LTVs less than or equal to
75%). In the case of mortgage loans originated under the Full Documentation
category, the WMC Guidelines require documentation of income (which may consist
of (i) a verification of employment form covering a specified time period which
varies with LTV, (ii) two most recent pay stubs and two years of tax returns
and/or (iii) two years of bank statements) and telephonic verification. Under
the Full-Alternative Documentation category, only two years of bank statements
are required. In the case of mortgage loans originated under the Lite
Documentation category, the WMC Guidelines require similar documentation of
income, provided that such documentation may cover shorter periods of time and
telephonic verification may be omitted. Lite Documentation mortgage loans are
generally acceptable at 5% greater LTV than Stated Documentation mortgage loans,
up to a maximum of 80% LTV. In the case of mortgage loans originated under the
Stated Documentation category, the WMC Guidelines require (i) that income be
stated on the application, accompanied by proof of self employment in the case
of self-employed individuals, (ii) that a WMC prefunding auditor conduct
telephonic verification of employment, or in the case of self-employed
individuals, telephonic verification of business line and (iii) that stated
income be consistent with type of work listed on the application. No Ratio
Documentation mortgage loans ("A-" risk categories only) and Simple 65
Documentation mortgage loans require no proof of self-employment, income
documentation or proof of assets. Debt Ratio calculations are not used in the
case of No Ratio Documentation and Simple 65 Documentation mortgage loans.
The general collateral requirements in the WMC Guidelines specify that
a mortgaged property not have a condition rating of lower than "average". For
mortgage loans with LTVs greater than 80%, deferred maintenance costs may
generally not exceed $1,500. At LTVs of 80% and below, deferred maintenance
costs are generally acceptable at the lesser of $4,000 or 3% of the value of the
mortgaged property. Each appraisal includes a market data analysis based on
recent sales of comparable homes in the area. The general collateral
requirements in the WMC Guidelines specify conditions and parameters relating to
zoning, land-to-improvement ratio, special hazard zones, neighborhood property
value trends, whether the property site is too isolated, whether the property
site is too close to commercial businesses, whether the property site is rural,
city or suburban, whether the property site is typical for the neighborhood in
which it is located and whether the property site is sufficient in size and
shape to support all improvements.
S-39
<PAGE>
<PAGE>
The WMC Guidelines used by Equity Services are less stringent than the
standards generally acceptable to FNMA and FHLMC with regard to the mortgagor's
credit standing and repayment ability and in certain other respects. Mortgagors
who qualify under the WMC Guidelines generally have payment histories and Debt
Ratios which would not satisfy FNMA and FHLMC underwriting guidelines and may
have a record of major derogatory credit items such as outstanding judgments or
prior bankruptcies. The WMC Guidelines establish the maximum permitted LTV for
each loan type based upon these and other risk factors.
Equity Services requires that all mortgage loans have title insurance
and be secured by liens on real property. Equity Services also requires that
fire and extended coverage casualty insurance be maintained on the mortgaged
property in an amount equal to the greater of full replacement or the amount of
all liens on such mortgaged property. In addition, flood insurance is obtained
where applicable and a tax service is used to monitor the payment of property
taxes on all loans.
RISK CATEGORIES
Under the WMC Guidelines, various risk categories are used to grade the
likelihood that the mortgagor will satisfy the repayment conditions of the
mortgage loan. These risk categories establish the maximum permitted LTV and
loan amount, given the borrower's mortgage payment history, the borrower's
consumer credit history, the borrower's liens/charge-offs/bankruptcy history,
the borrower's Debt Ratio (except under the No Ratio Documentation category),
the borrower's use of proceeds (purchase or refinance), the documentation type
and other factors. Lite Documentation mortgage loans are generally acceptable at
5% greater LTV than Stated Documentation mortgage loans, up to a maximum of 85%
LTV. No Ratio Documentation mortgage loans have a maximum loan amount of
$350,000 and a maximum LTV of 80%. Simple 65 Documentation mortgage loans have a
maximum loan amount of $250,000 and a maximum LTV of 65%. In general, higher
credit risk mortgage loans are graded in categories which permit higher Debt
Ratios and more (or more recent) major derogatory credit items such as
outstanding judgments or prior bankruptcies. Tax liens are not considered in
determining risk category; derogatory medical collections are not considered in
determining risk category and are not required to be paid off; and delinquent
student loans are not considered in determining risk category if other consumer
credit is paid as agreed.
The WMC Guidelines specify the following risk categories and associated
criteria for grading the potential likelihood that an applicant will satisfy the
repayment obligations of a mortgage loan. However, as described above, the
following are guidelines only, and exceptions are made on a case-specific basis.
In addition, variations of the following criteria are applicable under the
programs established by Equity Services for the origination of Super Jumbo Loans
and for the origination of mortgage loans secured by mortgages on condominiums,
vacation and second homes, manufactured housing and two- to four-family
properties. A small percentage of the Mortgage Loans were made to borrowers with
credit profiles resulting in a risk category somewhat better than Risk Category
A- described below and permitting LTVs approximately 5% higher in all
documentation categories and up to 90% in the Simple 65 Documentation category
for borrowers with FICO scores starting at 640.
RISK CATEGORY "A-"
Maximum loan amount: $750,000 for Full Documentation; $400,000 for Stated
Documentation; $300,000 for non-owner-occupied mortgaged property.
Mortgage payment history: not more than two 30 day delinquencies during the
preceding 12 months (a rolling 30 day delinquency counts as only one such
delinquency) and no 60 day delinquencies during the preceding 12 months.
Consumer credit history: majority paid as agreed during the preceding 12 months;
30 day delinquencies and isolated 60 day delinquencies during the preceding 12
months are permitted.
Liens/charge-offs: minor in nature.
Bankruptcy: permitted if filed more than two years preceding origination of
loan.
Notice of Default ("NOD")/foreclosures: none permitted within the preceding two
years.
Maximum LTV: 90% for Full Documentation and owner-occupied mortgaged property;
80% for Full Documentation and non-owner-occupied mortgaged property; 80% for
Stated Documentation and owner-occupied mortgaged property;
S-40
<PAGE>
<PAGE>
70% for Stated Documentation and non-owner-occupied mortgaged property. For 90%
LTV mortgage loans, maximum loan amount is limited to $400,000 and maximum Debt
Ratio is limited to 45%.
Debt Ratio: 45% to 55%.
RISK CATEGORY "B"
Maximum loan amount: $500,000 for Full Documentation; $400,000 for Stated
Documentation; $300,000 for non-owner-occupied mortgaged property.
Mortgage payment history: either (i) not more than two 30 day delinquencies and
one 60 day delinquency during the preceding 12 months (a rolling 30 day or 60
day delinquency counts as only one such delinquency) or (ii) not more than four
30 day delinquencies during the preceding 12 months (a rolling 30 day
delinquency counts as only one such delinquency) and no 60 day delinquencies
during the preceding 12 months.
Consumer credit history: some 60 day and some 90 day delinquencies during the
preceding 12 months are permitted. A borrower with no consumer credit history
will be deemed to have a "B" risk category consumer credit history.
Liens/charge-offs: minor in nature.
Bankruptcy: permitted if filed more than two years preceding origination of
loan.
NODs/foreclosures: none permitted within the preceding two years.
Maximum LTV: 85% for Full Documentation and owner-occupied mortgaged property;
75% for Full Documentation and non-owner-occupied mortgaged property; 75% for
Stated Documentation and owner-occupied mortgaged property; 65% for Stated
Documentation and non-owner-occupied mortgaged property.
Debt Ratio: 50% to 60%.
RISK CATEGORY "C"
Maximum loan amount: $400,000 for Full Documentation; $350,000 for Stated
Documentation; $250,000 for non-owner-occupied mortgaged property.
Mortgage payment history: 60 day and 90 day delinquencies during the preceding
12 months are permitted at Equity Services' discretion.
Consumer credit history: a pattern of late payments during the preceding 12
months is permitted.
Liens/charge-offs: permitted at Equity Services' discretion.
Bankruptcy: permitted if filed more than 12 months preceding origination of
loan; if Chapter 13, an LTV of 70% or less is allowed and the Seller will pay
off a bankruptcy trustee if payments in the plan were as agreed.
NODs/foreclosures: none permitted within the preceding 12 months.
Maximum LTV: 75% for Full Documentation and owner-occupied mortgaged property
(80% where borrower has 5 years steady employment with the same employer,
borrower has 5 years of residency in the same house, loan amount does not exceed
$300,000, mortgaged property is a single-family residence and Debt Ratio does
not exceed 50%); 70% for Full Documentation and non-owner-occupied mortgaged
property; 70% for Stated Documentation and owner-occupied mortgaged property;
60% for Stated Documentation and non-owner-occupied mortgaged property.
Debt Ratio: 50% to 60%.
RISK CATEGORY "D"
Maximum loan amount: $300,000 for Full Documentation; $200,000 for Stated
Documentation; $200,000 for non-owner-occupied mortgaged property.
Mortgage payment history: maximum 120 day delinquency status (up to 149 actual
days) during the preceding 12 months.
Consumer credit history: poor consumer credit history during the preceding 12
months is permitted.
Liens/charge-offs: permitted at Equity Services' discretion.
S-41
<PAGE>
<PAGE>
Bankruptcy: permitted if discharged at least one day prior to origination of the
loan.
NODs/foreclosures: NOD outstanding less than 149 days at the time of origination
of the loan is permitted.
Maximum LTV: 70% for Full Documentation and owner-occupied mortgaged property;
60% for Full Documentation and non-owner-occupied mortgaged property; 65% for
Stated Documentation and owner-occupied mortgaged property; 60% for Stated
Documentation and non-owner-occupied mortgaged property.
Debt Ratio: 60%.
LIMITED SUB-PRIME SERVICING EXPERIENCE; LOSS AND DELINQUENCY EXPERIENCE
Until August 1997, Equity Services sold its sub-prime product on a
whole-loan, servicing released basis to secondary market investors.
Consequently, there is currently very limited information regarding the
delinquency and loss experience relating to WMC's sub-prime mortgage portfolio.
In addition, WMC historically serviced only conforming or prime quality mortgage
loans, and the majority of that servicing portfolio was sold in connection with
the acquisition of WMC by Apollo. WMC's servicing platform is currently directed
primarily to servicing the sub-prime market.
Sub-prime mortgage loans originated or acquired by WMC were first
securitized in August, 1997 when the WMC Mortgage Loan Pass-Through
Certificates, Series 1997-1 were issued (the "WMC 1997-1 CERTIFICATES"). WMC has
completed three additional securitizations for the issuance of the WMC Mortgage
Loan Pass-Through Certificates, Series 1997-2 (the "WMC 1997-2 CERTIFICATES"),
the WMC Mortgage Loan Asset Backed Certificates, Series 1998-1 (the "WMC 1998-1
CERTIFICATES") and the WMC Mortgage Pass-Through Certificates, Series 1998-A
(the "WMC 1998-A Certificates"). The table below summarizes the delinquency
information for (i) the mortgage loans in all four securitizations as reported
at July 31, 1998. It should be noted that the total amount of mortgage loans on
which the data below is based includes many mortgage loans which were not, as of
the respective dates indicated, outstanding long enough to give rise to some of
the indicated periods of delinquency, to foreclosure or bankruptcy proceedings
or to forbearance or REO property status. In the absence of such mortgage loans,
the delinquency, forbearance, foreclosure, bankruptcy and REO property
percentages indicated above would be higher and could be substantially higher.
Because the Trust Fund will consist of a fixed group of Mortgage Loans, the
actual delinquency, forbearance, foreclosure, bankruptcy and REO property
percentages with respect to the Mortgage Pool may therefore be expected to be
higher, and may be substantially higher, than the percentages indicated below.
<TABLE>
<S> <C> <C>
Total Principal Amount and Number of Loans Outstanding in WMC
Sub-Prime Securitizations...................................... $1,599,874,413 15,484
Delinquency(1) (Principal Amount and Number)
Period of Delinquency:
30-59 Days................................... $32,358,389 375
60-89 Days................................... $2,314,970 21
90+ Days..................................... $966,956 7
Total Delinquencies................................... $35,640,314 403
Delinquencies as a Percentage of Total Outstanding Loans....... 2.23%
Foreclosures Pending(2) (Principal Amount)..................... $55,564,644
Foreclosures Pending as a Percentage of
Total Loans Outstanding............................... 3.47%
Bankruptcies Pending(3) (Principal Amount)..................... $11,817,060
Bankruptcies Pending as a
Percentage of Total Loans Outstanding................. 0.74%
Total Delinquencies Plus Foreclosures Pending and Bankruptcies
Pending (Principal Amount)..................................... $103,022,018
Total Delinquencies Plus Foreclosures Pending and Bankruptcies
Pending as a Percentage of Total Loans Outstanding............. 6.44%
</TABLE>
- -----------------
(1) The delinquency balances, percentages and numbers set forth under this
heading exclude (a) delinquent mortgage loans that were in foreclosure
at the date indicated ("FORECLOSURE LOANS"), (b) delinquent mortgage
loans as to which the related mortgagor was
S-42
<PAGE>
<PAGE>
in bankruptcy proceedings at the date indicated ("BANKRUPTCY LOANS").
All Foreclosure Loans and Bankruptcy Loans have been segregated into
the sections of the table entitled "Foreclosures Pending" and
"Bankruptcies Pending", respectively, and are not included in the
"30-59 Days," "60-89 Days," "90+ Days" and "Total Delinquencies"
sections of the table.
(2) Mortgage loans that are in foreclosure but as to which the mortgaged
property has not been liquidated at the date indicated.
(3) Mortgage loans as to which the related mortgagor is in bankruptcy
proceedings at the date indicated.
The foregoing information was taken directly from the reports to the
holders of the WMC 1997-1 Certificates, WMC 1997-2 Certificates, WMC 1998-1
Certificates and WMC 1998-A Certificates, which is provided by the related
trustee and based on information provided by the Master Servicer. The Company
makes no representation or warranty as to the accuracy of the foregoing
information. The delinquency, foreclosure and bankruptcy numbers, percentages
and aggregate principal balances of the mortgage loans, in each case are
calculated as of the last day of the calendar month in the month preceding the
related determination date.
QUALITY CONTROL PROCEDURES HIGHLIGHTS
Each month, WMC's quality control department conducts a review and
verification of approximately 10% of the loans originated and purchased during
the previous month with specific attention to the following areas:
Legal Documentation: Promissory note, mortgage, deed of trust,
truth-in-lending disclosure, title policy and all other applicable origination
documents are reviewed for accuracy and proper signatures.
Credit Documentation: All credit verifications, credit applications and
credit reports are reviewed for accuracy and proper signatures.
All reviews are reported to management on a monthly basis. Management
meets with the department supervisors in both underwriting and quality control
to review results. Quality control functions are performed separately from loan
originating and underwriting.
Quality Control Appraisals: Each appraisal is reviewed with emphasis on
the following areas: verification of occupancy, valuation method, and review of
comparable sales.
In addition to the review above, re-inspections are performed on 10% of
the reviewed loans, i.e., approximately 1.0% of originations. If a pattern of
questionable values or methodology becomes apparent for an appraiser, a meeting
is arranged to discuss these problems, and the appraisal may be replaced.
COLLECTION PROCEDURES
Collections are conducted by WMC's service center at its corporate
headquarters in Woodland Hills, California.
The collection department is structured in such a way that generally
the most experienced collectors are responsible for the accounts which are most
delinquent. Accounts which are 1-29 days delinquent are handled by collectors
with a minimum of 2 years of experience in sub-prime mortgage collections.
Accounts which are 30-59 days delinquent are handled by collectors with a
minimum of 3 years of experience in sub-prime mortgage collections. All accounts
over 60 days delinquent are reviewed by a loss mitigation collector with a
minimum of 5 years of experience in sub-prime mortgage collections. Accounts may
be transferred to a loss mitigation collector at any time during the delinquency
process, depending on the loan situation and the degree of delinquency. Loss
mitigation collectors are responsible for accounts requiring "special handling",
such as short pays, forbearance, settlement, and overall workout handling. Loss
mitigation collectors review all pre-foreclosure accounts and are responsible
for packaging loans for foreclosure committee approval. Bankruptcy and
foreclosure collectors (or processors) with a minimum of 3 years of experience
in sub-prime mortgage collections are responsible for monitoring
trustee/attorney performance. The REO department is responsible for marketing
and managing the sale effort for any property acquired through foreclosure, and
a minimum of 2 years of experience in mortgage collections is required.
YEAR 2000 CONSEQUENCES
As is the case with most companies using computers in their operations,
WMC is faced with the task of completing its compliance goals in connection with
the year 2000 issue during the next year and a half. The year 2000 issue is the
result of prior computer programs being written using two digits, rather than
four digits, to define the applicable year. Any of WMC's programs that have
time-sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. This could result in major system failure or
miscalculations. WMC is presently in the
S-43
<PAGE>
<PAGE>
process of upgrading its computer software to programs which will be year 2000
compliant. WMC has no mainframe applications. All of WMC's computer applications
run on either a personal computer, a network server or on an AS400. WMC uses
third-party vendor software packages for all of its major systems. An outside
organization has been retained as consultants to WMC to manage and staff the
year 2000 assessments and planning effort, and one officer of WMC is exclusively
devoted to Year 2000 compliance. It is the expectation of WMC to have all of its
systems that support core business processes upgraded and tested by December 31,
1998. In late March 1998, WMC was informed that it should plan for its Year 2000
Compliant Release for its mortgage loan processing system to be available on
September 30, 1998, rather than the previously targeted June 1998. WMC is now
working to determine the effect that the delay will have on being able to
complete all testing by December 31, 1998. While WMC currently is unable to
quantify the overall cost of this work, it does not foresee any materially
adverse effects on WMC's results of operations or financial conditions as a
result of such changes.
However, in the event that any of WMC's suppliers, customers, brokers
or agents do not successfully and timely achieve year 2000 compliance, WMC's
business or operations could be materially adversely affected.
DESCRIPTION OF CERTIFICATES
GENERAL
The Series 1998-B WMC Mortgage Pass-Through Certificates will consist
of the following ten classes: (i) Class A-1 Certificates (the "CLASS A-1
CERTIFICATES"), Class A-2 Certificates (the "CLASS A-2 CERTIFICATES") and Class
A-IO Certificates (the "CLASS A-IO CERTIFICATES"; together with the Class A-1
Certificates and the Class A-2 Certificates, the "CLASS A CERTIFICATES"); (ii)
Class M-1 Certificates (the "CLASS M-1 CERTIFICATES") and Class M-2 Certificates
(the "CLASS M-2 CERTIFICATES"; together with the Class M-1 Certificates, the
"CLASS M CERTIFICATES"); (iii) Class B Certificates (the "CLASS B CERTIFICATES";
together with the Class M Certificates, the "SUBORDINATE CERTIFICATES"); (iv)
Class C Certificates (the "CLASS C CERTIFICATES") and (v) Class R-I
Certificates, Class R-II Certificates and Class R-III Certificates (together,
the "CLASS R CERTIFICATES" or the "RESIDUAL CERTIFICATES"). The Class A-IO
Certificates will be divided into three components (each, a "COMPONENT"): Class
A-IO Component A, Class A-IO Component B and Class A-IO Component C. Only the
Class A Certificates and the Subordinate Certificates (together, the "OFFERED
CERTIFICATES") are offered hereby.
The Certificates will evidence the entire beneficial ownership interest
in the Trust Fund. The Trust Fund will consist of: (i) the Mortgage Loans; (ii)
such assets as from time to time are identified as deposited in respect of the
Mortgage Loans in the Certificate Account, the Distribution Account, the
Pre-Funding Account, the Capitalized Interest Account and the Available Funds
Cap Carryover Reserve Account and belonging to the Trust Fund; (iii) property
acquired by foreclosure of such Mortgage Loans or deed in lieu of foreclosure;
(iv) any applicable insurance policies; and (v) all proceeds of the foregoing.
The Offered Certificates (other than the Class A-IO Certificates) will
be issued in book-entry format in minimum denominations of $25,000 and integral
multiples of $1 in excess thereof. The Class A-IO Certificates will be issued in
book-entry format in minimum denominations of a 20% percentage interest and
integral multiples of 0.01% percentage interests in excess thereof.
BOOK-ENTRY REGISTRATION OF THE OFFERED CERTIFICATES
Holders of the Offered Certificates (the "DTC REGISTERED CERTIFICATES")
may elect to hold their DTC Registered Certificates through DTC, in the United
States, or CEDEL or Euroclear, in Europe, if they are Participants (as defined
in the Prospectus) of such systems, or indirectly through organizations which
are Participants in such systems. The DTC Registered Certificates will be issued
in one or more securities which equal the aggregate Certificate Principal
Balance of the DTC Registered Certificates and will initially be registered in
the name of Cede & Co. ("CEDE"), 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 (in such capacities, individually the "RELEVANT
DEPOSITARY" and collectively the "EUROPEAN DEPOSITARIES") which in turn will
hold such positions in customers' securities accounts in the depositaries' names
on the books of DTC. DTC Registered Certificateholders that are not Participants
or Intermediaries (as defined in the Prospectus) but desire to
S-44
<PAGE>
<PAGE>
purchase, sell or otherwise transfer ownership of, or other interests in the DTC
Registered Certificates may do so only through Participants or Intermediaries.
Accordingly, DTC Registered Certificateholders will not be recognized by the
Trustee or Master Servicer as Certificateholders, as such term is defined in the
Pooling Agreement, and DTC Registered Certificateholders will be permitted to
receive information furnished to Certificateholders and to exercise the rights
of Certificateholders only indirectly through DTC, its Participants and
Intermediaries. Except as described below, no DTC Registered Certificateholder
will be entitled to receive a physical certificate representing such security (a
"DEFINITIVE CERTIFICATE"). Unless and until Definitive Certificates are issued,
it is anticipated that the only "HOLDER" of the DTC Registered Certificates will
be Cede, as nominee of DTC.
DTC Registered Certificateholders will receive all payments of
principal of, and interest on, the DTC Registered Certificates from the Trustee
through DTC, Participants and Intermediaries. While the DTC Registered
Certificates are outstanding (except under the circumstances described below),
under the rules, regulations and procedures creating and affecting DTC and its
operations (the "RULES"), DTC is required to make book-entry transfers among
Participants and Intermediaries on whose behalf it acts with respect to the DTC
Registered Certificates and is required to receive and transmit payments of
principal of, and interest on, the DTC Registered Certificates. Participants and
Intermediaries with whom DTC Registered Certificateholders have accounts with
respect to DTC Registered Certificates are similarly required to make book-entry
transfers and receive and transmit such payments on behalf of their respective
DTC Registered Certificateholders.
DTC Registered Certificateholders will not receive or be entitled to
receive Definitive Certificates representing their respective interests in the
DTC Registered Certificates, except under the limited circumstances described
below. Unless and until Definitive Certificates are issued, DTC Registered
Certificateholders who are not Participants may transfer ownership of DTC
Registered Certificates only through Participants and Intermediaries by
instructing such Participants and Intermediaries to transfer the DTC Registered
Certificates, by book-entry transfer, through DTC for the account of the
purchasers of such DTC Registered Certificates, which account is maintained with
their respective Participants. Under the Rules and in accordance with DTC's
normal procedures, transfers of ownership of DTC Registered Certificates will be
executed through DTC and the accounts of the respective Participants at DTC will
be debited and credited. Similarly, the Participants and Intermediaries will
make debits or credits, as the case may be, on their records on behalf of the
selling and purchasing DTC Registered Certificateholders.
Under a book-entry format, DTC Registered Certificateholders of the DTC
Registered Certificates may experience some delay in their receipt of payments,
since such payments will be forwarded by the Trustee to Cede. Payments with
respect to DTC Registered Certificates held through CEDEL or Euroclear will be
credited to the cash accounts of Participants in such systems in accordance with
the relevant system's rules and procedures, to the extent received by the
Relevant Depositary. Such payments will be subject to tax reporting in
accordance with relevant United States tax laws and regulations. Because DTC can
only act on behalf of Participants and Intermediaries, the ability of a DTC
Registered Certificateholder to pledge DTC Registered Certificates to persons or
entities that do not participate in the such system, or otherwise take actions
in respect of such DTC Registered Certificates, may be limited due to the lack
of physical certificates for such DTC Registered Certificates. In addition,
issuance of the DTC Registered Certificates in book-entry form may reduce the
liquidity of such DTC Registered Certificates in the secondary market since
certain potential investors may be unwilling to purchase securities for which
they cannot obtain physical certificates.
DTC has advised the Trustee that, unless and until Definitive
Certificates are issued, DTC will take any action permitted to be taken by the
holders of the DTC Registered Certificates under the Pooling Agreement only at
the direction of the Participants and Intermediaries to whose DTC accounts the
DTC Registered Certificates are credited, to the extent that such actions are
taken on behalf of the Participants and Intermediaries whose holdings include
such DTC Registered Certificates. CEDEL or Euroclear, as the case may be, will
take any other action permitted to be taken by holders of DTC Registered
Certificates under the Pooling Agreement on behalf of a Participant in such
system 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
and Intermediaries, with respect to some DTC Registered Certificates which
conflict with actions taken with respect to other DTC Registered Certificates.
S-45
<PAGE>
<PAGE>
Definitive Certificates will be issued to DTC Registered
Certificateholders of the DTC Registered Certificates, or their nominees, rather
than to DTC, if (a) the Trustee determines that the DTC is no longer willing,
qualified or able to discharge properly its responsibilities as nominee and
depository with respect to the DTC Registered Certificates and the Trustee is
unable to locate a qualified successor, (b) the Trustee elects to terminate a
book-entry system through DTC or (c) after the occurrence of an Event of
Default, pursuant to the Pooling Agreement, DTC Registered Certificateholders of
any class having Percentage Interests aggregating at least a majority of the
Certificate Principal Balances of such DTC Registered Certificates advise the
DTC through the Intermediaries and the 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 such DTC Registered Certificateholders.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the Trustee will be required to notify all DTC Registered
Certificateholders of the occurrence of such event and the availability through
DTC of Definitive Certificates. Upon surrender by DTC of the global certificate
or certificates representing the DTC Registered Certificates and instructions
for re-registration, the Trustee will issue and authenticate Definitive
Certificates, and thereafter the Trustee will recognize the holders of such
Definitive Certificates as Certificateholders under the Pooling Agreement.
Although DTC, CEDEL and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of DTC Registered Certificates among
Participants and Intermediaries 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. See Annex I hereto.
None of the Company, the Master Servicer or the Trustee will have any
liability for any actions taken by DTC or its nominee, including, without
limitation, actions for any aspect of the records relating to or payments made
on account of beneficial ownership interests in the DTC Registered Certificates
held by Cede, as nominee for DTC, or for maintaining, supervising or reviewing
any records relating to such beneficial ownership interests.
PAYMENTS ON MORTGAGE LOANS; DEPOSITS TO CERTIFICATE ACCOUNT AND DISTRIBUTION
ACCOUNT
The Master Servicer shall establish and maintain in the name of the
Trustee a separate trust account (the "CERTIFICATE ACCOUNT") for the benefit of
the holders of the Certificates. The Certificate Account will be an Eligible
Account (as defined in the Pooling Agreement). Subject to the investment
provisions described below, upon receipt by the Master Servicer of interest due
and principal received after the Cut-off Date or Subsequent Cut-off Date, as
applicable, in respect of the Mortgage Loans (excluding amounts representing the
Servicing Fee, reimbursement for Monthly Advances and Servicing Advances and
insurance proceeds to be applied to the restoration or repair of a Mortgaged
Property or similar items), the Master Servicer will deposit such amounts in the
Certificate Account. Amounts so deposited may be invested in Eligible
Investments (as described in the Pooling Agreement) maturing no later than one
Business Day prior to the date on which the amount on deposit therein is
required to be deposited in the Distribution Account (as defined below) or on
such Distribution Date if certain conditions set forth in the Pooling Agreement
are met.
The Trustee will establish an account (the "DISTRIBUTION ACCOUNT") into
which will be deposited amounts withdrawn from the Certificate Account for
distribution to Certificateholders on each Distribution Date. The Distribution
Account will be an Eligible Account. Amounts on deposit therein may be invested
in Eligible Investments maturing on or before the Business Day prior to the
related Distribution Date or on such Distribution Date if certain conditions set
forth in the Pooling Agreement are met.
Eligible Investments are specified in the Pooling Agreement and are
limited to investments which meet the criteria of the Rating Agencies.
ADVANCES
Not later than two Business Days prior to each Distribution Date, the
Master Servicer will deposit in the Certificate Account an amount, to be
distributed on the related Distribution Date, equal to the sum of the interest
accrued on each Mortgage Loan through the related due date for such Mortgage
Loan but not received by the Master Servicer as of the close of business on the
related Determination Date (net of the Servicing Fee) (the "MONTHLY ADVANCE").
Such obligation of the Master Servicer continues with respect to each Mortgage
Loan until such Mortgage Loan becomes a
S-46
<PAGE>
<PAGE>
Liquidated Mortgage Loan. Monthly Advances may be funded by the Master Servicer
from subsequent collections on the Mortgage Loans generally, and are
reimbursable as described below.
Subject to the second following paragraph, in the course of performing
its servicing obligations, the Master Servicer will pay all reasonable and
customary "out-of-pocket" costs and expenses incurred in the performance of its
servicing obligations, including, but not limited to, the cost of (i) the
preservation, restoration and protection of the Mortgaged Properties, (ii) any
enforcement or judicial proceedings, including foreclosures, and (iii) the
management and liquidation of Mortgaged Properties acquired in satisfaction of
the related Mortgage. Each such expenditure will constitute a "SERVICING
ADVANCE".
The Master Servicer's right to reimbursement for Servicing Advances is
limited to late collections on the related Mortgage Loan, including Liquidation
Proceeds, released mortgaged property proceeds, Insurance Proceeds and such
other amounts as may be collected by the Master Servicer from the related
mortgagor or otherwise relating to the Mortgage Loan in respect of which such
unreimbursed amounts are owed. The Master Servicer's right to reimbursement for
Monthly Advances shall be limited to late collections of interest on any
Mortgage Loan and to Liquidation Proceeds and Insurance Proceeds on the related
Mortgage Loan. The Master Servicer's right to such reimbursements is prior to
the rights of Certificateholders.
Notwithstanding the foregoing, the Master Servicer is not required to
make any Monthly Advance or Servicing Advance if in the good faith judgment and
sole discretion of the Master Servicer, the Master Servicer determines that such
advance will not be ultimately recoverable from collections received from the
mortgagor in respect of the related Mortgage Loan or other recoveries in respect
of such Mortgage Loan (a "NONRECOVERABLE ADVANCE"). However, if any Servicing
Advance or Monthly Advance is determined by the Master Servicer to be
nonrecoverable from such sources, the amount of such Nonrecoverable Advance may
be reimbursed to the Master Servicer from other amounts on deposit in the
Certificate Account.
In addition, the Master Servicer will also be required to deposit
Compensating Interest (as defined below) in the Certificate Account with respect
to any full prepayment received on a Mortgage Loan during the related Due
Period, out of its own funds without any right of reimbursement therefor.
"COMPENSATING INTEREST" is an amount equal to the difference between (x) 30
days' interest at the Mortgage Rate (or at such lower rate as may be in effect
for such Mortgage Loan because of application of the Relief Act, or as a result
of any Debt Service Reduction (as defined herein) and net of the rate at which
the Servicing Fee is calculated) on the Stated Principal Balance of such
Mortgage Loan as of the first day of the related Due Period and (y) to the
extent not previously advanced, the interest paid by the mortgagor with respect
to the Mortgage Loan during such Due Period. Notwithstanding the foregoing, the
Master Servicer will not be required to pay Compensating Interest with respect
to any Due Period in an amount in excess of the aggregate Servicing Fee received
by the Master Servicer for such Due Period and any resulting shortfall will be
borne by the Certificateholders to the extent not covered by Net Monthly Excess
Cash Flow.
INTEREST REMITTANCE AMOUNT AND PRINCIPAL REMITTANCE AMOUNT
The "INTEREST REMITTANCE AMOUNT" for any Distribution Date is equal to
(i) the portion allocable to interest of all scheduled monthly payments on the
Mortgage Loans received during the related Due Period, less the Servicing Fee,
(ii) all Monthly Advances and Compensating Interest, (iii) amounts applied to
pay interest from the Capitalized Interest Account, if any, and (iv) certain
unscheduled collections, including Insurance Proceeds, Liquidation Proceeds and
proceeds from repurchases of (and certain amounts received in connection with
any substitutions for) the Mortgage Loans (in each case less the Servicing Fee
due), received or deemed received during the related Due Period, to the extent
such amounts are allocable to interest.
The "PRINCIPAL REMITTANCE AMOUNT" for any Distribution Date is equal to
the sum of (i) the portion allocable to principal of all scheduled monthly
payments on the Mortgage Loans received with respect to the related Due Period,
(ii) certain unscheduled collections, including full and partial mortgagor
prepayments on the Mortgage Loans, Insurance Proceeds, Liquidation Proceeds and
proceeds from repurchases of (and certain amounts received in connection with
any substitutions for) the Mortgage Loans, received or deemed received during
the related Due Period, to the extent such amounts are allocable to principal
and (iii) with respect to the Distribution Date following the termination of the
Pre- Funding Period, that amount, if any, remaining on deposit in the
Pre-Funding Account. "DUE PERIOD" means, with respect to any Determination Date
or Distribution Date, the period from and including the second day of the
calendar
S-47
<PAGE>
<PAGE>
month immediately preceding such Determination Date or Distribution Date, as the
case may be, through the first day of the calendar month of such Determination
Date or Distribution Date, as the case may be.
INTEREST DISTRIBUTIONS
On each Distribution Date, the Trustee shall make the following
distributions, to the extent of the Interest Remittance Amount:
(i) first, to the holders of each Component of the Class A-IO
Certificates, pro rata, an amount equal to the Accrued Certificate
Interest (as defined below) thereon for such Distribution Date, plus
any Unpaid Interest Shortfall (as defined below) thereon;
(ii) second, from the balance, if any, remaining of the
Interest Remittance Amount after the distributions described in clause
(i) above, to the Class A-1 and Class A-2 Certificateholders, pro rata,
an amount equal to the Accrued Certificate Interest thereon for such
Distribution Date, plus any Unpaid Interest Shortfall thereon;
(iii) third, from the balance, if any, remaining of the
Interest Remittance Amount after the distributions described in clauses
(i) and (ii) above, to the Class M-1 Certificateholders, an amount
equal to the Accrued Certificate Interest thereon for such Distribution
Date;
(iv) fourth, from the balance, if any, remaining of the
Interest Remittance Amount after the distributions described in clauses
(i) through (iii) above, to the Class M-2 Certificateholders, an amount
equal to the Accrued Certificate Interest thereon for such Distribution
Date;
(v) fifth, from the balance, if any, remaining of the Interest
Remittance Amount after the distributions described in clauses (i)
through (iv) above, to the Class B Certificateholders, an amount equal
to the Accrued Certificate Interest thereon for such Distribution Date;
and
(vi) sixth, any amount remaining (the "NET MONTHLY EXCESS
INTEREST AMOUNT") shall be included in the Net Monthly Excess Cash Flow
as described in "-Net Monthly Excess Cash Flow Distributions" below and
applied as described therein.
"ACCRUED CERTIFICATE INTEREST" on any Distribution Date and for each
class of Offered Certificates will be equal to one month's interest accrued
during the related Interest Accrual Period on the related Certificate Principal
Balance (or Notional Amount, in the case of the Components of the Class A-IO
Certificates) immediately prior to such Distribution Date, at the related
Pass-Through Rate for such Distribution Date, less interest shortfalls incurred
for the corresponding period on the Mortgage Loans relating to the Relief Act or
similar legislation or regulations, with all such reductions allocated pro rata
among the Offered Certificates. Interest on the Offered Certificates, other than
the Class A-IO Certificates, will be calculated on the basis of a 360-day year
and the actual number of days elapsed during the related Interest Accrual
Period. Interest on the Components of the Class A-IO Certificates will be
calculated on the basis of a 360-day year consisting of twelve 30-day months.
The "INTEREST ACCRUAL PERIOD" means, with respect to each Distribution
Date and (i) each class of Offered Certificates (other than the Class A-IO
Certificates), the period from and including the Distribution Date in the month
preceding the month of such Distribution Date (or, in the case of the first
Distribution Date, from the Closing Date) through the day before such
Distribution Date and (ii) the Class A-IO Certificates, the calendar month
preceding such Distribution Date.
If on any Distribution Date the Interest Remittance Amount is
insufficient to pay Accrued Certificate Interest on any class of Offered
Certificates, the shortfall will be allocated through the priority of payment
set forth above. Such shortfalls could occur, for example, if delinquencies on
the related Mortgage Loans not covered by Monthly Advances were exceptionally
high and were concentrated in a particular month. In addition, such shortfalls
could occur if Prepayment Interest Shortfalls were particularly high in a
particular month and Compensating Interest was insufficient to cover such
shortfall. The "PREPAYMENT INTEREST SHORTFALL" for any Distribution Date is
equal to the aggregate shortfall, if any, in collections of interest (adjusted
to the related Net Mortgage Rates) resulting from mortgagor prepayments on the
Mortgage Loans during the related Due Period. Such shortfalls will result
because interest on prepayments in full is paid only to the date of prepayment,
and because no interest is paid on prepayments in part, as such prepayments in
part are applied to reduce the outstanding principal balance of the related
Mortgage Loans as of
S-48
<PAGE>
<PAGE>
the Due Date in the month of prepayment. Any Accrued Certificate Interest
remaining unpaid as to any class of the Offered Certificates, as a result of any
such shortfalls (other than any shortfalls caused in connection with Relief Act
Shortfalls or Debt Service Reductions) will be carried forward and will bear
interest at the related Pass-Through Rate and be payable on future Distribution
Dates to the extent of funds available therefor (such amount, including interest
thereon, as of any Distribution Date, the "UNPAID INTEREST SHORTFALL"). Such
amounts payable to the Class A Certificates will be paid concurrently with
Accrued Certificate Interest thereon pursuant to clause (i) of the third
preceding paragraph or from the Net Monthly Excess Cash Flow. Such amounts owed
to the Class M-1, Class M-2 and Class B Certificates will be payable solely from
the Net Monthly Excess Cash Flow as described in "-- Net Monthly Excess Cash
Flow Distributions" below.
The "PASS-THROUGH RATE" with respect to each class of Offered
Certificates (other than the Components of the Class A-IO Certificates) is equal
to the lesser of (i) LIBOR plus the related Certificate Margin (the rate
described in this clause (i), the "LIBOR CERTIFICATE RATE") and (ii) the
weighted average of the Mortgage Rates of the Mortgage Loans as of the second
day of the month preceding the month of such Distribution Date, weighted on the
basis of the related Stated Principal Balances as of such date, minus the sum of
(a) the Servicing Fee Rate and (b) the Strip Effective Rate multiplied by a
fraction equal to (x) the Notional Amount for such Distribution Date divided by
(y) the sum of the Pool Principal Balance and the Pre-Funded Amount immediately
prior to such Distribution Date (the rate described in this clause (ii), the
"AVAILABLE FUNDS CAP"). The "STRIP EFFECTIVE RATE" is equal to 5.50% for the
first 12 Distribution Dates, 4.00% for the 13th through 24th Distribution Dates,
2.50% for the 25th through 30th Distribution Dates, and 0.00% thereafter. The
"CERTIFICATE MARGIN" for each class of Offered Certificates is as follows:
<TABLE>
<CAPTION>
Class Certificate Margin
----- ------------------
<S> <C> <C>
(1) (2)
Class A-1 0.06% 0.12%
Class A-2 0.22% 0.44%
Class M-1 0.34% 0.51%
Class M-2 0.65% 0.975%
Class B 1.30% 1.95%
</TABLE>
- ----------------
(1) For Interest Accrual Periods beginning on or prior to the Optional
Termination Date.
(2) For Interest Accrual Periods beginning after the Optional Termination Date.
With respect to each Distribution Date, "LIBOR" will equal the
interbank offered rate for one-month United States dollar deposits in the London
market as quoted 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 Interest Accrual
Period or, in the case of the first Distribution Date, the second LIBOR Business
Day prior to the Closing Date. "TELERATE PAGE 3750" means the display designated
as page 3750 on the Telerate Service (or such other page as may replace page
3750 on that service for the purpose of displaying London interbank offered
rates of major banks). If such rate does not appear on such page (or such other
page as may replace that page on that service, or if such service is no longer
offered, such other service for displaying LIBOR or comparable rates as may be
selected by the Trustee after consultation with the Master Servicer), the rate
will be the Reference Bank Rate. The "REFERENCE BANK RATE" will be determined on
the basis of the rates at which deposits in U.S. dollars are offered by the
reference banks (which shall be three major banks that are engaged in
transactions in the London interbank market, selected by the Trustee after
consultation with the Master Servicer) as of 11:00 A.M., London time, on the day
that is two LIBOR Business Days prior to the immediately preceding Interest
Accrual Period to prime banks in the London interbank market for a period of one
month in amounts approximately equal to the Aggregate Certificate Principal
Balance of the Offered Certificates. The Trustee will request the principal
London office of each of the reference banks to provide a quotation of its rate.
If at least two such quotations are provided, the rate will be the arithmetic
mean of the quotations. If on such date fewer than two quotations are provided,
S-49
<PAGE>
<PAGE>
the rate will be the arithmetic mean of the rates quoted by one or more major
banks in New York City, selected by the Trustee after consultation with the
Master Servicer, as of 11:00 A.M., New York City time, on such date for loans in
U.S. dollars to leading European banks for a period of one month in amounts
approximately equal to the Aggregate Certificate Principal Balance of the
Offered Certificates. If no such quotations can be obtained, the rate will be
equal to LIBOR for the prior Distribution Date. "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 Distribution Date, the Pass-Through Rate for an Offered
Certificate (other than the Class A-IO Certificates) is based on the Available
Funds Cap, holders of such Certificates will be entitled to receive the
Available Funds Cap Carryover Amount on future Distribution Dates, subject to
available funds, and such amounts owed to the Offered Certificates will be
payable solely from the amounts on deposit in the Available Funds Cap Carryover
Reserve Account described under "-- Available Funds Cap Carryover Reserve
Account" below. The ratings assigned to the Offered Certificates do not
address the likelihood of the payment of any Available Funds Cap Carryover
Amount.
The "PASS-THROUGH RATE" for each Class A-IO Component will be as
follows: with respect to Class A-IO Component A, 1.50% for the first 12
Distribution Dates, and 0.00% thereafter; with respect to Class A-IO Component
B, 1.50% for the first 24 Distribution Dates, and 0.00% thereafter; with respect
to Class A-IO Component C, 2.50% for the first 30 Distribution Dates, and 0.00%
thereafter. The Components of the Class A-IO Certificates have no Certificate
Principal Balance and will accrue interest at the related Pass-Through Rate on
the Notional Amount.
As described herein, Accrued Certificate Interest on each class of
Offered Certificates is based on the Certificate Principal Balances or Notional
Amounts thereof immediately prior to the related Distribution Date. The
"CERTIFICATE PRINCIPAL BALANCE" of any class of Class A Certificates (other than
the Class A-IO Certificates) means the initial Certificate Principal Balance
thereof as reduced by the sum of all amounts actually distributed to the holders
of such Certificates on all prior Distribution Dates on account of principal.
The "CERTIFICATE PRINCIPAL BALANCE" of any class of Subordinate Certificates
means the initial Certificate Principal Balance thereof as reduced by the sum
(i) of all amounts actually distributed to the holders of such Certificates on
all prior Distribution Dates on account of principal and (ii) Realized Losses,
if any, allocated to such class in reduction of the principal amount thereof as
described under "Description of Certificates -- Allocation of Losses;
Subordination" herein. The "NOTIONAL AMOUNT" of each Component of the Class A-IO
Certificates means the lesser of (i) $80,000,000 and (ii) the sum of the Pool
Principal Balance and the Pre-Funded Amount immediately prior to the date of
determination.
The "NET MORTGAGE RATE" on each Mortgage Loan is equal to the Mortgage
Rate thereon minus the Servicing Fee Rate.
The "STATED PRINCIPAL BALANCE" of any Mortgage Loan as of any date of
determination is equal to the unpaid principal balance thereof at the close of
business on the Cut-off Date or Subsequent Cut-off Date, as applicable, reduced
by all amounts allocable to principal that have been distributed to
Certificateholders with respect to such Mortgage Loan, and as further reduced to
the extent of any Realized Loss incurred with respect to such Mortgage Loan on
or before the last day of the most recently ended Due Period.
PRINCIPAL DISTRIBUTIONS
The "PRINCIPAL DISTRIBUTION AMOUNT" means, as of any Distribution Date,
the sum of (i) the Principal Remittance Amount, minus, on any Distribution Date
occurring on or after the Stepdown Date (as defined herein), the
Overcollateralization Reduction Amount (as defined herein), if any, and (ii) the
Extra Principal Distribution Amount (funded as described below under "-- Net
Monthly Excess Cash Flow Distributions"), if any, for such Distribution Date. On
each Distribution Date prior to the Stepdown Date and on or after the Stepdown
Date if a Trigger Event is in effect, the Principal Distribution Amount will be
distributed to the holders of the Offered Certificates (other than the Class A-
IO Certificates) as follows:
(i) first, to the holders of the Class A-1 Certificates until
the Certificate Principal Balance of the Class A-1 Certificates has
been reduced to zero;
S-50
<PAGE>
<PAGE>
(ii) second, the balance, if any, remaining of the Principal
Distribution Amount after the distribution described in clause (i)
above, to the holders of the Class A-2 Certificates until the
Certificate Principal Balance of the Class A-2 Certificates has been
reduced to zero;
(iii) third, the balance, if any, remaining of the Principal
Distribution Amount after the distribution described in clauses (i) and
(ii) above, to the holders of the Class M-1, Class M-2 and Class B
Certificates, in that order, in each case until the Certificate
Principal Balance of the related Class has been reduced to zero; and
(iv) fourth, any Principal Remittance Amount remaining (the
"NET MONTHLY EXCESS PRINCIPAL AMOUNT" for such Distribution Date) shall
be included in the Net Monthly Excess Cash Flow as described in "-- Net
Monthly Excess Cash Flow Distributions" below and applied as described
therein.
On each Distribution Date on or after the Stepdown Date so long as no
Trigger Event is in effect, the Principal Distribution Amount will be
distributed to the holders of the Offered Certificates (other than the Class
A-IO Certificates) as follows:
(i) first, to the holders of the Class A-1 Certificates until
the Certificate Principal Balance of the Class A-1 Certificates has
been reduced to zero, an amount equal to the excess, if any, of (x) the
sum of Certificate Principal Balance of the Class A-1 Certificates and
Class A-2 Certificates immediately prior to such Distribution Date over
(y) the lesser of (a) the product of (1) 50.30% and (2) the Pool
Principal Balance as of the last day of the related Due Period and (b)
the Pool Principal Balance as of the last day of the related Due Period
minus $4,000,000;
(ii) second, and only if the Certificate Principal Balance of
the Class A-1 Certificates has been reduced to zero, from the balance,
if any, remaining of the Principal Distribution Amount after the
distribution described in clause (i) above, to the holders of the Class
A-2 Certificates, until the Certificate Principal Balance of the Class
A-2 Certificates has been reduced to zero, an amount equal to the
excess, if any, of (x) the Certificate Principal Balance of the Class
A-2 Certificates immediately prior to such Distribution Date over (y)
the lesser of (a) the product of (1) 50.30% and (2) the Pool Principal
Balance as of the last day of the related Due Period and (b) the Pool
Principal Balance as of the last day of the related Period minus
$4,000,000;
(iii) third, from the balance, if any, remaining of the
Principal Distribution Amount after the distributions described in
clauses (i) and (ii) above, to the holders of the Class M-1
Certificates, until the Certificate Principal Balance of the Class M-1
Certificates has been reduced to zero, the excess, if any, of (x) the
sum of (a) the aggregate Certificate Principal Balance of the Class A
Certificates (after taking into account distributions pursuant to
clauses (i) and (ii) above on such Distribution Date) and (b) the
Certificate Principal Balance of the Class M-1 Certificates immediately
prior to such Distribution Date over (y) the lesser of (a) the product
of (1) 66.30% and (2) the Pool Principal Balance as of the last day of
the related Due Period and (b) the Pool Principal Balance as of the
last day of the related Due Period minus $4,000,000;
(iv) fourth, from the balance, if any, remaining of the
Principal Distribution Amount after the distributions described in
clauses (i) though (iii) above, to the holders of the Class M-2
Certificates, until the Certificate Principal Balance of the Class M-2
Certificates has been reduced to zero, the excess, if any, of (x) the
sum of (a) the aggregate Certificate Principal Balance of the Class A
Certificates and Class M-1 Certificates (after taking into account
distributions pursuant to clauses (i) through (iii) above on such
Distribution Date) and (b) the Certificate Principal Balance of the
Class M-2 Certificates immediately prior to such Distribution Date over
(y) the lesser of (a) the product of (1) 80.30% and (2) the Pool
Principal Balance as of the last day of the related Due Period and (b)
the Pool Principal Balance as of the last day of the related Due Period
minus $4,000,000;
(v) fifth, from the balance, if any, remaining of the
Principal Distribution Amount after the distributions described in
clauses (i) through (iv) above, to the holders of the Class B
Certificates, until the Certificate Principal Balance of the Class B
Certificates has been reduced to zero, the excess, if any, of (x) the
sum of (a) the Certificate Principal Balance of the Class A
Certificates and Class M Certificates (after taking into account
distributions pursuant to clauses (i) through (iv) above on such
Distribution Date) and (b) the Certificate Principal Balance of the
Class B Certificates immediately prior to such Distribution Date over
(y)
S-51
<PAGE>
<PAGE>
the lesser of (a) the product of (1) 92.30% and (2) the Pool Principal
Balance as of the last day of the related Due Period and (b) the Pool
Principal Balance as of the last day of the related Due Period minus
$4,000,000; and
(vi) sixth, any Principal Remittance Amount remaining (the
"NET MONTHLY EXCESS PRINCIPAL AMOUNT" for such Distribution Date) shall
be included in the Net Monthly Excess Cash Flow as described in "-- Net
Monthly Excess Cash Flow Distributions" below and applied as described
therein.
Notwithstanding the foregoing, on any Distribution Date on which the
sum of (i) the aggregate Certificate Principal Balance of the Subordinate
Certificates and (ii) the Overcollateralization Amount for such Distribution
Date is equal to zero, any principal amounts payable to the Class A-1 and Class
A-2 Certificates will be distributed pro rata.
A "TRIGGER EVENT" is in effect if on a Distribution Date the percentage
obtained by dividing (x) the aggregate Stated Principal Balance of the Mortgage
Loans that are 60 or more days delinquent in payment of principal and interest
as of the last day of the preceding calendar month (including Mortgage Loans in
foreclosure and REO Mortgage Loans), by (y) the Pool Principal Balance as of the
last day of the preceding calendar month, equals or exceeds 35% of the Senior
Enhancement Percentage.
The "STEPDOWN DATE" means the later to occur of (x) the Distribution
Date in October 2001 and (y) the first Distribution Date on which the Senior
Enhancement Percentage (after taking into account distributions of principal on
such Distribution Date) is greater than or equal to the Senior Specified
Enhancement Percentage.
The "SENIOR ENHANCEMENT PERCENTAGE" means, as of any Distribution Date,
the percentage obtained by dividing (x) the sum of (i) the aggregate Certificate
Principal Balance of the Subordinate Certificates immediately prior to such
Distribution Date (or if the Certificate Principal Balance of the Class A-1 and
Class A-2 Certificates has been reduced to zero, the aggregate Certificate
Principal Balance of each Class of Subordinate Certificates other than the most
senior Class of Subordinate Certificates then outstanding) and (ii) the
Overcollateralization Amount (in each case after any payments of the Principal
Distribution Amount to the Offered Certificates on such Distribution Date), by
(y) the Pool Principal Balance of the Mortgage Loans as of the last day of the
related Due Period.
The "SENIOR SPECIFIED ENHANCEMENT PERCENTAGE" on any date of
determination thereof means 49.70%.
The "EXTRA PRINCIPAL DISTRIBUTION AMOUNT" means, as of any Distribution
Date, the lesser of (x) the Net Monthly Excess Interest Amount for such
Distribution Date and (y) the excess, if any, of (i) the Required
Overcollateralization Amount for such Distribution Date over (ii) the
Overcollateralization Amount for such Distribution Date.
In no event will any Principal Distribution Amount paid with respect to
any Distribution Date and any class of Offered Certificates be less than zero or
greater than the then outstanding Certificate Principal Balance of such class.
A "LIQUIDATED MORTGAGE LOAN" means, as of any Distribution Date, a
Mortgage Loan with respect to which the Master Servicer has determined, in
accordance with the servicing procedures specified in the Pooling Agreement, as
of the end of the preceding Due Period, that all Liquidation Proceeds which it
expects to recover with respect to such Mortgage Loan have been recovered.
NET MONTHLY EXCESS CASH FLOW DISTRIBUTIONS
On any Distribution Date, the sum of the Net Monthly Excess Interest
Amount, the Net Monthly Excess Principal Amount and the Overcollateralization
Reduction Amount is the "NET MONTHLY EXCESS CASH FLOW" for such Distribution
Date.
On any Distribution Date, the Net Monthly Excess Cash Flow will be
applied in the following order of priority on such Distribution Date:
(i) first, to pay any Unpaid Interest Shortfall on the Class A
Certificates until such Unpaid Interest Shortfall is reduced to zero;
(ii) second, to fund the Extra Principal Distribution Amount
for such Distribution Date (which is paid as a component of the
Principal Distribution Amount in the order of priority described
above);
S-52
<PAGE>
<PAGE>
(iii) third, to pay any Unpaid Interest Shortfall on the Class
M-1 Certificates until such Unpaid Interest Shortfall is reduced to
zero;
(iv) fourth, to reimburse the Class M-1 Certificates for any
Realized Losses previously allocated thereto as described below under
"-- Allocation of Losses; Subordination," until fully reimbursed;
(v) fifth, to pay any Unpaid Interest Shortfall on the Class
M-2 Certificates until such Unpaid Interest Shortfall is reduced to
zero;
(vi) sixth, to reimburse the Class M-2 Certificates for any
Realized Losses previously allocated thereto as described below under
"-- Allocation of Losses; Subordination," until fully reimbursed;
(vii) seventh, to pay any Unpaid Interest Shortfall on the
Class B Certificates until such Unpaid Interest Shortfall is reduced to
zero;
(viii) eighth, to reimburse the Class B Certificates for any
Realized Losses previously allocated thereto as described below under
"-- Allocation of Losses; Subordination," until fully reimbursed;
(ix) ninth, to the Available Funds Cap Carryover Reserve
Account, the amount necessary to bring the amount on deposit therein up
to the Available Funds Cap Carryover Amount for each class of Offered
Certificates entitled thereto;
(x) tenth, to the holders of the Class C Certificates, the
amount to which they are entitled in accordance with the terms of the
Pooling Agreement; and
(xi) eleventh, any remaining amounts, to the holders of the
Class R Certificates.
"AVAILABLE FUNDS CAP CARRYOVER AMOUNT" means, on any Distribution Date
and for each class of Offered Certificates (other than the Class A-IO
Certificates), the sum of (A) if on such Distribution Date the Pass-Through Rate
for such Certificates is based on the Available Funds Cap, the excess of (i) the
amount of interest the holders of such Certificates would otherwise be entitled
to receive on such Distribution Date had such rate been calculated at the LIBOR
Certificate Rate for such Distribution Date over (ii) the amount of interest
payable to such holders at the Available Funds Cap for such Distribution Date,
(B) the Available Funds Cap Carryover Amount, together with accrued interest
thereon, for all previous Distribution Dates not previously paid to such class
of Offered Certificates from the Available Funds Cap Carryover Reserve Account,
and (C) one month's interest on the amount calculated in (B) at the LIBOR
Certificate Rate for such Distribution Date.
AVAILABLE FUNDS CAP CARRYOVER RESERVE ACCOUNT
The Trustee will establish on the Closing Date and maintain a reserve
account (the "AVAILABLE FUNDS CAP CARRYOVER RESERVE ACCOUNT") and deposit
therein on each Distribution Date the amount called for by clause (ix) under
"-Net Monthly Excess Cash Flow Distributions" above for such Distribution Date.
On each Distribution Date, the Trustee will withdraw, to the extent that funds
are available therefor, an amount equal to the Available Funds Cap Carryover
Amount for such Distribution Date for each class of Offered Certificates (other
than the Class A-IO Certificates) from the Available Funds Cap Carryover Reserve
Account, and pay such amount first to the Class A-1 and Class A-2
Certificatesholders, pro rata, and then to the Class M-1, Class M-2 and Class B
Certificateholders, in that order, in reduction of the Available Funds Cap
Carryover Amount for each such class. After payment of such amount, the Trustee
will pay all amounts remaining on deposit in the Available Funds Cap Carryover
Reserve Account in excess of any amounts in respect of the Available Funds Cap
Carryover Amount that are on deposit in the Available Funds Cap Carryover
Reserve Account on such Distribution Date to the Seller.
The Available Funds Cap Carryover Reserve Account and the income earned
thereon will not be assets of either REMIC.
OVERCOLLATERALIZATION PROVISIONS
With respect to any Distribution Date, the "OVERCOLLATERALIZATION
AMOUNT" will be the excess, if any, of (a) the sum of the aggregate Stated
Principal Balances of the Mortgage Loans as of the last day of the immediately
preceding Due Period and the Pre-Funded Amount, if any, over (b) the Aggregate
Certificate Principal Balances as of such date (after taking into account the
payment to the Offered Certificates of the Principal Distribution Amount but
S-53
<PAGE>
<PAGE>
prior to taking into account any allocation of Realized Losses on such
Distribution Date). On the Closing Date, the Overcollateralization Amount will
be zero. The Pooling Agreement requires that the Net Monthly Excess Cash Flow,
to the extent available therefor as described above, will be applied as an
accelerated payment of principal on the Offered Certificates (other than the
Class A-IO Certificates) to the extent that the Required Overcollateralization
Amount exceeds the Overcollateralization Amount as of such Distribution Date.
The "REQUIRED OVERCOLLATERALIZATION AMOUNT" means as of any Distribution Date
(i) on or prior to the Step-Down Date $30,800,000, and (ii) after the Step-Down
Date the greater of (x) the lesser of (a) 3.85% of the sum of the Pool Principal
Balance of the Closing Date Mortgage Loans as of the Cut-off Date and the
Original Pre-Funded Amount and (b) 7.70% of the Pool Principal Balance as of the
end of the related Due Period and (y) $4,000,000. Notwithstanding the foregoing,
so long as a Trigger Event has occurred and is continuing, the Required
Overcollateralization Amount with respect to such Distribution Date will remain
equal to the amount required as of the Distribution Date immediately preceding
the date on which such Trigger Event occurred.
In the event that the Required Overcollateralization Amount is
permitted to decrease or "step down" on a Distribution Date in the future, a
portion of the principal which would otherwise be distributed to the holders of
the Offered Certificates (other than the Class A-IO Certificates) on such
Distribution Date will not be distributed to the holders of such Offered
Certificates on such Distribution Date. This has the effect of decelerating the
amortization of the Offered Certificates (other than the Class A-IO
Certificates) relative to the amortization of the Mortgage Loans, and of
reducing the Overcollateralization Amount. With respect to any Distribution
Date, the "OVERCOLLATERALIZATION REDUCTION AMOUNT" will be the excess, if any,
of (a) the Overcollateralization Amount on such Distribution Date over (b) the
Required Overcollateralization Amount on such Distribution Date. If, on any
Distribution Date, the Overcollateralization Reduction Amount is, or, after
taking into account all other distributions to be made on such Distribution
Date, would be, greater than zero (i.e., the Overcollateralization Amount is or
would be greater than the Required Overcollateralization Amount), then such
amounts, which would otherwise be distributed to the holders of the Offered
Certificates (other than the Class A-IO Certificates) as principal on such
Distribution Date, will instead be distributed to the Certificateholders as
described under " -- Net Monthly Excess Cash Flow Distributions" herein.
ALLOCATION OF LOSSES; SUBORDINATION
If a Mortgage Loan becomes a Liquidated Mortgage Loan during a Due
Period, the Net Liquidation Proceeds relating thereto and allocated to principal
may be less than the outstanding principal balance of such Mortgage Loan. The
amount of such insufficiency is a "REALIZED LOSS". Realized Losses will, in
effect, be absorbed first by the Class C and Class R Certificates (through the
application of the Net Monthly Excess Interest Amount to fund such deficiency
and through a reduction in the Overcollateralization Amount). On each
Distribution Date following the application of all amounts distributable on such
date, to the extent the Pool Principal Balance of the Mortgage Loans is less
than the Aggregate Certificate Principal Balance of the Offered Certificates due
to Realized Losses on the Mortgage Loans, the Certificate Principal Balances of
the Offered Certificates will be reduced as follows, until such deficiency is
fully allocated: first, the Certificate Principal Balance of the Class B
Certificates will be reduced, until the Certificate Principal Balance thereof
has been reduced to zero; second, the Certificate Principal Balance of the Class
M-2 Certificates will be reduced, until the Certificate Principal Balance
thereof has been reduced to zero; and third, the Certificate Principal Balance
of the Class M-1 Certificates will be reduced, until the Certificate Principal
Balance thereof has been reduced to zero. The Certificate Principal Balances of
the Class A-1 and Class A-2 Certificates will not be so reduced and such
Certificates will continue to be entitled to receive Accrued Certificate
Interest on their respective balances, subject to available funds. The
Certificate Principal Balance of any Subordinate Certificate reduced as the
result of the allocation of Realized Losses will not be reinstated and the
amount of the Certificate Principal Balance so reduced will no longer bear
interest. However, any loss allocated to a Subordinate Certificate may be repaid
through the mechanics of the payment of the Net Monthly Excess Cash Flow as
described above.
Any allocation of the principal portion of a Realized Loss (other than
a Debt Service Reduction) to a Subordinate Certificate will be effected by
reducing the Certificate Principal Balance thereof. The interest portion of
Realized Losses and the principal portion of Debt Service Reductions will be
allocated to the Offered Certificates through the priority of payment provisions
described in "Description of Certificates -- Interest Distributions" and
"-- Principal Distributions" herein. As used herein, "DEBT SERVICE REDUCTION"
means a reduction in the amount of the monthly payment due on a Mortgage Loan
as a result of certain bankruptcy proceedings, but does not include any
S-54
<PAGE>
<PAGE>
permanent forgiveness of principal. As used herein, "SUBORDINATION" refers to
the provisions discussed above for the sequential allocation of Realized Losses
among the various classes of Subordinate Certificates and also to the
subordination provided by the Overcollateralization Amount inasmuch as Realized
Losses are only allocated to the Subordinate Certificates after the
Overcollateralization Amount has been reduced to zero, as well as all provisions
effecting such allocations, including the priorities for distribution of cash
flows in the amounts described herein.
On each Distribution Date, holders of the Class A-IO Certificates will
have a right to distributions of the Interest Remittance Amount that is prior to
the rights of the holders of the Class A-1, Class A-2, Class M and Class B
Certificates, and holders of the Class A-1 and A-2 Certificates will have a
right to distributions of the Interest Remittance Amount remaining that is prior
to the rights of the Class M Certificates and Class B Certificates, in each case
to the extent necessary to satisfy the payment of Accrued Certificate Interest
to the holders of the Class A Certificates. On each Distribution Date, the
holders of the Class A-1 Certificates will have a right to distributions of the
Principal Distribution Amount that is prior to the rights of the Class A-2,
Class M and Class B Certificates, and holders of the Class A-2 Certificates will
have a right to distributions of the Principal Distribution Amount remaining
that is prior to the rights of the Class M and Class B Certificates, in each
case to the extent necessary to satisfy the payment of the Principal
Distribution Amount to the holders of the Class A-1 and Class A-2 Certificates.
Similarly, holders of the Class M Certificates have a right to distributions
that is prior to the rights of the holders of the Class B Certificates, and
holders of a Class of Class M Certificates with a higher payment priority have a
right to distributions that is prior to the rights of the holders of any Class
of Class M Certificates with a lower payment priority. In addition, the
overcollateralization provisions of the Pooling Agreement will also increase the
likelihood of distribution of full amounts of interest and principal to the
Offered Certificates entitled thereto on each Distribution Date.
The priority of payment provisions herein will accelerate the
amortization of the Class A-1 Certificates and, to a lesser extent, the Class
A-2 Certificates (other than the Class A-IO Certificates) relative to the actual
amortization of the Mortgage Loans. To the extent that the Class A Certificates
(other than the Class A-IO Certificates) are amortized faster than the Mortgage
Loans, in the absence of offsetting Realized Losses, the percentage interest
evidenced by such Class A Certificates in the Mortgage Loans will be decreased,
thereby increasing, relative to the Certificate Principal Balances of the
Subordinate Certificates and the Overcollateralization Amount, the subordination
afforded the Class A Certificates by the Subordinate Certificates and the
Overcollateralization Amount.
The priority of payment provisions herein among the Subordinate
Certificates, as described herein, also generally has the effect during certain
periods, in the absence of losses, of decreasing the percentage interest
evidenced by any class of related Subordinate Certificates with a higher payment
priority, thereby increasing, relative to its Certificate Principal Balance, the
Subordination afforded to such class of the Subordinate Certificates by the
Overcollateralization Amount (including overcollateralization created by the Net
Monthly Excess Cash Flow) and any class of Subordinate Certificates with a lower
payment priority.
PRE-FUNDING ACCOUNT
On the Closing Date, the Original Pre-Funded Amount will be deposited
in the Pre-Funding Account, which account shall be in the name of and maintained
by the Trustee and shall be part of the Trust Fund. During the Pre-Funding
Period, the Pre-Funded Amount will be maintained in the Pre-Funding Account. The
Original Pre-Funded Amount will be reduced during the Pre-Funding Period by the
amount thereof used to purchase Subsequent Mortgage Loans in accordance with the
Pooling Agreement. Any Pre-Funded Amount remaining at the end of the Pre-Funding
Period will be distributed to the holders of the Class A-1 Certificates on the
Distribution Date after the expiration of the Pre-Funding Period in reduction of
the Certificate Principal Balance of the Class A-1 Certificates, thus resulting
in a principal prepayment of such Class A-1 Certificates.
Amounts on deposit in the Pre-Funding Account will be invested in the
investments permitted by the Pooling Agreement. All interest and any other
investment earnings on amounts on deposit in the Pre-Funding Account will be
deposited in the Capitalized Interest Account prior to each Distribution Date.
The Pre-Funding Account will not be an asset of any REMIC.
S-55
<PAGE>
<PAGE>
CAPITALIZED INTEREST ACCOUNT
On the Closing Date a cash amount, as required by the Rating Agencies,
will be deposited in the Capitalized Interest Account, which account shall be in
the name of and maintained by the Trustee and shall be part of the Trust Fund.
The amount on deposit in the Capitalized Interest Account, including
reinvestment income thereon and amounts deposited thereto from the Pre-Funding
Account, will be used by the Trustee to fund the excess, if any, of (i) the sum
of the amount of interest accruing at the weighted average applicable
Pass-Through Rates on the amount by which the Aggregate Certificate Principal
Balance exceeds the Pool Principal Balance, over (ii) the amount of any
reinvestment income on monies on deposit in the Pre-Funding Account. Such
amounts on deposit will be so applied by the Trustee on the October, November
and December 1998 Distribution Dates to fund such excess, if any. Any amounts
remaining in the Capitalized Interest Account at the end of the Pre-Funding
Period and not needed for such purpose will be paid to the Seller and will not
thereafter be available for distribution to the holders of the Offered
Certificates. Amounts on deposit in the Capitalized Interest Account will be
invested in investments permitted by the Pooling Agreement. The Capitalized
Interest Account will not be an asset of any REMIC.
CERTAIN YIELD AND PREPAYMENT CONSIDERATIONS
GENERAL
The yield to maturity and the aggregate amount of distributions on the
Offered Certificates will be affected by the rate and timing of principal
payments on the Mortgage Loans and the amount and timing of mortgagor defaults
resulting in Realized Losses. In addition, such yields may be adversely affected
by a higher or lower than anticipated rate of principal payments on the Mortgage
Loans in the Trust Fund. The rate of principal payments on such Mortgage Loans
will in turn be affected by the amortization schedules of the Mortgage Loans,
the rate and timing of principal prepayments thereon by the Mortgagors,
liquidations of defaulted Mortgage Loans and repurchases of Mortgage Loans due
to certain breaches of representations. The timing of changes in the rate of
prepayments, liquidations and repurchases of the Mortgage Loans may, and the
timing of Realized Losses will, significantly affect the yield to an investor,
even if the average rate of principal payments experienced over time is
consistent with an investor's expectation. The rate of prepayment on the
Mortgage Loans cannot be predicted. Mortgage loans such as the Mortgage Loans
have been originated in significant volume only during the past few years and
neither the Company nor the Seller is aware of any publicly available studies or
statistics on the rate of prepayment of such Mortgage Loans. The prepayment
experience of the Trust Fund with respect to the Mortgage Loans may be affected
by a wide variety of factors, including economic conditions, prevailing interest
rate levels, the availability of alternative financing, homeowner mobility and
changes affecting the deductibility for federal income tax purposes of interest
payments on mortgage loans. Since the rate and timing of principal payments on
the Mortgage Loans will depend on future events and on a variety of factors (as
described more fully herein and in the Prospectus under "Yield Considerations"
and "Maturity and Prepayment Considerations"), no assurance can be given as to
such rate or the timing of principal payments on the Offered Certificates.
All of the Mortgage Loans may be prepaid in whole or in part at any
time. Where permitted by law and the related loan documentation program, the
related mortgagor generally will be required to pay a prepayment charge in
connection with any voluntary prepayment. All the Mortgage Loans contain
due-on-sale clauses. As described under "Description of Certificates --
Principal Distributions" herein, during certain periods all or a
disproportionately large percentage of principal collections on the Mortgage
Loans will be allocated to the Class A Certificates, and during certain periods
no principal collections or a disproportionately small portion of principal
collections will be distributed to the Subordinate Certificates. Prepayments,
liquidations and purchases of the Mortgage Loans will result in distributions
to holders of the Offered Certificates (other than the Class A-IO Certificates)
of principal amounts which would otherwise be distributed over the remaining
terms of the Mortgage Loans. Factors affecting prepayment (including defaults
and liquidations) of mortgage loans include changes in Mortgagors' housing
needs, job transfers, unemployment, Mortgagors' net equity in the mortgaged
properties, changes in the value of the mortgaged properties, mortgage market
interest rates, solicitations by the Seller or other mortgage originators and
servicing decisions. In addition, the rate of prepayments on the Mortgage Loans
is sensitive to the credit standing of the borrower, which may improve and
thereby allow the borrower to refinance on more favorable terms, or may decline
and limit the borrower's ability to refinance. The prepayment behavior of the
2/28 Loans, 3/27 Loans or 5/25 Loans may differ from that of the
S-56
<PAGE>
<PAGE>
other Mortgage Loans. As a 2/28 Loan, 3/27 Loan or 5/25 Loan approaches its
initial adjustment 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 existence of the applicable periodic reset cap, maximum
Mortgage Rate and minimum Mortgage Rate also may affect the likelihood of
prepayments resulting from refinancings. All of the Mortgage Loans are
adjustable rate mortgage loans. As is the case with conventional fixed rate
mortgage loans, adjustable rate mortgage loans may be subject to a greater rate
of principal prepayments in a declining interest rate environment. For example,
if prevailing interest rates fall significantly, adjustable-rate mortgage loans
could be subject to higher prepayment rates than if prevailing interest rates
remain constant because the availability of fixed rate mortgage loans at
competitive interest rates may encourage mortgagors to refinance their
adjustable rate mortgage loan to "lock in" a lower fixed interest rate. However,
no assurance can be given as to the level of prepayments that the Mortgage Loans
will experience.
The prepayment experience on sub-prime mortgage loans may differ from
that on prime mortgage loans, primarily due to the credit quality of the typical
borrower. Because the credit histories of many sub-prime borrowers may preclude
them from other traditional sources of financing or they may be required to
incur relatively higher origination costs than borrowers under prime mortgage
loans, such borrowers may be less likely to refinance due to a decline in market
interest rates. As a result, the Mortgage Loans may prepay at slower rates than
those of prime mortgage loans. In the alternative, 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. Prepayments may also
affect the yield to the holders of the Offered Certificates, if as a result of
prepayments, the weighted average margins are reduced.
Depending on prevailing market rates, the future outlook for market
rates and economic conditions generally, some mortgagors may sell or refinance
mortgaged properties in order to realize their equity in the mortgaged
properties, to meet cash flow needs or to make other investments.
The Offered Certificates are subject to various priorities for payment
of principal as described herein. Distributions of principal on classes of
Offered Certificates having an earlier priority of payment will be affected by
the rates of prepayment of the Mortgage Loans early in the life of the Mortgage
Pool. The timing of commencement of principal distributions and the weighted
average lives of classes of Offered Certificates with a later priority of
payment will be affected by the rates of prepayment of the Mortgage Loans both
before and after the commencement of principal distributions on such classes. In
addition, the yield to maturity of the Offered Certificates will depend on
whether, to what extent, and the timing with respect to which, Net Monthly
Excess Cash Flow is used to accelerate payments of principal on the Offered
Certificates or any Overcollateralization Reduction Amount is released. See
"Description of Certificates-Overcollateralization Provisions" herein.
The rate of defaults on the Mortgage Loans will also affect the rate
and timing of principal payments on the Mortgage Loans. In general, defaults on
mortgage loans are expected to occur with greater frequency in their early
years. The rate of default on Mortgage Loans which are refinance or limited
documentation mortgage loans, and on Mortgage Loans with high LTVs, may be
higher than for other types of Mortgage Loans. Furthermore, the rate and timing
of prepayments, defaults and liquidations on the Mortgage Loans will be affected
by the general economic condition of the region of the country in which the
related Mortgaged Properties are located. The risk of delinquencies and loss is
greater and prepayments are less likely in regions where a weak or deteriorating
economy exists, as may be evidenced by, among other factors, increasing
unemployment or falling property values. See "Yield Considerations", "Maturity
and Prepayment Considerations" and "Risk Factors" in the Prospectus.
In addition, the yield to maturity on each class of Offered
Certificates will depend on, among other things, the price paid by the holders
of the Offered Certificates and the related Pass-Through Rate. The extent to
which the yield to maturity of an Offered Certificate is sensitive to
prepayments will depend, in part, upon the degree to which it is purchased at a
discount or premium. In general, if a class of Offered Certificates (including
the Class A-IO Certificates) is purchased at a premium and principal
distributions thereon occur at a rate faster than assumed at the time of
purchase, the investor's actual yield to maturity will be lower than anticipated
at the time of purchase. Conversely, if a class of Offered Certificates is
purchased at a discount and principal distributions thereon occur at a rate
slower than assumed at the time of purchase, the investor's actual yield to
maturity will be lower than anticipated at the time of purchase. For additional
considerations relating to the yield on the Offered Certificates, see "Yield
Considerations" and "Maturity and Prepayment Considerations" in the Prospectus.
S-57
<PAGE>
<PAGE>
Certificates with Subordination Features: As described herein, during
certain periods all or a disproportionately large percentage of principal
payments on the Mortgage Loans will be allocated to the Class A-1 Certificates
and, to a lesser extent, the Class A-2 Certificates and, during certain periods,
no principal payments will be distributed to the Subordinate Certificates.
Unless the Certificate Principal Balance of the Class A-1 and Class A-2
Certificates has been reduced to zero, the Subordinate Certificates will not be
entitled to receive distributions of principal until the Stepdown Date.
Furthermore, if a Trigger Event is in effect, the Subordinate Certificates will
not be entitled to receive distributions in respect of principal until the
Certificate Principal Balance of the Class A-1 and Class A-2 Certificates has
been reduced to zero. To the extent that no principal payments are distributed
on the Subordinate Certificates, the Subordination afforded the Class A
Certificates by the Subordinate Certificates (together with the
Overcollateralization Amount created by the Net Monthly Excess Cash Flow), in
the absence of offsetting Realized Losses allocated thereto, will be increased,
and the weighted average lives of the Subordinate Certificates will be extended.
The yields on the Class M Certificates will be sensitive, and the yield
on the Class B Certificates will be extremely sensitive, to the rate and timing
of defaults on the Mortgage Loans resulting in losses on the Mortgage Loans. If
the actual rate and severity of losses on the Mortgage Loans is higher than the
rate and/or severity assumed by a holder of a Class M Certificate or Class B
Certificate, the actual yield to maturity of such Certificate may be lower than
the yield calculated by such holder based on such assumption. The timing of such
losses will also affect an investor's actual yield to maturity, even if the rate
of defaults and severity of losses is consistent with an investor's
expectations. In general, the earlier a loss occurs, the greater the effect on
the investor's yield to maturity.
The yield on the Class B Certificates will be extremely sensitive to
such losses, because such losses will be allocated to the Class B Certificates
before any such allocation is made to any other class of Offered Certificates
until the Class Principal Balance of the Class B Certificates is reduced to
zero. Following the exhaustion of coverage provided by the Class B Certificates,
the yield to maturity on the Class M-2 Certificates and Class M-1 Certificates,
in that order, will be extremely sensitive to the rate and timing of such
losses.
The only credit enhancement for the Class B Certificates is the
overcollateralization feature of the Trust Fund and excess interest. The
overcollateralization is intended to be created through the application of
certain excess interest amounts to the payment of principal of the Offered
Certificates (other than the Class A-IO Certificates). These excess interest
amounts arise from the excess of the weighted average Mortgage Rate (net of
certain fees) over the weighted average applicable Pass-Through Rate. Mortgage
Loans with higher Mortgage Rates will contribute more to the excess interest
than Mortgage Loans with relatively lower Mortgage Rates. If Mortgage Loans with
relatively higher Mortgage Rates prepay, the amount of excess interest may be
less than otherwise would be the case. There can be no assurance as to whether
or when sufficient excess interest will be generated to cause the
Overcollateralization Amount to equal the Required Overcollateralization Amount.
Class A-IO Certificates Yield Considerations. Investors should note
that the Class A-IO Certificates are only entitled to distributions on or prior
to the Distribution Date in March 2001. In addition, if the aggregate Stated
Principal Balance of the Mortgage Loans has been reduced to 10% of the sum of
the Pool Principal Balance of the Closing Date Mortgage Loans as of the Cut-off
Date and the Original Pre-Funded Amount prior to such date, the yield to
investors on the Class A-IO Certificates will be extremely sensitive to the rate
and timing of principal payments on the Mortgage Loans (including prepayments,
defaults and liquidations), which rate may fluctuate significantly over time. In
addition, if at such time the Master Servicer or the holders of the Class C or
Class R Certificates effect an optional termination of the Trust Fund, the Class
A-IO Certificates will receive no further distributions. Investors in the Class
A-IO Certificates should fully consider the risk that an extremely rapid rate of
prepayments on the Mortgage Loans could result in the failure of such investors
to fully recover their investments.
Assumed Final Distribution Date: The assumed final Distribution Date
with respect to the Class A Certificates (other than the Class A-IO
Certificates) is September 20, 2028, which is the 360th Distribution Date, and
the assumed final Distribution Date with respect to the Class M and Class B
Certificates is October 20, 2029, which date is the Distribution Date
immediately following the latest scheduled maturity date for any Initial
Mortgage Loan, plus thirteen months. No event of default, change in the
priorities for distribution among the various classes or other provisions under
the Pooling Agreement will arise or become applicable solely by reason of the
failure to retire the entire Certificate Principal Balance of any class of
Certificates on or before its assumed final Distribution Date.
S-58
<PAGE>
<PAGE>
The actual final Distribution Date with respect to each class of
Offered Certificates could occur significantly earlier than the assumed final
Distribution Date for such class because (i) Net Monthly Excess Cash Flow will
be used to make accelerated payments of principal to the holders of the Offered
Certificates (other than the Class A-IO Certificates), which payments will have
the effect of shortening the weighted average lives of the Offered Certificates
of each class, (ii) prepayments are likely to occur, which will also have the
effect of shortening the weighted average lives of the Offered Certificates and
(iii) the Master Servicer, the holders of Class C Certificates or the holders of
Class R Certificates may cause a termination of the Trust Fund when the Pool
Principal Balance is less than 10% of the sum of the Pool Principal Balance of
the Closing Date Mortgage Loans as of the Cut-off Date and the Original
Pre-Funded Amount.
Weighted Average Life: Weighted average life refers to the average
amount of time that will elapse from the date of issuance of a security to the
date of distribution to the investor of each dollar distributed in reduction of
principal of such security (assuming no losses). The weighted average life of
the Offered Certificates will be influenced by, among other things, the rate at
which principal of the Mortgage Loans is paid, which may be in the form of
scheduled amortization, prepayments or liquidations.
The following tables are based on a Constant Prepayment Rate model
("CPR"). CPR represents an assumed constant rate of prepayment each month,
expressed as a per annum percentage of the principal balance of a pool of
mortgage loans for that month. CPR does not purport to be a historical
description of prepayment experience or a prediction of the anticipated rate of
prepayment of any pool of mortgage loans, including the Mortgage Loans. The
Company and the Seller believe that no existing statistics of which it is aware
provide a reliable basis for holders of Offered Certificates to predict the
amount or the timing of receipt of prepayments on the Mortgage Loans.
Since the following tables were prepared on the basis of the
assumptions in the following paragraph, there are discrepancies between
characteristics of the actual Mortgage Loans and the characteristics of the
Mortgage Loans assumed in preparing the tables. Any such discrepancy may have an
effect upon the percentages of the Certificate Principal Balances outstanding
and weighted average lives of the Offered Certificates (other than the Class
A-IO Certificates) set forth in the tables. In addition, since the actual
Mortgage Loans in the Trust Fund have characteristics which differ from those
assumed in preparing the tables set forth below, the distributions of principal
on the Offered Certificates (other than the Class A-IO Certificates) may be made
earlier or later than as indicated in the tables.
For the purpose of the tables below, it is assumed that: (i) the
Mortgage Pool consists of Mortgage Loans having the approximate characteristics
set forth below and the first through the eleventh of such hypothetical Mortgage
Loans represent Closing Date Mortgage Loans and the twelfth through fourteenth
of such hypothetical Mortgage Loans represent Subsequent Mortgage Loans
transferred to the Mortgage Pool by November 19, 1998, (ii) the Closing Date for
the Offered Certificates is September 4, 1998, (iii) distributions on the
Offered Certificates are made on the 20th day of each month regardless of the
day on which the Distribution Date actually occurs, commencing in October 1998
and are made in accordance with the priorities described herein, (iv) the
scheduled monthly payments of principal and interest on the Mortgage Loans will
be timely made on the first day of each month (with no defaults), (v) the
Mortgage Loans' prepayment rates are equal to the respective percentages of CPR
indicated in the tables, (vi) all prepayments are prepayments in full and
include 30 days' interest thereon, (vii) the scheduled monthly payments of
principal and interest on the Mortgage Loans will be timely delivered on the
first day of each month (with no defaults) (viii) no reinvestment income from
any trust account is available for the payment to the holders of the Offered
Certificates other than the Pre-Funding Account and Capitalized Interest
Account, (ix) optional termination is exercised, (x) the Offered Certificates of
each class have the respective Pass-Through Rates and initial Certificate
Principal Balances as set forth herein, (xi) the Required Overcollateralization
Amount is as described herein, (xii) Six-Month LIBOR remains constant at
5.6875%, (xiii) LIBOR remains constant at 5.6563% and (xiv) the Servicing Fee
Rate equals approximately 0.51% per annum.
S-59
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
ORIGINAL REMAINING
TERM TO TERM TO FIRST SUBSEQUENT MAXIMUM MINIMUM MONTHS TO
PRINCIPAL MORTGAGE MATURITY MATURITY PERIODIC PERIODIC MORTGAGE MORTGAGE NEXT RATE
BALANCE RATE (MONTHS) (MONTHS) MARGIN SET-CAP CAP RATE RATE ADJUSTMENT
------- ---- -------- -------- ------ ------- --- ---- ---- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
CLOSING DATE MORTGAGE LOANS:
89,466,937.01 9.489 360 359 6.538 1 1 16.008 9.489 5
7,082,565.34 10.168 360 353 6.727 3 1 16.73 10.168 17
12,172,831.64 10.426 360 356 6.925 2.995 1 16.936 10.426 20
33,311,190.96 10.104 360 358 6.773 2.897 1 16.602 10.104 22
211,534,856.97 10.223 360 359 6.771 2.432 1 16.713 10.223 23
284,858,419.72 10.296 360 360 6.771 1.862 1 16.800 10.296 24
11,616,920.28 9.367 360 359 6.618 3 1 15.861 9.367 35
9,461,880.44 9.548 360 360 6.68 3 1 16.061 9.548 37
10,142,529.39 9.506 359 359 6.627 1 1 16.151 9.506 6
49,484,547.59 10.392 360 360 6.775 1.779 1 16.897 10.392 24
867,320.66 11.112 360 360 6.796 3 1 17.612 11.112 36
SUBSEQUENT MORTGAGE LOANS:
13,412,851.16 9.506 359 359 6.627 1 1 16.151 9.506 6
65,440,172.34 10.392 360 360 6.775 1.779 1 16.897 10.392 24
1,146,976.50 11.112 360 360 6.796 3 1 17.612 11.112 36
</TABLE>
Subject to the foregoing discussion and assumptions, the following
tables indicate the percentages of the Certificate Principal Balance of each
such class of Offered Certificates that would be outstanding after each of the
dates shown at various percentages of CPR and the corresponding weighted average
lives.
S-60
<PAGE>
<PAGE>
PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING
AT THE FOLLOWING PERCENTAGES OF CPR
<TABLE>
<CAPTION>
Class A-1 Class A-2
------------------------------------------------- --------------------------------------------
0% 10% 20% 25% 30% 40% 50% 0% 10% 20% 25% 30% 40% 50%
------------------------------------------------ --------------------------------------------
Distribution Date
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage................. 100 100 100 100 100 100 100 100 100 100 100 100 100 100
September 20, 1999................. 93 74 54 45 35 15 0 100 100 100 100 100 100 93
September 20, 2000................. 90 53 19 4 0 0 0 100 100 100 100 82 38 3
September 20, 2001................. 89 36 0 0 0 0 0 100 100 89 58 31 0 0
September 20, 2002................. 88 21 0 0 0 0 0 100 100 70 54 31 0 0
September 20, 2003................. 87 7 0 0 0 0 0 100 100 55 40 28 0 0
September 20, 2004................. 86 0 0 0 0 0 0 100 92 44 30 20 0 0
September 20, 2005................. 85 0 0 0 0 0 0 100 80 35 22 0 0 0
September 20, 2006................. 83 0 0 0 0 0 0 100 71 28 0 0 0 0
September 20, 2007................. 81 0 0 0 0 0 0 100 64 22 0 0 0 0
September 20, 2008................. 79 0 0 0 0 0 0 100 57 17 0 0 0 0
September 20, 2009................. 77 0 0 0 0 0 0 100 50 0 0 0 0 0
September 20, 2010................. 74 0 0 0 0 0 0 100 45 0 0 0 0 0
September 20, 2011................. 71 0 0 0 0 0 0 100 40 0 0 0 0 0
September 20, 2012................. 68 0 0 0 0 0 0 100 35 0 0 0 0 0
September 20, 2013................. 64 0 0 0 0 0 0 100 31 0 0 0 0 0
September 20, 2014................. 60 0 0 0 0 0 0 100 27 0 0 0 0 0
September 20, 2015................. 55 0 0 0 0 0 0 100 24 0 0 0 0 0
September 20, 2016................. 50 0 0 0 0 0 0 100 21 0 0 0 0 0
September 20, 2017................. 44 0 0 0 0 0 0 100 18 0 0 0 0 0
September 20, 2018................. 37 0 0 0 0 0 0 100 0 0 0 0 0 0
September 20, 2019................. 29 0 0 0 0 0 0 100 0 0 0 0 0 0
September 20, 2020................. 20 0 0 0 0 0 0 100 0 0 0 0 0 0
September 20, 2021................. 10 0 0 0 0 0 0 100 0 0 0 0 0 0
September 20, 2022................. 0 0 0 0 0 0 0 98 0 0 0 0 0 0
September 20, 2023................. 0 0 0 0 0 0 0 81 0 0 0 0 0 0
September 20, 2024................. 0 0 0 0 0 0 0 69 0 0 0 0 0 0
September 20, 2025................. 0 0 0 0 0 0 0 54 0 0 0 0 0 0
September 20, 2026................. 0 0 0 0 0 0 0 38 0 0 0 0 0 0
September 20, 2027................. 0 0 0 0 0 0 0 20 0 0 0 0 0 0
September 20, 2028................. 0 0 0 0 0 0 0 0 0 0 0 0 0 0
Weighted Average Life (years)(1)(2) 15.81 2.47 1.27 1.03 0.87 0.65 0.52 27.11 12.05 6.13 4.71 3.54 1.96 1.51
Weighted Average Life (years)(1)(3) 15.81 2.47 1.27 1.03 0.87 0.65 0.52 27.18 12.83 6.79 5.25 3.98 1.96 1.51
</TABLE>
- -------------------------
(1) The weighted average life of a Certificate of any class is determined
by (i) multiplying the amount of each distribution in reduction of the
related Certificate Principal Balance by the number of years from the
date of issuance of the Certificate to the related Distribution Date,
(ii) adding the results, and (iii) dividing such sum by the original
Certificate Principal Balance of the Certificate.
(2) Assumes the Master Servicer exercises its right of optional termination
at the earliest permissible date.
(3) Assumes that the Certificates remain outstanding to their maturity.
This table has been prepared based on the assumptions described above
(including the assumptions regarding the characteristics and performance of the
Mortgage Loans, which differ from the actual characteristics and performance
thereof) and should be read in conjunction therewith.
S-61
<PAGE>
<PAGE>
PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING
AT THE FOLLOWING PERCENTAGES OF CPR
<TABLE>
<CAPTION>
Class M-1 Class M-2
---------------------------------------------------------------------------------------------------
0% 10% 20% 25% 30% 40% 50% 0% 10% 20% 25% 30% 40% 50%
----------------------------------------------------------------------------------------------------
Distribution Date
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage............. 100 100 100 100 100 100 100 100 100 100 100 100 100 100
September 20, 1999............. 100 100 100 100 100 100 100 100 100 100 100 100 100 100
September 20, 2000............. 100 100 100 100 100 100 100 100 100 100 100 100 100 100
September 20, 2001............. 100 100 100 100 100 56 0 100 100 100 100 100 100 36
September 20, 2002............. 100 100 80 62 83 56 0 100 100 80 62 47 82 0
September 20, 2003............. 100 100 64 46 33 0 0 100 100 64 46 33 0 0
September 20, 2004............. 100 100 51 35 23 0 0 100 100 51 35 23 0 0
September 20, 2005............. 100 92 40 26 0 0 0 100 92 40 26 0 0 0
September 20, 2006............. 100 82 32 0 0 0 0 100 82 32 0 0 0 0
September 20, 2007............. 100 73 25 0 0 0 0 100 73 25 0 0 0 0
September 20, 2008............. 100 65 20 0 0 0 0 100 65 20 0 0 0 0
September 20, 2009............. 100 58 0 0 0 0 0 100 58 0 0 0 0 0
September 20, 2010............. 100 51 0 0 0 0 0 100 51 0 0 0 0 0
September 20, 2011............. 100 46 0 0 0 0 0 100 46 0 0 0 0 0
September 20, 2012............. 100 40 0 0 0 0 0 100 40 0 0 0 0 0
September 20, 2013............. 100 35 0 0 0 0 0 100 35 0 0 0 0 0
September 20, 2014............. 100 31 0 0 0 0 0 100 31 0 0 0 0 0
September 20, 2015............. 100 27 0 0 0 0 0 100 27 0 0 0 0 0
September 20, 2016............. 100 24 0 0 0 0 0 100 24 0 0 0 0 0
September 20, 2017............. 100 20 0 0 0 0 0 100 20 0 0 0 0 0
September 20, 2018............. 100 0 0 0 0 0 0 100 0 0 0 0 0 0
September 20, 2019............. 100 0 0 0 0 0 0 100 0 0 0 0 0 0
September 20, 2020............. 100 0 0 0 0 0 0 100 0 0 0 0 0 0
September 20, 2021............. 100 0 0 0 0 0 0 100 0 0 0 0 0 0
September 20, 2022............. 100 0 0 0 0 0 0 100 0 0 0 0 0 0
September 20, 2023............. 94 0 0 0 0 0 0 94 0 0 0 0 0 0
September 20, 2024............. 79 0 0 0 0 0 0 79 0 0 0 0 0 0
September 20, 2025............. 63 0 0 0 0 0 0 63 0 0 0 0 0 0
September 20, 2026............. 44 0 0 0 0 0 0 44 0 0 0 0 0 0
September 20, 2027............. 23 0 0 0 0 0 0 23 0 0 0 0 0 0
September 20, 2028............. 0 0 0 0 0 0 0 0 0 0 0 0 0 0
Weighted Average Life
(years)(1)(2) 27.54 12.97 6.62 5.37 4.95 3.84 2.37 27.54 12.97 6.62 5.30 4.61 4.37 3.04
Weighted Average Life
(years)(1)(3) 27.62 13.85 7.34 5.95 5.42 5.23 2.37 27.62 13.82 7.29 5.84 5.05 4.79 4.00
</TABLE>
- -------------------------
(1) The weighted average life of a Certificate of any class is determined
by (i) multiplying the amount of each distribution in reduction of the
related Certificate Principal Balance by the number of years from the
date of issuance of the Certificate to the related Distribution Date,
(ii) adding the results, and (iii) dividing such sum by the original
Certificate Principal Balance of the Certificate.
(2) Assumes the Master Servicer exercises its right of optional termination
at the earliest permissible date.
(3) Assumes that the Certificates remain outstanding to their maturity.
This table has been prepared based on the assumptions described above
(including the assumptions regarding the characteristics and performance of the
Mortgage Loans, which differ from the actual characteristics and performance
thereof) and should be read in conjunction therewith.
S-62
<PAGE>
<PAGE>
PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING
AT THE FOLLOWING PERCENTAGES OF CPR
<TABLE>
<CAPTION>
Class B
---------------------------------------------------
0% 10% 20% 25% 30% 40% 50%
---------------------------------------------------
Distribution Date
<S> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage.............. 100 100 100 100 100 100 100
September 20, 1999.............. 100 100 100 100 100 100 100
September 20, 2000.............. 100 100 100 100 100 100 100
September 20, 2001.............. 100 100 100 100 100 100 100
September 20, 2002.............. 100 100 80 62 47 26 0
September 20, 2003.............. 100 100 64 46 33 0 0
September 20, 2004.............. 100 100 51 35 23 0 0
September 20, 2005.............. 100 92 40 26 0 0 0
September 20, 2006.............. 100 82 32 0 0 0 0
September 20, 2007.............. 100 73 25 0 0 0 0
September 20, 2008.............. 100 65 20 0 0 0 0
September 20, 2009.............. 100 58 0 0 0 0 0
September 20, 2010.............. 100 51 0 0 0 0 0
September 20, 2011.............. 100 46 0 0 0 0 0
September 20, 2012.............. 100 40 0 0 0 0 0
September 20, 2013.............. 100 35 0 0 0 0 0
September 20, 2014.............. 100 31 0 0 0 0 0
September 20, 2015.............. 100 27 0 0 0 0 0
September 20, 2016.............. 100 24 0 0 0 0 0
September 20, 2017.............. 100 20 0 0 0 0 0
September 20, 2018.............. 100 0 0 0 0 0 0
September 20, 2019.............. 100 0 0 0 0 0 0
September 20, 2020.............. 100 0 0 0 0 0 0
September 20, 2021.............. 100 0 0 0 0 0 0
September 20, 2022.............. 100 0 0 0 0 0 0
September 20, 2023.............. 94 0 0 0 0 0 0
September 20, 2024.............. 79 0 0 0 0 0 0
September 20, 2025.............. 63 0 0 0 0 0 0
September 20, 2026.............. 44 0 0 0 0 0 0
September 20, 2027.............. 23 0 0 0 0 0 0
September 20, 2028.............. 0 0 0 0 0 0 0
Weighted Average Life
(years)(1)(2) 27.54 12.97 6.62 5.27 4.48 3.82 3.38
Weighted Average Life
(years)(1)(3) 27.61 13.67 7.12 5.67 4.82 4.06 4.18
</TABLE>
- -------------------------
(1) The weighted average life of a Certificate of any class is determined
by (i) multiplying the amount of each distribution in reduction of the
related Certificate Principal Balance by the number of years from the
date of issuance of the Certificate to the related Distribution Date,
(ii) adding the results, and (iii) dividing such sum by the original
Certificate Principal Balance of the Certificate.
(2) Assumes the Master Servicer exercises its right of optional termination
at the earliest permissible date.
(3) Assumes that the Certificates remain outstanding to their maturity.
This table has been prepared based on the assumptions described above
(including the assumptions regarding the characteristics and performance of the
Mortgage Loans, which differ from the actual characteristics and performance
thereof) and should be read in conjunction therewith.
S-63
<PAGE>
<PAGE>
POOLING AGREEMENT
GENERAL
The Certificates will be issued pursuant to the Pooling Agreement dated
as of September 1, 1998, among the Company, the Seller, the Master Servicer and
the Trustee. Reference is made to the Prospectus for important information in
addition to that set forth herein regarding the terms and conditions of the
Pooling Agreement and the Offered Certificates. The Trustee, or any of its
affiliates, in its individual or any other capacity, may become the owner or
pledgee of Certificates with the same rights as it would have if it were not
Trustee. The Offered Certificates will be transferable and exchangeable at the
corporate trust office of the Trustee, which will serve as Certificate Registrar
and paying agent. The Company will provide a prospective or actual
Certificateholder, without charge, on written request, a copy (without exhibits)
of the Pooling Agreement. Requests should be addressed to the President, WMC
Secured Assets Corp., 6320 Canoga Avenue, Woodland Hills, California 91367. In
addition to the circumstances described in the Prospectus, the Company may
terminate the Trustee for cause under certain circumstances. See "The
Agreements -- Trustee" in the Prospectus.
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
The Servicing Fee for each Mortgage Loan is payable out of the interest
payments on such Mortgage Loan. The Servicing Fees in respect of each Mortgage
Loan will be at least 0.5075% per annum (the "SERVICING FEE RATE") of the
outstanding principal balance of such Mortgage Loan. The Servicing Fees consist
of (a) servicing compensation payable to the Master Servicer in respect of its
master servicing activities, and (b) subservicing and other related compensation
payable to the Subservicer (including such compensation paid to the Master
Servicer as the direct servicer of a Mortgage Loan for which there is no
Subservicer). All assumption fees, late payment charges, prepayment charges or
fees and other fees and charges, to the extent collected from the borrower, will
be retained by the Master Servicer as additional servicing compensation. See
"Servicing of Mortgage Loans -- Servicing and Other Compensation and Payment of
Expenses; Spread" in the Prospectus for information regarding other possible
compensation to the Master Servicer and the Subservicer and for information
regarding expenses payable by the Master Servicer.
The Master Servicer's right to reimbursement for unreimbursed Servicing
Advances is limited to late collections on the related Mortgage Loan, including
Liquidation Proceeds, released mortgaged property proceeds, Insurance Proceeds
and such other amounts as may be collected by the Master Servicer from the
related mortgagor or otherwise relating to the Mortgage Loan in respect of which
such unreimbursed amounts are owed. The Master Servicer's right to reimbursement
for unreimbursed Monthly Advances shall be limited to late collections of
interest on any Mortgage Loan and to Liquidation Proceeds and Insurance Proceeds
on the related Mortgage Loan. The Master Servicer's right to such reimbursements
is prior to the rights of Certificateholders. In addition, if any Servicing
Advance or Monthly Advance is determined by the Master Servicer to be
non-recoverable from such sources, the amount of such Nonrecoverable Advances
may be reimbursed to the Master Servicer from other amounts on deposit in the
Certificate Account.
Not later than two Business Days prior to each Distribution Date, the
Master Servicer is required to remit to the Trustee, without any right of
reimbursement, Compensating Interest (up to the aggregate Servicing Fee for the
related Due Period) with respect to each Mortgage Loan as to which a principal
prepayment in full was received during the related Due Period.
The Servicing Fee will not be reduced to cover shortfalls in interest
collections resulting from partial prepayments on the Mortgage Loans.
CERTAIN MATTERS REGARDING THE COMPANY, SELLER AND MASTER SERVICER
The Master Servicer may perform any of its duties and obligations under
the Pooling Agreement through one or more subservicers or delegates, which may
be affiliates of the Master Servicer. Notwithstanding any such arrangement, the
Master Servicer will remain liable and obligated to the Trustee and the
Certificateholders for the Master Servicer's duties and obligations under the
Pooling Agreement, without any diminution of such duties and obligations and as
if the Master Servicer itself were performing such duties and obligations.
See "The Agreements -- Certain Matters regarding the Master Servicer and
the Company" in the Prospectus for information regarding resignation,
indemnification and succession of the Master Servicer.
S-64
<PAGE>
<PAGE>
EVENTS OF DEFAULT
"EVENTS OF DEFAULT" will consist of: (i) (A) any failure by the Master
Servicer to make any required Monthly Advance or (B) any other failure of the
Master Servicer to deposit in the Certificate Account or Distribution Account
any deposit required to be made under the Pooling Agreement, which failure
continues unremedied for five Business Days after the giving of written notice
of such failure to the Master Servicer by the Trustee, or to the Master Servicer
and the Trustee by Certificateholders holding Certificates evidencing at least
25% of the aggregate Voting Rights; (ii) any failure by the Master Servicer duly
to observe or perform in any material respect any other of its covenants or
agreements in the Pooling Agreement which continues unremedied for 30 days after
the giving of written notice of such failure to the Master Servicer by the
Trustee, or to the Master Servicer and the Trustee by any Certificateholders
holding Certificates evidencing at least 25% of the aggregate Voting Rights;
(iii) any failure by the Master Servicer to make any required Servicing Advance,
which failure continues unremedied for a period of 30 days after the giving of
written notice of such failure to the Master Servicer by the Trustee, or to the
Master Servicer and the Trustee by any Certificateholders holding Certificates
evidencing at least 25% of the aggregate Voting Rights; (iv) certain events of
insolvency, readjustment of debt, marshalling of assets and liabilities or
similar proceedings relating to the Master Servicer and certain actions by the
Master Servicer indicating insolvency, reorganization or inability to pay its
obligations (each, an "INSOLVENCY EVENT"); (v) so long as the Seller is the
Master Servicer and subject to the limitations set forth in the Pooling
Agreement, any failure of the Seller to repurchase or substitute Qualified
Substitute Mortgage Loans for Defective Mortgage Loans as required pursuant to
the Purchase Agreement or the Pooling Agreement; and (vi) certain loss or
delinquency tests specified in the Pooling Agreement are not met. See "The
Agreements -- Events of Default and Rights Upon Event of Default" in the
Prospectus.
At all times during the term of the Pooling Agreement, the Voting
Rights will be allocated among the holders of the Offered Certificates in
proportion to the original Certificate Principal Balances of their respective
classes. The holders of the Class C Certificates and the Residual Certificates
will have no Voting Rights.
TERMINATION; PURCHASE OF MORTGAGE LOANS
The Trust Fund will terminate on the Distribution Date following the
earliest of (i) the Distribution Date on which the Aggregate Certificate
Principal Balance has been reduced to zero, (ii) the final payment or other
liquidation of the last Mortgage Loan in the Trust Fund, and (iii) the optional
purchase by the Master Servicer of the Mortgage Loans, as described below.
Subject to provisions in the Pooling Agreement concerning adopting a
plan of complete liquidation, the Master Servicer may, at its option, terminate
the Pooling Agreement on any date (the "OPTIONAL TERMINATION DATE") on which the
Pool Principal Balance is less than 10% of the sum of the Pool Principal Balance
of the Closing Date Mortgage Loans as of the Cut-off Date and the Original
Pre-Funded Amount by purchasing, on the next succeeding Distribution Date, all
of the outstanding Mortgage Loans at a price equal to the sum of the outstanding
Pool Principal Balance (subject to reduction as provided in the Pooling
Agreement if the purchase price is based in part on the appraised value of any
REO Property included in the Trust Fund and such appraised value is less than
the outstanding principal balance of the related Mortgage Loan) and accrued and
unpaid interest thereon at the weighted average of the Mortgage Rates through
the end of the Due Period preceding the final Distribution Date. In addition, if
the Master Servicer does not exercise its option to terminate the Pooling
Agreement within two Distribution Dates after which such option vests, the
holders of the Class C or Class R Certificates shall have the right to terminate
the Pooling Agreement by purchasing all of the outstanding Mortgage Loans at the
purchase price referred to above and otherwise in accordance with the provisions
of the Pooling Agreement.
Any such purchase shall be accomplished by deposit into the
Distribution Account of the purchase price specified above.
S-65
<PAGE>
<PAGE>
OPTIONAL PURCHASE OF DEFAULTED MORTGAGE LOANS
The Master Servicer has the option, but is not obligated, to purchase
from the Trust Fund any Mortgage Loan that is 90 days or more delinquent (each,
a "DEFAULTED MORTGAGE LOAN") at the Purchase Price.
THE TRUSTEE
The First National Bank of Chicago, a national banking association, has
been named Trustee pursuant to the Pooling Agreement.
The Trustee may have normal banking relationships with the Company, the
Seller and the Master Servicer.
The Trustee may resign at any time, in which event the Company will be
obligated to appoint a successor Trustee, as approved by the Master Servicer.
The Company may also remove the Trustee if the Trustee ceases to be eligible to
continue as such under the Pooling Agreement or if the Trustee becomes
insolvent. Upon becoming aware of such circumstances, the Company will be
obligated to appoint a successor Trustee, as approved by the Master Servicer
(such Master Servicer approval not to be unreasonably withheld). Any resignation
or removal of the Trustee and appointment of a successor Trustee will not become
effective until acceptance of the appointment by the successor Trustee.
No holder of a Certificate will have any right under the Pooling
Agreement to institute any proceeding with respect to the Pooling Agreement
unless such holder previously has given to the Trustee written notice of default
and unless Certificateholders holding Certificates evidencing at least 51% of
the aggregate Voting Rights in the Trust Fund, have made written requests 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. The Trustee will be
under no obligation to exercise any of the trusts or powers vested in it by the
Pooling Agreement or to make any investigation of matters arising thereunder or
to institute, conduct or defend any litigation thereunder or in relation thereto
at the request, order or direction of any of the Certificateholders, unless such
Certificateholders have offered to the Trustee reasonable security or indemnity
against the cost, expenses and liabilities which may be incurred therein or
thereby.
DESCRIPTION OF THE PURCHASE AGREEMENTS
The Mortgage Loans to be transferred to the Trust Fund by the Company
will be purchased by the Company from WMC Mortgage Corp. (the "SELLER") and an
unaffiliated seller pursuant to two Mortgage Loan Purchase Agreements to be
entered into between the Company, as purchaser of the Mortgage Loans, and the
Seller and such unaffiliated seller, respectively, each as seller of the related
Mortgage Loans (each, a "PURCHASE AGREEMENT"). Under the Purchase Agreements,
the Seller and such unaffiliated seller will, respectively, agree to transfer
the related Mortgage Loans to the Company. Pursuant to the Pooling Agreement,
the Mortgage Loans will be immediately transferred by the Company to the Trust
Fund, and the Company will assign certain of its rights in, to and under the
Purchase Agreement with the Seller to the Trust Fund. See "The Mortgage
Pools -- Representations by Sellers" in the Prospectus for information regarding
the repurchase and/or substitution obligations of the Seller.
USE OF PROCEEDS
The net proceeds to be received from the sale of the Certificates will
be applied by the Company towards the purchase of the Mortgage Loans.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
Upon the issuance of the Offered Certificates, Thacher Proffitt & Wood,
counsel to the Company, will deliver its opinion generally to the effect that,
assuming compliance with all provisions of the Pooling Agreement, for federal
income tax purposes, REMIC I, REMIC II and REMIC III will each qualify as a
REMIC under the Code.
S-66
<PAGE>
<PAGE>
For federal income tax purposes, (a) the Class R-I Certificates will
constitute the sole class of "residual interests" in REMIC I, (b) the Class R-II
Certificates will be the sole class of "residual interests" in REMIC II, (c)
each class of Offered Certificates (exclusive of the right to receive payments
from the Available Funds Cap Carryover Reserve Account in respect of the
Available Funds Cap Carryover Amount) will represent ownership of "regular
interests" in REMIC II and REMIC III and will generally be treated as debt
instruments of REMIC II and REMIC III and (d) the Class R-III Certificates will
constitute the sole class of "residual certificates" in REMIC II. See "Federal
Income Tax Consequences -- REMICs" in the Prospectus; provided, however, that
any reference therein to "regular interests" in a REMIC or to REMIC Regular
Certificates shall be exclusive of the right to receive payments from the
Available Funds Cap Carryover Reserve Account in respect of the Available Funds
Cap Carryover Amount.
For federal income tax reporting purposes, the Class A-IO Certificate
will, and the other Offered Certificates will not, be treated as having been
issued with original issue discount. Although the tax treatment is not entirely
certain, the Class A-IO Certificates will be treated as having been issued with
original issue discount for federal income tax purposes equal to the excess of
all expected payments of interest on such Certificates over their issue price.
The prepayment assumption that will be used in determining the rate of accrual
of original issue discount, market discount and premium, if any, for federal
income tax purposes will be based on the assumption that, subsequent to the date
of any determination the Mortgage Loans will prepay at a rate equal to 100% of
the Prepayment Assumption. No representation is made that the Mortgage Loans
will prepay at that rate or at any other rate. Although unclear, a holder of a
Class A-IO Certificate may be entitled to deduct a loss to the extent that its
remaining basis exceeds the maximum amount of future payments to which such
Certificateholder would be entitled if there were no further prepayments of the
Loans. See "Federal Income Tax Consequences-General" and "-- Taxation of Owners
of REMIC Regular Certificates -- Original Issue Discount" in the Prospectus.
Each holder of an Offered Certificate (other than a Class A-IO
Certificate) is deemed to own an undivided beneficial ownership interest in two
assets, a REMIC regular interest and the right to receive payments from the
Available Funds Cap Carryover Reserve Account in respect of the Available Funds
Cap Carryover Amount. The Available Funds Cap Carryover Reserve Account is not
an asset of either REMIC. The treatment of amounts received by an Offered
Certificateholder (other than a holder of a Class A-IO Certificate) under such
Certificateholder's right to receive the Available Funds Cap Carryover Amount
will depend on the portion, if any, of such Offered Certificateholder's (other
than a holder of a Class A-IO Certificate) purchase price allocable thereto.
Under the REMIC Regulations, each holder of an Offered Certificate must allocate
its purchase price for the Offered Certificate between its undivided interest in
the regular interests and its undivided interest in the right to receive
payments from the Available Funds Cap Carryover Reserve Account in respect of
the Available Funds Cap Carryover Amount in accordance with the relative fair
market values of each property right. Payments made to the holders of the
Offered Certificates (other than a holder of a Class A-IO Certificate) with
respect to the Available Funds Cap Carryover Amount will be included in income
based on the regulations relating to notional principal contracts (the "NOTIONAL
PRINCIPAL CONTRACT REGULATIONS"). The OID Regulations provide that the Issuer's
allocation of the issue price is binding on all holders unless the holder
explicitly discloses on its tax return that its allocation is different from the
Issuer's allocation. For tax reporting purposes, a de minimis value will be
assigned to the Available Funds Cap Carryover Amount. Under the REMIC
Regulations, the Master Servicer is required to account for the regular interest
and the right to receive payments from the Available Funds Carryover Reserve
Account in respect of the Available Funds Cap Carryover Amount as discrete
property rights. Holders of the Offered Certificates (other than a Class A-IO
Certificate) are advised to consult their own tax advisors regarding the
allocation of issue price, timing, character and source of income and deductions
resulting from the ownership of the Certificates. Treasury regulations have been
promulgated under Section 1275 of the Code generally providing for the
integration of a "qualifying debt instrument" with a hedge if the combined cash
flows of the components are substantially equivalent to the cash flows on a
variable rate debt instrument. However, such regulations specifically disallow
integration of debt instruments subject to Section 1272(a)(6) of the Code.
Therefore, holders of the Offered Certificates (other than a Class A-IO
Certificate) will be unable to use the integration method provided for under
such regulations with respect to such Certificates. Ownership of the right to
the Available Funds Cap Carryover Amount will nevertheless entitle the owner to
amortize the separate price paid for the right to the Available Funds Cap
Carryover Amount under the Notional Principal Contract Regulations.
In certain circumstances OID Regulations permit the holder of a debt
instrument to recognize original issue discount under a method that differs from
that used by the issuer. Accordingly, it is possible that the holder of a
S-67
<PAGE>
<PAGE>
Certificate may be able to select a method for recognizing original issue
discount that differs from that used by the Master Servicer in preparing reports
to the Certificateholders and the IRS.
Certain classes of the Offered Certificates may be treated for federal
income tax purposes as having been issued at a premium. Whether any holder of
such a class of Certificates will be treated as holding a certificate with
amortizable bond premium will depend on such Certificateholder's purchase price
and the distributions remaining to be made on such Certificate at the time of
its acquisition by such Certificateholder. Holders of such classes of
Certificates should consult their tax advisors regarding the possibility of
making an election to amortize such premium. See "Federal Income Tax
Consequences -- REMICS -- Taxation of Owners of REMIC Regular Certificates"
and "-- Premium" in the Prospectus.
This paragraph applies to the Offered Certificates (in the case of the
Offered Certificates other than the Class A-IO Certificates, exclusive of any
rights in the Available Funds Cap Carryover Reserve Account). The Offered
Certificates will be treated as assets described in Section 7701(a)(19)(C) of
the Code and "real estate assets" under Section 856(c)(4)(A) of the Code
generally in the same proportion that the assets of the Trust Fund would be so
treated. In addition, interest on the Offered Certificates will be treated as
"interest on obligations secured by mortgages on real property" under Section
856(c)(3)(B) of the Code generally to the extent that such Offered Certificates
are treated as "real estate assets" under Section 856(c)(4)(A) of the Code.
Moreover, the Offered Certificates (other than the Residual Certificates) will
be "qualified mortgages" within the meaning of Section 860G(a)(3) of the Code if
transferred to another REMIC on its startup day in exchange for a regular or
residual interest therein. However, prospective investors in Offered
Certificates that will be generally treated as assets described in Section
860G(a)(3) of the Code should note that, notwithstanding such treatment, any
repurchase of such a Certificate pursuant to the right of the Master Servicer or
the Company to repurchase such Offered Certificates may adversely affect any
REMIC that holds such Offered Certificates if such repurchase is made under
circumstances giving rise to a Prohibited Transaction Tax. See "The Pooling
Agreement -- Termination" herein and "Federal Income Tax
Consequences -- REMICS -- Characterization of Investments in REMIC Certificates"
in the Prospectus.
The holders of the Offered Certificates will be required to include in
income interest on such Certificates in accordance with the accrual method of
accounting. As noted above, each holder of an Offered Certificate (other than a
Class A-IO Certificate) will be required to allocate a portion of the purchase
price paid for the Offered Certificates to the right to receive payments from
the Available Funds Cap Carryover Reserve Account in respect of the Available
Funds Cap Carryover Amount. The value of the right to receive any such Available
Funds Cap Carryover Amount is a question of fact which could be subject to
differing interpretations. Because the Available Funds Cap Carryover Amount is
treated as a separate right of each Offered Certificate (other than a Class A-IO
Certificate) not payable by the REMICs, such right will not be treated as a
qualifying asset for any Certificateholder that is a mutual savings bank,
domestic building and loan association, real estate investment trust, or real
estate mortgage investment conduit and any amounts received from the Available
Funds Cap Carryover Reserve Account will not be qualifying real estate income
for real estate investment trusts.
WMC will be designated as the "tax matters person" with respect to
REMIC I, REMIC II and REMIC III as defined in the REMIC Provisions (as defined
in the Prospectus), and in connection therewith will be required to hold not
less than 0.01% of each of the Class R-I Certificates, Class R-II Certificates
and Class R-III Certificates.
For further information regarding federal income tax consequences of
investing in the Offered Certificates, see "Federal Income Tax
Consequences -- REMICS" in the Prospectus.
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in an underwriting
agreement (the "UNDERWRITING AGREEMENT"), among the Company, WMC and Bear,
Stearns & Co. Inc. as representative of the Underwriters, the Underwriters have
agreed to purchase the Offered Certificates as follows: Bear, Stearns & Co. Inc.
and CS First Boston Corporation will each acquire approximately 33.33% of the
Offered Certificates (other than the Class A-IO Certificates); Lehman Brothers
Inc., First Union Capital Markets, a division of Wheat First Securities, Inc.
and NationsBanc Montgomery Securities LLC will each acquire approximately 11.11%
of the Offered Certificates (other than the Class A-IO Certificates); and Bear,
Stearns & Co. Inc. will acquire a 100% percentage interest in the Class A-IO
Certificates.
S-68
<PAGE>
<PAGE>
The Company has been advised by the Underwriters that they propose
initially to offer the Offered Certificates to the public at the respective
offering prices set forth on the cover page hereof and to certain dealers less a
concession not in excess of the respective amounts set forth below (expressed as
a percentage of the related Certificate Principal Balance or Notional Amount).
The Underwriters may allow and such dealers may reallow a discount not in excess
of the respective amounts set forth in the table below to certain other dealers.
After the initial public offering of the Offered Certificates, the public
offering price and such concessions and reallowances may be changed.
<TABLE>
<CAPTION>
CLASS OF SELLING REALLOWANCE
CERTIFICATE CONCESSION DISCOUNT
----------- ---------- --------
<S> <C> <C>
Class A-1 0.09000% 0.04500%
Class A-2 0.15000% 0.07500%
Class M-1 0.30000% 0.15000%
Class M-2 0.39000% 0.19500%
Class B 0.42000% 0.21000%
Class A-IO 0.05250% 0.02625%
</TABLE>
In connection with the offering, the Underwriters may purchase and sell
the Offered Certificates in the open market. These transactions may include
purchases to cover short positions created by an Underwriter in connection with
the offering. Short positions created by an Underwriter involve the sale by an
Underwriter of a greater number of Offered Certificates than they are required
to purchase from the Company in the offering. An Underwriter also may impose a
penalty bid, whereby selling concessions allowed to broker-dealers in respect of
the securities sold in the offering may be reclaimed by such Underwriter if such
Offered Certificates are repurchased by such Underwriter in covering
transactions. These activities may maintain or otherwise affect the market price
of the Offered Certificates, which may be higher than the price that might
otherwise prevail in the open market; and these activities, if commenced, may be
discontinued at any time. These transactions may be effected in the
over-the-counter market or otherwise.
The Underwriting Agreement provides that the Company will indemnify the
Underwriters, and under limited circumstances the Underwriters will indemnify
the Company, against certain civil liabilities under the Act or contribute to
payments required to be made in respect thereof.
There can be no assurance that a secondary market for the Offered
Certificates will develop or, if it does develop, that it will continue. The
primary source of information available to investors concerning the Offered
Certificates will be the monthly statements discussed in the Prospectus under
"Description of Securities -- Reports to Securityholders," which will include
information as to the outstanding principal balance of the Offered Certificates
and the status of the applicable form of credit enhancement. There can be no
assurance that any additional information regarding the Offered Certificates
will be available through any other source. In addition, the Company is not
aware of any source through which price information about the Offered
Certificates will be generally available on an ongoing basis. The limited nature
of such information regarding the Offered Certificates may adversely affect the
liquidity of the Offered Certificates, even if a secondary market for the
Offered Certificates becomes available.
LEGAL OPINIONS
Certain legal matters relating to the Offered Certificates will be
passed upon for the Company by Thacher Proffitt & Wood, New York, New York and
for the Underwriters by Brown & Wood LLP, New York, New York.
RATINGS
It is a condition to the issuance of the Class A Certificates (other
than the Class A-IO Certificates) that they be rated "AAA" by Standard & Poor's
and Aaa by Moody's. It is a condition to the issuance of the Class A-IO
Certificates that they be rated "AAAr" by Standard & Poor's and Aaa by Moody's.
It is a condition to the issuance of
S-69
<PAGE>
<PAGE>
the Class M-1, Class M-2 and Class B Certificates that they be rated not lower
than "AA", "A" and "BBB", respectively, by Standard & Poor's and Aa2, A2 and
Baa3, respectively, by Moody's.
The ratings of Standard & Poor's on mortgage pass-through certificates
address the likelihood of the receipt by Certificateholders of payments required
under the Pooling Agreement. Standard & Poor's ratings take into consideration
the credit quality of the mortgage pool, structural and legal aspects associated
with the Certificates, and the extent to which the payment stream in the
mortgage pool is adequate to make payments required under the Offered
Certificates. The ratings of Standard & Poor's on the Offered Certificates do
not, however, constitute a statement regarding frequency of prepayments on the
mortgages. See "Certain Yield and Prepayment Considerations" herein. The ratings
assigned by Standard & Poor's to the Offered Certificates do not address the
possibility that the Offered Certificates might suffer a lower than anticipated
yield, nor does it address the likelihood that the Available Funds Cap Carryover
Amount will be paid to the Offered Certificates (other than the Class A-IO
Certificates). The "r" of the "AAAr" rating of the Class A-IO Certificates by
Standard & Poor's is attached to highlight derivative, hybrid, and certain other
obligations that Standard & Poor's believes may experience high volatility or
high variability in expected returns due to non-credit risks. Examples of such
obligations are securities the principal or interest return of which is indexed
to equities, commodities or currencies; certain swaps and options; and interest
only and principal only mortgage securities. The absence of an "r" symbol should
not be taken as an indication that an obligation will exhibit no volatility or
variability in total return.
The ratings of Moody's on mortgage pass-through certificates address
the likelihood of the receipt by the holders thereof of all distributions on the
underlying mortgage loans to which they are entitled. Moody's ratings on
pass-through certificates do not represent any assessment of the likelihood that
principal prepayments will be made by mortgagors or the degree to which such
prepayments might differ from that originally anticipated. The ratings assigned
by Moody's to the Offered Certificates do not address the possibility that the
Offered Certificate might suffer a lower than anticipated yield, nor does it
address the likelihood that the Available Funds Cap Carryover Amount will be
paid to the Offered Certificates.
The Company has not requested a rating on the Offered Certificates by
any rating agency other than Standard & Poor's and Moody's. However, there can
be no assurance as to whether any other rating agency will rate the Offered
Certificates, or, if it does, what rating would be assigned by any such other
rating agency. A rating on the Certificates by another rating agency, if
assigned at all, may be lower than the ratings assigned to the Offered
Certificates by Standard & Poor's and Moody's.
A security rating is not a recommendation to buy, sell or hold
securities and may be subject to revision or withdrawal at any time by the
assigning rating organization. Each security rating should be evaluated
independently of any other security rating. In the event that the ratings
initially assigned to the Offered Certificates are subsequently lowered for any
reason, no person or entity is obligated to provide any additional support or
credit enhancement with respect to the Offered Certificates.
LEGAL INVESTMENT
The Class M-2 and Class B Certificates will not constitute "mortgage
related securities" for purposes of SMMEA. The Class A and Class M-1
Certificates will not constitute "mortgage related securities" for purposes of
SMMEA until such time as the balance of the Pre-Funding Account is reduced to
zero. At such time, the Class A and Class M-1 Certificates will constitute
"mortgage related securities" for purposes of SMMEA. for so long as they are
rated in one of the two highest rating categories by one or more nationally
recognized statistical rating organizations. As such, the Class A Certificates
and the Class M-1 Certificates will be legal investments for certain entities to
the extent provided in SMMEA, subject to state laws overriding SMMEA.
Furthermore, certain states have enacted legislation overriding the legal
investment provisions of SMMEA. Institutions whose investment activities are
subject to legal investment laws and regulations or to review by regulatory
authorities should consult with their legal advisors in determining whether and
to what extent the Offered Certificates are subject to restrictions on
investment, capital requirements or otherwise. All investors whose investment
authority is subject to legal restrictions should consult their own legal
advisors to determine whether, and to what extent, the Offered Certificates will
constitute legal investments for them. In this connection, the Office of the
Comptroller of the Currency (the "OCC") has amended 12 C.F.R. Part
S-70
<PAGE>
<PAGE>
1 to authorize national banks to purchase and sell for their own account,
without limitation as to a percentage of the bank's capital and surplus (but
subject to compliance with certain general standards in 12 C.F.R. 'SS' 1.5
concerning "safety and soundness" and retention of credit information), certain
"Type IV Securities," defined in 12 C.F.R. 'SS' 1.2(1) to include certain
"residential mortgage-related securities." As so defined, "residential
mortgage-related security" means, in relevant part, "mortgage related security"
within the meaning of SMMEA. The National Credit Union Administration (the
"NCUA") has adopted rules, codified at 12 C.F.R. Part 703, which permit federal
credit unions to invest in "mortgage related securities" under certain limited
circumstances, other than stripped mortgage related securities, residual
interests in mortgage related securities, and commercial mortgage related
securities, unless the credit union has obtained written approval from the NCUA
to participate in the "investment pilot program" described in 12 C.F.R. 'SS'
703.140. Finally, effective May 26, 1998 (October 1, 1998 in the case of federal
credit unions), the 1992 "Supervisory Policy Statement on Securities Activities"
of the Federal Financial Institutions Examination Council (the "FFIEC") has been
superseded by the FFIEC's "Supervisory Policy Statements on Investment
Securities and End-User Derivatives Activities" (the "1998 POLICY STATEMENT").
The 1998 Policy Statement deletes the specific "high-risk mortgage securities"
tests, and substitutes general guidelines which depository institutions must
follow in managing risks (including market, credit, liquidity, operational
(transaction), and legal risks) applicable to all securities (including mortgage
pass-through securities and mortgage-derivative products) used for investment
purposes. See "Legal Investment Matters" in the Prospectus.
ERISA CONSIDERATIONS
A fiduciary of any employee benefit plan or other plan or arrangement
subject to ERISA, or Section 4975 of the Code (a "PLAN") or any insurance
company (whether through its general or separate accounts) or other person
investing "plan assets" of any Plan should carefully review with its legal
advisors whether the purchase or holding of Offered Certificates could give rise
to a transaction prohibited or not otherwise permissible under ERISA or Section
4975 of the Code. The purchase or holding of the Class A Certificates by or on
behalf of, or with Plan Assets of, a Plan may qualify for exemptive relief under
the Exemption, as described under "ERISA Considerations Prohibited Transaction
Exemptions" in the Prospectus. However, the Exemption contains a number of
conditions which must be met for the Exemption to apply, including the
requirement that any such Plan must be an "accredited investor" as defined in
Rule 501(a)(1) of Regulation D of the Securities and Exchange Commission under
the Securities Act of 1933, as amended.
The Small Business Job Protection Act of 1996 added a new Section
401(c) to ERISA, which provides certain exemptive relief from the provisions of
Part 4 of Title I of ERISA and Section 4975 of the Code, including the
prohibited transaction restrictions imposed by ERISA and the related excise
taxes imposed by the Code, for transactions involving an insurance company
general account. Pursuant to Section 401(c) of ERISA, the Department of Labor
("DOL") is required to issue final regulations ("401(C) REGULATIONS") no later
than December 31, 1997 which are to provide guidance for purposes of
determining, in cases where insurance policies supported by an insurer's general
account are issued to or for the benefit of a Plan on or before December 31,
1998, which general account assets constitute Plan Assets. Section 401(c) of
ERISA generally provides that, until the date which is 18 months after the
401(c) Regulations become final, no person shall be subject to liability under
Part 4 of Title I of ERISA and Section 4975 of the Code on the basis of a claim
that the assets of an insurance company general account constitute Plan Assets,
unless (i) as otherwise provided by the Secretary of Labor in the 401(c)
Regulations to prevent avoidance of the regulations or (ii) an action is brought
by the Secretary of Labor for certain breaches of fiduciary duty which would
also constitute a violation of federal or state criminal law. Any assets of an
insurance company general account which support insurance policies issued to a
Plan after December 31, 1998 or issued to Plans on or before December 31, 1998
for which the insurance company does not comply with the 401(c) Regulations may
be treated as Plan Assets. In addition, because Section 401(c) does not relate
to insurance company separate accounts, separate account assets are still
treated as Plan Assets of any Plan invested in such separate account. Insurance
companies contemplating the investment of general account assets in the Class A
Certificates should consult with their legal advisors with respect to the
applicability of Section 401(c) of ERISA, including the general account's
ability to continue to hold the Offered Certificates after the date which is 18
months after the date the 401(c) Regulations become final.
S-71
<PAGE>
<PAGE>
Because the exemptive relief afforded by the Exemption (or any similar
exemption that might be available) will not likely apply to the purchase, sale
or holding of the Subordinate Certificates (due to the subordinate nature
thereof) and the Subordinate Certificates will be issued and transferred only in
book-entry form through DTC, CEDEL and Euroclear, any purchase of a Subordinate
Certificate will be deemed to have represented by such purchase that either (a)
such purchaser is not a Plan and is not purchasing such Securities on behalf of,
or with Plan Assets of, any Plan or (b) the purchase of any such Security by or
on behalf of, or with Plan Assets of, any Plan is permissible under applicable
law, will not result in any non-exempt prohibited transaction under ERISA or
Section 4975 of the Code and will not subject the Company, the Trustee or the
Master Servicer to any obligation in addition to those undertaken in the related
Agreement.
To the extent that Definitive Certificates are issued with respect to
Subordinate Certificates, transfers of such Subordinate Certificates to a Plan,
to a trustee or other person acting on behalf of any Plan, or to any other
person using the assets of any Plan to effect such acquisition will not be
registered by the Trustee unless the transferee provides the Company, the
Trustee and the Master Servicer with an opinion of counsel satisfactory to the
Company, the Trustee and the Master Servicer, which opinion will not be at the
expense of the Company, the Trustee or the Master Servicer, that the purchase of
such Certificates by or on behalf of such Plan is permissible under applicable
law, will not constitute or result on a non-exempt prohibited transaction under
ERISA or Section 4975 of the Code and will not subject the Company, the Trustee
or the Master Servicer to any obligation in addition to those undertaken in the
Pooling Agreement. In lieu of such opinion of counsel, the transferee may
provide a certification substantially to the effect that the purchase of
Subordinate Certificates by or on behalf of such Plan is permissible under
applicable law, will not constitute or result in a non-exempt prohibited
transaction under ERISA or Section 4975 of the Code, will not subject the
Company, the Trustee or the Master Servicer to any obligation in addition to
those undertaken in the Pooling Agreement, and the following statements are
correct: (i) the transferee is an insurance company and the source of funds used
to purchase such Subordinate Certificates is an "insurance company general
account" (as such term is defined in PTCE 95-60), (ii) the conditions set forth
in Sections I and III of PTCE 95-60 have been satisfied and (iii) there is no
Plan with respect to which the amount of such general accounts reserves and
liabilities for contracts held by or on behalf of such Plan and all other Plans
maintained by the same employer (or any "affiliate" thereof, as defined in PTCE
95-60) or by the same employee organization exceed 10% of the total of all
reserves and liabilities of such general account (as determined under PTCE
95-60) as of the date of the acquisition of such Subordinate Certificates.
Any fiduciary or other investor of Plan Assets that proposes to acquire
or hold the Offered Certificates on behalf of or with Plan Assets of any Plan
should consult with its counsel with respect to the potential applicability of
the fiduciary responsibility provisions of ERISA and the prohibited transaction
provisions of the ERISA and the Code to the proposed investment. See "ERISA
Considerations" in the Prospectus.
S-72
<PAGE>
<PAGE>
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered WMC
Mortgage Pass-Through Certificates, Series 1998-B: Class A, Class M-1, Class M-2
and Class B Certificates (the "GLOBAL SECURITIES") will be available only in
book-entry form. Investors in the Global Securities may hold such Global
Securities through any of DTC, Cedel or Euroclear. The Global Securities will be
traceable as home market instruments in both the European and U.S. domestic
markets. Initial settlement and all secondary trades will settle in same-day
funds.
Secondary market trading between investors through Cedel and Euroclear
will be conducted in the ordinary way in accordance with the normal rules and
operating procedures of Cedel and Euroclear and in accordance with conventional
eurobond practice (i.e., seven calendar day settlement).
Secondary market trading between investors through DTC will be
conducted according to DTC's rules and procedures applicable to U.S. corporate
debt obligations.
Secondary cross-market trading between Cedel or Euroclear and DTC
Participants holding Certificates will be effected on a delivery-against-payment
basis through the respective Depositaries of Cedel and Euroclear (in such
capacity) and as DTC Participants.
Non-U.S. holders (as described below) of Global Securities will be
subject to U.S. withholding taxes unless such holders meet certain requirements
and deliver appropriate U.S. tax documents to the securities clearing
organizations or their participants.
INITIAL SETTLEMENT
All Global Securities will be held in book-entry form by DTC in the
name of Cede & Co. as nominee of DTC. Investors' interests in the Global
Securities will be represented through financial institutions acting on their
behalf as direct and indirect Participants in DTC. As a result, Cedel and
Euroclear will hold positions on behalf of their participants through their
Relevant Depositary which in turn will hold such positions in their accounts as
DTC Participants.
Investors electing to hold their Global Securities through DTC will
follow DTC settlement practices. Investor securities custody accounts will be
credited with their holdings against payment in same-day funds on the settlement
date.
Investors electing to hold their Global Securities through Cedel or
Euroclear accounts will follow the settlement procedures applicable to
conventional eurobonds, except that there will be no temporary global security
and no "lock-up" or restricted period. Global Securities will be credited to the
securities custody accounts on the settlement date against payment in same-day
funds.
SECONDARY MARKET TRADING
Since the purchaser determines the place of delivery, it is important
to establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired value
date.
Trading between DTC Participants. Secondary market trading between DTC
Participants will be settled using the procedures applicable to prior mortgage
loan asset-backed certificates issues in same-day funds. Trading between Cedel
and/or Euroclear Participants. Secondary market trading between Cedel
Participants or Euroclear Participants will be settled using the procedures
applicable to conventional eurobonds in same-day funds. Trading between DTC,
Seller and Cedel or Euroclear Participants. When Global Securities are to be
transferred from the account of a DTC Participant to the account of a Cedel
Participant or a Euroclear Participant, the purchaser will send instructions to
Cedel or Euroclear through a Cedel Participant or Euroclear Participant at least
one business day prior to settlement. Cedel or Euroclear will instruct the
Relevant Depositary, as the case may be, to receive the Global Securities
against payment. Payment will include interest accrued on the Global Securities
from and including the last coupon payment date to and excluding the settlement
date, on the basis of the actual number of days in such accrual period and a
year assumed to consist of 360 days. For transactions settling on the 31st of
the month, payment will include interest accrued to and excluding the first day
of the following month. Payment will then be made by the Relevant Depositary to
the DTC
I - 1
<PAGE>
<PAGE>
Participant's account against delivery of the Global Securities. After
settlement has been completed, the Global Securities will be credited to the
respective clearing system and by the clearing system, in accordance with its
usual procedures, to the Cedel Participant's or Euroclear Participant's account.
The securities credit will appear the next day (European time) and the cash debt
will be back-valued to, and the interest on the Global Securities will accrue
from, the value date (which would be the preceding day when settlement occurred
in New York). If settlement is not completed on the intended value date (i.e.,
the trade fails), the Cedel or Euroclear cash debt will be valued instead as of
the actual settlement date.
Cedel Participants and Euroclear Participants will need to make
available to the respective clearing systems the funds necessary to process
same-day funds settlement. The most direct means of doing so is to preposition
funds for settlement, either from cash on hand or existing lines of credit, as
they would for any settlement occurring within Cedel or Euroclear. Under this
approach, they may take on credit exposure to Cedel or Euroclear until the
Global Securities are credited to their account one day later. As an
alternative, if Cedel or Euroclear has extended a line of credit to them, Cedel
Participants or Euroclear Participants can elect not to preposition funds and
allow that credit line to be drawn upon to finance settlement. Under this
procedure, Cedel Participants or Euroclear Participants purchasing Global
Securities would incur overdraft charges for one day, assuming they cleared the
overdraft when the Global Securities were credited to their accounts. However,
interest on the Global Securities would accrue from the value date. Therefore,
in many cases the investment income on the Global Securities earned during that
one-day period may substantially reduce or offset the amount of such overdraft
charges, although the result will depend on each Cedel Participant's or
Euroclear Participant's particular cost of funds. Since the settlement is taking
place during New York business hours, DTC Participants can employ their usual
procedures for crediting Global Securities to the respective European Depositary
for the benefit of Cedel Participants or Euroclear Participants. The sale
proceeds will be available to the DTC seller on the settlement date. Thus, to
the DTC Participants a cross-market transaction will settle no differently than
a trade between two DTC Participants.
Trading between Cedel or Euroclear Seller and DTC Purchaser. Due to
time zone differences in their favor, Cedel Participants and Euroclear
Participants may employ their customary procedures for transactions in which
Global Securities are to be transferred by the respective clearing system,
through the respective Depositary, to a DTC Participant. The seller will send
instructions to Cedel or Euroclear through a Cedel Participant or Euroclear
Participant at least one business day prior to settlement. In these cases Cedel
or Euroclear will instruct the respective Depositary, as appropriate, to credit
the Global Securities to the DTC Participant's account against payment. Payment
will include interest accrued on the Global Securities from and including the
last coupon payment to and excluding the settlement date on the basis of the
actual number of days in such accrual period and a year assumed to consist to
360 days. For transactions settling on the 31st of the month, payment will
include interest accrued to and excluding the first day of the following month.
The payment will then be reflected in the account of Cedel Participant or
Euroclear Participant the following day, and receipt of the cash proceeds in the
Cedel Participant's or Euroclear Participant's account would be back-valued to
the value date (which would be the preceding day, when settlement occurred in
New York). Should the Cedel Participant or Euroclear Participant have a line of
credit with its respective clearing system and elect to be in debt in
anticipation of receipt of the sale proceeds in its account, the back-valuation
will extinguish any overdraft incurred over that one-day period. If settlement
is not completed on the intended value date (i.e., the trade fails), receipt of
the cash proceeds in the Cedel Participant's or Euroclear Participant's account
would instead be valued as of the actual settlement date.
Finally, day traders that use Cedel or Euroclear and that purchase
Global Securities from DTC Participants for delivery to Cedel Participants or
Euroclear Participants should note that these trades would automatically fail on
the sale side unless affirmative action is taken. At least three techniques
should be readily available to eliminate this potential problem:
(a) borrowing through Cedel or Euroclear for one day (until
the purchase side of the trade is reflected in their Cedel or Euroclear
accounts) in accordance with the clearing system's customary
procedures;
(b) borrowing the Global Securities in the U.S. from a DTC
Participant no later than one day prior to settlement, which would give
the Global Securities sufficient time to be reflected in their Cedel or
Euroclear account in order to settle the sale side of the trade; or
I - 2
<PAGE>
<PAGE>
(c) staggering the value dates for the buy and sell sides of
the trade so that the value date for the purchase from the DTC
Participant is at least one day prior to the value date for the sale to
the Cedel Participant or Euroclear Participant.
CERTAIN U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A beneficial owner of Global Securities holding securities through
Cedel or Euroclear (or through DTC if the holder has an address outside the
U.S.) will be subject to the 30% U.S. withholding tax that generally applies to
payments of interest (including original issue discount) on registered debt
issued by U.S. Persons (as defined below), unless (i) each clearing system, bank
or other financial institution that holds customers' securities in the ordinary
course of its trade or business in the chain of intermediaries between such
beneficial owner and the U.S. entity required to withhold tax complies with
applicable certification requirements and (ii) such beneficial owner takes one
of the following steps to obtain an exemption or reduced tax rate: Exemption for
Non-U.S. Persons (Form W-8). Beneficial Holders of Global Securities that are
Non-U.S. Persons (as defined below) can obtain a complete exemption from the
withholding tax by filing a signed Form W-8 (Certificate of Foreign Status). If
the information shown on Form W-8 changes, a new Form W-8 must be filed within
30 days of such change.
Exemption for Non-U.S. Persons with effectively connected income (Form
4224). A Non-U.S. Person (as defined below), including a non-U.S. corporation or
bank with a U.S. branch, for which the interest income is effectively connected
with its conduct of a trade or business in the United States, can obtain an
exemption from the withholding tax by filing Form 4224 (Exemption from
Withholding of Tax on Income Effectively Connected with the Conduct of a Trade
or Business in the United States).
Exemption or reduced rate for Non-U.S. Persons resident in treaty
countries (Form 1001). Non-U.S. Persons residing in a country that has a tax
treaty with the United States can obtain an exemption or reduced tax rate
(depending on the treaty terms) by filing Form 1001 (Holdership, Exemption or
Reduced Rate Certificate). If the treaty provides only for a reduced rate,
withholding tax will be imposed at that rate unless the filer alternatively
files Form W-8. Form 1001 may be filed by Certificate Holders or their agent.
Exemption for U.S. Persons (Form W-9). U.S. Persons can obtain a complete
exemption from the withholding tax by filing Form W-9 (Payer's Request for
Taxpayer Identification Number and Certification).
U.S. Federal Income Tax Reporting Procedure. The Holder 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
security (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, partnership or other entity organized in or under the laws of the
United States or any political subdivision thereof (unless, in the case of a
partnership, future Treasury regulations provide otherwise), (iii) an estate or
trust that is subject to U.S. federal income tax regardless of the source of its
income, or (iv) a trust other than a "foreign trust," as defined in Section
7701(a)(31) of the Code. The term "NON-U.S. PERSON" means any person who is not
a U.S. Person. This summary does not deal with all aspects of U.S. Federal
income tax withholding that may be relevant to foreign holders of the Global
Securities. Investors are advised to consult their own tax advisors for specific
tax advice concerning their holding and disposing of the Global Securities.
I - 3
<PAGE>
<PAGE>
PROSPECTUS
Mortgage Pass-Through Certificates
Mortgage-Backed Notes
WMC Secured Assets Corp.
The mortgage pass-through certificates ("Certificates") or
mortgage-backed notes ("Notes") offered hereby (the "Offered Securities") and by
the supplements hereto (each, a "Prospectus Supplement") will be offered from
time to time in series. The Offered Securities of each series, together with any
other mortgage pass-through certificates or mortgage-backed notes of such
series, are collectively referred to herein as the "Securities."
Each series of Certificates will represent in the aggregate the entire
beneficial ownership interest in, and each series of Notes will represent
indebtedness of, a trust fund (with respect to any series, the "Trust Fund") to
be established by WMC Secured Assets Corp. (the "Company"). Each Trust Fund will
consist primarily of a segregated pool (a "Mortgage Pool") of one- to
four-family and/or junior mortgage loans or manufactured housing conditional
sales contracts and installment loan agreements (collectively, the "Mortgage
Loans") or interests therein (which may include Mortgage Securities as defined
herein), acquired by the Company from one or more affiliated or unaffiliated
institutions (the "Sellers"). See "The Company" and "The Mortgage Pools." The
Mortgage Loans may include sub-prime mortgage loans. The Mortgage Loans and
other assets in each Trust Fund, which may only include, if applicable,
reinvestment income, reserve funds, cash accounts and various forms of credit
enhancement as described herein (collectively, the "Trust Fund Assets") will be
held in trust for the benefit of the holders of the related series of Securities
(the "Securityholders") pursuant to (i) with respect to each series of
Certificates, a pooling and servicing agreement or other agreement (in either
case, a "Pooling Agreement") or (ii) with respect to each series of Notes, an
indenture (an "Indenture"), in each case as more fully described herein and in
the related Prospectus Supplement. Information regarding the Offered Securities
of a series, and the general characteristics of the Mortgage Loans and other
Trust Fund Assets in the related Trust Fund, will be set forth in the related
Prospectus Supplement.
Each series of Securities will include one or more classes. Each class
of Securities of any series will represent the right, which right may be senior
or subordinate to the rights of one or more of the other classes of the
Securities, to receive a specified portion of payments of principal or interest
(or both) on the Mortgage Loans and the other Trust Fund Assets in the related
Trust Fund in the manner described herein under "Description of the Securities"
and in the related Prospectus Supplement. A series may include one or more
classes of Securities entitled to principal distributions, with
disproportionate, nominal or no interest distributions, or to interest
distributions, with disproportionate, nominal or no principal distributions. A
series may include two or more classes of Securities which differ as to the
timing, sequential order, priority of payment, pass-through rate or amount of
distributions of principal or interest or both.
(cover continued on next page)
-------------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 18 HEREIN FOR A DISCUSSION OF
MATERIAL RISKS AFFECTING INVESTMENT IN THE SECURITIES.
PROCEEDS OF THE ASSETS IN THE RELATED TRUST FUND AND PAYMENTS UNDER ANY
FINANCIAL GUARANTY INSURANCE POLICY ARE THE SOLE SOURCE OF PAYMENTS ON THE
SECURITIES. THE SECURITIES DO NOT REPRESENT AN INTEREST IN OR OBLIGATION OF THE
COMPANY, THE MASTER SERVICER OR ANY OF THEIR RESPECTIVE AFFILIATES. NEITHER THE
SECURITIES OF ANY SERIES NOR THE UNDERLYING MORTGAGE LOANS OR MORTGAGE
SECURITIES WILL BE GUARANTEED OR INSURED BY THE COMPANY, THE MASTER SERVICER OR
ANY OF THEIR RESPECTIVE AFFILIATES.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
----------------------------------
The Offered Securities may be offered through one or more different
methods, including offerings through underwriters, as more fully described under
"Methods of Distribution" and in the related Prospectus Supplement.
There will be no secondary market for the Offered Securities of any
series prior to the offering thereof. There can be no assurance that a secondary
market for any of the Offered Securities will develop or, if it does develop,
that it will continue. The Offered Securities will not be listed on any
securities exchange.
Retain this Prospectus for future reference. This Prospectus may not be
used to consummate sales of securities offered hereby unless accompanied by a
Prospectus Supplement.
The date of this Prospectus is August 10, 1998.
<PAGE>
<PAGE>
(continued from previous page)
The Company's only obligations with respect to a series of Securities
will be pursuant to certain representations and warranties made by the Company,
except as provided in the related Prospectus Supplement. The master servicer
(the "Master Servicer") for any series of Securities will be named in the
related Prospectus Supplement. The principal obligations of the Master Servicer
will be pursuant to its contractual servicing obligations (which include its
limited obligation to make certain advances in the event of delinquencies in
payments on the related Mortgage Loans). See "Description of the Securities."
If so specified in the related Prospectus Supplement, the Trust Fund
for a series of Securities may include any one or any combination of a financial
guaranty insurance policy, mortgage pool insurance policy, letter of credit,
bankruptcy bond, special hazard insurance policy, or reserve fund. In addition
to or in lieu of the foregoing, credit enhancement may be provided by means of
subordination of one or more classes of Securities or by Overcollateralization
(as defined herein). See "Description of Credit Enhancement."
The rate of payment of principal of each class of Securities entitled
to a portion of principal payments on the Mortgage Loans in the related Mortgage
Pool and the Trust Fund Assets will depend on the priority of payment of such
class and the rate and timing of principal payments (including by reason of
prepayments, defaults, liquidations and repurchases of Mortgage Loans) on such
Mortgage Loans and other Trust Fund Assets. A rate of principal payment slower
or faster than that anticipated may affect the yield on a class of Securities in
the manner described herein and in the related Prospectus Supplement. See "Yield
Considerations."
With respect to each series of Certificates, one or more separate
elections may be made to treat the related Trust Fund or a designated portion
thereof as a real estate mortgage investment conduit ("REMIC") for federal
income tax purposes. If applicable, the Prospectus Supplement for a series of
Certificates will specify which class or classes of the related series of
Certificates will be considered to be regular interests in the related REMIC and
which class of Certificates or other interests will be designated as the
residual interest in the related REMIC. See "Federal Income Tax Consequences"
herein.
2
<PAGE>
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND ANY PROSPECTUS
SUPPLEMENT WITH RESPECT HERETO AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON. THIS PROSPECTUS AND ANY PROSPECTUS
SUPPLEMENT WITH RESPECT HERETO DO NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES OFFERED
HEREBY AND THEREBY OR AN OFFER OF SUCH 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; HOWEVER, IF ANY MATERIAL CHANGE OCCURS WHILE
THIS PROSPECTUS IS REQUIRED BY LAW TO BE DELIVERED, THIS PROSPECTUS WILL BE
AMENDED OR SUPPLEMENTED ACCORDINGLY.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
AVAILABLE INFORMATION............................................................................................6
REPORTS TO SECURITYHOLDERS.......................................................................................6
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE................................................................6
SUMMARY OF PROSPECTUS............................................................................................7
RISK FACTORS....................................................................................................18
THE MORTGAGE POOLS..............................................................................................23
General................................................................................................23
The Mortgage Loans.....................................................................................24
Underwriting Standards.................................................................................28
Qualifications of Originators and Sellers..............................................................29
Representations by Sellers.............................................................................29
SERVICING OF MORTGAGE LOANS.....................................................................................32
General................................................................................................32
The Master Servicer....................................................................................32
Collection and Other Servicing Procedures; Mortgage Loan Modifications.................................32
Subservicers...........................................................................................34
Special Servicers......................................................................................34
Realization Upon or Sale of Defaulted Mortgage Loans...................................................34
Servicing and Other Compensation and Payment of Expenses; Spread.......................................36
Evidence as to Compliance..............................................................................37
DESCRIPTION OF THE SECURITIES...................................................................................37
General................................................................................................37
Form of Securities.....................................................................................39
Assignment of Trust Fund Assets........................................................................40
Certificate Account....................................................................................42
Distributions..........................................................................................45
Distributions of Interest and Principal on the Securities.............................................46
Pre-Funding Account....................................................................................47
Distributions on the Securities in Respect of Prepayment Premiums......................................47
Allocation of Losses and Shortfalls....................................................................47
Advances...............................................................................................47
Reports to Securityholders.............................................................................48
DESCRIPTION OF CREDIT ENHANCEMENT...............................................................................49
General................................................................................................49
Subordinate Securities.................................................................................50
Overcollateralization..................................................................................51
Financial Guaranty Insurance Policy....................................................................51
Mortgage Pool Insurance Policies.......................................................................51
Letter of Credit.......................................................................................53
Special Hazard Insurance Policies......................................................................53
Bankruptcy Bonds.......................................................................................54
Reserve Funds..........................................................................................54
Maintenance of Credit Enhancement......................................................................55
Reduction or Substitution of Credit Enhancement........................................................57
</TABLE>
3
<PAGE>
<PAGE>
<TABLE>
<S> <C>
PURCHASE OBLIGATIONS............................................................................................57
PRIMARY MORTGAGE INSURANCE, HAZARD INSURANCE;
CLAIMS THEREUNDER......................................................................................58
General................................................................................................58
Primary Mortgage Insurance Policies....................................................................58
Hazard Insurance Policies..............................................................................59
FHA Insurance..........................................................................................60
VA Mortgage Guaranty..................................................................................61
THE COMPANY.....................................................................................................61
THE AGREEMENTS..................................................................................................61
General................................................................................................61
Certain Matters Regarding the Master Servicer and the Company..........................................62
Events of Default and Rights Upon Event Default........................................................63
Amendment..............................................................................................65
Termination; Retirement of Securities..................................................................66
The Trustee............................................................................................67
Duties of the Trustee..................................................................................68
Certain Matters Regarding the Trustee..................................................................68
Resignation and Removal of the Trustee.................................................................68
YIELD CONSIDERATIONS............................................................................................68
MATURITY AND PREPAYMENT CONSIDERATIONS..........................................................................71
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS.........................................................................72
Single Family Loans....................................................................................72
Cooperative Loans......................................................................................73
Tax Aspects of Cooperative Ownership...................................................................74
Contracts..............................................................................................74
Foreclosure on Mortgages and Certain Contracts.........................................................75
Foreclosure on Shares of Cooperatives..................................................................77
Repossession with respect to Contracts.................................................................78
Rights of Redemption...................................................................................79
Anti-Deficiency Legislation and Other Limitations on Lenders...........................................80
Environmental Legislation..............................................................................81
Consumer Protection Laws with respect to Contracts.....................................................82
Enforceability of Certain Provisions...................................................................83
Subordinate Financing..................................................................................83
Installment Contracts..................................................................................84
Applicability of Usury Laws............................................................................84
Alternative Mortgage Instruments.......................................................................85
Formaldehyde Litigation with respect to Contracts......................................................85
Soldiers' and Sailors' Civil Relief Act of 1940........................................................86
Forfeitures in Drug and RICO Proceedings...............................................................86
Junior Mortgages.......................................................................................86
Negative Amortization Loans............................................................................87
FEDERAL INCOME TAX CONSEQUENCES.................................................................................87
General................................................................................................87
REMICS.................................................................................................88
Notes.................................................................................................102
Grantor Trust Funds...................................................................................103
STATE AND OTHER TAX CONSEQUENCES...............................................................................111
ERISA CONSIDERATIONS...........................................................................................111
Representation from Plans Investing in Notes with "Substantial Equity Features"
or Certain Certificates............................................................................115
Tax Exempt Investors..................................................................................116
Consultation with Counsel.............................................................................116
LEGAL INVESTMENT MATTERS.......................................................................................116
USE OF PROCEEDS................................................................................................118
METHODS OF DISTRIBUTION........................................................................................118
LEGAL MATTERS..................................................................................................119
</TABLE>
4
<PAGE>
<PAGE>
<TABLE>
<S> <C>
FINANCIAL INFORMATION..........................................................................................119
RATING ......................................................................................................119
INDEX OF PRINCIPAL DEFINITIONS.................................................................................120
</TABLE>
5
<PAGE>
<PAGE>
UNTIL 90 DAYS AFTER THE DATE OF EACH PROSPECTUS SUPPLEMENT, ALL DEALERS
EFFECTING TRANSACTIONS IN THE RELATED OFFERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THE DISTRIBUTION THEREOF, MAY BE REQUIRED TO DELIVER THIS
PROSPECTUS AND THE RELATED PROSPECTUS SUPPLEMENT. THIS DELIVERY REQUIREMENT IS
IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS SUPPLEMENT AND
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934 (the "Exchange Act") and in accordance therewith
files reports and other information with the Securities and Exchange Commission
(the "Commission"). Such reports and other information filed by the Company can
be inspected and copied at the public reference facilities maintained by the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, and its Regional
Offices located as follows: Chicago Regional Office, 500 West Madison, 14th
Floor, Chicago, Illinois 60661; New York Regional Office, Seven World Trade
Center, New York, New York 10048. Copies of such material can also be obtained
from the Public Reference Section of the Commission, 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates and electronically through the
Commission's Electronic Data Gathering, Analysis and Retrieval system at the
Commission's Web site (http://www.sec.gov). The Company does not intend to send
any financial reports to Securityholders.
This Prospectus does not contain all of the information set forth in
the Registration Statement (of which this Prospectus forms a part) and exhibits
thereto which the Company has filed with the Commission under the Securities Act
of 1933 (the "Securities Act") and to which reference is hereby made.
REPORTS TO SECURITYHOLDERS
The Master Servicer or another designated person will be required to
provide periodic unaudited reports concerning each Trust Fund to all registered
holders of Offered Securities of the related series with respect to each Trust
Fund as are required under the Exchange Act and the rules and regulations of the
Commission thereunder. See "Description of the Securities--Reports to
Securityholders."
The Company intends to make a written request to the staff of the
Commission that the staff either (i) issue an order pursuant to Section 12(h) of
the Exchange Act exempting the Company from certain reporting requirements under
the Exchange Act with respect to each Trust Fund or (ii) state that the staff
will not recommend that the Commission take enforcement action if the Company
fulfills its reporting obligations as described in its written request. If such
request is granted, the Company will file or cause to be filed with the
Commission as to each Trust Fund the periodic unaudited reports to holders of
the Offered Securities referenced in the preceding paragraph; however, because
of the nature of the Trust Funds, it is unlikely that any significant additional
information will be filed. In addition, because of the limited number of
Securityholders expected for each series, the Company anticipates that a
significant portion of such reporting requirements will be permanently suspended
following the first fiscal year for the related Trust Fund.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
There are incorporated herein and in the related Prospectus Supplement
by reference all documents and reports filed or caused to be filed by the
Company with respect to a Trust Fund pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act, prior to the termination of the offering of the
Offered Securities of the related series. The Company will provide or cause to
be provided without charge to each person to whom this Prospectus is delivered
in connection with the offering of one or more classes of Offered Securities,
upon written or oral request of such person, a copy of any or all such reports
incorporated herein by reference, in each case to the extent such reports relate
to one or more of such classes of such Offered Securities, other than the
exhibits to such documents, unless such exhibits are specifically incorporated
by reference in such documents. Requests should be directed in writing to WMC
Secured Assets Corp., 6320 Canoga Avenue, Woodland Hills, California 91367, or
by telephone at (818) 592-2610. The Company has determined that its financial
statements will not be material to the offering of any Offered Securities.
6
<PAGE>
<PAGE>
SUMMARY OF PROSPECTUS
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus and by reference to
the information with respect to each series of Securities contained in the
Prospectus Supplement to be prepared and delivered in connection with the
offering of Offered Securities of such series. Capitalized terms used in this
summary that are not otherwise defined shall have the meanings ascribed thereto
elsewhere in this Prospectus. An index indicating where certain capitalized
terms used herein are defined appears at the end of this Prospectus.
<TABLE>
<S> <C>
Securities Offered............................... Mortgage pass-through certificates or mortgage-backed
notes. The mortgage pass-through certificates (the
"Offered Certificates") or mortgage-backed notes (the
"Offered Notes"; the Offered Notes or the Offered
Certificates, the "Offered Securities") offered hereby
and by the various Prospectus Supplements with respect
hereto will be offered from time to time in series. The
Offered Securities of each series, together with any
other mortgage pass-through certificates or mortgage-
backed notes of such series, are collectively referred to
herein as the "Securities."
Risk Factors..................................... There are material risks associated with an investment in
the Offered Certificates. See "Risk Factors" herein.
Company.......................................... WMC Secured Assets Corp. (the "Company"), a
wholly-owned subsidiary of WMC Mortgage Corp.
("WMC Mortgage"). See "The Company."
Master Servicer.................................. The master servicer (the "Master Servicer"), if any, for
a series of Securities will be specified in the related
Prospectus Supplement and may be WMC Mortgage or
another affiliate of the Company. See "Servicing of
Mortgage Loans--The Master Servicer."
Special Servicer................................. The special servicer (the "Special Servicer"), if any, for
a series of Securities will be specified, or the
circumstances under which a Special Servicer will be
appointed will be described, in the related Prospectus
Supplement. Any Special Servicer may be an affiliate
of the Company. See "Servicing of Mortgage
Loans--Special Servicers."
Issuer........................................... With respect to each series of Notes, the issuer (the
"Issuer") will be an owner trust established by it for the
purpose of issuing such series of Notes. Each such
owner trust will be created pursuant to a trust agreement
(the "Owner Trust Agreement") between the Company,
acting as depositor, and the Owner Trustee. Each series
of Notes will represent indebtedness of the Issuer and
will be issued pursuant to an indenture between the
</TABLE>
7
<PAGE>
<PAGE>
<TABLE>
<S> <C>
Issuer and the Trustee (the "Indenture") whereby the Issuer
will pledge the Trust Fund to secure the Notes under the lien
of the Indenture. As to each series of Notes where the Issuer
is an owner trust, the ownership of the Trust Fund will be
evidenced by certificates (the "Equity Certificates") issued
under the Owner Trust Agreement, which are not offered hereby.
The Notes will represent nonrecourse obligations solely of the
Issuer, and the proceeds of the related Trust Fund will be the
sole source of payments on the Notes, except to the extent of
any credit enhancement which is not included in the Trust
Fund. See "Description of Credit Enhancement" herein.
With respect to each series of Certificates, the Issuer will
be a trust created pursuant to the related Pooling Agreement
for the purpose of issuing such series of Certificates. Each
series of Certificates will represent an undivided ownership
interest in the underlying assets of such trust.
Trustees......................................... The trustee or indenture trustee (each, the "Trustee") for
each series of Certificates and Notes, respectively, will
be named in the related Prospectus Supplement. The
Owner Trustee (the "Owner Trustee") for each series of
Notes will be named in the related Prospectus
Supplement. See "The Agreements--The Trustee."
The Securities................................... Each series of Securities will include one or more
classes of Securities which will represent either (i) with
respect to each series of Certificates, in the aggregate
the entire beneficial ownership interest in, or (ii) with
respect to each series of Notes, indebtedness of, a
segregated pool of Mortgage Loans (exclusive of any
portion of interest payments (the "Spread") relating to
each Mortgage Loan retained by the Company or any of
its affiliates) or interests therein (which may include
Mortgage Securities as defined herein), and certain other
assets as described below (collectively, a "Trust Fund"),
and will be issued pursuant to either (i) with respect to
each series of Certificates, a pooling and servicing
agreement or other agreement specified in the related
Prospectus Supplement (in either case, a "Pooling
Agreement") or (ii) with respect to each series of Notes,
an indenture specified in the related Prospectus
Supplement (the "Indenture"). Except for certain Strip
Securities and REMIC Residual Certificates (each as
hereinafter described), each series of Securities, or class
of Securities in the case of a series consisting of two or
more classes, will have a stated principal balance and
</TABLE>
8
<PAGE>
<PAGE>
<TABLE>
<S> <C>
will be entitled to distributions of interest based on a
specified interest rate or rates (each, a "Security Interest
Rate"). The Security Interest Rate of each Security offered
hereby will be stated in the related Prospectus Supplement as
the "Pass-Through Rate" with respect to a Certificate and the
"Note Interest Rate" with respect to a Note. Each series or
class of Securities may have a different Security Interest
Rate, which may be a fixed, variable or adjustable Security
Interest Rate, or any combination of two or more such Security
Interest Rates. The related Prospectus Supplement will specify
the Security Interest Rate or Rates for each series or class
of Securities, or the initial Security Interest Rate or Rates
and the method for determining subsequent changes to the
Security Interest Rate or Rates.
A series may include one or more classes of Securities ("Strip
Securities") entitled (i) to principal distributions, with
disproportionate, nominal or no interest distribu tions, or
(ii) to interest distributions, with dispropor tionate,
nominal or no principal distributions. In addition, a series
may include two or more classes of Securities which differ as
to timing, sequential order, priority of payment, pass-through
rate or amount of distributions of principal or interest or
both, or as to which distributions of principal or interest or
both on any class may be made upon the occurrence of specified
events, in accordance with a schedule or formula, or on the
basis of collections from designated portions of the Mortgage
Pool, which series may include one or more classes of
Securities ("Accrual Securities"), as to which certain accrued
interest will not be distributed but rather will be added to
the principal balance thereof on each Distribution Date, as
hereinafter defined, in the manner described in the related
Prospectus Supplement.
If so provided in the related Prospectus Supplement, a series
of Securities may include one or more classes of Securities
(collectively, the "Senior Securities") which are senior to
one or more classes of Securities (collectively, the
"Subordinate Securities") in respect of certain distributions
of principal and interest and allocations of losses on
Mortgage Loans. In addition, certain classes of Senior (or
Subordinate) Securities may be senior to other classes of
Senior (or Subordinate) Securities in respect of such
distributions or losses. As to each series of Certificates,
one or more elections may be made to treat the related Trust
Fund or a designated portion thereof as a "real estate
mortgage investment conduit" or "REMIC" as defined in the
Internal Revenue
</TABLE>
9
<PAGE>
<PAGE>
<TABLE>
<S> <C>
Code of 1986 (the "Code"). See "Description of the
Securities."
The Securities will not be guaranteed or insured by any
governmental agency or instrumentality, by the Company, the
Master Servicer or any of their respective affiliates or by
any other person.
Securities of one or more classes of a series may be issued in
book-entry form. See "Description of the Securities--Form of
Securities."
The Mortgage Pools............................... Each Trust Fund will consist primarily of a segregated
pool (a "Mortgage Pool") of mortgage loans and/or
manufactured housing conditional sales and installment
loan agreements (collectively, the "Mortgage Loans") or
interests therein. Each Mortgage Loan will be secured
by a first or junior lien on or security interest in (i) a
one- to four-family residential property or (iii) a new or
used manufactured home (each, a "Mortgaged
Property"). The Mortgaged Properties may be located
in any one of the 50 states, the District of Columbia or
the Commonwealth of Puerto Rico. For a description of
the types of Mortgage Loans that may be included in the
Mortgage Pools, see "The Mortgage Pools--The
Mortgage Loans." The Mortgage Loans will not be
guaranteed or insured by the Company, any of its
affiliates.
If specified in the related Prospectus Supplement, Mortgage
Loans which are converting or converted from an
adjustable-rate to a fixed-rate or certain Mortgage Loans for
which the Mortgage Rate has been reset may be repurchased by
the Company or purchased by the related Master Servicer, the
applicable Seller or another party, or a designated
remarketing agent will use its best efforts to arrange the
sale thereof as further described herein.
If so specified in the related Prospectus Supplement, some
Mortgage Loans may be delinquent as of the date of their
deposit in the related Trust Fund.
If so specified in the related Prospectus Supplement, there
may be a concentration of "sub-prime" mortgage loans, which do
not meet the credit standards of "A" quality borrowers.
If specified in the related Prospectus Supplement, a Trust
Fund may include or consist solely of mortgage
</TABLE>
10
<PAGE>
<PAGE>
<TABLE>
<S> <C>
pass-through certificates evidencing interests in Mortgage
Loans ("Mortgage Securities"), as described herein. See "The
Mortgage Pools-General" herein.
Each Mortgage Loan and Mortgage Security included in a Trust
Fund will have been selected by the Company from among those
purchased, either directly or indirectly, from a prior holder
thereof (a "Seller"), which prior holder may or may not be the
originator of such Mortgage Loan or the issuer of such
Mortgage Security and may be an affiliate of the Company. A
Mortgage Security included in a Trust Fund, however, may also
have been issued previously by the Company or an affiliate
thereof. Mortgage Securities included in the Trust Fund (i)
either will have been (a) previously registered under the
Securities Act of 1933, or (b) are eligible for sale under
Rule 144(k); and (ii) will be acquired in bona fide secondary
market transactions. See "The Mortgage Pools-General" herein.
A Current Report on Form 8-K will be available upon request to
purchasers of the Offered Securities of the related series and
will be filed, together with the related Pooling Agreement,
with respect to each series of Certificates, and the related
Servicing Agreement, Owner Trust Agreement and Indenture, with
respect to each series of Notes, with the Securities and
Exchange Commission within fifteen days after such initial
issuance.
Mortgage Loans with Special
Payment Features............................... If so specified in the related Prospectus Supplement,
certain of the Mortgage Loans included in a Trust Fund
may not be fully amortizing over their terms to maturity
and, thus, will require substantial payments of principal
and interest at their stated maturity (such Mortgage
Loans, "Balloon Loans") or have other special payment
features. See "The Mortgage Pools--The Mortgage
Loans."
Interest Distributions........................... Interest on each class of Offered Securities of each
series, other than Strip Securities or Accrual Securities
(prior to the time when accrued interest becomes
payable thereon), will accrue at the applicable Security
Interest Rate (which may be a fixed, variable or
adjustable rate or any combination thereof) on such
class's principal balance outstanding from time to time
and will be remitted on the 25th day or other day as
specified in the Prospectus Supplement (or, if such day
is not a business day, on the next succeeding business
</TABLE>
11
<PAGE>
<PAGE>
<TABLE>
<S> <C>
day) of each month, commencing with the month following the
month in which the Cut-off Date (as defined in the applicable
Prospectus Supplement) occurs (each, a "Distribution Date").
Distributions, if any, with respect to interest on Strip
Securities will be calculated and made on each Distribution
Date as described herein under "Description of the
Securities--Distribution of Interest and Principal on the
Securities" and in the related Prospectus Supplement. Interest
that has accrued but is not yet payable on any Accrual
Securities will be added to the principal balance of such
class on each Distribution Date, and will thereafter bear
interest at the applicable Security Interest Rate.
Distributions of interest with respect to one or more classes
of Offered Securities (or, in the case of a class of Accrual
Securities, accrued interest to be added to the principal
balance thereof) may be reduced as a result of the occurrence
of certain delinquencies not covered by advances, losses,
prepayments and other contingencies described herein and in
the related Prospectus Supplement. See "Yield Considerations"
and "Description of the Securities--Distribution of Interest
and Principal on the Securities."
Principal Distributions.......................... Principal distributions on the Securities of each series
will be payable on each Distribution Date, commencing
with the Distribution Date in the month following the
month in which the Cut-off Date occurs, to the holders
of the Securities of such series, or of the class or classes
of Securities then entitled thereto, on a pro rata basis
among all such Securities or among the Securities of any
such class, in proportion to their respective outstanding
principal balances, or in the priority and manner
otherwise specified in the related Prospectus
Supplement. Strip Securities with no principal balance
will not receive distributions in respect of principal.
Distributions of principal with respect to any series of
Securities, or with respect to one or more classes
included therein, may be reduced to the extent of certain
delinquencies not covered by advances or losses not
covered by the applicable form of credit enhancement.
See "The Mortgage Pools," "Maturity and Prepayment
Considerations" and "Description of the Securities."
Pre-Funding Account.............................. If so specified in the related Prospectus Supplement, a
portion of the proceeds of the sale of one or more
Classes of Securities of a series may be deposited in a
segregated account to be applied to acquire additional
Mortgage Loans from the Sellers, subject to the
limitations set forth herein under "Description of the
</TABLE>
12
<PAGE>
<PAGE>
<TABLE>
<S> <C>
Securities--Pre-Funding Account." At no time shall the amount
held in a Pre-Funding Account exceed 40% of the aggregate
outstanding principal balance of the related Securities. The
related Agreement or other agreement providing for the
transfer of additional Mortgage Loans generally will provide
that all such transfers must be made within up to three months
(with respect to any series of Certificates) or up to one year
(with respect to any series of Notes) after the Closing Date.
Monies on deposit in the Pre-Funding Account and not applied
to acquire such additional Mortgage Loans within the time set
forth in the related Pooling Agreement or other applicable
agreement may be treated as principal and applied in the
manner described in the related Prospectus Supplement.
Credit Enhancement............................... If so specified in the Prospectus Supplement, the Trust
Fund with respect to any series of Securities may
include any one or any combination of a financial
guaranty insurance policy, mortgage pool insurance
policy, letter of credit, special hazard insurance policy,
bankruptcy bond or reserve fund to provide full or
partial coverage for certain defaults and losses relating
to the Mortgage Loans. Credit support also may be
provided in the form of subordination of one or more
classes of Securities in a series under which losses are
first allocated to any Subordinate Securities up to a
specified limit or in the form of Overcollateralization.
With respect to any series of Notes, the related Equity
Certificates, insofar as they represent the beneficial
ownership interest in the Issuer, will be subordinate to
the related Notes. Any form of credit enhancement will
have certain limitations and exclusions from coverage
thereunder, which will be described in the related
Prospectus Supplement. Losses not covered by any
form of credit enhancement will be borne by the holders
of the related Securities (or certain classes thereof). To
the extent not set forth herein, the amount and types of
coverage, the identification of any entity providing the
coverage, the terms of any subordination and related
information will be set forth in the Prospectus
Supplement relating to a series of Securities. See
"Description of Credit Enhancement" and
"Subordination."
Advances......................................... If and to the extent described in the related Prospectus
Supplement, and subject to any limitations specified
therein, the Master Servicer for any Trust Fund will be
obligated to make, or have the option of making, certain
advances with respect to delinquent scheduled payments
</TABLE>
13
<PAGE>
<PAGE>
<TABLE>
<S> <C>
on the Mortgage Loans in such Trust Fund. Any such advance
made by the Master Servicer with respect to a Mortgage Loan is
recoverable by it as described herein under "Description of
the Securities--Advances" either from recoveries on or in
respect of the specific Mortgage Loan or, with respect to any
advance subsequently determined to be nonrecoverable from
recoveries on or in respect of the specific Mortgage Loan, out
of funds otherwise distributable to the holders of the related
series of Securities, which may include the holders of any
Senior Securities of such series. If and to the extent
provided in the Prospectus Supplement for a series of
Securities, the Master Servicer will be entitled to receive
interest on its advances for the period that they are
outstanding payable from amounts in the related Trust Fund. As
specified in the Prospectus Supplement with respect to any
series of Securities as to which the Trust Fund includes
Mortgage Securities, the advancing obligations in respect of
the underlying Mortgage Loans will be pursuant to the terms of
such Mortgage Securities, as may be supplemented by the terms
of the applicable Pooling Agreement, and may differ from the
provisions described herein.
Optional Termination............................. The Master Servicer, the Company or a person specified
in the related Prospectus Supplement or the holder of the
Equity Certificates with respect to a series of Notes
(other than the holder of any Class of Offered
Securities, other than any Class of REMIC Residual
Certificates, if offered), may at its option either (i)
effect early retirement of a series of Securities through
the purchase of the assets in the related Trust Fund or
(ii) purchase, in whole but not in part, the Securities
specified in the related Prospectus Supplement. With
respect to any series of Certificates, no such purchase
shall be made unless either (i) the aggregate principal
balance of the Certificates as of such date is equal to or
less than the percentage specified in the related
Prospectus Supplement (which shall not be greater than
10%) of the aggregate principal balance of the
Certificates as of the Closing Date or (ii) the aggregate
principal balance of the Mortgage Loans as of such date
is equal to or less than the percentage specified in the
related Prospectus Supplement (which shall not be
greater than 10%) of the aggregate principal balance of
the Mortgage Loans as of the Cut-off Date. With respect
to any series of Certificates, an optional purchase of the
Mortgage Loans in the related Trust Fund may not result
in such Certificates receiving an amount equal to the
principal balance thereof plus accrued and unpaid
</TABLE>
14
<PAGE>
<PAGE>
<TABLE>
<S> <C>
interest and any undistributed shortfall thereon. With respect
to any Series of Notes, no such purchase shall be made unless
the aggregate principal balance of the Notes as of such date
is equal to or less than the percentage specified in the
related Prospectus Supplement (which shall not be greater than
25%) of the aggregate principal balance of the Notes as of the
Closing Date or a period specified in the related Prospectus
Supplement (which shall not be shorter than seven years) has
elapsed since the initial Distribution Date; in each case
under the circumstances and in the manner set forth herein
under "The Agreements--Termination; Retirement of Securit ies"
and in the related Prospectus Supplement.
Limited Liquidity................................ There will not be any application to list the Offered
Securities on an exchange or to quote the Securities in
the automated quotation system of a registered securities
association. As a result, any resale prices that may be
available for any Offered Security in any market that
may develop may be at a discount from the initial
offering price or the fair market value thereof. See
"Risk Factors--Limited Liquidity" herein.
Legal Investment................................. At the date of issuance, as to each series, each class of
Offered Securities will be rated at the request of the
Company in one of the four highest rating categories by
one or more nationally recognized statistical rating
agencies (each, a "Rating Agency"). If so specified in
the related Prospectus Supplement, each class of Offered
Securities that is rated in one of the two highest rating
categories by at least one Rating Agency will constitute
"mortgage related securities" for purposes of the
Secondary Mortgage Market Enhancement Act of 1984,
as amended ("SMMEA"). Investors whose investment
authority is subject to legal restrictions should consult
their own legal advisors to determine whether and to
what extent the Offered Securities of any series
constitute legal investments for them. See "Legal
Investment Matters."
ERISA Considerations............................. The Employee Retirement Income Security Act of 1974,
as amended ("ERISA"), imposes certain fiduciary and
prohibited transaction restrictions on employee pension
and welfare benefit plans subject to ERISA. Section
4975 of the Code imposes essentially the same
restrictions on tax-qualified retirement plans described
in Section 401(a) of the Code and on Individual Retirement
Accounts described in Section 408 of the Code (collectively,
"Tax Favored Plans"). ERISA and the Code prohibit a broad
range of
</TABLE>
15
<PAGE>
<PAGE>
<TABLE>
<S> <C>
transactions involving assets of ERISA Plans and Tax Favored
Plans and persons who have certain specified relationships to
such Plans, unless a statutory or administrative exemption is
available with respect to any such transaction. Under
regulations issued by the Department of Labor under ERISA, the
assets of a Plan acquiring Securities may be deemed to include
an interest in the underlying assets of the Trust Fund, which
could result in a prohibited transaction under ERISA or the
Code unless a statutory or administrative exemption is
available and may also result in a party exercising management
or discretionary control of the Mortgage Loans and other
assets included in the Trust Fund being deemed to be a
fiduciary of such Plan. If a prohibited transaction occurs,
penalties may include a 15% excise tax on the party to the
transaction who is a party in interest with a specified
relationship to the Plan, and civil money penalties under
ERISA. The Department of Labor has issued individual
prohibited transaction exemption to certain underwriters which
may exempt certain transaction relating to mortgage
pass-through certificates issued by the underwriter, and has
also issued class exemptions which any provide relief for
certain Plan investors. These exemptions generally require an
analysis of facts and, based on the facts relating to an
offering or purchase of Offered Securities, may not apply to
all offerings of Offered Securities or to all prospective
investors. See "ERISA Considerations" herein and in the
related Prospectus Supplement.
Federal Income
Tax Consequences............................... Offered Certificates of each series of Certificates will
constitute or evidence ownership of either (i) interests
("Grantor Trust Certificates") in a Trust Fund treated as
a grantor trust under applicable provisions of the Code
or (ii) "regular interests" ("REMIC Regular
Certificates") or "residual interests" ("REMIC Residual
Certificates") in a Trust Fund, or a portion thereof,
treated as a REMIC under Sections 860A through 860G
of the Code. Offered Notes of each series of Notes will
represent indebtedness of the related Trust Fund.
Ratings.......................................... It is a condition to the issuance of any class of Offered
Securities that they shall have been rated not lower than
the highest four rating categories by at least one Rating
Agency. 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. A security rating does not address the
frequency of prepayments of Mortgage Loans, or the
</TABLE>
16
<PAGE>
<PAGE>
<TABLE>
<S> <C>
corresponding effect on yield to investors. See "Rating"
herein.
</TABLE>
17
<PAGE>
<PAGE>
RISK FACTORS
This section includes all principal factors that make the offering
speculative or one of high risk. Investors should consider, among other things,
the following factors in connection with the purchase of the Offered Securities:
High LTV Loans: Property Value below Loan Value. Some or all of the
Mortgage Loans secured by junior liens included in any Trust Fund may be High
LTV Loans. High LTV Loans with Combined Loan-to-Value Ratios in excess of 100%
may have been originated with a limited expectation of recovering any amounts
from the foreclosure of the related Mortgaged Property and are underwritten with
an emphasis on the creditworthiness of the related borrower. If such Mortgage
Loans go into foreclosure and are liquidated, there may be no amounts recovered
from the related Mortgaged Property unless the value of the property increases
or the principal amount of the related senior liens have been reduced such as to
reduce the current Combined Loan-to-Value Ratio of the related Mortgage Loan to
below 100%. Any such losses, to the extent not covered by credit enhancement,
may affect the yield to maturity of the Bonds.
Mortgage Loans with Limited Recourse or Limited Enforceability. It is
anticipated that some or all of the Mortgage Loans included in any Trust Fund
will be nonrecourse loans or loans for which recourse may be restricted or
unenforceable. As to those Mortgage Loans, recourse in the event of Mortgagor
default will be limited to the specific Mortgaged Property and other assets, if
any, that were pledged to secure the Mortgage Loan. However, even with respect
to those Mortgage Loans that provide for recourse against the Mortgagor and its
assets generally, there can be no assurance that enforcement of such recourse
provisions will be practicable, or that the other assets of the Mortgagor will
be sufficient to permit a recovery in respect of a defaulted Mortgage Loan in
excess of the liquidation value of the related Mortgaged Property. Any risks
associated with Mortgage Loans with no or limited recourse may affect the yield
to maturity of the Securities to the extent losses caused by such risks which
are not covered by credit enhancement are allocated to the Securities.
Underwriting Standards of Unaffiliated Sellers May Vary. Mortgage Loans
to be included in a Mortgage Pool will have been purchased by the Company,
either directly or indirectly from Sellers. Such Mortgage Loans will generally
have been originated in accordance with underwriting standards acceptable to the
Company and generally described herein under "The Mortgage Pools--Underwriting
Standards" or such alternative underwriting criteria as may be described in the
related Prospectus Supplement. However, in some cases, particularly those
involving Unaffiliated Sellers, the Company may not be able to establish the
underwriting standards used in the origination of the related Mortgage Loans. In
those cases, the related Prospectus Supplement will include a statement to such
effect, will describe any related risks, and will reflect what, if any,
reunderwriting of the related Mortgage Loans was done by the Company or any of
its affiliates. To the extent the Mortgage Loans cannot be reunderwritten or the
underwriting criteria cannot be verified, the Mortgage Loans may suffer losses
greater than they would had they been directly underwritten by the Company or an
affiliate thereof. Any such losses, to the extent not covered by credit
enhancement, may affect the yield to maturity of the Securities.
Borrowers Ability to Repay Balloon Loans. Certain of the Mortgage Loans
included in a Trust Fund may not be fully amortizing (or may not amortize at
all) over their terms to maturity and, thus, will require substantial payments
of principal and interest (that is, balloon payments) at their stated maturity.
Mortgage Loans of this type involve a greater degree of risk than
self-amortizing loans because the ability of a Mortgagor to make a balloon
payment typically will depend upon its ability either to fully refinance the
loan or to sell the related Mortgaged Property at a price sufficient to permit
the Mortgagor to make the balloon payment. The ability of a Mortgagor to
accomplish either of these goals will be affected by a number of factors,
including the value of the related Mortgaged Property, the level of available
mortgage rates at the time of sale or refinancing, the Mortgagor's equity in the
related Mortgaged Property, prevailing general economic conditions and the
availability of credit for loans secured by comparable real properties. Any
risks associated with the Balloon Loans may affect the yield to maturity of the
Securities to the extent losses caused by such risks which are not covered by
credit enhancement are allocated to the Securities.
Shortfalls Due to Optional Termination of Series of Certificates. With
respect to any series of Certificates, the Master Servicer, the Company or a
person specified in the related Prospectus Supplement (other than the holder of
any Class of Offered Securities, other than any Class of REMIC Residual
Certificates, if offered), may at its option
18
<PAGE>
<PAGE>
either (i) effect early retirement of a series of Certificates the purchase of
the assets in the related Trust Fund or (ii) purchase, in whole but not in part,
the Certificates specified in the related Prospectus Supplement. No such
purchase shall be made unless either (i) the aggregate principal balance of the
Certificates as of such date is equal to or less than the percentage specified
in the related Prospectus Supplement (which shall not be greater than 10%) of
the aggregate principal balance of the Certificates as of the Closing Date or
(ii) the aggregate principal balance of the Mortgage Loans as of such date is
equal to or less than the percentage specified in the related Prospectus
Supplement (which shall not be greater than 10%) of the aggregate principal
balance of the Mortgage Loans as of the Cut-off Date. However, an optional
purchase of the Mortgage Loans in the related Trust Fund may not result in such
Certificates receiving an amount equal to the principal balance thereof plus
accrued and unpaid interest and any undistributed shortfall thereon. See "The
Agreements--Optional Termination" herein.
Yield and Prepayment Considerations. The yield to maturity of the
Offered Securities of each series will depend on, among other things, the rate
and timing of principal payments (including prepayments, liquidations due to
defaults, and repurchases due to conversion of ARM Loans to fixed interest rate
loans or breaches of representations and warranties) on the related Mortgage
Loans and the price paid by Certificateholders. Such yield may be adversely
affected by a higher or lower than anticipated rate of prepayments on the
related Mortgage Loans. The yield to maturity on Strip Securities will be
extremely sensitive to the rate of prepayments on the related Mortgage Loans. In
addition, the yield to maturity on certain other types of classes of Securities,
including Accrual Securities, Securities with a Pass-Through Rate which
fluctuates inversely with an index or certain other classes in a series
including more than one class of Securities, may be relatively more sensitive to
the rate of prepayment on the related Mortgage Loans than other classes of
Securities. In addition, to the extent amounts in any Pre-Funding Account have
not been used to purchase additional Mortgage Loans, holders of the Securities
may receive an additional prepayment, which may affect their yield to maturity.
In addition, Securityholders may not be able to reinvest amount received from
any Pre-Funding Account in comparable securities, or may only be able to do so
at a lower interest rate. Prepayments are influenced by a number of factors,
including prevailing mortgage market interest rates, local and regional economic
conditions and homeowner mobility. See "Yield Considerations" and "Maturity and
Prepayment Considerations" herein.
Discretion of Master Servicer to Extend Relief to Delinquent
Mortgagors. Under a Pooling Agreement or a Servicing Agreement, a Master
Servicer is granted certain discretion to extend relief to Mortgagors whose
payments become delinquent. In the case of Single Family Loans and Contracts, a
Master Servicer may, among other things, grant a period of temporary indulgence
to a Mortgagor or may enter into a liquidating plan providing for repayment by
such Mortgagor of delinquent amounts within a specified period from the date of
execution of the plan. However, the Master Servicer must first determine that
any such waiver or extension will not impair the coverage of any related
insurance policy or materially adversely affect the security for such Mortgage
Loan. Such relief may not result in higher repayments and may instead result in
a lower liquidation or foreclosure price to the Master Servicer, which would
affect the yield to the holders of the Securities. See "Servicing of Mortgage
Loans--Collection and Other Servicing Procedures; Mortgage Loan Modifications."
Legal and Regulatory Risks. Applicable federal and state laws generally
regulate interest rates and other charges, require certain disclosures, prohibit
unfair and deceptive practices, regulate debt collection, and require licensing
of the originators of the mortgage loans and contracts. Depending on the
provisions of the applicable law and the specified facts and circumstances
involved, violations of those laws, policies and principles may limit the
ability to collect all or part of the principal of or interest on the Mortgage
Loans and may entitle the borrower to a refund of amounts previously paid. See
"Certain Legal Aspects of Mortgage Loans" herein. To the extent such laws and
regulations result in losses on the mortgage loans, the yield to maturity of the
Securities, to the extent not covered by credit enhancement, may be affected.
Cost of Environmental Clean-up May Increase Losses On Mortgage Loans.
Under various federal, state and local environmental laws, ordinances and
regulations, a current or previous owner of real property may be liable for the
costs of removal or remediation of hazardous or toxic substances on, under or in
such property. Such laws often impose liability whether or not the owner or
operation knew of, or was responsible for, the presence of such hazardous or
toxic substances. A lender also risks such liability on foreclosure of the
mortgage on such property. To the extent the Master Servicer acquires title to
any Mortgaged Property contaminated with or affected by hazardous wastes or
hazardous substances, the Mortgage Loans may incur losses. See "Servicing of
Mortgage Loans--Realization Upon
19
<PAGE>
<PAGE>
or Sale of Defaulted Mortgage Loans" and "Certain Legal Aspects of Mortgage
Loans--Environmental Legislation." To the extent such environmental risks result
in losses on the mortgage loans, the yield to maturity of the Securities, to the
extent not covered by credit enhancement, may be affected.
Federal Tax Considerations Regarding REMIC Residual Certificates.
Holders of REMIC Residual Certificates will be required to report on their
federal income tax returns as ordinary income their pro rata share of the
taxable income of the REMIC, regardless of the amount or timing of their receipt
of cash payments, as described under "Federal Income Tax Consequences--REMICs".
Accordingly, under certain circumstances, holders of Offered Certificates that
constitute REMIC Residual Certificates may have taxable income and tax
liabilities arising from such investment during a taxable year in excess of the
cash received during such period. The requirement that holders of REMIC Residual
Certificates report their pro rata share of the taxable income and net loss of
the REMIC will continue until the principal balances of all classes of
Certificates of the related series have been reduced to zero, even though
holders of REMIC Residual Certificates have received full payment of their
stated interest and principal. A portion (or, in certain circumstances, all) of
such Certificateholder's share of the REMIC taxable income may be treated as
"excess inclusion" income to such holder, which (i) generally will not be
subject to offset by losses from other activities, (ii) for a tax-exempt holder,
will be treated as unrelated business taxable income and (iii) for a foreign
holder, will not qualify for exemption from withholding tax. Individual holders
of REMIC Residual Certificates may be limited in their ability to deduct
servicing fees and other expenses of the REMIC. In addition, REMIC Residual
Certificates are subject to certain restrictions on transfer. Because of the
special tax treatment of REMIC Residual Certificates, the taxable income arising
in a given year on a REMIC Residual Certificate will not be equal to the taxable
income associated with investment in a corporate bond or stripped instrument
having similar cash flow characteristics and pre-tax yield. Therefore, the
after-tax yield on a REMIC Residual Certificate may be significantly less than
that of a corporate bond or stripped instrument having similar cash flow
characteristics.
ERISA Considerations. Sections 404 and 406 of the Employee Retirement
Income Security Act of 1974, as amended ("ERISA"), impose certain fiduciary and
prohibited transaction restrictions on employee pension and welfare benefit
plans subject to ERISA ("ERISA Plans") and on certain other retirement plans.
Section 4975 of the Code imposes essentially the same prohibited transaction
restrictions on tax-qualified retirement plans described in Section 401(a) of
the Code and on Individual Retirement Accounts described in Section 408 of the
Code (collectively, "Tax Favored Plans"). ERISA and the Code prohibit a broad
range of transactions involving assets of ERISA Plans and Tax Favored Plans
(collectively, "Plans") and persons who have certain specified relationships to
such Plans, unless a statutory or administrative exemption is available with
respect to any such transaction. Under regulations issued by the Department of
Labor under ERISA, the assets of a Plan acquiring Securities may be deemed to
include an interest in the underlying assets of the Trust Fund, which could
result in a prohibited transaction under ERISA or the Code unless a statutory or
administrative exemption is available and may also result in a party exercising
management or discretionary control of the Mortgage Loans and other assets
included in the Trust Fund being deemed to be a fiduciary of such Plan. If a
prohibited transaction occurs, penalties may include a 15% excise tax on the
party to the transaction who is a party in interest with a specified
relationship to the Plan, and civil money penalties under ERISA. The Department
of Labor has issued individual prohibited transaction exemption to certain
underwriters which may exempt certain transaction relating to mortgage
pass-through certificates issued by the underwriter, and has also issued class
exemptions which any provide relief for certain Plan investors. These exemptions
generally require an analysis of facts and, based on the facts relating to an
offering or purchase of Offered Securities, may not apply to all offerings of
Offered Securities or to all prospective investors. Investors are advised to
consult their counsel and to review "ERISA Considerations" herein and in the
related Prospectus Supplement. See "ERISA Considerations".
Mortgage Loans with Junior Liens or Second Mortgages. Certain Mortgage
Loans may be secured by second liens on the related Mortgaged Properties. As to
Mortgage Loans secured by second mortgages, the proceeds from any liquidation,
insurance or condemnation proceedings will be available to satisfy the
outstanding balance of such Mortgage Loans only to the extent that the claims of
such senior mortgages have been satisfied in full, including any related
foreclosure costs. In addition, the holder of a Mortgage Loan secured by a
junior mortgage may not foreclose on the Mortgaged Property unless it forecloses
subject to the senior mortgages, in which case it must either pay the entire
amount due on the senior mortgages to the senior mortgagees at or prior to the
foreclosure sale or undertake the obligation to make payments on the senior
mortgages in the event the mortgagor is in default thereunder. The Trust Fund
will not have any source of funds to satisfy the senior mortgages or make
payments due to the senior mortgagees, although the Master Servicer or
Subservicer may, at its option, advance such amounts to the extent
20
<PAGE>
<PAGE>
deemed recoverable and prudent. In the event that such proceeds from a
foreclosure or similar sale of the related Mortgaged Property are insufficient
to satisfy all senior liens and the Mortgage Loan in the aggregate, the Trust
Fund, as the holder of the junior lien, and, accordingly, Holders of one or more
classes of the Securities, to the extent not covered by credit enhancement, are
likely to (i) incur losses in jurisdictions in which a deficiency judgment
against the borrower is not available, and (ii) incur losses if any deficiency
judgment obtained is not realized upon. In addition, the rate of default of
second mortgage loans may be greater than that of mortgage loans secured by
first liens on comparable properties.
Mortgage Loan Geographic Concentration. Certain geographic regions of
the United States from time to time will experience weaker regional economic
conditions and housing markets, and, consequently, will experience higher rates
of loss and delinquency than will be experienced on mortgage loans generally.
For example, a region's economic condition and housing market may be directly,
or indirectly, adversely affected by natural disasters or civil disturbances
such as earthquakes, hurricanes, floods, eruptions or riots. The economic impact
of any of these types of events may also be felt in areas beyond the region
immediately affected by the disaster or disturbance. The Mortgage Loans securing
certain series of Securities may be concentrated in these regions, and such
concentration may present risk considerations in addition to those generally
present for similar mortgage-backed securities without such concentration.
Moreover, as described below, any Mortgage Loan for which a breach of a
representation or warranty exists will remain in the related Trust Fund in the
event that a Seller is unable, or disputes its obligation, to repurchase such
Mortgage Loan and such a breach does not also constitute a breach of any
representation made by any other person. In such event, any resulting losses
will be borne by the related form of credit enhancement, to the extent
available. Any risks associated with Mortgage Loan concentration may affect the
yield to maturity of the Securities to the extent losses caused by such risks
which are not covered by credit enhancement are allocated to the Securities.
Mortgage Loans Originated Below Federal Standards. Certain Mortgage
Loans may be "sub-prime" mortgage loans. Such Mortgage Loans will be
underwritten in accordance with underwriting standards which are less stringent
than guidelines for "A" quality borrowers. Such mortgagors who may have a record
of credit write-offs, outstanding judgments, prior bankruptcies and other credit
items that do not satisfy the guidelines for "A" quality borrowers. Accordingly,
"sub-prime" Mortgage Loans are likely to experience rates of delinquency,
foreclosure and loss that are higher, and may be substantially higher, than
mortgage loans originated in accordance with "A" quality underwriting
guidelines. Any such losses, to the extent not covered by credit enhancement,
may affect the yield to maturity of the Securities.
Declines in Property Values or Change of Financial Conditions. An
investment in securities such as the Securities that are secured by mortgage
loans and/or manufactured housing conditional sales contracts and installment
loan agreements may be affected by, among other things, a decline in real estate
values and changes in the borrowers' financial condition. No assurance can be
given that values of the Mortgaged Properties have remained or will remain at
their levels on the dates of origination of the related Mortgage Loans. If the
residential real estate market should experience an overall decline in property
values such that the outstanding balances of the Mortgage Loans, and any
secondary financing on the Mortgaged Properties, in a particular Mortgage Pool
become equal to or greater than the value of the Mortgaged Properties, the
actual rates of delinquencies, foreclosures and losses could be higher than
those now generally experienced in the mortgage lending industry. In particular,
Mortgage Loans with high Loan-to-Value Ratios will be affected by any decline in
real estate values. Any decrease in the value of such Mortgage Loans may result
in an allocation of losses which is not covered by credit enhancement to the
Securities.
Limitations or Delay of Recovery Due to Foreclosure Risks of the
Mortgage Loans. Statutory and judicial limitations on foreclosure procedures may
delay recovery in respect of the Mortgaged Property and, in some instances,
limit the amount that may be recovered by the foreclosing lender. Foreclosure
procedures may vary from state to state. Two primary methods of foreclosing a
mortgage instrument are judicial foreclosure, involving court proceedings, and
non-judicial foreclosure pursuant to a power of sale granted in the mortgage
instrument. A foreclosure action is subject to most of the delays and expenses
of other lawsuits if defenses are raised or counterclaims are asserted. Delays
may also result from difficulties in locating necessary defendants. Non-judicial
foreclosures may be subject to delays resulting from state laws mandating the
recording of notice of default and notice of sale and, in certain states, notice
to any party having an interest of record in the real property, including junior
lienholders. Certain states have adopted "anti-deficiency" statutes that limit
the ability of a lender to realize upon assets
21
<PAGE>
<PAGE>
other than assets securing a mortgage loan. In addition, United States courts
have traditionally imposed general equitable principles to limit the remedies
available to lenders in foreclosure actions that are perceived by the court as
harsh or unfair. The effect of such statutes and judicial principles may be to
delay and/or reduce distributions in respect of the Securities. See "Certain
Legal Aspects of Mortgage Loans--Foreclosure on Mortgage Loans."
Mortgage Loans with Variable Payments. Certain of the types of loans
which may be included in the Mortgage Pools may involve additional uncertainties
not present in traditional types of loans. In the case of Mortgage Loans that
are subject to negative amortization, due to the addition to principal balance
of Deferred Interest, the principal balances of such Mortgage Loans could be
increased to an amount equal to or in excess of the value of the underlying
Mortgaged Properties, thereby increasing the likelihood of default. In the case
of Buydown Loans, the increase in the Monthly Payment by the Mortgagor during
and following the Buydown Period may result in an increased risk of default on
such Buydown Loan. Certain of the Mortgage Loans provide for escalating or
variable payments by the borrower under the Mortgage Loan (the "Mortgagor"), as
to which the Mortgagor is generally qualified on the basis of the initial
payment amount. In some instances, Mortgagors may not be able to make their loan
payments as such payments increase and thus the likelihood of default will
increase. Any risks associated with the variable payments of such Mortgage Loans
may affect the yield to maturity of the Securities to the extent losses caused
by such risks which are not covered by credit enhancement are allocated to the
Securities.
Limited Liquidity of the Offered Securities. There can be no assurance
that a secondary market for the Offered Securities of any series will develop
or, if it does develop, that it will provide Securityholders with liquidity of
investment or that it will continue for the life of the Offered Securities of
any series. The Prospectus Supplement for any series of Offered Securities may
indicate that an underwriter specified therein intends to establish a secondary
market in such Securities, however no underwriter will be obligated to do so.
The Offered Securities will not be listed on any securities exchange and as a
result, any resale prices that may be available for any Security in any market
that may develop may be at a discount from the initial offering price or the
fair market value thereof.
Limited Obligations of the Company, Master Servicer or Affiliates. The
Offered Securities will not represent an interest in or obligation of the
Company, the Master Servicer or any of their respective affiliates. The only
obligations of the foregoing entities with respect to the Securities or the
Mortgage Loans will be the obligations (if any) of the Company pursuant to
certain limited representations and warranties made with respect to the Mortgage
Loans, the Master Servicer's servicing obligations under the related Pooling
Agreement (including, if and to the extent described in the related Prospectus
Supplement, its limited obligation to make certain advances in the event of
delinquencies on the Mortgage Loans) and, if and to the extent expressly
described in the related Prospectus Supplement, certain limited obligations of
the Master Servicer in connection with a Purchase Obligation or an agreement to
purchase or act as remarketing agent with respect to a Convertible Mortgage Loan
upon conversion to a fixed rate. Neither the Securities nor the underlying
Mortgage Loans will be guaranteed or insured by the Company, the Master Servicer
or any of their respective affiliates or by any other person. Proceeds of the
assets included in the related Trust Fund for each series of Securities
(including the Mortgage Loans and any form of credit enhancement) will be the
sole source of payments on the Securities, and there will be no recourse to the
Company, the Master Servicer or any other entity in the event that such proceeds
are insufficient or otherwise unavailable to make all payments provided for
under the Securities.
Limitations, Reduction and Substitution of Credit Enhancement. With
respect to each series of Securities, credit enhancement will be provided in
limited amounts to cover certain types of losses on the underlying Mortgage
Loans. Credit enhancement will be provided in one or more of the forms referred
to herein, including, but not limited to: subordination of other classes of
Securities of the same series; a Financial Guaranty Insurance Policy; a Mortgage
Pool Insurance Policy; a Letter of Credit; a Purchase Obligation; a Special
Hazard Insurance Policy; a Bankruptcy Bond; a Reserve Fund;
Overcollateralization; or any combination thereof. See "Subordination" and
"Description of Credit Enhancement" herein. Regardless of the form of credit
enhancement provided, the amount of coverage will be limited in amount and in
most cases will be subject to periodic reduction in accordance with a schedule
or formula. Furthermore, such credit enhancements may provide only very limited
coverage as to certain types of losses or risks, and may provide no coverage as
to certain other types of losses or risks. 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 the holders of the
related Securities (or certain classes thereof). The Company, the Master
Servicer or other specified person generally will be permitted to reduce,
terminate or substitute all or a portion of the
22
<PAGE>
<PAGE>
credit enhancement for any series of Securities, if each applicable Rating
Agency indicates that the then-current rating(s) thereof will not be adversely
affected. The rating(s) of any series of Securities by any applicable Rating
Agency may be lowered following the initial issuance thereof as a result of the
downgrading of the obligations of any applicable credit support provider, or as
a result of losses on the related Mortgage Loans in excess of the levels
contemplated by such Rating Agency at the time of its initial rating analysis.
Neither the Company, the Master Servicer nor any of their respective affiliates
will have any obligation to replace or supplement any credit enhancement, or to
take any other action to maintain any rating(s) of any series of Securities. See
"Description of Credit Enhancement--Reduction of Credit Enhancement."
Limited Nature of Ratings. It is a condition to the issuance of the
Securities that each class of Securities be rated in one of the four highest
rating categories by a nationally recognized statistical rating agency. A
security rating is not a recommendation to buy, sell or hold securities and may
be subject to revision or withdrawal at any time. No person is obligated to
maintain the rating on any Certificate, and, accordingly, there can be no
assurance that the ratings assigned to any Certificate on the date on which such
Securities are initially issued will not be lowered or withdrawn by a Rating
Agency at any time thereafter. In the event any rating is revised or withdrawn,
the liquidity or the market value of the related Securities may be adversely
affected. See "Rating" herein.
THE MORTGAGE POOLS
GENERAL
Each Mortgage Pool will consist primarily of Mortgage Loans, minus the
Spread, if any, or any other interest retained by the Company or any affiliate
of the Company. The Mortgage Loans may consist of Single Family Loans and
Contracts, each as described below.
The Mortgage Loans (other than the Contracts) will be evidenced by
promissory notes ("Mortgage Notes") and secured by mortgages, deeds of trust or
other similar security instruments ("Mortgages") that, in each case, create a
first or junior lien on the related Mortgagor's fee or leasehold interest in the
related Mortgaged Property. The Mortgaged Properties for such loans may consist
of attached or detached one-family dwelling units, two- to four-family dwelling
units, condominiums, townhouses, row houses, individual units in planned-unit
developments and certain other individual dwelling units (a "Single Family
Property" and the related loans, "Single Family Loans"), which in each case may
be owner-occupied or may be a vacation, second or non-owner-occupied home.
The "Contracts" will consist of manufactured housing conditional sales
contracts and installment loan agreements each secured by a Manufactured Home.
The "Manufactured Homes" securing the Contracts will consist of manufactured
homes within the meaning of 42 United States Code, Section 5402(6), which
defines a "manufactured home" as "a structure, transportable in one or more
sections, which in the traveling mode, is eight body feet or more in width or
forty body feet or more in length, or, when erected on site, is three hundred
twenty or more square feet, and which is built on a permanent chassis and
designed to be used as a dwelling with or without a permanent foundation when
connected to the required utilities, and includes the plumbing, heating, air
conditioning, and electrical systems contained therein; except that such term
shall include any structure which meets all the requirements of this paragraph
except the size requirements and with respect to which the manufacturer
voluntarily files a certification required by the Secretary of Housing and Urban
Development and complies with the standards established under this chapter."
Mortgaged Properties may be located in any one of the 50 states, the
District of Columbia or the Commonwealth of Puerto Rico.
The Mortgage Loans will not be guaranteed or insured by the Company or
any of its affiliates. However, if so specified in the related Prospectus
Supplement, the Mortgage Loans may be insured by the Federal Housing
Administration (the "FHA" and such loans, "FHA Loans") or by the Veterans
Administration (the "VA" and such loans, "VA Loans"). See "Description of
Primary Insurance Policies--FHA Insurance" and "-- VA Insurance."
23
<PAGE>
<PAGE>
A Mortgage Pool may include Mortgage Loans that are delinquent as of
the date the related series of Securities is issued. In that case, the related
Prospectus Supplement will set forth, as to each such Mortgage Loan, available
information as to the period of such delinquency and any other information
relevant for a prospective purchaser to make an investment decision. No Mortgage
Loan in a Mortgage Pool shall be 90 days or more delinquent. Mortgage Loans
which are more than 30 and less than 90 days delinquent included in any Mortgage
Pool will have detailed delinquency data relating to them included in the
related Prospectus Supplement.
Certain Mortgage Loans may be "sub-prime" mortgage loans. Such Mortgage
Loans will be underwritten in accordance with underwriting standards which are
less stringent than guidelines for "A" quality borrowers. Such mortgagors who
may have a record of credit write-offs, outstanding judgments, prior
bankruptcies and other credit items that do not satisfy the guidelines for "A"
quality borrowers.
Each Mortgage Loan will be selected by the Company for inclusion in a
Mortgage Pool from among those purchased by the Company, either directly or
through its affiliates, from banks, savings and loan associations, mortgage
bankers, mortgage brokers, investment banking firms, the Resolution Trust
Corporation (the "RTC"), the Federal Deposit Insurance Corporation (the "FDIC")
and other mortgage loan originators or sellers not affiliated with the Company
("Unaffiliated Sellers") or from WMC Mortgage, the parent of the Company, and
its affiliates ("Affiliated Sellers"; Unaffiliated Sellers and Affiliated
Sellers are collectively referred to herein as "Sellers"). If a Mortgage Pool is
composed of Mortgage Loans acquired by the Company directly from Unaffiliated
Sellers, the related Prospectus Supplement will specify the extent of Mortgage
Loans so acquired. The characteristics of the Mortgage Loans are as described
in the related Prospectus Supplement. Other mortgage loans available for
purchase by the Company may have characteristics which would make them eligible
for inclusion in a Mortgage Pool but were not selected for inclusion in such
Mortgage Pool.
Under certain circumstances, the Mortgage Loans to be included in a
Mortgage Pool will be delivered either directly or indirectly to the Company by
one or more Sellers identified in the related Prospectus Supplement,
concurrently with the issuance of the related series of Securities (a
"Designated Seller Transaction"). Such Securities may be sold in whole or in
part to any such Seller in exchange for the related Mortgage Loans, or may be
offered under any of the other methods described herein under "Methods of
Distribution." The related Prospectus Supplement for a Mortgage Pool composed of
Mortgage Loans acquired by the Company pursuant to a Designated Seller
Transaction will generally include information, provided by the related Seller,
about the Seller, the Mortgage Loans and the underwriting standards applicable
to the Mortgage Loans. None of the Company or, unless it is the Seller, WMC
Mortgage or any of their affiliates will make any representation or warranty
with respect to such Mortgage Loans, or any representation as to the accuracy or
completeness of such information provided by the Seller.
If specified in the related Prospectus Supplement, the Trust Fund for a
series of Securities may include mortgage pass-through certificates evidencing
interests in Mortgage Loans ("Mortgage Securities"), as described herein. The
Mortgage Securities may have been issued previously by the Company or an
affiliate thereof, a financial institution or other entity engaged generally in
the business of mortgage lending or a limited purpose corporation organized for
the purpose of, among other things, acquiring and depositing mortgage loans into
such trusts, and selling beneficial interests in such trusts. Such Mortgage
Securities will be generally similar to Securities offered hereunder. However,
any Mortgage Securities included in a Trust Fund will (i) either have been (a)
previously registered under the Securities Act, or (b) eligible for sale under
Rule 144(k) under the Exchange Act; and (ii) be acquired in bona fide secondary
market transactions. As to any such series of Securities, the related Prospectus
Supplement will include a description of such Mortgage Securities and any
related credit enhancement, and the Mortgage Loans underlying such Mortgage
Securities will be described together with any other Mortgage Loans included in
the Mortgage Pool relating to such series.
THE MORTGAGE LOANS
Each of the Mortgage Loans will be a type of mortgage loan described or
referred to in paragraphs numbered (1) through (7) below, with any variations
described in the related Prospectus Supplement:
24
<PAGE>
<PAGE>
(1) Fixed-rate, fully-amortizing mortgage loans (which may
include mortgage loans converted from adjustable-rate mortgage loans or
otherwise modified) providing for level monthly payments of principal
and interest and terms at origination or modification of not more than
approximately 15 years;
(2) Fixed-rate, fully-amortizing mortgage loans (which may
include mortgage loans converted from adjustable-rate mortgage loans or
otherwise modified) providing for level monthly payments of principal
and interest and terms at origination or modification of more than 15
years, but not more than approximately 25 or 30 years;
(3) Fully-amortizing adjustable-rate mortgage loans ("ARM
Loans") having an original or modified term to maturity of not more
than approximately 25 or 30 years with a related interest rate (a
"Mortgage Rate") which generally adjusts initially either three months,
six months or one, two, three, five or seven years or other intervals
subsequent to the initial payment date, and thereafter at either
three-month, six-month, one-year or other intervals (with corresponding
adjustments in the amount of monthly payments) over the term of the
mortgage loan to equal the sum of a fixed percentage set forth in the
related Mortgage Note (the "Note Margin") and an index*. The related
Prospectus Supplement will set forth the relevant index and the
highest, lowest and weighted average Note Margin with respect to the
ARM Loans in the related Mortgage Pool. The related Prospectus
Supplement will also indicate any periodic or lifetime limitations on
changes in any per annum Mortgage Rate at the time of any adjustment.
If specified in the related Prospectus Supplement, an ARM Loan may
include a provision that allows the Mortgagor to convert the adjustable
Mortgage Rate to a fixed rate at some point during the term of such ARM
Loan generally not later than six to ten years subsequent to the
initial payment date;
(4) Negatively-amortizing ARM Loans having original or
modified terms to maturity of not more than approximately 25 or 30
years with Mortgage Rates which generally adjust initially on the
payment date referred to in the related Prospectus Supplement, and on
each of certain periodic payment dates thereafter, to equal the sum of
the Note Margin and the index. The scheduled monthly payment will be
adjusted as and when described in the related Prospectus Supplement to
an amount that would fully amortize the Mortgage Loan over its
remaining term on a level debt service basis; provided that increases
in the scheduled monthly payment may be subject to certain limitations
as specified in the related Prospectus Supplement. If an adjustment to
the Mortgage Rate on a Mortgage Loan causes the amount of interest
accrued thereon in any month to exceed the scheduled monthly payment on
such mortgage loan, the resulting amount of interest that has accrued
but is not then payable ("Deferred Interest") will be added to the
principal balance of such Mortgage Loan;
(5) Fixed-rate, graduated payment mortgage loans having
original or modified terms to maturity of not more than approximately
15 years with monthly payments during the first year calculated on the
basis of an assumed interest rate which is a specified percentage below
the Mortgage Rate on such mortgage loan. Such monthly payments increase
at the beginning of the second year by a specified percentage of the
monthly payment during the preceding year and each year thereafter to
the extent necessary to amortize the mortgage loan over the remainder
of its approximately 15-year term. Deferred Interest, if any, will be
added to the principal balance of such mortgage loans;
(6) Fixed-rate, graduated payment mortgage loans having
original or modified terms to maturity of not more than approximately
25 or 30 years with monthly payments during the first year
- --------
* The index (the "Index") for a particular Mortgage Pool will be
specified in the related Prospectus Supplement and may include one of the
following indexes: (i) the weekly average yield on U.S. Treasury securities
adjusted to a constant maturity of either six months or one year, (ii) the
weekly auction average investment yield of U.S. Treasury bills of six months,
(iii) the daily Bank Prime Loan rate made available by the Federal Reserve
Board, (iv) the cost of funds of member institutions for the Federal Home Loan
Bank of San Francisco, (v) the interbank offered rates for U.S. dollar deposits
in the London market, each calculated as of a date prior to each scheduled
interest rate adjustment date which will be specified in the related Prospectus
Supplement or (vi) any other index described in the related Prospectus
Supplement.
25
<PAGE>
<PAGE>
calculated on the basis of an assumed interest rate which is a
specified percentage below the Mortgage Rate. Such monthly payments
increase at the beginning of the second year by a specified percentage
of the monthly payment during the preceding year and each year
thereafter to the extent necessary to fully amortize the mortgage loan
within its approximately 25- or 30-year term. Deferred Interest, if
any, will be added to the principal balance of such mortgage loan; or
(7) Mortgage loans ("Balloon Loans") having payment terms
similar to those described in one of the preceding paragraphs numbered
(1) through (6), calculated on the basis of an assumed amortization
term, but providing for a payment (a "Balloon Payment") of all
outstanding principal and interest to be made at the end of a specified
term that is shorter than such assumed amortization term.
If provided in the related Prospectus Supplement, certain of the
Mortgage Pools may contain Single Family Loans secured by junior liens, and the
related senior liens ("Senior Liens") may not be included in the Mortgage Pool.
The primary risk to holders of such Mortgage Loans secured by junior liens is
the possibility that adequate funds will not be received in connection with a
foreclosure of the related Senior Liens to satisfy fully both the Senior Liens
and the Mortgage Loan. In the event that a holder of a Senior Lien forecloses on
a Mortgaged Property, the proceeds of the foreclosure or similar sale will be
applied first to the payment of court costs and fees in connection with the
foreclosure, second to real estate taxes, third in satisfaction of all
principal, interest, prepayment or acceleration penalties, if any, and any other
sums due and owing to the holder of the Senior Liens. The claims of the holders
of the Senior Liens will be satisfied in full out of proceeds of the liquidation
of the related Mortgaged Property, if such proceeds are sufficient, before the
Trust Fund as holder of the junior lien receives any payments in respect of the
Mortgage Loan. If the Master Servicer were to foreclose on any such Mortgage
Loan, it would do so subject to any related Senior Liens. In order for the debt
related to the Mortgage Loan to be paid in full at such sale, a bidder at the
foreclosure sale of such Mortgage Loan would have to bid an amount sufficient to
pay off all sums due under the Mortgage Loan and the Senior Liens or purchase
the Mortgaged Property subject to the Senior Liens. In the event that such
proceeds from a foreclosure or similar sale of the related Mortgaged Property
are insufficient to satisfy all Senior Liens and the Mortgage Loan in the
aggregate, the Trust Fund, as the holder of the junior lien, and, accordingly,
holders of one or more classes of the Securities of the related series bear (i)
the risk of delay in distributions while a deficiency judgment against the
borrower is sought and (ii) the risk of loss if the deficiency judgment is not
realized upon. Moreover, deficiency judgments may not be available in certain
jurisdictions or the Mortgage Loan may be nonrecourse. In addition, a junior
mortgagee may not foreclose on the property securing a junior mortgage unless it
forecloses subject to the senior mortgages.
If so specified in the related Prospectus Supplement, a Mortgage Loan
may contain a prohibition on prepayment (the period of such prohibition, a
"Lock-out Period" and its date of expiration, a "Lock-out Expiration Date") or
require payment of a premium or a yield maintenance penalty (a "Prepayment
Penalty").
Certain information, including information regarding loan-to-value
ratios (each, a "Loan-to-Value Ratio") at origination of the Mortgage Loans
underlying each series of Securities, will be supplied in the related Prospectus
Supplement. In the case of most Mortgage Loans, the "Loan-to-Value Ratio" at
origination is defined generally as the ratio, expressed as a percentage, of the
principal amount of the Mortgage Loan at origination (or, if appropriate, at the
time of an appraisal subsequent to origination), plus, in the case of a Mortgage
Loan secured by a junior lien, the outstanding principal balance of the related
Senior Liens, to the Value of the related Mortgaged Property. The "Value" of a
Mortgaged Property securing a Single Family Loan generally will be equal to the
lesser of (x) the appraised value determined in an appraisal obtained at
origination of such Mortgage Loan, if any, or, if the related Mortgaged Property
has been appraised subsequent to origination, the value determined in such
subsequent appraisal and (y) the sales price for the related Mortgaged Property
(except in certain circumstances in which there has been a subsequent
appraisal). In the case of certain refinanced, modified or converted Single
Family Loans, the "Value" of the related Mortgaged Property will be equal to the
lesser of (x) the appraised value of the related Mortgaged Property determined
at origination or in an appraisal, if any, obtained at the time of refinancing,
modification or conversion and (y) the sales price of the related Mortgage
Property or, if the Mortgage Loan is not a rate and term refinance Mortgage Loan
and if the Mortgaged Property was owned for a relatively short period of time
prior to refinancing, modification or conversion, the sum of the sales price of
the related Mortgaged Property plus the added value of any improvements. Certain
Mortgage Loans which are subject to negative amortization will have
Loan-to-Value Ratios which will increase after origination as a result of such
negative amortization. For purposes
26
<PAGE>
<PAGE>
of calculating the Loan-to-Value Ratio of a Contract relating to a new
Manufactured Home, the "Value" is no greater than the sum of a fixed percentage
of the list price of the unit actually billed by the manufacturer to the dealer
(exclusive of freight to the dealer site), including "accessories" identified in
the invoice (the "Manufacturer's Invoice Price"), plus the actual cost of any
accessories purchased from the dealer, a delivery and set-up allowance,
depending on the size of the unit, and the cost of state and local taxes, filing
fees and up to three years prepaid hazard insurance premiums. With respect to a
used Manufactured Home, the "Value" is the least of the sale price, the
appraised value, and the National Automobile Dealer's Association book value
plus prepaid taxes and hazard insurance premiums. The appraised value of a
Manufactured Home is based upon the age and condition of the manufactured
housing unit and the quality and condition of the mobile home park in which it
is situated, if applicable. Manufactured Homes are less likely than other types
of housing to experience appreciation in value and more likely to experience
depreciation in value over time.
The Mortgage Loans may be "equity refinance" Mortgage Loans, as to
which a portion of the proceeds are used to refinance an existing mortgage loan,
and the remaining proceeds may be retained by the Mortgagor or used for purposes
unrelated to the Mortgaged Property. Alternatively, the Mortgage Loans may be
"rate and term refinance" Mortgage Loans, as to which substantially all of the
proceeds (net of related costs incurred by the Mortgagor) are used to refinance
an existing mortgage loan or loans (which may include a junior lien) primarily
in order to change the interest rate or other terms thereof. The Mortgage Loans
may be mortgage loans which have been consolidated and/or have had various terms
changed, mortgage loans which have been converted from adjustable rate mortgage
loans to fixed rate mortgage loans, or construction loans which have been
converted to permanent mortgage loans. In addition, a Mortgaged Property may be
subject to secondary financing at the time of origination of the Mortgage Loan
or thereafter. In addition, certain or all of the Single Family Loans secured by
junior liens may have Loan-to-Value Ratios in excess of 80% and as high as 150%
and will not be insured by a Primary Insurance Policy (such Mortgage Loans,
"High LTV Loans").
If provided for in the related Prospectus Supplement, a Mortgage Pool
may contain ARM Loans which allow the Mortgagors to convert the adjustable rates
on such Mortgage Loans to a fixed rate at some point during the life of such
Mortgage Loans (each such Mortgage Loan, a "Convertible Mortgage Loan"),
generally not later than six to ten years subsequent to the date of origination,
depending upon the length of the initial adjustment period. If specified in the
related Prospectus Supplement, upon any conversion, the Company, the related
Master Servicer, the applicable Seller or a third party will purchase the
converted Mortgage Loan as and to the extent set forth in the related Prospectus
Supplement. Alternatively, if specified in the related Prospectus Supplement,
the Company or the related Master Servicer (or another party specified therein)
may agree to act as remarketing agent with respect to such converted Mortgage
Loans and, in such capacity, to use its best efforts to arrange for the sale of
converted Mortgage Loans under specified conditions. Upon the failure of any
party so obligated to purchase any such converted Mortgage Loan, the inability
of any remarketing agent to arrange for the sale of the converted Mortgage Loan
and the unwillingness of such remarketing agent to exercise any election to
purchase the converted Mortgage Loan for its own account, the related Mortgage
Pool will thereafter include both fixed rate and adjustable rate Mortgage Loans.
If provided for in the related Prospectus Supplement, certain of the
Mortgage Loans may be subject to temporary buydown plans ("Buydown Mortgage
Loans") pursuant to which the monthly payments made by the Mortgagor during the
early years of the Mortgage Loan (the "Buydown Period") will be less than the
scheduled monthly payments on the Mortgage Loan, the resulting difference to be
made up from (i) an amount (such amount, exclusive of investment earnings
thereon, being hereinafter referred to as "Buydown Funds") contributed by the
seller of the Mortgaged Property or another source and placed in a custodial
account (the "Buydown Account"), (ii) if the Buydown Funds are contributed on a
present value basis, investment earnings on such Buydown Funds or (iii)
additional buydown funds to be contributed over time by the Mortgagor's employer
or another source. See "Description of the Securities--Payments on Mortgage
Loans; Deposits to Certificate Account." Generally, the Mortgagor under each
Buydown Mortgage Loan will be qualified at the applicable lower monthly payment.
Accordingly, the repayment of a Buydown Mortgage Loan is dependent on the
ability of the Mortgagor to make larger level monthly payments after the Buydown
Funds have been depleted and, for certain Buydown Mortgage Loans, during the
Buydown Period.
The Prospectus Supplement for each series of Securities will contain
information, to the extent known or reasonably ascertainable, as to the loss and
delinquency experience of the Seller and/or the Master Servicer with
27
<PAGE>
<PAGE>
respect to Mortgage Loans similar to those included in the Trust Fund. Such
information generally will be provided when such Seller and/or Master Servicer
have a seasoned portfolio of Mortgage Loans.
The Prospectus Supplement for each series of Securities will contain
information as to the type of Mortgage Loans that will be included in the
related Mortgage Pool. Each Prospectus Supplement applicable to a series of
Securities will include certain information, generally as of the Cut-off Date
and to the extent then available to the Company, on an approximate basis, as to
(i) the aggregate principal balance of the Mortgage Loans, (ii) the type of
property securing the Mortgage Loans, (iii) the original or modified terms to
maturity of the Mortgage Loans, (iv) the range of principal balances of the
Mortgage Loans at origination or modification, (v) the earliest origination or
modification date and latest maturity date of the Mortgage Loans, (vi) the
Loan-to-Value Ratios of the Mortgage Loans, (vii) the Mortgage Rate or range of
Mortgage Rates borne by the Mortgage Loans, (viii) if any of the Mortgage Loans
are ARM Loans, the applicable Index, the range of Note Margins and the weighted
average Note Margin, (ix) the geographical distribution of the Mortgage Loans,
(x) the number of Buydown Mortgage Loans, if applicable, and (xi) the percent of
ARM Loans which are convertible to fixed-rate mortgage loans, if applicable. A
Current Report on Form 8-K will be available upon request to holders of the
related series of Securities and will be filed, together with the related
Pooling Agreement, with respect to each series of Certificates, or the related
Servicing Agreement, Trust Agreement and Indenture, with respect to each series
of Notes, with the Securities and Exchange Commission within fifteen days after
the initial issuance of such Securities. In the event that Mortgage Loans are
added to or deleted from the Trust Fund after the date of the related Prospectus
Supplement, such addition or deletion will be noted in the Current Report on
Form 8-K. In no event, however, will more than 5% (by principal balance at the
Cut-off Date) of the Mortgage Loans or Mortgage Securities deviate from the
characteristics of the Mortgage Loans or Mortgage Securities set forth in the
related Prospectus Supplement.
The Company will cause the Mortgage Loans constituting each Mortgage
Pool (or Mortgage Securities evidencing interests therein) to be assigned,
without recourse, to the Trustee named in the related Prospectus Supplement, for
the benefit of the holders of all of the Securities of a series. Except to the
extent that servicing of any Mortgage Loan is to be transferred to a Special
Servicer, the Master Servicer named in the related Prospectus Supplement will
service the Mortgage Loans, directly or through other mortgage servicing
institutions ("Subservicers"), pursuant to a Pooling Agreement, with respect to
each series of Certificates, or a servicing agreement (a "Servicing Agreement"),
with respect to each series of Notes, and will receive a fee for such services.
See "Servicing of Mortgage Loans," "Description of the Securities" and "The
Agreements." With respect to those Mortgage Loans serviced by the Master
Servicer through a Subservicer, the Master Servicer will remain liable for its
servicing obligations under the related Pooling Agreement or Servicing Agreement
as if the Master Servicer alone were servicing such Mortgage Loans. The Master
Servicer's obligations with respect to the Mortgage Loans will consist
principally of its contractual servicing obligations under the related Pooling
Agreement or Servicing Agreement (including its obligation to enforce certain
purchase and other obligations of Subservicers and Sellers, as more fully
described herein under "--Representations by Sellers" below, "Servicing of
Mortgage Loans--Subservicers," and "Description of the Securities--Assignment of
Trust Fund Assets," and, if and to the extent set forth in the related
Prospectus Supplement, its obligation to make certain cash advances in the event
of delinquencies in payments on or with respect to the Mortgage Loans as
described herein under "Description of the Securities--Advances") or pursuant to
the terms of any Mortgage Securities.
UNDERWRITING STANDARDS
Mortgage Loans to be included in a Mortgage Pool will have been
purchased by the Company, either directly or indirectly from Sellers. Such
Mortgage Loans, as well as Mortgage Loans underlying Mortgage Securities, will
generally have been originated in accordance with underwriting standards
acceptable to the Company and generally described below. Any Mortgage Loan not
directly underwritten by the Company or its affiliates will be reunderwritten by
the Company or its affiliates, except in the case of a Designated Seller's
transaction, in which case each Mortgage Loan will be underwritten by the
Designated Seller or an affiliate thereof. The reunderwriting standards of the
Company or its affiliates for such Mortgage Loans generally will be in
accordance with the same standards as those for Mortgage Loans directly
underwritten, with any variations described in the related Prospectus
Supplement.
28
<PAGE>
<PAGE>
The underwriting standards to be used in originating the Mortgage Loans
are primarily intended to assess the creditworthiness of the Mortgagor, the
value of the Mortgaged Property and the adequacy of such property as collateral
for the Mortgage Loan.
The primary considerations in underwriting a Single Family Loan or
Contract are the Mortgagor's employment stability and whether the Mortgagor has
sufficient monthly income available (i) to meet the Mortgagor's monthly
obligations on the proposed Mortgage Loan (generally determined on the basis of
the monthly payments due in the year of origination) and other expenses related
to the home (such as property taxes and hazard insurance) and (ii) to meet
monthly housing expenses and other financial obligations and monthly living
expenses. However, the Loan-to-Value Ratio of the Mortgage Loan is another
critical factor. In addition, a Mortgagor's credit history and repayment
ability, as well as the type and use of the Mortgaged Property, are also
considerations.
High LTV Loans are underwritten with an emphasis on the
creditworthiness of the related Mortgagor. Such Mortgage Loans are underwritten
with a limited expectation of recovering any amounts from the foreclosure of the
related Mortgaged Property.
It is expected that each prospective Mortgagor will complete a mortgage
loan application that includes information with respect to the applicant's
liabilities, income, credit history, employment history and personal
information. One or more credit reports on each applicant from national credit
reporting companies generally will be required. The report typically contains
information relating to such matters as credit history with local and national
merchants and lenders, installment debt payments and any record of defaults,
bankruptcies, repossessions, or judgments.
Mortgaged Properties generally will be appraised by licensed
appraisers. The appraiser will generally address neighborhood conditions, site
and zoning status and condition and valuation of improvements. In the case of
Mortgaged Properties secured by Single Family Loans, the appraisal report will
generally include a reproduction cost analysis (when appropriate) based on the
current cost of constructing a similar home and a market value analysis based on
recent sales of comparable homes in the area. The value of the property being
financed, as indicated by the appraisal, must be such that it currently
supports, and is anticipated to support in the future, the outstanding loan
balance. All appraisals are required to be on forms acceptable to the Federal
National Mortgage Association ("FNMA") and/or the Federal Home Loan Mortgage
Corporation ("FHLMC").
Notwithstanding the foregoing, Loan-to-Value Ratios will not
necessarily constitute an accurate measure of the risk of liquidation loss in a
pool of Mortgage Loans. For example, the value of a Mortgaged Property as of the
date of initial issuance of the related series of Securities may be less than
the Value determined at loan origination, and will likely continue to fluctuate
from time to time based upon changes in economic conditions and the real estate
market.
With respect to any FHA Loan or VA Loans the Mortgage Loan Seller will
be required to represent that it has complied with the applicable underwriting
policies of the FHA or VA, respectively. See "Description of Primary Insurance
Policies--FHA Insurance" and "--VA Insurance" herein.
QUALIFICATIONS OF ORIGINATORS AND SELLERS
Each Mortgage Loan generally will be originated, directly or through
mortgage brokers and correspondents, by a savings and loan association, savings
bank, commercial bank, credit union, insurance company, or similar institution
which is supervised and examined by a federal or state authority, or by a
mortgagee approved by the Secretary of Housing and Urban Development pursuant to
sections 203 and 211 of the National Housing Act of 1934, as amended (the
"Housing Act").
REPRESENTATIONS BY SELLERS
Each Seller will have made representations and warranties in respect of
the Mortgage Loans and/or Mortgage Securities sold by such Seller and evidenced
by a series of Securities. In the case of Mortgage Loans, such representations
and warranties will generally include, among other things, that as to each such
Mortgage Loan: (i)
29
<PAGE>
<PAGE>
any required hazard and primary mortgage insurance policies were effective at
the origination of such Mortgage Loan, and each such policy remained in effect
on the date of purchase of such Mortgage Loan from the Seller by or on behalf of
the Company; (ii) with respect to each Mortgage Loan other than a Contract,
either (A) a title insurance policy insuring (subject only to permissible title
insurance exceptions) the lien status of the Mortgage was effective at the
origination of such Mortgage Loan and such policy remained in effect on the date
of purchase of the Mortgage Loan from the Seller by or on behalf of the Company
or (B) if the Mortgaged Property securing such Mortgage Loan is located in an
area where such policies are generally not available, there is in the related
mortgage file an attorney's certificate of title indicating (subject to such
permissible exceptions set forth therein) the lien status of the mortgage; (iii)
the Seller has good title to such Mortgage Loan and such Mortgage Loan was
subject to no offsets, defenses or counterclaims except as may be provided under
the Relief Act and except to the extent that any buydown agreement exists for a
Buydown Mortgage Loan; (iv) there are no mechanics' liens or claims for work,
labor or material affecting the related Mortgaged Property which are, or may be
a lien prior to, or equal with, the lien of the related Mortgage (subject only
to permissible title insurance exceptions); (v) the related Mortgaged Property
is free from damage and in good repair; (vi) there are no delinquent tax or
assessment liens against the related Mortgaged Property; (vii) such Mortgage
Loan is not more than 90 days' delinquent as to any scheduled payment of
principal and/or interest; (viii) if a Primary Insurance Policy is required with
respect to such Mortgage Loan, such Mortgage Loan is the subject of such a
policy; and (ix) such Mortgage Loan was made in compliance with, and is
enforceable under, all applicable local, state and federal laws in all material
respects. In the case of Mortgage Securities, such representations and
warranties will generally include, among other things, that as to each such
Mortgage Security: (i) such Mortgage Security is validly issued and outstanding
and entitled to the benefits of the agreement pursuant to which it was issued;
and (ii) the Seller has good title to such Mortgage Security. In the event of a
breach of a Seller's representation or warranty that materially adversely
affects the interests of the Securityholders in a Mortgage Loan or Mortgage
Security, the related Seller will be obligated to cure the breach or repurchase
or, if permitted, replace such Mortgage Loan or Mortgage Security as described
below. However, there can be no assurance that a Seller will honor its
obligation to repurchase or, if permitted, replace any Mortgage Loan or Mortgage
Security as to which such a breach of a representation or warranty arises.
All of the representations and warranties of a Seller in respect of a
Mortgage Loan or Mortgage Security will have been made as of the date on which
such Mortgage Loan or Mortgage Security was purchased from the Seller by or on
behalf of the Company; the date as of which such representations and warranties
were made will be a date prior to the date of initial issuance of the related
series of Securities or, in the case of a Designated Seller Transaction, will be
the date of closing of the related sale by the applicable Seller. A substantial
period of time may have elapsed between the date as of which the representations
and warranties were made and the later date of initial issuance of the related
series of Securities. Accordingly, the Seller's purchase obligation (or, if
specified in the related Prospectus Supplement, limited replacement option)
described below will not arise if, during the period commencing on the date of
sale of a Mortgage Loan or Mortgage Security by the Seller, an event occurs that
would have given rise to such an obligation had the event occurred prior to sale
of the affected Mortgage Loan or Mortgage Security, as the case may be. The only
representations and warranties to be made for the benefit of holders of
Securities in respect of any related Mortgage Loan or Mortgage Security relating
to the period commencing on the date of sale of such Mortgage Loan or Mortgage
Security by the Seller to or on behalf of the Company will be certain limited
representations of the Company and the Master Servicer described under
"Description of the Securities--Assignment of Trust Fund Assets" below.
The Company will assign to the Trustee for the benefit of the holders
of the related series of Securities all of its right, title and interest in each
agreement by which it purchased a Mortgage Loan or Mortgage Security from a
Seller insofar as such agreement relates to the representations and warranties
made by such Seller in respect of such Mortgage Loan or Mortgage Security and
any remedies provided for with respect to any breach of such representations and
warranties. If a Seller cannot cure a breach of any representation or warranty
made by it in respect of a Mortgage Loan or Mortgage Security which materially
and adversely affects the interests of the Securityholders therein within a
specified period after having discovered or received notice of such breach,
then, such Seller will be obligated to purchase such Mortgage Loan or Mortgage
Security at a price (the "Purchase Price") set forth in the related Pooling
Agreement or Servicing Agreement which Purchase Price generally will be equal to
the principal balance thereof as of the date of purchase plus accrued and unpaid
interest through or about the date of purchase at the related Mortgage Rate or
pass-through rate, as applicable (net of any portion of such interest payable
30
<PAGE>
<PAGE>
to such Seller in respect of master servicing compensation, special servicing
compensation or subservicing compensation, as applicable, and the Spread, if
any).
As to any Mortgage Loan required to be purchased by a Seller as
provided above, rather than repurchase the Mortgage Loan, the Seller, if so
specified in the related Prospectus Supplement, will be entitled, at its sole
option, to remove such Mortgage Loan (a "Deleted Mortgage Loan") from the Trust
Fund and substitute in its place another Mortgage Loan of like kind (a
"Qualified Substitute Mortgage Loan"); however, with respect to a series of
Certificates for which no REMIC election is to be made, such substitution must
be effected within 120 days of the date of the initial issuance of the related
series of Certificates. With respect to a Trust Fund for which a REMIC election
is to be made, such substitution of a defective Mortgage Loan must be effected
within two years of the date of the initial issuance of the related series of
Certificates, and may not be made if such substitution would cause the Trust
Fund, or any portion thereof, to fail to qualify as a REMIC or result in a
prohibited transaction tax under the Code. Any Qualified Substitute Mortgage
Loan generally will, on the date of substitution, (i) have an outstanding
principal balance, after deduction of the principal portion of the monthly
payment due in the month of substitution, not in excess of the outstanding
principal balance of the Deleted Mortgage Loan (the amount of any shortfall to
be deposited in the Certificate Account by the Master Servicer in the month of
substitution for distribution to the Securityholders), (ii) have a Mortgage Rate
and a Net Mortgage Rate not less than (and not more than one percentage point
greater than) the Mortgage Rate and Net Mortgage Rate, respectively, of the
Deleted Mortgage Loan as of the date of substitution, (iii) have a Loan-to-Value
Ratio at the time of substitution no higher than that of the Deleted Mortgage
Loan at the time of substitution, (iv) have a remaining term to maturity not
greater than (and not more than one year less than) that of the Deleted Mortgage
Loan and (v) comply with all of the representations and warranties made by such
Affiliated Seller as of the date of substitution. The related purchase agreement
may include additional requirements relating to ARM Loans or other specific
types of Mortgage Loans, or additional provisions relating to meeting the
foregoing requirements on an aggregate basis where a number of substitutions
occur contemporaneously. No Seller will have any option to substitute for a
Mortgage Security that it is obligated to repurchase in connection with a breach
of a representation and warranty.
The Master Servicer will be required under the applicable Pooling
Agreement or Servicing Agreement to use reasonable efforts to enforce this
purchase or substitution obligation for the benefit of the Trustee and the
Securityholders, following such practices it would employ in its good faith
business judgment and which are normal and usual in its general mortgage
servicing activities; provided, however, that this purchase or substitution
obligation will not become an obligation of the Master Servicer in the event the
applicable Seller fails to honor such obligation. In instances where a Seller is
unable, or disputes its obligation, to purchase affected Mortgage Loans and/or
Mortgage Securities, the Master Servicer, employing the standards set forth in
the preceding sentence, may negotiate and enter into one or more settlement
agreements with such Seller that could provide for, among other things, the
purchase of only a portion of the affected Mortgage Loans and/or Mortgage
Securities. Any such settlement could lead to losses on the Mortgage Loans
and/or Mortgage Securities which would be borne by the related Securities. In
accordance with the above described practices, the Master Servicer will not be
required to enforce any purchase obligation of a Seller arising from any
misrepresentation by the Seller, if the Master Servicer determines in the
reasonable exercise of its business judgment that the matters related to such
misrepresentation did not directly cause or are not likely to directly cause a
loss on the related Mortgage Loan or Mortgage Security. If the Seller fails to
repurchase and no breach of any other party's representations has occurred, the
Seller's purchase obligation will not become an obligation of the Company or any
other party. In the case of a Designated Seller Transaction where the Seller
fails to repurchase a Mortgage Loan or Mortgage Security and neither the Company
nor any other entity has assumed the representations and warranties, such
repurchase obligation of the Seller will not become an obligation of the Company
or any other party. The foregoing obligations will constitute the sole remedies
available to Securityholders or the Trustee for a breach of any representation
by a Seller or for any other event giving rise to such obligations as described
above.
Neither the Company nor the Master Servicer will be obligated to
purchase a Mortgage Loan or Mortgage Security if a Seller defaults on its
obligation to do so, and no assurance can be given that the Sellers will carry
out such purchase obligations. Such a default by a Seller is not a default by
the Company or by the Master Servicer. However, to the extent that a breach of
the representations and warranties of a Seller also constitutes a breach of a
representation made by the Company or the Master Servicer, as described below
under "Description of the Securities--Assignment of Trust Fund Assets," the
Company or the Master Servicer may have a purchase or substitution obligation.
Any Mortgage Loan or Mortgage Security not so purchased or substituted for shall
remain
31
<PAGE>
<PAGE>
in the related Trust Fund and any losses related thereto shall be allocated to
the related credit enhancement, to the extent available, and otherwise to one or
more classes of the related series of Securities.
If a person other than a Seller makes the representations and
warranties referred to in the first paragraph of this "--Representations by
Sellers" section, or a person other than a Seller is responsible for
repurchasing or replacing any Mortgage Loan or Mortgage Security in connection
with a breach of such representations and warranties, the identity of such
person will be specified in the related Prospectus Supplement.
SERVICING OF MORTGAGE LOANS
GENERAL
The Mortgage Loans and Mortgage Securities included in each Mortgage
Pool will be serviced and administered pursuant to either a Pooling Agreement or
a Servicing Agreement. Forms of Pooling Agreements and a form of Servicing
Agreement have been filed as an exhibit to the Registration Statement of which
this Prospectus is a part. However, the provisions of each Pooling Agreement or
Servicing Agreement will vary depending upon the nature of the related Mortgage
Pool. The following summaries describe certain material servicing-related
provisions that may appear in a Pooling Agreement or Servicing Agreement for a
Mortgage Pool that includes Mortgage Loans. The related Prospectus Supplement
will describe any servicing-related provision of such a Pooling Agreement or
Servicing Agreement that materially differs from the description thereof
contained in this Prospectus and, if the related Mortgage Pool includes Mortgage
Securities, will summarize all of the material provisions of the related Pooling
Agreement or Servicing Agreement that govern the administration of such Mortgage
Securities and identify the party responsible for such administration.
With respect to any series of Securities as to which the related
Mortgage Pool includes Mortgage Securities, the servicing and administration of
the Mortgage Loans underlying such Mortgage Securities will be pursuant to the
terms of such Mortgage Securities. It is expected that Mortgage Loans underlying
any Mortgage Securities in a Mortgage Pool would be serviced and administered
generally in the same manner as Mortgage Loans included in a Mortgage Pool,
however, there can be no assurance that such will be the case, particularly if
such Mortgage Securities are issued by an entity other than the Company or any
of its affiliates. The related Prospectus Supplement will describe any material
differences between the servicing described below and the servicing of Mortgage
Loans underlying the Mortgage Securities in any Mortgage Pool.
THE MASTER SERVICER
The master servicer (the "Master Servicer"), if any, for a series of
Securities will be named in the related Prospectus Supplement and may be WMC
Mortgage or another affiliate of the Company. The Master Servicer is required to
maintain a fidelity bond and errors and omissions policy with respect to its
officers and employees and other persons acting on behalf of the Master Servicer
in connection with its activities under a Pooling Agreement or a Servicing
Agreement.
COLLECTION AND OTHER SERVICING PROCEDURES; MORTGAGE LOAN MODIFICATIONS
The Master Servicer for any Mortgage Pool, directly or through
Subservicers, will be obligated under the Pooling Agreement or Servicing
Agreement to service and administer the Mortgage Loans in such Mortgage Pool for
the benefit of the related Securityholders, in accordance with applicable law
and the terms of such Pooling Agreement or Servicing Agreement, such Mortgage
Loans and any instrument of credit enhancement included in the related Trust
Fund, and, to the extent consistent with the foregoing, in the same manner as
would prudent institutional mortgage lenders servicing comparable mortgage loans
for their own account in the jurisdictions where the related Mortgaged
Properties are located. Subject to the foregoing, the Master Servicer will have
full power and authority to do any and all things in connection with such
servicing and administration that it may deem necessary and desirable.
As part of its servicing duties, a Master Servicer will be required to
make reasonable efforts to collect all payments called for under the terms and
provisions of the Mortgage Loans that it services and will be obligated to
32
<PAGE>
<PAGE>
follow such collection procedures as it would follow with respect to mortgage
loans that are comparable to such Mortgage Loans and held for its own account,
provided such procedures are consistent with the terms of the related Pooling
Agreement or Servicing Agreement, including the servicing standard specified
therein and generally described in the preceding paragraph (as such may be more
particularly described in the related Prospectus Supplement, the "Servicing
Standard"), and do not impair recovery under any instrument of credit
enhancement included in the related Trust Fund. Consistent with the foregoing,
the Master Servicer will be permitted, in its discretion, to waive any
Prepayment Premium, late payment charge or other charge in connection with any
Mortgage Loan.
Under a Pooling Agreement or a Servicing Agreement, a Master Servicer
will be granted certain discretion to extend relief to Mortgagors whose payments
become delinquent. In the case of Single Family Loans and Contracts, a Master
Servicer may, among other things, grant a period of temporary indulgence to a
Mortgagor or may enter into a liquidating plan providing for repayment by such
Mortgagor of delinquent amounts within a specified period from the date of
execution of the plan. However, the Master Servicer must first determine that
any such waiver or extension will not impair the coverage of any related
insurance policy or materially adversely affect the security for such Mortgage
Loan.
Certain of the Mortgage Loans in a Mortgage Pool may contain a
due-on-sale clause that entitles the lender to accelerate payment of the
Mortgage Loan upon any sale or other transfer of the related Mortgaged Property
made without the lender's consent. In any case in which property subject to a
Single Family Loan or Contract is being conveyed by the Mortgagor, the Master
Servicer will in general be obligated, to the extent it has knowledge of such
conveyance, to exercise its rights to accelerate the maturity of such Mortgage
Loan under any due-on-sale clause applicable thereto, but only if the exercise
of such rights is permitted by applicable law and only to the extent it would
not adversely affect or jeopardize coverage under any Primary Insurance Policy
or applicable credit enhancement arrangements. If the Master Servicer is
prevented from enforcing such due-on-sale or due-on-encumbrance clause under
applicable law or if the Master Servicer determines that it is reasonably likely
that a legal action would be instituted by the related Mortgagor to avoid
enforcement of such due-on-sale or due-on-encumbrance clause, the Master
Servicer may enter 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 under the Mortgage Loan subject to certain specified
conditions. The original Mortgagor may be released from liability on a Single
Family Loan or Contract if the Master Servicer shall have determined in good
faith that such release will not adversely affect the collectability of the
Mortgage Loan. The Master Servicer generally will be entitled to retain as
additional servicing compensation any fee collected in connection with the
permitted transfer of a Mortgaged Property. See "Certain Legal Aspects of
Mortgage Loans--Enforceability of Certain Provisions." FHA Loans contain no such
clause and may be assumed by the purchaser of the mortgaged property.
Mortgagors may, from time to time, request partial releases of the
Mortgaged Properties, easements, consents to alteration or demolition and other
similar matters. The Master Servicer may approve such a request if it has
determined, exercising its good faith business judgment in the same manner as it
would if it were the owner of the related Mortgage Loan, that such approval will
not adversely affect the security for, or the timely and full collectability of,
the related Mortgage Loan. Any fee collected by the Master Servicer for
processing such request will be retained by the Master Servicer as additional
servicing compensation.
In the case of Single Family Loans secured by junior liens on the
related Mortgaged Properties, unless otherwise provided in the related
Prospectus Supplement, the Master Servicer will be required to file (or cause to
be filed) of record a request for notice of any action by a superior lienholder
under the Senior Lien for the protection of the related Trustee's interest,
where permitted by local law and whenever applicable state law does not require
that a junior lienholder be named as a party defendant in foreclosure
proceedings in order to foreclose such junior lienholder's equity of redemption.
The Master Servicer also will be required to notify any superior lienholder in
writing of the existence of the Mortgage Loan and request notification of any
action (as described below) to be taken against the Mortgagor or the Mortgaged
Property by the superior lienholder. If the Master Servicer is notified that any
superior lienholder has accelerated or intends to accelerate the obligations
secured by the related Senior Lien, or has declared or intends to declare a
default under the mortgage or the promissory note secured thereby, or has filed
or intends to file an election to have the related Mortgaged Property sold or
foreclosed, then, the Master Servicer will be required to take, on behalf of the
related Trust Fund, whatever actions are necessary to protect the interests of
the related Securityholders, and/or to preserve the security of the related
Mortgage Loan, subject to the application of
33
<PAGE>
<PAGE>
the REMIC Provisions, if applicable. The Master Servicer will be required to
advance the necessary funds to cure the default or reinstate the superior lien,
if such advance is in the best interests of the related Securityholders and the
Master Servicer determines such advances are recoverable out of payments on or
proceeds of the related Mortgage Loan.
The Master Servicer for any Mortgage Pool will also be required to
perform other customary functions of a servicer of comparable loans, including
maintaining escrow or impound accounts for payment of taxes, insurance premiums
and similar items, or otherwise monitoring the timely payment of those items;
adjusting Mortgage Rates on ARM Loans; maintaining Buydown Accounts; supervising
foreclosures and similar proceedings; managing Mortgage Properties acquired
through or in lieu of foreclosure (each, an "REO Property"); and maintaining
servicing records relating to the Mortgage Loans in such Mortgage Pool. The
Master Servicer will be responsible for filing and settling claims in respect of
particular Mortgage Loans under any applicable instrument of credit enhancement.
See "Description of Credit Enhancement."
SUBSERVICERS
A Master Servicer may delegate its servicing obligations in respect of
the Mortgage Loans serviced by it to one or more third-party servicers (each, a
"Subservicer"), but the Master Servicer will remain liable for such obligations
under the related Pooling Agreement or Servicing Agreement unless otherwise
provided in the related Prospectus Supplement. The Master Servicer will be
solely liable for all fees owed by it to any Subservicer, irrespective of
whether the Master Servicer's compensation pursuant to the related Pooling
Agreement or Servicing Agreement is sufficient to pay such fees. Each
Subservicer will be entitled to reimbursement for certain expenditures which it
makes, generally to the same extent as would the Master Servicer for making the
same expenditures. See "--Servicing and Other Compensation and Payment of
Expenses; Spread" below and "Description of the Securities--The Certificate
Account."
SPECIAL SERVICERS
If and to the extent specified in the related Prospectus Supplement, a
special servicer (a "Special Servicer") may be a party to the related Pooling
Agreement or Servicing Agreement or may be appointed by the Master Servicer or
another specified party to perform certain specified duties in respect of
servicing the related Mortgage Loans that would otherwise be performed by the
Master Servicer (for example, the workout and/or foreclosure of defaulted
Mortgage Loans). The rights and obligations of any Special Servicer will be
specified in the related Prospectus Supplement, and the Master Servicer will be
liable for the performance of a Special Servicer only if, and to the extent, set
forth in such Prospectus Supplement.
REALIZATION UPON OR SALE OF DEFAULTED MORTGAGE LOANS
Except as described below, the Master Servicer will be required, in a
manner consistent with the Servicing Standard, to foreclose upon or otherwise
comparably convert the ownership of properties securing such of the Mortgage
Loans in the related Mortgage Pool as come into and continue in default and as
to which no satisfactory arrangements can be made for collection of delinquent
payments. In connection therewith, the Master Servicer will be authorized to
institute foreclosure proceedings, exercise any power of sale contained in the
related Mortgage, obtain a deed in lieu of foreclosure, or otherwise acquire
title to the related Mortgaged Property, by operation of law or otherwise, if
such action is consistent with the Servicing Standard. The Master Servicer's
actions in this regard must be conducted, however, in a manner that will permit
recovery under any instrument of credit enhancement included in the related
Trust Fund. In addition, the Master Servicer will not be required to expend its
own funds in connection with any foreclosure or to restore any damaged property
unless it shall determine that (i) such foreclosure and/or restoration will
increase the proceeds of liquidation of the Mortgage Loan to the related
Securityholders after reimbursement to itself for such expenses and (ii) such
expenses will be recoverable to it from related Insurance Proceeds, Liquidation
Proceeds or amounts drawn out of any fund or under any instrument constituting
credit enhancement (respecting which it shall have priority for purposes of
withdrawal from the Certificate Account in accordance with the Pooling Agreement
or Servicing Agreement).
34
<PAGE>
<PAGE>
The Master Servicer will not be obligated to foreclose upon or
otherwise convert the ownership of any Mortgaged Property securing a Single
Family Loan if it has received notice or has actual knowledge that such property
may be contaminated with or affected by hazardous wastes or hazardous
substances; however, no environmental testing generally will be required. The
Master Servicer will not be liable to the Securityholders of the related series
if, based on its belief that no such contamination or effect exists, the Master
Servicer forecloses on a Mortgaged Property and takes title to such Mortgaged
Property, and thereafter such Mortgaged Property is determined to be so
contaminated or affected.
With respect to a Mortgage Loan in default, the Master Servicer may
pursue foreclosure (or similar remedies) concurrently with pursuing any remedy
for a breach of a representation and warranty. However, the Master Servicer is
not required to continue to pursue both such remedies if it determines that one
such remedy is more likely to result in a greater recovery. Upon the first to
occur of final liquidation (by foreclosure or otherwise) and a repurchase or
substitution pursuant to a breach of a representation and warranty, such
Mortgage Loan will be removed from the related Trust Fund if it has not been
removed previously. The Master Servicer may elect to treat a defaulted Mortgage
Loan as having been finally liquidated if substantially all amounts expected to
be received in connection therewith have been received. Any additional
liquidation expenses relating to such Mortgage Loan thereafter incurred will be
reimbursable to the Master Servicer (or any Subservicer) from any amounts
otherwise distributable to holders of Securities of the related series, or may
be offset by any subsequent recovery related to such Mortgage Loan.
Alternatively, for purposes of determining the amount of related Liquidation
Proceeds to be distributed to Securityholders, the amount of any Realized Loss
or the amount required to be drawn under any applicable form of credit support,
the Master Servicer may take into account minimal amounts of additional receipts
expected to be received, as well as estimated additional liquidation expenses
expected to be incurred in connection with such defaulted Mortgage Loan. With
respect to certain series of Securities, if so provided in the related
Prospectus Supplement, the applicable form of credit enhancement may provide, to
the extent of coverage thereunder, that a defaulted Mortgage Loan will be
removed from the Trust Fund prior to the final liquidation thereof. In addition,
a Pooling Agreement or Servicing Agreement may grant to the Master Servicer, a
Special Servicer, a provider of credit enhancement and/or the holder or holders
of certain classes of Securities of the related series a right of first refusal
to purchase from the Trust Fund, at a predetermined purchase price (which, if
insufficient to fully fund the entitlements of Securityholders to principal and
interest thereon, will be specified in the related Prospectus Supplement), any
Mortgage Loan as to which a specified number of scheduled payments are
delinquent. Furthermore, a Pooling Agreement or a Servicing Agreement may
authorize the Master Servicer to sell any defaulted Mortgage Loan if and when
the Master Servicer determines, consistent with the Servicing Standard, that
such a sale would produce a greater recovery to Securityholders on a present
value basis than would liquidation of the related Mortgaged Property.
In the event that title to any Mortgaged Property is acquired in
foreclosure, deed in lieu of foreclosure or otherwise, the deed or certificate
of sale will be issued to the Trustee or to its nominee on behalf of
Securityholders of the related series. Notwithstanding any such acquisition of
title and cancellation of the related Mortgage Loan, such Mortgage Loan (an "REO
Mortgage Loan") will be considered for most purposes to be an outstanding
Mortgage Loan held in the Trust Fund until such time as the Mortgaged Property
is sold and all recoverable Liquidation Proceeds and Insurance Proceeds have
been received with respect to such defaulted Mortgage Loan (a "Liquidated
Mortgage Loan"). For purposes of calculations of amounts distributable to
Securityholders in respect of an REO Mortgage Loan, the amortization schedule in
effect at the time of any such acquisition of title (before any adjustment
thereto by reason of any bankruptcy or any similar proceeding or any moratorium
or similar waiver or grace period) will be deemed to have continued in effect
(and, in the case of an ARM Loan, such amortization schedule will be deemed to
have adjusted in accordance with any interest rate changes occurring on any
adjustment date therefor) so long as such REO Mortgage Loan is considered to
remain in the Trust Fund.
If title to any Mortgaged Property is acquired by a Trust Fund as to
which a REMIC election has been made, the Master Servicer, on behalf of the
Trust Fund, will be required to sell the Mortgaged Property within three years
of acquisition, unless (i) the Internal Revenue Service grants an extension of
time to sell such property or (ii) the Trustee receives an opinion of
independent counsel to the effect that the holding of the property by the Trust
Fund for more than three years after its acquisition will not result in the
imposition of a tax on the Trust Fund or cause the Trust Fund to fail to qualify
as a REMIC under the Code at any time that any Certificate is outstanding.
Subject to the foregoing and any other tax-related constraints, the Master
Servicer generally will be required to solicit bids for any Mortgaged Property
so acquired in such a manner as will be reasonably likely to realize a fair
price for such
35
<PAGE>
<PAGE>
property. If title to any Mortgaged Property is acquired by a Trust Fund as to
which a REMIC election has been made, the Master Servicer will also be required
to ensure that the Mortgaged Property is administered so that it constitutes
"foreclosure property" within the meaning of Code Section 860G(a)(8) at all
times, that the sale of such property does not result in the receipt by the
Trust Fund of any income from non-permitted assets as described in Code Section
860F(a)(2)(B), and that the Trust Fund does not derive any "net income from
foreclosure property" within the meaning of Code Section 860G(c)(2), with
respect to such property.
If Liquidation Proceeds collected with respect to a defaulted Mortgage
Loan are less than the outstanding principal balance of the defaulted Mortgage
Loan plus interest accrued thereon plus the aggregate amount of reimbursable
expenses incurred by the Master Servicer with respect to such Mortgage Loan, and
the shortfall is not covered under any applicable instrument or fund
constituting credit enhancement, the Trust Fund will realize a loss in the
amount of such difference. The Master Servicer will be entitled to reimburse
itself from the Liquidation Proceeds recovered on any defaulted Mortgage Loan,
prior to the distribution of such Liquidation Proceeds to Securityholders,
amounts that represent unpaid servicing compensation in respect of the Mortgage
Loan, unreimbursed servicing expenses incurred with respect to the Mortgage Loan
and any unreimbursed advances of delinquent payments made with respect to the
Mortgage Loan. If so provided in the related Prospectus Supplement, the
applicable form of credit enhancement may provide for reinstatement subject to
certain conditions in the event that, following the final liquidation of a
Mortgage Loan and a draw under such credit enhancement, subsequent recoveries
are received. In addition, if a gain results from the final liquidation of a
defaulted Mortgage Loan or an REO Mortgage Loan which is not required by law to
be remitted to the related Mortgagor, the Master Servicer will be entitled to
retain such gain as additional servicing compensation unless the related
Prospectus Supplement provides otherwise. For a description of the Master
Servicer's (or other specified person's) obligations to maintain and make claims
under applicable forms of credit enhancement and insurance relating to the
Mortgage Loans, see "Description of Credit Enhancement" and "Primary Mortgage
Insurance, Hazard Insurance; Claims Thereunder."
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES; SPREAD
The principal servicing compensation to be paid to the Master Servicer
in respect of its master servicing activities for a series of Securities will be
equal to the percentage per annum described in the related Prospectus Supplement
(which may vary under certain circumstances) of the outstanding principal
balance of each Mortgage Loan, and such compensation will be retained by it on a
monthly or other periodic basis from collections of interest on such Mortgage
Loan in the related Trust Fund at the time such collections are deposited into
the applicable Certificate Account. This portion of the servicing fee will be
calculated with respect to each Mortgage Loan by multiplying such fee by the
principal balance of such Mortgage Loan. In addition, the Master Servicer may
retain all prepayment premiums, assumption fees and late payment charges, to the
extent collected from Mortgagors, and any benefit which may accrue as a result
of the investment of funds in the applicable Certificate Account. Any additional
servicing compensation will be described in the related Prospectus Supplement.
Any Subservicer will receive a portion of the Master Servicer's compensation as
its sub-servicing compensation.
In addition to amounts payable to any Subservicer, the Master Servicer
will pay or cause to be paid certain ongoing expenses associated with each Trust
Fund and incurred by it in connection with its responsibilities under the
Pooling Agreement or Servicing Agreement, including, if so specified in the
related Prospectus Supplement, payment of any fee or other amount payable in
respect of any alternative credit enhancement arrangements, payment of the fees
and disbursements of the Trustee, any custodian appointed by the Trustee and the
Security Registrar, and payment of expenses incurred in enforcing the
obligations of Subservicers and Sellers. The Master Servicer will be entitled to
reimbursement of expenses incurred in enforcing the obligations of Subservicers
and Sellers under certain limited circumstances. In addition, the Master
Servicer will be entitled to reimbursements for certain expenses incurred by it
in connection with Liquidated Mortgage Loans and in connection with the
restoration of Mortgaged Properties, such right of reimbursement being prior to
the rights of Securityholders to receive any related Liquidation Proceeds or
Insurance Proceeds. If and to the extent so provided in the related Prospectus
Supplement, the Master Servicer will be entitled to receive interest on amounts
advanced to cover such reimbursable expenses for the period that such advances
are outstanding at the rate specified in such Prospectus Supplement, and the
Master Servicer will be entitled to payment of such interest periodically from
general collections on the Mortgage Loans in the related Trust Fund prior to any
payment to Securityholders or as otherwise provided in the related Pooling
Agreement or Servicing Agreement and described in such Prospectus Supplement.
36
<PAGE>
<PAGE>
The Prospectus Supplement for a series of Securities will specify
whether there will be any Spread retained. Any such Spread will be a specified
portion of the interest payable on each Mortgage Loan in a Mortgage Pool and
will not be part of the related Trust Fund. Any such Spread will be established
on a loan-by-loan basis and the amount thereof with respect to each Mortgage
Loan in a Mortgage Pool will be specified on an exhibit to the related Pooling
Agreement or Servicing Agreement. Any partial recovery of interest in respect of
a Mortgage Loan will be allocated between the owners of any Spread and the
holders of classes of Securities entitled to payments of interest as provided in
the related Prospectus Supplement and the applicable Pooling Agreement or
Servicing Agreement.
If and to the extent provided in the related Prospectus Supplement, the
Master Servicer may be required to apply a portion of the servicing compensation
otherwise payable to it in respect of any period to any Prepayment Interest
Shortfalls resulting from Mortgagor prepayments during such period. See "Yield
Considerations."
EVIDENCE AS TO COMPLIANCE
Each Pooling Agreement and Servicing Agreement will provide that on or
before a specified date in each year, beginning the first such date that is at
least a specified number of months after the Cut-off Date, a firm of independent
public accountants will furnish a statement to the Company and the Trustee to
the effect that, on the basis of an examination by such firm conducted
substantially in compliance with the Uniform Single Attestation Program for
Mortgage Bankers or the Audit Program for Mortgages serviced for FHLMC, the
servicing of mortgage loans under agreements (including the related Pooling
Agreement or Servicing Agreement) substantially similar to each other was
conducted in compliance with such agreements except for such significant
exceptions or errors in records that, in the opinion of the firm, the Uniform
Single Attestation Program for Mortgage Bankers or the Audit Program for
Mortgages serviced for FHLMC requires it to report. In rendering its statement
such firm may rely, as to the matters relating to the direct servicing of
mortgage loans by Subservicers, upon comparable statements for examinations
conducted substantially in compliance with the Uniform Single Attestation
Program for Mortgage Bankers or the Audit Program for Mortgages serviced for
FHLMC (rendered within one year of such statement) of firms of independent
public accountants with respect to those Subservicers which also have been the
subject of such an examination.
Each Pooling Agreement and Servicing Agreement will also provide for
delivery to the Trustee, on or before a specified date in each year, of an
annual statement signed by one or more officers of the Master Servicer to the
effect that, to the best knowledge of each such officer, the Master Servicer has
fulfilled in all material respects its obligations under the Pooling Agreement
or Servicing Agreement throughout the preceding year or, if there has been a
material default in the fulfillment of any such obligation, such statement shall
specify each such known default and the nature and status thereof. Such
statement may be provided as a single form making the required statements as to
more than one Pooling Agreement or Servicing Agreement.
Copies of the annual accountants' statement and the annual statement of
officers of a Master Servicer may be obtained by Securityholders without charge
upon written request to the Master Servicer or Trustee.
DESCRIPTION OF THE SECURITIES
GENERAL
The Securities will be issued in series. Each series of Certificates
(or, in certain instances, two or more series of Certificates) will be issued
pursuant to a Pooling Agreement, similar to one of the forms filed as an exhibit
to the Registration Statement of which this Prospectus is a part. Each Pooling
Agreement will be filed with the Securities and Exchange Commission as an
exhibit to a Current Report on Form 8-K. Each series of Notes (or, in certain
instances, two or more series of Notes) will be issued pursuant to an Indenture
between the related Issuer and the Trustee, similar to the form filed as an
exhibit to the Registration Statement of which this Prospectus is a part. Such
Trust Fund will be created pursuant to an Owner Trust Agreement (the "Owner
Trust Agreement"; an Owner Trust Agreement, Servicing Agreement, Indenture or
Pooling Agreement, an "Agreement") between the Company and the Owner Trustee.
Each Indenture, along with the related Servicing Agreement and Owner Trust
Agreement, will be filed with the Securities and Exchange Commission as an
exhibit to a Current Report on Form 8-K. The
37
<PAGE>
<PAGE>
following summaries (together with additional summaries under "The Agreements"
below) describe certain material provisions relating to the Securities common to
each Agreements.
Certificates of each series covered by a particular Pooling Agreement
will evidence specified beneficial ownership interests in a separate Trust Fund
created pursuant to such Pooling Agreement. Each series of Notes covered by a
particular Indenture will evidence indebtedness of a separate Trust Fund created
pursuant to the related Owner Trust Agreement. A Trust Fund will consist of, to
the extent provided in the Pooling Agreement or Owner Trust Agreement: (i) such
Mortgage Loans (and the related mortgage documents) or interests therein
(including any Mortgage Securities) underlying a particular series of Securities
as from time to time are subject to the Pooling Agreement or Servicing
Agreement, exclusive of, if specified in the related Prospectus Supplement, any
Spread or other interest retained by the Company or any of its affiliates with
respect to each such Mortgage Loan; (ii) such assets including, without
limitation, all payments and collections in respect of the Mortgage Loans or
Mortgage Securities due after the related Cut-off Date, as from time to time are
identified as deposited in respect thereof in the related Certificate Account as
described below; (iii) any property acquired in respect of Mortgage Loans in the
Trust Fund, whether through foreclosure of such Mortgage Loans or by deed in
lieu of foreclosure or otherwise; (iv) hazard insurance policies, Primary
Insurance Policies and FHA insurance policies, if any, maintained in respect of
Mortgage Loans in the Trust Fund and certain proceeds of such policies; (v)
certain rights of the Company under any Mortgage Loan Purchase Agreement,
including in respect of any representations and warranties therein; and (vi) any
combination, as and to the extent specified in the related Prospectus
Supplement, of a Financial Guaranty Insurance Policy, Mortgage Pool Insurance
Policy, Letter of Credit, Purchase Obligation, Special Hazard Insurance Policy
or Bankruptcy Bond as described under "Description of Credit Enhancement."
If provided in the related Prospectus Supplement, the original
principal amount of a series of Securities may exceed the principal balance of
the Mortgage Loans or Mortgage Securities initially being delivered to the
Trustee. Cash in an amount equal to such difference will be deposited into a
separate trust account (the "Pre-Funding Account") maintained with the Trustee.
During the period set forth in the related Prospectus Supplement, amounts on
deposit in the Pre-Funding Account may be used to purchase additional Mortgage
Loans or Mortgage Securities for the related Trust Fund. Any amounts remaining
in the Pre-Funding Account at the end of such period will be distributed as a
principal prepayment to the holders of the related series of Securities at the
time and in the manner set forth in the related Prospectus Supplement.
Each series of Securities may consist of any one or a combination of
the following: (i) a single class of Securities; (ii) two or more classes of
Securities, one or more classes of which will be senior ("Senior Securities") in
right of payment to one or more of the other classes ("Subordinate Securities"),
and as to which certain classes of Senior (or Subordinate) Securities may be
senior to other classes of Senior (or Subordinate) Securities, as described in
the respective Prospectus Supplement (any such series, a "Senior/Subordinate
Series"); (iii) two or more classes of Securities, one or more classes ("Strip
Securities") of which will be entitled to (a) principal distributions, with
disproportionate, nominal or no interest distributions or (b) interest
distributions, with disproportionate, nominal or no principal distributions;
(iv) two or more classes of Securities which differ as to the timing, sequential
order, rate, pass-through rate or amount of distributions of principal or
interest or both, or as to which distributions of principal or interest or both
on any such class may be made upon the occurrence of specified events, in
accordance with a schedule or formula (including "planned amortization classes"
and "targeted amortization classes"), or on the basis of collections from
designated portions of the Mortgage Pool, and which classes may include one or
more classes of Securities ("Accrual Securities") with respect to which certain
accrued interest will not be distributed but rather will be added to the
principal balance thereof on each Distribution Date for the period described in
the related Prospectus Supplement; or (v) other types of classes of Securities,
as described in the related Prospectus Supplement. With respect to any series of
Notes, the Equity Certificates, insofar as they represent the beneficial
ownership interest in the Issuer, will be subordinate to the related Notes. As
to each series, all Securities offered hereby (the "Offered Securities") will be
rated in one of the four highest rating categories by one or more Rating
Agencies. Credit support for the Offered Securities of each series may be
provided by a Financial Guaranty Insurance Policy, Mortgage Pool Insurance
Policy, Letter of Credit, Bankruptcy Bond, Purchase Obligation, Reserve Fund or
Overcollateralization as described under "Description of Credit Enhancement," by
the subordination of one or more other classes of Securities as described under
"Subordination" or by any combination of the foregoing.
38
<PAGE>
<PAGE>
If so specified in the Prospectus Supplement relating to a series of
Certificates, one or more elections may be made to treat the related Trust Fund,
or a designated portion thereof, as a REMIC. If such an election is made with
respect to a series of Certificates, one of the classes of Certificates in such
series will be designated as evidencing the sole class of "residual interests"
in each related REMIC, as defined in the Code; alternatively, a separate class
of ownership interests will evidence such residual interests. All other classes
of Certificates in such series will constitute "regular interests" in the
related REMIC, as defined in the Code and will be designated as such. As to each
series of Certificates as to which a REMIC election is to be made, the Master
Servicer, Trustee or other specified person will be obligated to take certain
specified actions required in order to comply with applicable laws and
regulations.
FORM OF SECURITIES
Except as described below, the Offered Securities of each series will
be issued as physical certificates or notes in fully registered form only in the
denominations specified in the related Prospectus Supplement, and will be
transferrable and exchangeable at the corporate trust office of the registrar
(the "Security Registrar") named in the related Prospectus Supplement. With
respect to each series of Certificates or Notes, the Security Registrar will be
referred to as the "Certificate Registrar" or "Note Registrar," respectively. No
service charge will be made for any registration of exchange or transfer of
Offered Securities, but the Trustee may require payment of a sum sufficient to
cover any tax or other governmental charge. The term "Securityholder" or
"Holder" as used herein refers to the entity whose name appears on the records
of the Security Registrar (consisting of or including the "Security Register")
as the registered holder of a Security.
If so specified in the related Prospectus Supplement, specified classes
of a series of Securities will be initially issued through the book-entry
facilities of The Depository Trust Company ("DTC"). As to any such class of
Securities ("DTC Registered Securities"), the record Holder of such Securities
will be DTC's nominee. DTC is a limited-purpose trust company organized under
the laws of the State of New York, which holds securities for its participating
organizations ("Participants") and facilitates the clearance and settlement of
securities transactions between Participants through electronic book-entry
changes in the accounts of Participants. Participants include securities brokers
and dealers, banks, trust companies and clearing corporations and may include
certain other organizations. Other institutions that are not Participants but
clear through or maintain a custodial relationship with Participants (such
institutions, "Intermediaries") have indirect access to DTC's clearance system.
No person acquiring an interest in any DTC Registered Securities (each
such person, a "Beneficial Owner") will be entitled to receive a Security
representing such interest in registered, certificated form, unless either (i)
DTC ceases to act as depository in respect thereof and a successor depository is
not obtained, or (ii) the Company elects in its sole discretion to discontinue
the registration of such Securities through DTC. Prior to any such event,
Beneficial Owners will not be recognized by the Trustee or the Master Servicer
as Holders of the related Securities for purposes of the related Pooling
Agreement or Indenture, and Beneficial Owners will be able to exercise their
rights as owners of such Securities only indirectly through DTC, Participants
and Intermediaries. Any Beneficial Owner that desires to purchase, sell or
otherwise transfer any interest in DTC Registered Securities may do so only
through DTC, either directly if such Beneficial Owner is a Participant or
indirectly through Participants and, if applicable, Intermediaries. Pursuant to
the procedures of DTC, transfers of the beneficial ownership of any DTC
Registered Securities will be required to be made in minimum denominations
specified in the related Prospectus Supplement. The ability of a Beneficial
Owner to pledge DTC Registered Securities to persons or entities that are not
Participants in the DTC system, or to otherwise act with respect to such
Securities, may be limited because of the lack of physical certificates or notes
evidencing such Securities and because DTC may act only on behalf of
Participants.
Distributions in respect of the DTC Registered Securities will be
forwarded by the Trustee or other specified person to DTC, and DTC will be
responsible for forwarding such payments to Participants, each of which will be
responsible for disbursing such payments to the Beneficial Owners it represents
or, if applicable, to Intermediaries. Accordingly, Beneficial Owners may
experience delays in the receipt of payments in respect of their Securities.
Under DTC's procedures, DTC will take actions permitted to be taken by Holders
of any class of DTC Registered Securities under the Pooling Agreement or
Indenture only at the direction of one or more Participants to whose account the
DTC Registered Securities are credited and whose aggregate holdings represent no
less than any minimum amount of Percentage Interests or voting rights required
therefor. DTC may take conflicting actions with respect to
39
<PAGE>
<PAGE>
any action of Holders of Securities of any Class to the extent that Participants
authorize such actions. None of the Master Servicer, the Company, the Trustee or
any of their respective affiliates will have any liability for any aspect of the
records relating to or payments made on account of beneficial ownership
interests in the DTC Registered Securities, or for maintaining, supervising or
reviewing any records relating to such beneficial ownership interests.
ASSIGNMENT OF TRUST FUND ASSETS
At the time of issuance of a series of Securities, the Company will
assign, or cause to be assigned, to the related Trustee (or its nominee),
without recourse, the Mortgage Loans or Mortgage Securities being included in
the related Trust Fund, together with, all principal and interest received on or
with respect to such Mortgage Loans or Mortgage Securities after the Cut-off
Date, other than principal and interest due on or before the Cut-off Date. If
specified in the related Prospectus Supplement, the Company or any of its
affiliates may retain the Spread, if any, for itself or transfer the same to
others. The Trustee will, concurrently with such assignment, deliver the
Securities of such series to or at the direction of the Company in exchange for
the Mortgage Loans and/or Mortgage Securities in the related Trust Fund. Each
Mortgage Loan will be identified in a schedule appearing as an exhibit to the
related Pooling Agreement or Servicing Agreement. Such schedule will include,
among other things, information as to the principal balance of each Mortgage
Loan in the related Trust Fund as of the Cut-off Date, as well as information
respecting the Mortgage Rate, the currently scheduled monthly payment of
principal and interest, the maturity of the Mortgage Note and the Loan-to-Value
Ratio at origination or modification (without regard to any secondary
financing).
In addition, the Company will, as to each Mortgage Loan (other than
Mortgage Loans underlying any Mortgage Securities and other than Contracts),
deliver, or cause to be delivered, to the related Trustee (or to the custodian
described below) the Mortgage Note endorsed, without recourse, either in blank
or to the order of such Trustee (or its nominee), the Mortgage with evidence of
recording indicated thereon (except for any Mortgage not returned from the
public recording office), an assignment of the Mortgage in blank or to the
Trustee (or its nominee) in recordable form, together with any intervening
assignments of the Mortgage with evidence of recording thereon (except for any
such assignment not returned from the public recording office), and, if
applicable, any riders or modifications to such Mortgage Note and Mortgage,
together with certain other documents at such times as set forth in the related
Pooling Agreement or Servicing Agreement. Such assignments may be blanket
assignments covering Mortgages on Mortgaged Properties located in the same
county, if permitted by law. Notwithstanding the foregoing, a Trust Fund may
include Mortgage Loans where the original Mortgage Note is not delivered to the
Trustee if the Company delivers, or causes to be delivered, to the related
Trustee (or the custodian) a copy or a duplicate original of the Mortgage Note,
together with an affidavit certifying that the original thereof has been lost or
destroyed. In addition, if the Company cannot deliver, with respect to any
Mortgage Loan, the Mortgage or any intervening assignment with evidence of
recording thereon concurrently with the execution and delivery of the related
Pooling Agreement or Servicing Agreement because of a delay caused by the public
recording office, the Company will deliver, or cause to be delivered, to the
related Trustee (or the custodian) a true and correct photocopy of such Mortgage
or assignment as submitted for recording within one year. The Company will
deliver, or cause to be delivered, to the related Trustee (or the custodian)
such Mortgage or assignment with evidence of recording indicated thereon after
receipt thereof from the public recording office. If the Company cannot deliver,
with respect to any Mortgage Loan, the Mortgage or any intervening assignment
with evidence of recording thereon concurrently with the execution and delivery
of the related Pooling Agreement or Servicing Agreement because such Mortgage or
assignment has been lost, the Company will deliver, or cause to be delivered, to
the related Trustee (or the custodian) a true and correct photocopy of such
Mortgage or assignment with evidence of recording thereon. Assignments of the
Mortgage Loans to the Trustee (or its nominee) will be recorded in the
appropriate public recording office, except in states where, in the opinion of
counsel acceptable to the Trustee, such recording is not required to protect the
Trustee's interests in the Mortgage Loan against the claim of any subsequent
transferee or any successor to or creditor of the Company or the originator of
such Mortgage Loan. In addition, unless specified in the related Prospectus
Supplement, the Company will, as to each Contract, deliver, or cause to be
delivered, the original Contract endorsed, without recourse, to the order of the
Trustee and copies of documents and instruments related to the Contract and the
security interest in the Manufactured Home securing the Contract, together with
a blanket assignment to the Trustee of all Contracts in the related Trust Fund
and such documents and instruments. In order to give notice of the right, title
and interest of the Securityholders to the Contracts, the Company will cause to
be executed and delivered to the Trustee a UCC-1 financing statement identifying
the Trustee as the secured party and identifying all Contracts as
40
<PAGE>
<PAGE>
collateral. The Company will, as to each Mortgage Security included in a
Mortgage Pool, deliver, or cause to be delivered, to the related Trustee (or the
custodian) a physical certificate or note evidencing such Mortgage Security,
registered in the name of the related Trustee (or its nominee), or endorsed in
blank or to the related Trustee (or its nominee), or accompanied by transfer
documents sufficient to effect a transfer to the Trustee (or its nominee).
The Trustee (or the custodian hereinafter referred to) will hold such
documents in trust for the benefit of the related Securityholders, and generally
will review such documents within 90 days after receipt thereof in the case of
documents delivered concurrently with the execution and delivery of the related
Pooling Agreement or Indenture, and within the time period specified in the
related Pooling Agreement or Indenture in the case of all other documents
delivered. If any such document is found to be missing or defective in any
material respect, the Trustee (or such custodian) will be required to promptly
so notify the Master Servicer, the Company, and the related Seller. If the
related Seller does not cure the omission or defect within a specified period
after notice is given thereto by the Trustee, and such omission or defect
materially and adversely affects the interests of Securityholders in the
affected Mortgage Loan or Mortgage Security, then, the related Seller will be
obligated to purchase such Mortgage Loan or Mortgage Security from the Trustee
at its Purchase Price (or, if and to the extent it would otherwise be permitted
to do so for a breach of representation and warranty as described under "The
Mortgage Pools--Representations of Sellers," to substitute for such Mortgage
Loan or Mortgage Security). The Trustee will be obligated to enforce this
obligation of the Seller to the extent described above under "The Mortgage
Pools--Representations by Sellers," but there can be no assurance that the
applicable Seller will fulfill its obligation to purchase (or substitute for)
the affected Mortgage Loan or Mortgage Security as described above. The Company
will not be obligated to purchase or substitute for such Mortgage Loan or
Mortgage Security if the Seller defaults on its obligation to do so. This
purchase or substitution obligation constitutes the sole remedy available to the
related Securityholders and the related Trustee for omission of, or a material
defect in, a constituent document. Any affected Mortgage Loan or Mortgage
Security not so purchased or substituted for shall remain in the related Trust
Fund.
The Trustee will be authorized at any time to appoint one or more
custodians pursuant to a custodial agreement to hold title to the Mortgage Loans
and/or Mortgage Securities in any Mortgage Pool, and to maintain possession of
and, if applicable, to review, the documents relating to such Mortgage Loans
and/or Mortgage Securities, in any case as the agent of the Trustee. The
identity of any such custodian to be appointed on the date of initial issuance
of the Securities will be set forth in the related Prospectus Supplement. Any
such custodian may be an affiliate of the Company or the Master Servicer.
With respect to the Mortgage Loans in a Mortgage Pool, except in the
case of a Designated Seller Transaction or as to Mortgage Loans underlying any
Mortgage Securities, the Company will make certain representations and
warranties as to the types and geographical concentrations of such Mortgage
Loans and as to the accuracy, in all material respects, of certain identifying
information furnished to the related Trustee in respect of each such Mortgage
Loan (e.g., original Loan-to-Value Ratio, principal balance as of the Cut-off
Date, Mortgage Rate and maturity). Upon a breach of any such representation
which materially and adversely affects the interests of the Securityholders in a
Mortgage Loan, the Company will be obligated to cure the breach in all material
respects, to purchase the Mortgage Loan at its Purchase Price or, to substitute
for such Mortgage Loan a Qualified Substitute Mortgage Loan in accordance with
the provisions for such substitution by Affiliated Sellers as described above
under "The Mortgage Pools--Representations by Sellers." However, the Company
will not be required to repurchase or substitute for any Mortgage Loan in
connection with a breach of a representation and warranty if the substance of
any such breach also constitutes fraud in the origination of the related
Mortgage Loan. This purchase or substitution obligation constitutes the sole
remedy available to Securityholders or the Trustee for such a breach of
representation by the Company. Any Mortgage Loan not so purchased or substituted
for shall remain in the related Trust Fund.
Pursuant to the related Pooling Agreement or Servicing Agreement, the
Master Servicer for any Mortgage Pool, either directly or through Subservicers,
will service and administer the Mortgage Loans included in such Mortgage Pool
and assigned to the related Trustee as more fully set forth under "Servicing of
Mortgage Loans." The Master Servicer will make certain representations and
warranties regarding its authority to enter into, and its ability to perform its
obligations under, the Pooling Agreement or Servicing Agreement.
41
<PAGE>
<PAGE>
CERTIFICATE ACCOUNT
General. The Master Servicer and/or the Trustee will, as to each Trust
Fund, establish and maintain or cause to be established and maintained one or
more separate accounts for the collection of payments on the related Mortgage
Loans and/or Mortgage Securities constituting such Trust Fund (collectively, the
"Certificate Account"), which will be established so as to comply with the
standards of each Rating Agency that has rated any one or more classes of
Securities of the related series. A Certificate Account may be maintained either
as an interest-bearing or a non-interest-bearing account, and the funds held
therein may be held as cash or invested in United States government securities
and other investment grade obligations specified in the related Pooling
Agreement or the related Servicing Agreement and Indenture ("Permitted
Investments"). Any Permitted Investments shall not cause the Company to register
under the Investment Company Act of 1940. Any interest or other income earned on
funds in the Certificate Account will be paid to the related Master Servicer or
Trustee as additional compensation. If permitted by such Rating Agency or
Agencies and so specified in the related Prospectus Supplement, a Certificate
Account may contain funds relating to more than one series of mortgage
pass-through certificates and may contain other funds representing payments on
mortgage loans owned by the related Master Servicer or serviced by it on behalf
of others.
Deposits. With respect to each series of Securities, the related Master
Servicer, Trustee or Special Servicer will be required to deposit or cause to be
deposited in the Certificate Account for the related Trust Fund within a certain
period following receipt (in the case of collections and payments), the
following payments and collections received, or advances made, by the Master
Servicer, the Trustee or any Special Servicer subsequent to the Cut-off Date
with respect to the Mortgage Loans and/or Mortgage Securities in such Trust Fund
(other than payments due on or before the Cut-off Date):
(i) all payments on account of principal, including principal
prepayments, on the Mortgage Loans;
(ii) all payments on account of interest on the Mortgage
Loans, including any default interest collected, in each case net of
any portion thereof retained by the Master Servicer, any Special
Servicer or Sub-Servicer as its servicing compensation or as
compensation to the Trustee, and further net of any Spread;
(iii) all payments on the Mortgage Securities;
(iv) all proceeds received under any hazard, title, primary
mortgage, FHA or other insurance policy that provides coverage with
respect to a particular Mortgaged Property or the related Mortgage Loan
(other than proceeds applied to the restoration of the property or
released to the related borrower in accordance with the customary
servicing practices of the Master Servicer (or, if applicable, a
Special Servicer) and/or the terms and conditions of the related
Mortgage (collectively, "Insurance Proceeds") and all other amounts
received and retained in connection with the liquidation of defaulted
Mortgage Loans or property acquired in respect thereof, by foreclosure
or otherwise ("Liquidation Proceeds"), together with the net operating
income (less reasonable reserves for future expenses) derived from the
operation of any Mortgaged Properties acquired by the Trust Fund
through foreclosure or otherwise;
(v) any amounts paid under any instrument or drawn from any
fund that constitutes credit enhancement for the related series of
Securities as described under "Description of Credit Enhancement";
(vi) any advances made as described under "--Advances" below;
(vii) any Buydown Funds (and, if applicable, investment
earnings thereon) required to be paid to Securityholders, as described
below;
(viii) all proceeds of any Mortgage Loan or Mortgage Security
purchased (or, in the case of a substitution, certain amounts
representing a principal adjustment) by the Master Servicer, the
Company, a Seller or any other person pursuant to the terms of the
related Pooling Agreement or Servicing Agreement as described under
"The Mortgage Pools--Representations by Sellers," "Servicing of
Mortgage Loans--Realization Upon and Sale of Defaulted Mortgage Loans,"
"--Assignment of Trust Fund Assets"
42
<PAGE>
<PAGE>
above, "The Agreements--Termination" and "Purchase Obligations" (all of
the foregoing, also "Liquidation Proceeds");
(ix) any amounts paid by the Master Servicer to cover
Prepayment Interest Shortfalls arising out of the prepayment of
Mortgage Loans as described under "Servicing of Mortgage
Loans--Servicing and Other Compensation and Payment of Expenses;
Spread";
(x) to the extent that any such item does not constitute
additional servicing compensation to the Master Servicer or a Special
Servicer, any payments on account of modification or assumption fees,
late payment charges or prepayment premiums on the Mortgage Loans;
(xi) any amount required to be deposited by the Master
Servicer or the Trustee in connection with losses realized on
investments for the benefit of the Master Servicer or the Trustee, as
the case may be, of funds held in the Certificate Account; and
(xii) any other amounts required to be deposited in the
Certificate Account as provided in the related Pooling Agreement or the
related Servicing Agreement and Indenture and described herein or in
the related Prospectus Supplement.
With respect to each Buydown Mortgage Loan, the Master Servicer will be
required to deposit the related Buydown Funds provided to it in a Buydown
Account which will comply with the requirements set forth herein with respect to
the Certificate Account. The terms of all Buydown Mortgage Loans provide for the
contribution of Buydown Funds in an amount equal to or exceeding either (i) the
total payments to be made from such funds pursuant to the related buydown plan
or (ii) if such Buydown Funds are to be deposited on a discounted basis, that
amount of Buydown Funds which, together with investment earnings thereon at a
rate as will support the scheduled level of payments due under the Buydown
Mortgage Loan. Neither the Master Servicer nor the Company will be obligated to
add to any such discounted Buydown Funds any of its own funds should investment
earnings prove insufficient to maintain the scheduled level of payments. To the
extent that any such insufficiency is not recoverable from the Mortgagor or, in
an appropriate case, from the Seller, distributions to Securityholders may be
affected. With respect to each Buydown Mortgage Loan, the Master Servicer will
be required monthly to withdraw from the Buydown Account and deposit in the
Certificate Account as described above the amount, if any, of the Buydown Funds
(and, if applicable, investment earnings thereon) for each Buydown Mortgage Loan
that, when added to the amount due from the Mortgagor on such Buydown Mortgage
Loan, equals the full monthly payment which would be due on the Buydown Mortgage
Loan if it were not subject to the buydown plan. The Buydown Funds will in no
event be a part of the related Trust Fund.
If the Mortgagor on a Buydown Mortgage Loan prepays such Mortgage Loan
in its entirety during the Buydown Period, the Master Servicer will be required
to withdraw from the Buydown Account and remit to the Mortgagor or such other
designated party in accordance with the related buydown plan any Buydown Funds
remaining in the Buydown Account. If a prepayment by a Mortgagor during the
Buydown Period together with Buydown Funds will result in full prepayment of a
Buydown Mortgage Loan, the Master Servicer generally will be required to
withdraw from the Buydown Account and deposit in the Certificate Account the
Buydown Funds and investment earnings thereon, if any, which together with such
prepayment will result in a prepayment in full; provided that Buydown Funds may
not be available to cover a prepayment under certain Mortgage Loan programs. Any
Buydown Funds so remitted to the Master Servicer in connection with a prepayment
described in the preceding sentence will be deemed to reduce the amount that
would be required to be paid by the Mortgagor to repay fully the related
Mortgage Loan if the Mortgage Loan were not subject to the buydown plan. Any
investment earnings remaining in the Buydown Account after prepayment or after
termination of the Buydown Period will be remitted to the related Mortgagor or
such other designated party pursuant to the agreement relating to each Buydown
Mortgage Loan (the "Buydown Agreement"). If the Mortgagor defaults during the
Buydown Period with respect to a Buydown Mortgage Loan and the property securing
such Buydown Mortgage Loan is sold in liquidation (either by the Master
Servicer, the Primary Insurer, the insurer under the Mortgage Pool Insurance
Policy (the "Pool Insurer") or any other insurer), the Master Servicer will be
required to withdraw from the Buydown Account the Buydown Funds and all
investment earnings thereon, if any, and either deposit the same in the
Certificate Account or, alternatively, pay the same to the
43
<PAGE>
<PAGE>
Primary Insurer or the Pool Insurer, as the case may be, if the Mortgaged
Property is transferred to such insurer and such insurer pays all of the loss
incurred in respect of such default.
Withdrawals. With respect to each series of Securities, the Master
Servicer, Trustee or Special Servicer may make withdrawals from the Certificate
Account for the related Trust Fund for any of the following purposes:
(i) to make distributions to the related Securityholders on
each Distribution Date;
(ii) to reimburse the Master Servicer or any other specified
person for unreimbursed amounts advanced by it as described under
"--Advances" below in respect of Mortgage Loans in the Trust Fund, such
reimbursement to be made out of amounts received which were identified
and applied by the Master Servicer as late collections of interest (net
of related servicing fees) on and principal of the particular Mortgage
Loans with respect to which the advances were made or out of amounts
drawn under any form of credit enhancement with respect to such
Mortgage Loans;
(iii) to reimburse the Master Servicer or a Special Servicer
for unpaid servicing fees earned by it and certain unreimbursed
servicing expenses incurred by it with respect to Mortgage Loans in the
Trust Fund and properties acquired in respect thereof, such
reimbursement to be made out of amounts that represent Liquidation
Proceeds and Insurance Proceeds collected on the particular Mortgage
Loans and properties, and net income collected on the particular
properties, with respect to which such fees were earned or such
expenses were incurred or out of amounts drawn under any form of credit
enhancement with respect to such Mortgage Loans and properties;
(iv) to reimburse the Master Servicer or any other specified
person for any advances described in clause (ii) above made by it and
any servicing expenses referred to in clause (iii) above incurred by it
which, in the good faith judgment of the Master Servicer or such other
person, will not be recoverable from the amounts described in clauses
(ii) and (iii), respectively, such reimbursement to be made from
amounts collected on other Mortgage Loans in the Trust Fund or, if and
to the extent so provided by the related Pooling Agreement or the
related Servicing Agreement and Indenture and described in the related
Prospectus Supplement, only from that portion of amounts collected on
such other Mortgage Loans that is otherwise distributable on one or
more classes of Subordinate Securities of the related series;
(v) if and to the extent described in the related Prospectus
Supplement, to pay the Master Servicer, a Special Servicer or another
specified entity (including a provider of credit enhancement) interest
accrued on the advances described in clause (ii) above made by it and
the servicing expenses described in clause (iii) above incurred by it
while such remain outstanding and unreimbursed;
(vi) to reimburse the Master Servicer, the Company, or any of
their respective directors, officers, employees and agents, as the case
may be, for certain expenses, costs and liabilities incurred thereby,
as and to the extent described under "The Agreements--Certain Matters
Regarding the Master Servicer and the Company";
(vii) if and to the extent described in the related Prospectus
Supplement, to pay the fees of the Trustee;
(viii) to reimburse the Trustee or any of its directors,
officers, employees and agents, as the case may be, for certain
expenses, costs and liabilities incurred thereby, as and to the extent
described under "The Agreements--Certain Matters Regarding the
Trustee";
(ix) to pay the Master Servicer or the Trustee, as additional
compensation, interest and investment income earned in respect of
amounts held in the Certificate Account;
(x) to pay (generally from related income) for costs incurred
in connection with the operation, management and maintenance of any
Mortgaged Property acquired by the Trust Fund by foreclosure or
otherwise;
44
<PAGE>
<PAGE>
(xi) if one or more elections have been made to treat the
Trust Fund or designated portions thereof as a REMIC, to pay any
federal, state or local taxes imposed on the Trust Fund or its assets
or transactions, as and to the extent described under "Federal Income
Tax Consequences--REMICS--Prohibited Transactions and Other Possible
REMIC Taxes";
(xii) to pay for the cost of an independent appraiser or other
expert in real estate matters retained to determine a fair sale price
for a defaulted Mortgage Loan or a property acquired in respect thereof
in connection with the liquidation of such Mortgage Loan or property;
(xiii) to pay for the cost of various opinions of counsel
obtained pursuant to the related Pooling Agreement or the related
Servicing Agreement and Indenture for the benefit of the related
Securityholders;
(xiv) to pay to itself, the Company, a Seller or any other
appropriate person all amounts received with respect to each Mortgage
Loan purchased, repurchased or removed from the Trust Fund pursuant to
the terms of the related Pooling Agreement or the related Servicing
Agreement and Indenture and not required to be distributed as of the
date on which the related Purchase Price is determined;
(xv) to make any other withdrawals permitted by the related
Pooling Agreement or the related Servicing Agreement and Indenture and
described in the related Prospectus Supplement; and
(xvi) to clear and terminate the Certificate Account upon the
termination of the Trust Fund.
DISTRIBUTIONS
Distributions on the Securities of each series will be made by or on
behalf of the related Trustee or Master Servicer on each Distribution Date as
specified in the related Prospectus Supplement from the Available Distribution
Amount for such series and such Distribution Date. Unless otherwise provided in
the related Prospectus Supplement, the "Available Distribution Amount" for any
series of Securities and any Distribution Date will refer to the total of all
payments or other collections (or advances in lieu thereof) on, under or in
respect of the Mortgage Loans and/or Mortgage Securities and any other assets
included in the related Trust Fund that are available for distribution to the
Securityholders of such series on such date. The particular components of the
Available Distribution Amount for any series on each Distribution Date will be
more specifically described in the related Prospectus Supplement.
Distributions on the Securities of each series (other than the final
distribution in retirement of any such Certificate) will be made to the persons
in whose names such Securities are registered at the close of business on the
last business day of the month preceding the month in which the applicable
Distribution Date occurs (the "Record Date"), and the amount of each
distribution will be determined as of the close of business on the date (the
"Determination Date") specified in the related Prospectus Supplement. All
distributions with respect to each class of Securities on each Distribution Date
will be allocated pro rata among the outstanding Securities in such class.
Payments will be made either by wire transfer in immediately available funds to
the account of a Securityholder at a bank or other entity having appropriate
facilities therefor, if such Securityholder has provided the Trustee or other
person required to make such payments with wiring instructions no later than
five business days prior to the related Record Date or such other date specified
in the related Prospectus Supplement (and, if so provided in the related
Prospectus Supplement, such Securityholder holds Securities in the requisite
amount or denomination specified therein), or by check mailed to the address of
such Securityholder as it appears on the Security Register; provided, however,
that the final distribution in retirement of any class of Securities will be
made only upon presentation and surrender of such Securities at the location
specified in the notice to Securityholders of such final distribution. Payments
will be made to each Certificateholder in accordance with such holder's
Percentage Interest in a particular class. The "Percentage Interest" represented
by a Security of a particular class will be equal to the percentage obtained by
dividing the initial principal balance or notional amount of such Security by
the aggregate initial amount or notional balance of all the Securities of such
class.
45
<PAGE>
<PAGE>
DISTRIBUTIONS OF INTEREST AND PRINCIPAL ON THE SECURITIES
Each class of Securities of each series (other than certain classes of
Strip Securities and certain REMIC Residual Certificates that have no Security
Interest Rate) may have a different Security Interest Rate, which may be fixed,
variable or adjustable, or any combination of two or more such rates. The
related Prospectus Supplement will specify the Security Interest Rate or, in the
case of a variable or adjustable Security Interest Rate, the method for
determining the Security Interest Rate, for each class. The related Prospectus
Supplement will specify whether interest on the Securities of such series will
be calculated on the basis of a 360-day year consisting of twelve 30-day months
or on a different method.
Distributions of interest in respect of the Securities of any class
(other than any class of Securities that will be entitled to distributions of
accrued interest commencing only on the Distribution Date, or under the
circumstances, specified in the related Prospectus Supplement ("Accrual
Securities"), and other than any class of Strip Securities or REMIC Residual
Certificates that is not entitled to any distributions of interest) will be made
on each Distribution Date based on the Accrued Certificate Interest for such
class and such Distribution Date, subject to the sufficiency of the portion of
the Available Distribution Amount allocable to such class on such Distribution
Date. Prior to the time interest is distributable on any class of Accrual
Securities, the amount of Accrued Certificate Interest otherwise distributable
on such class will be added to the principal balance thereof on each
Distribution Date. With respect to each class of Securities (other than certain
classes of Strip Securities and REMIC Residual Certificates), "Accrued
Certificate Interest" for each Distribution Date will be equal to interest at
the applicable Security Interest Rate accrued for a specified period (generally
one month) on the outstanding principal balance thereof immediately prior to
such Distribution Date. Unless otherwise provided in the related Prospectus
Supplement, Accrued Certificate Interest for each Distribution Date on Strip
Securities entitled to distributions of interest will be similarly calculated
except that it will accrue on a notional amount that is either (i) based on the
principal balances of some or all of the Mortgage Loans and/or Mortgage
Securities in the related Trust Fund or (ii) equal to the principal balances of
one or more other classes of Securities of the same series. Reference to such a
notional amount with respect to a class of Strip Securities is solely for
convenience in making certain calculations and does not represent the right to
receive any distribution of principal. If so specified in the related Prospectus
Supplement, the amount of Accrued Certificate Interest that is otherwise
distributable on (or, in the case of Accrual Securities, that may otherwise be
added to the principal balance of) one or more classes of the Securities of a
series will be reduced to the extent that any Prepayment Interest Shortfalls, as
described under "Yield Considerations", exceed the amount of any sums
(including, if and to the extent specified in the related Prospectus Supplement,
the Master Servicer's servicing compensation) that are applied to offset such
shortfalls. The particular manner in which such shortfalls will be allocated
among some or all of the classes of Securities of that series will be specified
in the related Prospectus Supplement. The related Prospectus Supplement will
also describe the extent to which the amount of Accrued Certificate Interest
that is otherwise distributable on (or, in the case of Accrual Securities, that
may otherwise be added to the principal balance of) a class of Offered
Securities may be reduced as a result of any other contingencies, including
delinquencies, losses and Deferred Interest on or in respect of the related
Mortgage Loans or application of the Relief Act with respect to such Mortgage
Loans. Any reduction in the amount of Accrued Certificate Interest otherwise
distributable on a class of Securities by reason of the allocation to such class
of a portion of any Deferred Interest on or in respect of the related Mortgage
Loans will result in a corresponding increase in the principal balance of such
class.
As and to the extent described in the related Prospectus Supplement,
distributions of principal with respect to a series of Securities will be made
on each Distribution Date to the holders of the class or classes of Securities
of such series entitled thereto until the principal balance(s) of such
Securities have been reduced to zero. In the case of a series of Securities
which includes two or more classes of Securities, the timing, sequential order,
priority of payment or amount of distributions in respect of principal, and any
schedule or formula or other provisions applicable to the determination thereof
(including distributions among multiple classes of Senior Securities or
Subordinate Securities), shall be as set forth in the related Prospectus
Supplement. Distributions of principal with respect to one or more classes of
Securities may be made at a rate that is faster (and, in some cases,
substantially faster) than the rate at which payments or other collections of
principal are received on the Mortgage Loans and/or Mortgage Securities in the
related Trust Fund, may not commence until the occurrence of certain events,
such as the retirement of one or more other classes of Securities of the same
series, or may be made at a rate that is slower (and, in some cases,
substantially slower) than the rate at which payments or other collections of
principal are received on such Mortgage Loans and/or Mortgage Securities. In
addition, distributions of principal with respect to one or more classes
46
<PAGE>
<PAGE>
of Securities may be made, subject to available funds, based on a specified
principal payment schedule and, with respect to one or more classes of
Securities, may be contingent on the specified principal payment schedule for
another class of the same series and the rate at which payments and other
collections of principal on the Mortgage Loans and/or Mortgage Securities in the
related Trust Fund are received.
PRE-FUNDING ACCOUNT
If so specified in the related Prospectus Supplement, the Pooling
Agreement or other agreement may provide for the transfer by the Sellers of
additional Mortgage Loans to the related Trust after the Closing Date. Such
additional Mortgage Loans will be required to conform to the requirements set
forth in the related Agreement or other agreement providing for such transfer,
and will be underwritten to the same standards as the Mortgage Loans initially
included in the Trust Fund. As specified in the related Prospectus Supplement,
such transfer may be funded by the establishment of a Pre-Funding Account (a
"Pre-Funding Account"). If a Pre-Funding Account is established, all or a
portion of the proceeds of the sale of one or more classes of Securities of the
related series will be deposited in such account to be released as additional
Mortgage Loans are transferred. A Pre-Funding Account will be required to be
maintained as an Eligible Account, the amounts therein may be required to be
invested in Permitted Investments and the amount held therein shall at no time
exceed 40% of the aggregate outstanding principal balance of the related
Securities. The related Agreement or other agreement providing for the transfer
of additional Mortgage Loans generally will provide that all such transfers must
be made within up to three months (with respect to any series of Certificates)
or up to one year (with respect to any series of Notes) after the Closing Date,
and that amounts set aside to fund such transfers (whether in a Pre-Funding
Account or otherwise) and not so applied within the required period of time will
be deemed to be principal prepayments and applied in the manner set forth in
such Prospectus Supplement. To the extent amounts in any Pre-Funding Account
have not been used to purchase additional Mortgage Loans, holders of the
Securities may receive an additional prepayment, which may affect their yield to
maturity. In addition, Securityholders may not be able to reinvest amount
received from any Pre-Funding Account in comparable securities, or may only be
able to do so at a lower interest rate.
DISTRIBUTIONS ON THE SECURITIES IN RESPECT OF PREPAYMENT PREMIUMS
If so provided in the related Prospectus Supplement, prepayment
premiums received on or in connection with the Mortgage Assets in any Trust Fund
will be distributed on each Distribution Date to the holders of the class of
Securities of the related series entitled thereto in accordance with the
provisions described in such Prospectus Supplement.
ALLOCATION OF LOSSES AND SHORTFALLS
The amount of any losses or shortfalls in collections on the Mortgage
Loans and/or Mortgage Securities in any Trust Fund (to the extent not covered or
offset by draws on any reserve fund or under any instrument of credit
enhancement) will be allocated among the respective classes of Securities of the
related series in the priority and manner, and subject to the limitations,
specified in the related Prospectus Supplement. As described in the related
Prospectus Supplement, such allocations may result in reductions in the
entitlements to interest and/or principal balances of one or more such classes
of Securities, or may be effected simply by a prioritization of payments among
such classes of Securities.
ADVANCES
If and to the extent provided in the related Prospectus Supplement, and
subject to any limitations specified therein, the related Master Servicer may be
obligated to advance, or have the option of advancing, on or before each
Distribution Date, from its or their own funds or from excess funds held in the
related Certificate Account that are not part of the Available Distribution
Amount for the related series of Securities for such Distribution Date, an
amount up to the aggregate of any payments of interest (and, if specified in the
related Prospectus Supplement, principal) that were due on or in respect of such
Mortgage Loans during the related Due Period and were delinquent on the related
Determination Date. No notice will be given to the Certificateholders of such
advances. A "Due Period" is the period between Distribution Dates, and scheduled
payments on the Mortgage Loans in any Trust Fund that became due during
47
<PAGE>
<PAGE>
a given Due Period will, to the extent received by the related Determination
Date or advanced by the related Master Servicer or other specified person, be
distributed on the Distribution Date next succeeding such Determination Date.
Advances are intended to maintain a regular flow of scheduled interest
and principal payments to holders of the class or classes of Securities entitled
thereto, rather than to guarantee or insure against losses. Accordingly, all
advances made from the Master Servicer's own funds will be reimbursable out of
related recoveries on the Mortgage Loans (including amounts received under any
fund or instrument constituting credit enhancement) respecting which such
advances were made (as to any Mortgage Loan, "Related Proceeds") and such other
specific sources as may be identified in the related Prospectus Supplement,
including amounts which would otherwise be payable as principal to the Offered
Securities.. No advance will be required to be made by the Master Servicer if,
in the good faith judgment of the Master Servicer, such advance would not be
recoverable from Related Proceeds or another specifically identified source (any
such advance, a "Nonrecoverable Advance"); and, if previously made by a Master
Servicer, a Nonrecoverable Advance will be reimbursable from any amounts in the
related Certificate Account prior to any distributions being made to the related
series of Securityholders.
If advances have been made from excess funds in a Certificate Account,
the Master Servicer that advanced such funds will be required to replace such
funds in the Certificate Account on any future Distribution Date to the extent
that funds then in the Certificate Account are insufficient to permit full
distributions to Securityholders on such date. If so specified in the related
Prospectus Supplement, the obligation of a Master Servicer to make advances may
be secured by a cash advance reserve fund or a surety bond. If applicable,
information regarding the characteristics of, and the identity of any obligor
on, any such surety bond, will be set forth in the related Prospectus
Supplement.
If any person other than the Master Servicer has any obligation to make
advances as described above, the related Prospectus Supplement will identify
such person.
If and to the extent so provided in the related Prospectus Supplement,
any entity making advances will be entitled to receive interest thereon for the
period that such advances are outstanding at the rate specified in such
Prospectus Supplement, and such entity will be entitled to payment of such
interest periodically from general collections on the Mortgage Loans in the
related Trust Fund prior to any payment to Securityholders or as otherwise
provided in the related Pooling Agreement or Servicing Agreement and described
in such Prospectus Supplement.
As specified in the related Prospectus Supplement with respect to any
series of Securities as to which the Trust Fund includes Mortgage Securities,
the advancing obligations with respect to the underlying Mortgage Loans will be
pursuant to the terms of such Mortgage Securities, as may be supplemented by the
terms of the applicable Pooling Agreement or Servicing Agreement, and may differ
from the provisions described above.
REPORTS TO SECURITYHOLDERS
With each distribution to Securityholders of a particular class of
Offered Securities, the related Master Servicer or Trustee will forward or cause
to be forwarded to each holder of record of such class of Securities a statement
or statements with respect to the related Trust Fund setting forth the
information specifically described in the related Pooling Agreement or the
related Servicing Agreement or Indenture, which generally will include the
following as applicable except as otherwise provided therein:
(i) the amount, if any, of such distribution allocable to
principal;
(ii) the amount, if any, of such distribution allocable to
interest;
(iii) the amount, if any, of such distribution allocable to
prepayment premiums;
(iv) with respect to a series consisting of two or more
classes, the outstanding principal balance or notional amount of each
class after giving effect to the distribution of principal on such
Distribution Date;
(v) the amount of servicing compensation received by the
related Master Servicer (and, if payable directly out of the related
Trust Fund, by any Special Servicer and any Sub-Servicer);
48
<PAGE>
<PAGE>
(vi) the aggregate amount of advances included in the
distributions on such Distribution Date, and the aggregate amount of
unreimbursed advances at the close of business on such Distribution
Date;
(vii) the aggregate principal balance of the Mortgage Loans in
the related Mortgage Pool on, or as of a specified date shortly prior
to, such Distribution Date;
(viii) the number and aggregate principal balance of any
Mortgage Loans in the related Mortgage Pool in respect of which (A) one
scheduled payment is delinquent, (B) two scheduled payments are
delinquent, (C) three or more scheduled payments are delinquent and (D)
foreclosure proceedings have been commenced;
(ix) the book value of any real estate acquired by such Trust
Fund through foreclosure or grant of a deed in lieu of foreclosure;
(x) the balance of the Reserve Fund, if any, at the close of
business on such Distribution Date;
(xi) the amount of coverage under any Financial Guaranty
Insurance Policy, Mortgage Pool Insurance Policy or Letter of Credit
covering default risk as of the close of business on the applicable
Determination Date and a description of any credit enhancement
substituted therefor;
(xii) the Special Hazard Amount, Fraud Loss Amount and
Bankruptcy Amount as of the close of business on the applicable
Distribution Date and a description of any change in the calculation of
such amounts;
(xiii) in the case of Securities benefiting from alternative
credit enhancement arrangements described in a Prospectus Supplement,
the amount of coverage under such alternative arrangements as of the
close of business on the applicable Determination Date; and
(xiv) with respect to any series of Securities as to which the
Trust Fund includes Mortgage Securities, certain additional information
as required under the related Pooling Agreement and specified in the
related Prospectus Supplement.
In the case of information furnished pursuant to subclauses (i)-(iii)
above, the amounts will be expressed as a dollar amount per minimum denomination
of the relevant class of Offered Securities or per a specified portion of such
minimum denomination. In addition to the information described above, reports to
Securityholders will contain such other information as is set forth in the
applicable Pooling Agreement or the applicable Servicing Agreement or Indenture,
which may include, without limitation, prepayments, reimbursements to
Subservicers and the Master Servicer and losses borne by the related Trust Fund.
In addition, within a reasonable period of time after the end of each
calendar year, the Master Servicer or Trustee will furnish a report to each
holder of record of a class of Offered Securities at any time during such
calendar year which, among other things, will include information as to the
aggregate of amounts reported pursuant to subclauses (i)-(iii) above for such
calendar year or, in the event such person was a holder of record of a class of
Securities during a portion of such calendar year, for the applicable portion of
such a year.
DESCRIPTION OF CREDIT ENHANCEMENT
GENERAL
Unless otherwise provided in the applicable Prospectus Supplement,
credit support with respect to the Offered Securities of each series may be
comprised of one or more of the following components. Each component will have
limitations and will provide coverage with respect to certain losses on the
related Mortgage Loans (as more particularly described in the related Prospectus
Supplement, "Realized Losses") that are (i) attributable to the Mortgagor's
failure to make any payment of principal or interest as required under the
Mortgage Note, but not
49
<PAGE>
<PAGE>
including Special Hazard Losses, Extraordinary Losses or other losses resulting
from damage to a Mortgaged Property, Bankruptcy Losses or Fraud Losses (any such
loss, a "Defaulted Mortgage Loss"); (ii) of a type generally covered by a
Special Hazard Insurance Policy (as defined below) (any such loss, a "Special
Hazard Loss"); (iii) attributable to certain actions which may be taken by a
bankruptcy court in connection with a Mortgage Loan, including a reduction by a
bankruptcy court of the principal balance of or the Mortgage Rate on a Mortgage
Loan or an extension of its maturity (any such loss, a "Bankruptcy Loss"); and
(iv) incurred on defaulted Mortgage Loans as to which there was fraud in the
origination of such Mortgage Loans (any such loss, a "Fraud Loss"). Defaulted
Mortgage Losses, Special Hazard Losses, Bankruptcy Losses and Fraud Losses in
excess of the amount of coverage provided therefor and losses occasioned by war,
civil insurrection, certain governmental actions, nuclear reaction and certain
other risks ("Extraordinary Losses") will not be covered. To the extent that the
credit support for the Offered Securities of any series is exhausted, the
holders thereof will bear all further risks of loss not otherwise insured
against.
As set forth below and in the applicable Prospectus Supplement, (i)
coverage with respect to Defaulted Mortgage Losses may be provided by one or
more of a Financial Guaranty Insurance Policy, Mortgage Pool Insurance Policy or
a Letter of Credit, (ii) coverage with respect to Special Hazard Losses may be
provided by one or more of a Financial Guaranty Insurance Policy, Letter of
Credit or a Special Hazard Insurance Policy (any instrument, to the extent
providing such coverage, a "Special Hazard Instrument"), (iii) coverage with
respect to Bankruptcy Losses may be provided by one or more of a Financial
Guaranty Insurance Policy, Letter of Credit or a Bankruptcy Bond and (iv)
coverage with respect to Fraud Losses may be provided by one or more of a
Financial Guaranty Insurance Policy, Mortgage Pool Insurance Policy, Letter of
Credit or mortgage repurchase bond. In addition, if provided in the applicable
Prospectus Supplement, in lieu of or in addition to any or all of the foregoing
arrangements, credit enhancement may be in the form of a Reserve Fund to cover
such losses, in the form of subordination of one or more classes of Subordinate
Securities to provide credit support to one or more classes of Senior
Securities, or in the form of Overcollateralization, or in the form of a
specified entity's agreement to repurchase certain Mortgage Loans or fund
certain losses pursuant to a Purchase Obligation, which obligations may be
supported by a Letter of Credit, surety bonds or other types of insurance
policies, certain other secured or unsecured corporate guarantees or in such
other form as may be described in the related Prospectus Supplement, or in the
form of a combination of two or more of the foregoing. The credit support may be
provided by an assignment of the right to receive certain cash amounts, a
deposit of cash into a Reserve Fund or other pledged assets, or by banks,
insurance companies, guarantees or any combination thereof identified in the
applicable Prospectus Supplement.
The amounts and type of credit enhancement arrangement as well as the
provider thereof, if applicable, with respect to the Offered Securities of each
series will be set forth in the related Prospectus Supplement. To the extent
provided in the applicable Prospectus Supplement and the Pooling Agreement or
Indenture, the credit enhancement arrangements may be periodically modified,
reduced and substituted for based on the aggregate outstanding principal balance
of the Mortgage Loans covered thereby. See "Description of Credit
Enhancement--Reduction or Substitution of Credit Enhancement." If specified in
the applicable Prospectus Supplement, credit support for the Offered Securities
of one series may cover the Offered Securities of one or more other series.
The descriptions of any insurance policies or bonds described in this
Prospectus or any Prospectus Supplement and the coverage thereunder do not
purport to be complete and are qualified in their entirety by reference to the
actual forms of such policies, copies of which are available upon request.
In general, references to "Mortgage Loans" under this "Description of
Credit Enhancement" section are to Mortgage Loans in a Trust Fund. However, if
so provided in the Prospectus Supplement for a series of Securities, any
Mortgage Securities included in the related Trust Fund and/or the related
underlying Mortgage Loans may be covered by one or more of the types of credit
support described herein. The related Prospectus Supplement will specify, as to
each such form of credit support, the information indicated below with respect
thereto, to the extent such information is material and available.
SUBORDINATE SECURITIES
If so specified in the related Prospectus Supplement, one or more
classes of Securities of a series may be Subordinate Securities. To the extent
specified in the related Prospectus Supplement, the rights of the holders of
50
<PAGE>
<PAGE>
Subordinate Securities to receive distributions from the Certificate Account on
any Distribution Date will be subordinated to the corresponding rights of the
holders of Senior Securities. If so provided in the related Prospectus
Supplement, the subordination of a class may apply only in the event of (or may
be limited to) certain types of losses or shortfalls. The related prospectus
Supplement will set forth information concerning the manner and amount of
subordination provided by a class or classes of Subordinate Securities in a
series and the circumstances under which such subordination will be available.
The Offered Securities of any series may include one or more classes of
Subordinate Securities.
If the Mortgage Loans and/or Mortgage Securities in any Trust Fund are
divided into separate groups, each supporting a separate class or classes of
Securities of the related series, credit enhancement may be provided by cross-
support provisions requiring that distributions be made on Senior Securities
evidencing interests in one group of Mortgage Loans and/or Mortgage Securities
prior to distributions on Subordinate Securities evidencing interests in a
different group of Mortgage Loans and/or Mortgage Securities within the Trust
Fund. The Prospectus Supplement for a series that includes a cross-support
provision will describe the manner and conditions for applying such provisions.
OVERCOLLATERALIZATION
If so specified in the related Prospectus Supplement, interest
collections on the Mortgage Loans may exceed interest payments on the Securities
for the related Payment Date (such excess referred to as "Excess Interest").
Such Excess Interest may be deposited into a Reserve Fund or applied as a
payment of principal on the Securities. To the extent Excess Interest is applied
as principal payments on the Securities, the effect will be to reduce the
principal balance of the Securities relative to the outstanding balance of the
Mortgage Loans, thereby creating "Overcollateralization" and additional
protection to the Securityholders, as specified in the related Prospectus
Supplement. If so provided in the related Prospectus Supplement,
Overcollateralization may also be provided as to any series of Securities by the
issuance of Securities in an initial aggregate principal amount which is less
than the aggregate principal amount of the related Mortgage Loans.
FINANCIAL GUARANTY INSURANCE POLICY
If so specified in the related Prospectus Supplement, a financial
guaranty insurance policy or surety bond (a "Financial Guaranty Insurance
Policy") may be obtained and maintained for a class or series of Securities. The
issuer of the Financial Guaranty Insurance Policy (the "Insurer") will be
described in the related Prospectus Supplement and a copy of the form of
Financial Guaranty Insurance Policy will be filed with the related Current
Report on Form 8-K.
A Financial Guaranty Insurance Policy will be unconditional and
irrevocable and will guarantee to holders of the applicable Securities that an
amount equal to the full amount of payments due to such holders will be received
by the Trustee or its agent on behalf of such holders for payment on each
Payment Date. The specific terms of any Financial Guaranty Insurance Policy will
be set forth in the related Prospectus Supplement. A Financial Guaranty
Insurance Policy may have limitations and generally will not insure the
obligation of the Sellers or the Master Servicer to purchase or substitute for a
defective Mortgage Loan and will not guarantee any specific rate of principal
prepayments. The Insurer will be subrogated to the rights of each holder to the
extent the Insurer makes payments under the Financial Guaranty Insurance Policy.
MORTGAGE POOL INSURANCE POLICIES
Any Mortgage Pool Insurance Policy obtained by the Company for each
Trust Fund will be issued by the Pool Insurer named in the applicable Prospectus
Supplement. Each Mortgage Pool Insurance Policy will, subject to the limitations
described below, cover Defaulted Mortgage Losses in an amount equal to a
percentage specified in the applicable Prospectus Supplement of the aggregate
principal balance of the Mortgage Loans on the Cut-off Date. As set forth under
"Maintenance of Credit Enhancement," the Master Servicer will use reasonable
efforts to maintain the Mortgage Pool Insurance Policy and to present claims
thereunder to the Pool Insurer on behalf of itself, the related Trustee and the
related Securityholders. The Mortgage Pool Insurance Policies, however, are not
blanket policies against loss, since claims thereunder may only be made
respecting particular defaulted Mortgage Loans and only upon satisfaction of
certain conditions precedent described below. Unless specified in the related
Prospectus Supplement,
51
<PAGE>
<PAGE>
the Mortgage Pool Insurance Policies may not cover losses due to a failure to
pay or denial of a claim under a Primary Insurance Policy, irrespective of the
reason therefor.
Each Mortgage Pool Insurance Policy will generally provide that no
claims may be validly presented thereunder unless, among other things, (i) any
required Primary Insurance Policy is in effect for the defaulted Mortgage Loan
and a claim thereunder has been submitted and settled, (ii) hazard insurance on
the property securing such Mortgage Loan has been kept in force and real estate
taxes and other protection and preservation expenses have been paid by the
Master Servicer, (iii) if there has been physical loss or damage to the
Mortgaged Property, it has been restored to its condition (reasonable wear and
tear excepted) at the Cut-off Date and (iv) the insured has acquired good and
merchantable title to the Mortgaged 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 Mortgage Loan at a price equal to the principal balance thereof plus
accrued and unpaid interest at the applicable Mortgage Rate to the date of
purchase and certain expenses incurred by the Master Servicer, Special Servicer
or Subservicer on behalf of the related Trustee and Securityholders, or (b) to
pay the amount by which the sum of the principal balance of the defaulted
Mortgage Loan plus accrued and unpaid interest at the Mortgage Rate to the date
of payment of the claim and the aforementioned expenses exceeds the proceeds
received from an approved sale of the Mortgaged Property, in either case net of
certain amounts paid or assumed to have been paid under any related Primary
Insurance Policy. Securityholders will experience a shortfall in the amount of
interest payable on the related Securities in connection with the payment of
claims under a Mortgage Pool Insurance Policy because the Pool Insurer is only
required to remit unpaid interest through the date a claim is paid rather than
through the end of the month in which such claim is paid. In addition, the
Securityholders will also experience losses with respect to the related
Securities in connection with payments made under a Mortgage Pool Insurance
Policy to the extent that the Master Servicer expends funds to cover unpaid real
estate taxes or to repair the related Mortgaged Property in order to make a
claim under a Mortgage Pool Insurance Policy, as those amounts will not be
covered by payments under such policy and will be reimbursable to the Master
Servicer from funds otherwise payable to the Securityholders. If any Mortgaged
Property securing a defaulted Mortgage Loan is damaged and proceeds, if any (see
"Special Hazard Insurance Policies" below for risks which are not covered by
such policies), from the related hazard insurance policy or applicable Special
Hazard Instrument are insufficient to restore the damaged property to a
condition sufficient to permit recovery under the Mortgage Pool Insurance
Policy, the Master Servicer is not required to expend its own funds to restore
the damaged property unless it determines (x) that such restoration will
increase the proceeds to one or more classes of Securityholders on liquidation
of the Mortgage Loan after reimbursement of the Master Servicer for its expenses
and (y) that such expenses will be recoverable by it through Liquidation
Proceeds or Insurance Proceeds.
A Mortgage Pool Insurance Policy (and certain Primary Insurance
Policies) will likely not insure against loss sustained by reason of a default
arising from, among other things, (i) fraud or negligence in the origination or
servicing of a Mortgage Loan, including misrepresentation by the Mortgagor, the
Seller or other persons involved in the origination thereof, or (ii) failure to
construct a Mortgaged Property in accordance with plans and specifications.
Depending upon the nature of the event, a breach of representation made by a
Seller may also have occurred. Such a breach, if it materially and adversely
affects the interests of Securityholders and cannot be cured, would give rise to
a purchase obligation on the part of the Seller, as more fully described under
"The Mortgage Pools--Representations by Sellers." However, such an event would
not give rise to a breach of a representation and warranty or a purchase
obligation on the part of the Company or Master Servicer.
The original amount of coverage under each Mortgage Pool Insurance
Policy will be reduced over the life of the related series of 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 includes certain expenses incurred by the Master Servicer,
Special Servicer or Subservicer as well as accrued interest on delinquent
Mortgage Loans to the date of payment of the claim. Accordingly, if aggregate
net claims paid under any Mortgage Pool Insurance Policy reach the original
policy limit, coverage under that Mortgage Pool Insurance Policy will be
exhausted and any further losses will be borne by holders of the related series
of Securities. In addition, unless the Master Servicer could determine that an
advance in respect of a delinquent Mortgage Loan would be recoverable to it from
the proceeds of the liquidation of such Mortgage Loan or otherwise, the Master
Servicer would not be obligated to make an advance respecting any such
delinquency since the advance would not be ultimately recoverable
52
<PAGE>
<PAGE>
to it from either the Mortgage Pool Insurance Policy or from any other related
source. See "Description of the Securities--Advances."
Since each Mortgage Pool Insurance Policy will require that the
property subject to a defaulted Mortgage Loan be restored to its original
condition prior to claiming against the Pool Insurer, such policy will not
provide coverage against hazard losses. As set forth under "Primary Mortgage
Insurance, Hazard Insurance; Claims Thereunder," the hazard policies covering
the Mortgage Loans typically exclude from coverage physical damage resulting
from a number of causes and, even when the damage is covered, may afford
recoveries which are significantly less than full replacement cost of such
losses. Further, no coverage in respect of Special Hazard Losses, Fraud Losses
or Bankruptcy Losses will cover all risks, and the amount of any such coverage
will be limited. See "Special Hazard Insurance Policies" below. As a result,
certain hazard risks will not be insured against and will therefore be borne by
the related Securityholders.
LETTER OF CREDIT
If any component of credit enhancement as to the Offered Securities of
any series is to be provided by a letter of credit (the "Letter of Credit"), a
bank (the "Letter of Credit Bank") will deliver to the related Trustee an
irrevocable Letter of Credit. The Letter of Credit may provide direct coverage
with respect to the Mortgage Loans or, if specified in the related Prospectus
Supplement, support an entity's obligation pursuant to a Purchase Obligation to
make certain payments to the related Trustee with respect to one or more
components of credit enhancement. The Letter of Credit Bank, as well as the
amount available under the Letter of Credit with respect to each component of
credit enhancement, will be specified in the applicable Prospectus Supplement.
If so specified in the related Prospectus Supplement, the Letter of Credit may
permit draws only in the event of certain types of losses and shortfalls. The
Letter of Credit may also provide for the payment of advances which the Master
Servicer would be obligated to make with respect to delinquent monthly mortgage
payments. The amount available under the Letter of Credit will, in all cases, be
reduced to the extent of the unreimbursed payments thereunder and may otherwise
be reduced as described in the related Prospectus Supplement. The Letter of
Credit will expire on the expiration date set forth in the related Prospectus
Supplement, unless earlier terminated or extended in accordance with its terms.
SPECIAL HAZARD INSURANCE POLICIES
Any insurance policy covering Special Hazard Losses (a "Special Hazard
Insurance Policy") obtained by the Company for a Trust Fund will be issued by
the insurer named in the applicable Prospectus Supplement. Each Special Hazard
Insurance Policy will, subject to limitations described below, protect holders
of the related series of Securities from (i) losses due to direct physical
damage to a Mortgaged Property other than any loss of a type covered by a hazard
insurance policy or a flood insurance policy, if applicable, and (ii) losses
from partial damage caused by reason of the application of the co-insurance
clauses contained in hazard insurance policies ("Special Hazard Losses"). See
"Primary Mortgage Insurance, Hazard Insurance; Claims Thereunder." However, a
Special Hazard Insurance Policy will not cover losses occasioned by war, civil
insurrection, certain governmental actions, errors in design, faulty workmanship
or materials (except under certain circumstances), nuclear reaction, chemical
contamination, waste by the Mortgagor and certain other risks. Aggregate claims
under a Special Hazard Insurance Policy will be limited to the amount set forth
in the related Prospectus Supplement and will be subject to reduction as
described in such related Prospectus Supplement. A Special Hazard Insurance
Policy will provide that no claim may be paid unless hazard and, if applicable,
flood insurance on the property securing the Mortgage Loan has been kept in
force and other protection and preservation expenses have been paid by the
Master Servicer.
Subject to the foregoing limitations, a Special Hazard Insurance Policy
will provide that, where there has been damage to property securing a foreclosed
Mortgage Loan (title to which has been acquired by the insured) and to the
extent such damage is not covered by the hazard insurance policy or flood
insurance policy, if any, maintained by the Mortgagor or the Master Servicer,
Special Servicer or the Subservicer, the insurer will pay the lesser of (i) the
cost of repair or replacement of such property or (ii) upon transfer of the
property to the insurer, the unpaid principal balance of such Mortgage Loan at
the time of acquisition of such property by foreclosure or deed in lieu of
foreclosure, plus accrued interest at the Mortgage Rate to the date of claim
settlement and certain expenses incurred by the Master Servicer, Special
Servicer or Subservicer with respect to such property. If the property is
transferred to a third party in a sale approved by the issuer of the Special
Hazard Insurance Policy (the "Special Hazard Insurer"),
53
<PAGE>
<PAGE>
the amount that the Special Hazard Insurer will pay will be the amount under
(ii) above reduced by the net proceeds of the sale of the property. No claim may
be validly presented under the Special Hazard Insurance Policy unless hazard
insurance on the property securing a defaulted Mortgage Loan has been kept in
force and other reimbursable protection, preservation and foreclosure expenses
have been paid (all of which must be approved in advance by the Special Hazard
Insurer). If the unpaid principal balance plus accrued interest and certain
expenses is paid by the insurer, the amount of further coverage under the
related Special Hazard Insurance Policy will be reduced by such amount less any
net proceeds from the sale of the property. Any amount paid as the cost of
repair of the property will further reduce coverage by such amount. Restoration
of the property with the proceeds described under (i) above will satisfy the
condition under each Mortgage Pool Insurance Policy that the property be
restored before a claim under such Mortgage Pool Insurance Policy may be validly
presented with respect to the defaulted Mortgage Loan secured by such property.
The payment described under (ii) above will render presentation of a claim in
respect of such Mortgage Loan under the related Mortgage Pool Insurance Policy
unnecessary. Therefore, so long as a Mortgage Pool Insurance Policy remains in
effect, the payment by the insurer under a Special Hazard Insurance Policy of
the cost of repair or of the unpaid principal balance of the related Mortgage
Loan plus accrued interest and certain expenses will not affect the total
Insurance Proceeds paid to Securityholders, but will affect the relative amounts
of coverage remaining under the related Special Hazard Insurance Policy and
Mortgage Pool Insurance Policy.
As and to the extent set forth in the applicable Prospectus Supplement,
coverage in respect of Special Hazard Losses for a series of Securities may be
provided, in whole or in part, by a type of Special Hazard Instrument other than
a Special Hazard Insurance Policy or by means of the special hazard
representation of the Company.
BANKRUPTCY BONDS
In the event of a personal bankruptcy of a Mortgagor, it is possible
that the bankruptcy court may establish the value of the Mortgaged Property of
such Mortgagor at an amount less than the then outstanding principal balance of
the Mortgage Loan secured by such Mortgaged Property (a "Deficient Valuation").
The amount of the secured debt could then be reduced to such value, and, thus,
the holder of such Mortgage Loan would become an unsecured creditor to the
extent the outstanding principal balance of such Mortgage Loan exceeds the value
assigned to the Mortgaged Property by the bankruptcy court. In addition, certain
other modifications of the terms of a Mortgage Loan can result from a bankruptcy
proceeding, including a reduction in the amount of the Monthly Payment on the
related Mortgage Loan (a "Debt Service Reduction"; Debt Service Reductions and
Deficient Valuations, collectively referred to herein as Bankruptcy Losses). See
"Certain Legal Aspects of Mortgage Loans and Related Matters--Anti-Deficiency
Legislation and Other Limitations on Lenders." Any Bankruptcy Bond to provide
coverage for Bankruptcy Losses for proceedings under the federal Bankruptcy Code
obtained by the Company for a Trust Fund will be issued by an insurer named in
the applicable Prospectus Supplement. The level of coverage under each
Bankruptcy Bond will be set forth in the applicable Prospectus Supplement.
RESERVE FUNDS
If so provided in the related Prospectus Supplement, the Company will
deposit or cause to be deposited in an account (a "Reserve Fund") any
combination of cash, one or more irrevocable letters of credit or one or more
Permitted Investments in specified amounts, or any other instrument satisfactory
to the relevant Rating Agency or Agencies, which will be applied and maintained
in the manner and under the conditions specified in such Prospectus Supplement.
In the alternative or in addition to such deposit, to the extent described in
the related Prospectus Supplement, a Reserve Fund may be funded through
application of all or a portion of amounts otherwise payable on any related
Subordinate Securities, from the Spread or otherwise. To the extent that the
funding of the Reserve Fund is dependent on amounts otherwise payable on related
Subordinate Securities, Spread or other cash flows attributable to the related
Mortgage Loans or on reinvestment income, the Reserve Fund may provide less
coverage than initially expected if the cash flows or reinvestment income on
which such funding is dependent are lower than anticipated. In addition, with
respect to any series of Securities as to which credit enhancement includes a
Letter of Credit, if so specified in the related Prospectus Supplement, under
certain circumstances the remaining amount of the Letter of Credit may be drawn
by the Trustee and deposited in a Reserve Fund. Amounts in a Reserve Fund may be
distributed to Securityholders, or applied to reimburse the Master Servicer for
outstanding advances, or may be used for other purposes, in the manner and to
the extent specified in the related Prospectus Supplement. The related
Prospectus
54
<PAGE>
<PAGE>
Supplement will disclose whether any such Reserve Fund is part of the related
Trust Fund. If set forth in the related Prospectus Supplement, a Reserve Fund
may provide coverage to more than one series of Securities.
In connection with the establishment of any Reserve Fund, the Reserve
Fund will be structured so that the Trustee will have a perfected security
interest for the benefit of the Securityholders in the assets in the Reserve
Fund. However, to the extent that the Company, any affiliate thereof or any
other entity has an interest in any Reserve Fund, in the event of the
bankruptcy, receivership or insolvency of such entity, there could be delays in
withdrawals from the Reserve Fund and corresponding payments to the
Securityholders which could adversely affect the yield to investors on the
related Securities.
Amounts deposited in any Reserve Fund for a series will be invested in
Permitted Investments by, or at the direction of, and for the benefit of the
Master Servicer or any other person named in the related Prospectus Supplement.
MAINTENANCE OF CREDIT ENHANCEMENT
To the extent that the applicable Prospectus Supplement does not
expressly provide for alternative credit enhancement arrangements in lieu of
some or all of the arrangements mentioned below, the following paragraphs shall
apply.
If a Financial Guaranty Insurance Policy has been obtained for a series
of Securities, the Master Servicer will be obligated to exercise reasonable
efforts to keep such Financial Guaranty Insurance Policy in full force and
effect throughout the term of the applicable Pooling Agreement, unless coverage
thereunder has been exhausted through payment of claims or until such Financial
Guaranty Insurance Policy is replaced in accordance with the terms of the
applicable Pooling Agreement. The Master Servicer will agree to pay the premiums
for each Financial Guaranty Insurance Policy on a timely basis. In the event the
Insurer ceases to be a qualified insurer as described in the related Prospectus
Supplement, or fails to make a required payment under the related Financial
Guaranty Insurance Policy, the Master Servicer will have no obligation to
replace the Insurer. Any losses associated with any reduction or withdrawal in
rating by an applicable Rating Agency shall be borne by the related
Securityholders.
If a Mortgage Pool Insurance Policy has been obtained for a series of
Securities, the Master Servicer will be obligated to exercise reasonable efforts
to keep such Mortgage Pool Insurance Policy (or an alternate form of credit
support) in full force and effect throughout the term of the applicable Pooling
Agreement or Servicing Agreement, unless coverage thereunder has been exhausted
through payment of claims or until such Mortgage Pool Insurance Policy is
replaced in accordance with the terms of the applicable Pooling Agreement or
Servicing Agreement. The Master Servicer will agree to pay the premiums for each
Mortgage Pool Insurance Policy on a timely basis. In the event the Pool Insurer
ceases to be a Qualified Insurer (such term being defined to mean a private
mortgage guaranty insurance company duly qualified as such under the laws of the
state of its incorporation and each state having jurisdiction over the insurer
in connection with the Mortgage Pool Insurance Policy and approved as an insurer
by FHLMC, FNMA or any successor entity) because it ceases to be qualified under
any such law to transact such insurance business or coverage is terminated for
any reason other than exhaustion of such coverage, the Master Servicer will use
reasonable efforts to obtain from another Qualified Insurer a replacement
insurance policy comparable to the Mortgage Pool Insurance Policy with a total
coverage equal to the then outstanding coverage of such Mortgage Pool Insurance
Policy, provided that, if the cost of the replacement policy is greater than the
cost of such Mortgage Pool Insurance Policy, the coverage of the replacement
policy will, unless otherwise agreed to by the Company, be reduced to a level
such that its premium rate does not exceed the premium rate on such Mortgage
Pool Insurance Policy. In the event that the Pool Insurer ceases to be a
Qualified Insurer because it ceases to be approved as an insurer by FHLMC, FNMA
or any successor entity, the Master Servicer will be obligated to review, not
less often than monthly, the financial condition of the Pool Insurer with a view
toward determining whether recoveries under the Mortgage Pool Insurance Policy
are jeopardized for reasons related to the financial condition of the Pool
Insurer. If the Master Servicer determines that recoveries are so jeopardized,
it will be obligated to exercise its best reasonable efforts to obtain from
another Qualified Insurer a replacement insurance policy as described above,
subject to the same cost limit. Any losses associated with any reduction or
withdrawal in rating by an applicable Rating Agency shall be borne by the
related Securityholders.
55
<PAGE>
<PAGE>
If a Letter of Credit or alternate form of credit enhancement has been
obtained for a series of Securities, the Master Servicer will be obligated to
exercise reasonable efforts to keep or cause to be kept such Letter of Credit
(or an alternate form of credit support) in full force and effect throughout the
term of the applicable Pooling Agreement or Indenture, unless coverage
thereunder has been exhausted through payment of claims or otherwise, or
substitution therefor is made as described below under "--Reduction or
Substitution of Credit Enhancement." Unless otherwise specified in the
applicable Prospectus Supplement, if a Letter of Credit obtained for a series of
Securities is scheduled to expire prior to the date the final distribution on
such Securities is made and coverage under such Letter of Credit has not been
exhausted and no substitution has occurred, the Trustee will draw the amount
available under the Letter of Credit and maintain such amount in trust for such
Securityholders.
In lieu of the Master Servicer's obligation to maintain a Financial
Guaranty Insurance Policy, Mortgage Pool Insurance Policy or Letter of Credit as
provided above, the Master Servicer may obtain a substitute Financial Guaranty
Insurance Policy, Mortgage Pool Insurance Policy or Letter of Credit. If the
Master Servicer obtains such a substitute Letter of Credit, Mortgage Pool
Insurance Policy or other form of credit enhancement, it will maintain and keep
such Financial Guaranty Insurance Policy, Mortgage Pool Insurance Policy or
Letter of Credit in full force and effect as provided herein. Prior to its
obtaining any substitute Financial Guaranty Insurance Policy, Mortgage Pool
Insurance Policy or Letter of Credit, the Master Servicer will obtain written
confirmation from the Rating Agency or Agencies that rated the related series of
Securities that the substitution of such Financial Guaranty Insurance Policy,
Mortgage Pool Insurance Policy or Letter of Credit for the existing credit
enhancement will not adversely affect the then-current ratings assigned to such
Securities by such Rating Agency or Agencies.
If a Special Hazard Instrument has been obtained for a series of
Securities, the Master Servicer will also be obligated to exercise reasonable
efforts to maintain and keep such Special Hazard Instrument in full force and
effect throughout the term of the applicable Pooling Agreement or Servicing
Agreement, unless coverage thereunder has been exhausted through payment of
claims or otherwise or substitution therefor is made as described below under
"--Reduction or Substitution of Credit Enhancement." If the Special Hazard
Instrument takes the form of a Special Hazard Insurance Policy, such policy will
provide coverage against risks of the type described herein under "Description
of Credit Enhancement--Special Hazard Insurance Policies." The Master Servicer
may obtain a substitute Special Hazard Instrument for the existing Special
Hazard Instrument if prior to such substitution the Master Servicer obtains
written confirmation from the Rating Agency or Agencies that rated the related
Securities that such substitution shall not adversely affect the then-current
ratings assigned to such Securities by such Rating Agency or Agencies.
If a Bankruptcy Bond has been obtained for a series of Securities, the
Master Servicer will be obligated to exercise reasonable efforts to maintain and
keep such Bankruptcy Bond in full force and effect throughout the term of the
Pooling Agreement or Servicing Agreement, unless coverage thereunder has been
exhausted through payment of claims or substitution therefor is made as
described below under "--Reduction or Substitution of Credit Enhancement." The
Master Servicer may obtain a substitute Bankruptcy Bond or other credit
enhancement for the existing Bankruptcy Bond if prior to such substitution the
Master Servicer obtains written confirmation from the Rating Agency or Agencies
that rated the related Securities that such substitution shall not adversely
affect the then-current ratings assigned to such Securities by such Rating
Agency or Agencies. See "--Bankruptcy Bonds" above.
The Master Servicer, on behalf of itself, the Trustee and
Securityholders, will provide the Trustee information required for the Trustee
to draw under the Letter of Credit and will present claims to the provider of
any Purchase Obligation, to each Pool Insurer, to the issuer of each Special
Hazard Insurance Policy or other Special Hazard Instrument, to the issuer of
each Bankruptcy Bond and, in respect of defaulted Mortgage Loans for which there
is no Subservicer, to each Primary Insurer and take such reasonable steps as are
necessary to permit recovery under such Letter of Credit, Purchase Obligation,
insurance policies or comparable coverage respecting defaulted Mortgage Loans or
Mortgage Loans which are the subject of a bankruptcy proceeding. Additionally,
the Master Servicer will present such claims and take such steps as are
reasonably necessary to provide for the performance by the provider of the
Purchase Obligation of its Purchase Obligation. As set forth above, all
collections by the Master Servicer under any Purchase Obligation, any Mortgage
Pool Insurance Policy, any Primary Insurance Policy or any Bankruptcy Bond and,
where the related property has not been restored, any Special Hazard Instrument,
are to be deposited in the related Certificate Account, subject to withdrawal as
described above. All draws under any Letter of Credit are also to be deposited
in the related Certificate Account. In those cases in which a Mortgage Loan is
serviced by a Subservicer, the Subservicer, on behalf of itself, the Trustee and
the Securityholders will present claims to the
56
<PAGE>
<PAGE>
Primary Insurer, and all collections thereunder shall initially be deposited in
a subservicing account that generally meets the requirements for the Certificate
Account prior to being delivered to the Master Servicer for deposit in the
related Certificate Account.
If any property securing a defaulted Mortgage Loan is damaged and
proceeds, if any, from the related hazard insurance policy or any applicable
Special Hazard Instrument are insufficient to restore the damaged property to a
condition sufficient to permit recovery under any Financial Guaranty Insurance
Policy, Mortgage Pool Insurance Policy, Letter of Credit or any related Primary
Insurance Policy, the Master Servicer is not required to expend its own funds to
restore the damaged property unless it determines (i) that such restoration will
increase the proceeds to one or more classes of Securityholders on liquidation
of the Mortgage Loan after reimbursement of the Master Servicer for its expenses
and (ii) that such expenses will be recoverable by it through Liquidation
Proceeds or Insurance Proceeds. If recovery under any Financial Guaranty
Insurance Policy, Mortgage Pool Insurance Policy, Letter of Credit or any
related Primary Insurance Policy is not available because the Master Servicer
has been unable to make the above determinations, has made such determinations
incorrectly or recovery is not available for any other reason, the Master
Servicer is nevertheless obligated to follow such normal practices and
procedures (subject to the preceding sentence) as it deems necessary or
advisable to realize upon the defaulted Mortgage Loan and in the event such
determination has been incorrectly made, is entitled to reimbursement of its
expenses in connection with such restoration.
REDUCTION OR SUBSTITUTION OF CREDIT ENHANCEMENT
The amount of credit support provided pursuant to any form of credit
enhancement may be reduced under certain specified circumstances. In most cases,
the amount available pursuant to any form of credit enhancement will be subject
to periodic reduction in accordance with a schedule or formula on a
nondiscretionary basis pursuant to the terms of the related Pooling Agreement or
Indenture. Additionally, in most cases, such form of credit support (and any
replacements therefor) may be replaced, reduced or terminated, and the formula
used in calculating the amount of coverage with respect to Bankruptcy Losses,
Special Hazard Losses or Fraud Losses may be changed, without the consent of the
Securityholders, upon the written assurance from each applicable Rating Agency
that the then-current rating of the related series of Securities will not be
adversely affected. Furthermore, in the event that the credit rating of any
obligor under any applicable credit enhancement is downgraded, the credit
rating(s) of the related series of Securities may be downgraded to a
corresponding level, and, the Master Servicer will not be obligated to obtain
replacement credit support in order to restore the rating(s) of the related
series of Securities. The Master Servicer will also be permitted to replace such
credit support with other credit enhancement instruments issued by obligors
whose credit ratings are equivalent to such downgraded level and in lower
amounts which would satisfy such downgraded level, provided that the
then-current rating(s) of the related series of Securities are maintained. Where
the credit support is in the form of a Reserve Fund, a permitted reduction in
the amount of credit enhancement will result in a release of all or a portion of
the assets in the Reserve Fund to the Company, the Master Servicer or such other
person that is entitled thereto. Any assets so released will not be available
for distributions in future periods.
PURCHASE OBLIGATIONS
With respect to certain types of Mortgage Loans to be included in any
Mortgage Pool, if specified in the related Prospectus Supplement, the Mortgage
Loans may be sold subject to a Purchase Obligation as described below that would
become applicable on a specified date or upon the occurrence of a specified
event. For example, with respect to certain types of ARM Loans as to which the
Mortgage Rate is fixed for the first five years, a Purchase Obligation may apply
on the first date that the Mortgage Rate of such Mortgage Loan is adjusted, and
such obligation may apply to the Mortgage Loans or to the related Securities
themselves, or to a corresponding Purchase Obligation of the Company or another
person as specified in the related Prospectus Supplement. With respect to any
Purchase Obligation, such obligation will be an obligation of an entity (which
may include a bank or other financial institution or an insurance company)
specified in the related Prospectus Supplement, and an instrument evidencing
such obligation (a "Purchase Obligation") shall be delivered to the related
Trustee for the benefit of the Securityholders of the related series.
57
<PAGE>
<PAGE>
The specific terms and conditions applicable to any Purchase Obligation
will be described in the related Prospectus Supplement, including the purchase
price, the timing of and any limitations and conditions to any such purchase.
Any Purchase Obligation will be payable solely to the Trustee for the benefit of
the Securityholders of the related series and will be nontransferable. Each
Purchase Obligation will be a general unsecured obligation of the provider
thereof, and prospective purchasers of Offered Securities must look solely to
the credit of such entity for payment under the Purchase Obligation.
PRIMARY MORTGAGE INSURANCE, HAZARD INSURANCE;
CLAIMS THEREUNDER
GENERAL
Each Mortgaged Property will be required to be covered by a hazard
insurance policy (as described below) and, if required as described below, a
Primary Insurance Policy. The following is only a brief description of certain
insurance policies and does not purport to summarize or describe all of the
provisions of these policies. Such insurance is subject to underwriting and
approval of individual Mortgage Loans by the respective insurers.
PRIMARY MORTGAGE INSURANCE POLICIES
In a securitization of Single Family Loans, certain Single Family Loans
included in the related Mortgage Pool having a Loan-to-Value Ratio at
origination of over 80% (or other percentage as described in the related
Prospectus Supplement) may be required by the Company to be covered by a primary
mortgage guaranty insurance policy (a "Primary Insurance Policy"). Such Primary
Insurance Policy will insure against default on a Mortgage Loan as to at least
the principal amount thereof exceeding 75% of the Value of the related Mortgaged
Property (or other percentage as described in the related Prospectus Supplement)
at origination of such Mortgage Loan, unless and until the principal balance of
the Mortgage Loan is reduced to a level that would produce a Loan-to-Value Ratio
equal to or less than at least 80% (or other percentage as described in the
Prospectus Supplement). In addition, with respect to such a securitization, the
Company will represent and warrant that, to the best of the Company's knowledge,
such Mortgage Loans are so covered. Such a Mortgage Loan will not be considered
to be an exception to the foregoing standard if no Primary Insurance Policy was
obtained at origination but the Mortgage Loan has amortized to below the above
Loan-to-Value Ratio percentage as of the applicable Cut-off Date. Mortgage Loans
which are subject to negative amortization will only be covered by a Primary
Insurance Policy if such coverage was so required upon their origination,
notwithstanding that subsequent negative amortization may cause such Mortgage
Loan's Loan-to-Value Ratio (based on the then-current balance) to subsequently
exceed the limits which would have required such coverage upon their
origination.
While the terms and conditions of the Primary Insurance Policies issued
by one primary mortgage guaranty insurer (a "Primary Insurer") will differ from
those in Primary Insurance Policies issued by other Primary Insurers, each
Primary Insurance Policy will in general provide substantially the following
coverage. The amount of the loss as calculated under a Primary Insurance Policy
covering a Mortgage Loan (herein referred to as the "Loss") will generally
consist of the unpaid principal amount of such Mortgage Loan and accrued and
unpaid interest thereon and reimbursement of certain expenses, less (i) rents or
other payments collected or received by the insured (other than the proceeds of
hazard insurance) that are derived from the related Mortgaged Property, (ii)
hazard insurance proceeds in excess of the amount required to restore such
Mortgaged Property and which have not been applied to the payment of the
Mortgage Loan, (iii) amounts expended but not approved by the Primary Insurer,
(iv) claim payments previously made on such Mortgage Loan and (v) unpaid
premiums and certain other amounts.
The Primary Insurer generally will be required to pay either: (i) the
insured percentage of the Loss; (ii) the entire amount of the Loss, after
receipt by the Primary Insurer of good and merchantable title to, and possession
of, the Mortgaged Property; or (iii) at the option of the Primary Insurer under
certain Primary Insurance Policies, the sum of the delinquent monthly payments
plus any advances made by the insured, both to the date of the claim payment
and, thereafter, monthly payments in the amount that would have become due under
the Mortgage Loan if it had not been discharged plus any advances made by the
insured until the earlier of (a) the date the Mortgage Loan would have been
discharged in full if the default had not occurred or (b) an approved sale.
58
<PAGE>
<PAGE>
As conditions precedent to the filing or payment of a claim under a
Primary Insurance Policy, in the event of default by the Mortgagor, the insured
will typically be required, among other things, to: (i) advance or discharge (a)
hazard insurance premiums and (b) as necessary and approved in advance by the
Primary Insurer, real estate taxes, protection and preservation expenses and
foreclosure and related costs; (ii) in the event of any physical loss or damage
to the Mortgaged Property, have the Mortgaged Property restored to at least its
condition at the effective date of the Primary Insurance Policy (ordinary wear
and tear excepted); and (iii) tender to the Primary Insurer good and
merchantable title to, and possession of, the Mortgaged Property.
For any Single Family Loan for which such coverage is required under
the standard described above, the Master Servicer will maintain or cause each
Subservicer to maintain, as the case may be, in full force and effect and to the
extent coverage is available a Primary Insurance Policy with regard to each
Single Family Loan, provided that such Primary Insurance Policy was in place as
of the Cut-off Date and the Company had knowledge of such Primary Insurance
Policy. In the event the Company gains knowledge that as of the Closing Date, a
Mortgage Loan which required a Primary Insurance Policy did not have one, then
the Master Servicer is required to use reasonable efforts to obtain and maintain
a Primary Insurance Policy to the extent that such a policy is obtainable at a
reasonable price. The Master Servicer or, in the case of a Designated Seller
Transaction, the Seller will not cancel or refuse to renew any such Primary
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 Pooling
Agreement or Indenture unless the replacement Primary Insurance Policy for such
canceled or non-renewed policy is maintained with an insurer whose claims-paying
ability is acceptable to the Rating Agency or Agencies that rated such series of
Securities for mortgage pass-through certificates having a rating equal to or
better than the highest then-current rating of any class of such series of
Securities. For further information regarding the extent of coverage under any
Mortgage Pool Insurance Policy or Primary Insurance Policy, see "Description of
Credit Enhancement--Mortgage Pool Insurance Policies."
HAZARD INSURANCE POLICIES
The terms of the Mortgage Loans require each Mortgagor to maintain a
hazard insurance policy for their Mortgage Loan. Additionally, the Pooling
Agreement or Servicing Agreement will require the Master Servicer to cause to be
maintained for each Mortgage Loan a hazard insurance policy providing for no
less than the coverage of the standard form of fire insurance policy with
extended coverage customary in the state in which the property is located. Such
coverage generally will be in an amount equal to the lesser of the principal
balance owing on such Mortgage Loan or 100% of the insurable value of the
improvements securing the Mortgage Loan except that, if generally available,
such coverage must not be less than the minimum amount required under the terms
thereof to fully compensate for any damage or loss on a replacement cost basis.
The ability of the Master Servicer to ensure that hazard insurance proceeds are
appropriately applied may be dependent on its being named as an additional
insured under any hazard insurance policy and under any flood insurance policy
referred to below, or upon the extent to which information in this regard is
furnished to the Master Servicer by Mortgagors or Subservicers.
As set forth above, all amounts collected by the Master Servicer under
any hazard policy (except for amounts to be applied to the restoration or repair
of the Mortgaged Property or released to the Mortgagor in accordance with the
Master Servicer's normal servicing procedures) will be deposited in the related
Certificate Account. The Pooling Agreement or Servicing Agreement will provide
that the Master Servicer may satisfy its obligation to cause hazard policies to
be maintained by maintaining a blanket policy insuring against losses on the
Mortgage Loans. If such blanket policy contains a deductible clause, the Master
Servicer will deposit in the applicable Certificate Account all sums 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 on the property by
fire, lightning, explosion, smoke, windstorm, hail, riot, strike and civil
commotion, subject to the conditions and exclusions specified in each policy.
Although the policies relating to the Mortgage Loans will be underwritten by
different insurers under different state laws in accordance with different
applicable state forms and therefore will not contain identical terms and
conditions, the basic terms thereof are dictated by respective state laws, and
most such policies typically do not cover any physical damage resulting from the
following: war, revolution, governmental actions, floods and other water-related
causes, earth movement (including earthquakes, landslides and mudflows), 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
59
<PAGE>
<PAGE>
risks and is not intended to be all-inclusive. Where the improvements securing a
Mortgage Loan are located in a federally designated flood area at the time of
origination of such Mortgage Loan, the Pooling Agreement or Servicing Agreement
requires the Master Servicer to cause to be maintained for each such Mortgage
Loan serviced, flood insurance (to the extent available) in an amount equal in
general to the lesser of the amount required to compensate for any loss or
damage on a replacement cost basis or the maximum insurance available under the
federal flood insurance program.
The hazard insurance policies covering the Mortgaged Properties
typically contain a co-insurance 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 improvements on the property in order to
recover the full amount of any partial loss. If the insured's coverage falls
below this specified percentage, such clause generally provides that the
insurer's liability in the event of partial loss does not exceed the greater of
(i) the replacement cost of the improvements damaged or destroyed less physical
depreciation 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 that Mortgagors are required to
maintain on the improvements securing the Mortgage Loans may decline as the
principal balances owing thereon decrease, and since residential properties have
historically appreciated in value over time, hazard insurance proceeds could be
insufficient to restore fully the damaged property in the event of a partial
loss. See "Description of Credit Enhancement--Special Hazard Insurance Policies"
for a description of the limited protection afforded by any Special Hazard
Insurance Policy against losses occasioned by hazards which are otherwise
uninsured against (including losses caused by the application of the
co-insurance clause described in the preceding paragraph).
Under the terms of the Mortgage Loans, Mortgagors are generally
required to present claims to insurers under hazard insurance policies
maintained on the Mortgaged Properties. The Master Servicer, on behalf of the
Trustee and Securityholders, is obligated to present claims under any Special
Hazard Insurance Policy or other Special Hazard Instrument and any blanket
insurance policy insuring against hazard losses on the Mortgaged Properties.
However, the ability of the Master Servicer to present such claims is dependent
upon the extent to which information in this regard is furnished to the Master
Servicer or the Subservicers by Mortgagors.
FHA INSURANCE
The FHA is responsible for administering various federal programs,
including mortgage insurance, authorized under The Housing Act and the United
States Housing Act of 1937, as amended.
Section 223(f) of the Housing Act allows HUD to insure mortgage loans
made for the purchase or refinancing of existing apartment projects which are at
least three years old. Section 244 also provides for co-insurance of mortgage
loans made under Section 223(f). Under Section 223(f), the loan proceeds cannot
be used for substantial rehabilitation work, but repairs may be made for up to,
in general, the greater of 15% of the value of the project or a dollar amount
per apartment unit established from time to time by HUD. In general the loan
term may not exceed 35 years and a loan to value ratio of no more than 85% is
required for the purchase of a project and 70% for the refinancing of a project.
HUD has the option, in most cases, to pay insurance claims in cash or
in debentures issued by HUD. Presently, claims are being paid in cash, and
claims have not been paid in debentures since 1965. HUD debentures issued in
satisfaction of FHA insurance claims bear interest at the applicable HUD
debenture interest rate. Unless otherwise provided in the related Prospectus
Supplement, the Master Servicer will be obligated to purchase any such debenture
issued in satisfaction of a defaulted FHA insured Mortgage Loan serviced by it
for an amount equal to the principal amount of any such debenture.
The Master Servicer will be required to take such steps as are
reasonably necessary to keep FHA insurance in full force and effect.
60
<PAGE>
<PAGE>
VA MORTGAGE GUARANTY
The Servicemen's Readjustment Act of 1944, as amended, permits a
veteran (or, in certain instances, his or her spouse) to obtain a mortgage loan
guaranty by the VA covering mortgage financing of the purchase of a one-to
four-family dwelling unit to be occupied as the veteran's home at an interest
rate not exceeding the maximum rate in effect at the time the loan is made, as
established by HUD. The program has no limit on the amount of a mortgage loan,
requires no down payment for the purchaser and permits the guaranty of mortgage
loans with terms, limited by the estimated economic life of the property, up to
30 years. The maximum guaranty that may be issued by the VA under this program
is 50% of the original principal amount of the mortgage loan up to a certain
dollar limit established by the VA. The liability on the guaranty is reduced or
increased pro rata with any reduction or increase in amount of indebtedness, but
in no event will the amount payable on the guaranty exceed the amount of the
original guaranty. Notwithstanding the dollar and percentage limitations of the
guaranty, a mortgagee will ordinarily suffer a monetary loss only when the
difference between the unsatisfied indebtedness and the proceeds of a
foreclosure sale of mortgaged premises is greater than the original guaranty as
adjusted. The VA may, at its option, and without regard to the guaranty, make
full payment to a mortgagee of the unsatisfied indebtedness on a mortgage upon
its assignment to the VA.
Since there is no limit imposed by the VA on the principal amount of a
VA-guaranteed mortgage loan but there is a limit on the amount of the VA
guaranty, additional coverage under a Primary Mortgage Insurance Policy may be
required by the Company for VA loans in excess of certain amounts. The amount of
any such additional coverage will be set forth in the related Prospectus
Supplement. Any VA guaranty relating to Contracts underlying a series of
Certificates will be described in the related Prospectus Supplement.
THE COMPANY
The Company is a limited purpose wholly-owned subsidiary of WMC
Mortgage Corp. ("WMC Mortgage"). The Company was incorporated in the State of
Delaware on July 24, 1997 and re-incorporated in the State of Delaware on
November 21, 1997. The Company was organized for the purpose of serving as a
private secondary mortgage market conduit. The Company does not have, nor is it
expected in the future to have, any significant assets.
WMC Mortgage may from time to time be a Seller or act as Master
Servicer with respect to a Mortgage Pool. WMC Mortgage is a mortgage banking
company incorporated in the State of California that originates or acquires one-
to four-family residential mortgage loans among other activities. WMC originates
both prime-quality mortgage loans and subprime-quality mortgage loans. WMC
Mortgage operates both production support and loan servicing platforms for its
originations.
The Company maintains its principal office at 6320 Canoga Avenue,
Woodland Hills, California 91367. Its telephone number is (818) 592-2610.
THE AGREEMENTS
GENERAL
Each series of Certificates will be issued pursuant to a pooling and
servicing agreement or other agreement specified in the related Prospectus
Supplement (in either case, a "Pooling Agreement"). In general, the parties to a
Pooling Agreement will include the Company, the Trustee, the Master Servicer
and, in some cases, a Special Servicer. However, a Pooling Agreement that
relates to a Trust Fund that includes Mortgage Securities may include a party
solely responsible for the administration of such Mortgage Securities, and a
Pooling Agreement that relates to a Trust Fund that consists solely of Mortgage
Securities may not include a Master Servicer, Special Servicer or other servicer
as a party. All parties to each Pooling Agreement under which Securities of a
series are issued will be identified in the related Prospectus Supplement. Each
series of Notes will be issued pursuant to an Indenture. The parties to each
Indenture will be the related Issuer and the Trustee. The Issuer will be created
pursuant to an Owner Trust Agreement between the Company and the Owner Trustee.
61
<PAGE>
<PAGE>
Forms of the Agreements have been filed as exhibits to the Registration
Statement of which this Prospectus is a part. However, 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 summaries
describe certain provisions that may appear in a Pooling Agreement with respect
to a series of Certificates or in either the Servicing Agreement or Indenture
with respect to a series of Notes. The Prospectus Supplement for a series of
Securities will describe any provision of the related Agreements that materially
differs from the description thereof set forth below. The summaries herein do
not purport to be complete and are subject to, and are qualified in their
entirety by reference to, all of the provisions of the Agreements for each
series of Securities and the description of such provisions in the related
Prospectus Supplement. As used herein with respect to any series, the term
"Security" refers to all of the Securities of that series, whether or not
offered hereby and by the related Prospectus Supplement, unless the context
otherwise requires. The Company will provide a copy of the Agreement (without
exhibits) that relates to any series of Securities without charge upon written
request of a holder of a Security of such series addressed to it at its
principal executive offices specified herein under "The Company".
CERTAIN MATTERS REGARDING THE MASTER SERVICER AND THE COMPANY
The Pooling Agreement or Servicing Agreement for each series of
Securities will provide that the Master Servicer may not resign from its
obligations and duties thereunder except upon a determination that performance
of such duties is no longer permissible under applicable law or except (a) in
connection with a permitted transfer of servicing or (b) upon appointment of a
successor servicer reasonably acceptable to the Trustee and upon receipt by the
Trustee of a letter from each Rating Agency generally to the effect that such
resignation and appointment will not, in and of itself, result in a downgrading
of the Securities. No such resignation will become effective until the Trustee
or a successor servicer has assumed the Master Servicer's responsibilities,
duties, liabilities and obligations under the Pooling Agreement or Servicing
Agreement.
Each Pooling Agreement and Servicing Agreement will also provide that,
except as set forth below, neither the Master Servicer, the Company, nor any
director, officer, employee or agent of the Master Servicer or the Company will
be under any liability to the Trust Fund or the Securityholders for any action
taken or for refraining from the taking of any action in good faith pursuant to
such Agreement, or for errors in judgment; provided, however, that neither the
Master Servicer, the Company, 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 or by reason of reckless
disregard of obligations and duties thereunder. Each Pooling Agreement and
Servicing Agreement will further provide that the Master Servicer, the Company,
and any director, officer, employee or agent of the Master Servicer or the
Company is entitled to indemnification by the Trust Fund and will be held
harmless against any loss, liability or expense incurred in connection with any
legal action relating to the Pooling Agreement or Servicing Agreement or the
related series of Securities, other than any loss, liability or expense related
to any specific Mortgage Loan or Mortgage Loans (except any such loss, liability
or expense otherwise reimbursable pursuant to the Pooling Agreement) and any
loss, liability or expense incurred by reason of willful misfeasance, bad faith
or gross negligence in the performance of duties thereunder or by reason of
reckless disregard of obligations and duties thereunder. In addition, each
Pooling Agreement and Servicing Agreement will provide that neither the Master
Servicer nor the Company will be under any obligation to appear in, prosecute or
defend any legal or administrative action that is not incidental to its
respective duties under the Pooling Agreement or Servicing Agreement and which
in its opinion may involve it in any expense or liability. The Master Servicer
or the Company may, however, in its discretion undertake any such action which
it may deem necessary or desirable with respect to the Pooling Agreement or
Servicing Agreement and the rights and duties of the parties thereto and the
interests of the Securityholders thereunder. In such event, the legal expenses
and costs of such action and any liability resulting therefrom will be expenses,
costs and liabilities of the Trust Fund, and the Master Servicer or the Company,
as the case may be, will be entitled to be reimbursed therefor out of funds
otherwise distributable to Securityholders.
Any person into which the Master Servicer may be merged or
consolidated, any person resulting from any merger or consolidation to which the
Master Servicer is a party or any person succeeding to the business of the
Master Servicer will be the successor of the Master Servicer under the related
Pooling Agreement or Servicing Agreement, provided that (i) such person is
qualified to service mortgage loans on behalf of FNMA or FHLMC and (ii) such
merger, consolidation or succession does not adversely affect the then-current
ratings of the classes of Securities of the related series that have been rated.
In addition, notwithstanding the prohibition on its resignation, the Master
62
<PAGE>
<PAGE>
Servicer may assign its rights under a Pooling Agreement or Servicing Agreement
to any person to whom the Master Servicer is transferring a substantial portion
of its mortgage servicing portfolio, provided clauses (i) and (ii) above are
satisfied and such person is reasonably satisfactory to the Company and the
Trustee. In the case of any such assignment, the Master Servicer will be
released from its obligations under such Pooling Agreement or Servicing
Agreement, exclusive of liabilities and obligations incurred by it prior to the
time of such assignment.
EVENTS OF DEFAULT AND RIGHTS UPON EVENT DEFAULT
Pooling Agreement
Events of Default under the Pooling Agreement in respect of a series of
Certificates, unless otherwise specified in the Prospectus Supplement, will
include, without limitation, (i) any failure by the Master Servicer to make a
required deposit to the Certificate Account or, if the Master Servicer is so
required, to distribute to the holders of any class of Certificates of such
series any required payment which continues unremedied for 5 days (or other time
period described in the related Prospectus Supplement) after the giving of
written notice of such failure to the Master Servicer by the Trustee or the
Company, or to the Master Servicer, the Company and the Trustee by the holders
of Certificates evidencing not less than 25% of the aggregate undivided
interests (or, if applicable, voting rights) in the related Trust Fund; (ii) any
failure by the Master Servicer duly to observe or perform in any material
respect any other of its covenants or agreements in the Pooling Agreement with
respect to such series of Certificates which continues unremedied for 30 days
(15 days in the case of a failure to pay the premium for any insurance policy
which is required to be maintained under the Pooling Agreement) after the giving
of written notice of such failure to the Master Servicer by the Trustee or the
Company, or to the Master Servicer, the Company and the Trustee by the holders
of Certificates evidencing not less than 25% of the aggregate undivided
interests (or, if applicable, voting rights) in the related Trust Fund; (iii)
certain events of insolvency, readjustment of debt, marshaling of assets and
liabilities or similar proceedings regarding the Master Servicer and certain
actions by the Master Servicer indicating its insolvency or inability to pay its
obligations; and (iv) any failure of the Master Servicer to make certain
advances as described herein under "Description of the Securities--Advances."
Additional Events of Default will be described in the related Prospectus
Supplement. A default pursuant to the terms of any Mortgage Securities included
in any Trust Fund will not constitute an Event of Default under the related
Pooling Agreement.
So long as an Event of Default remains unremedied, either the Company
or the Trustee may, and at the direction of the holders of Certificates
evidencing not less than 51% of the aggregate undivided interests (or, if
applicable, voting rights) in the related Trust Fund the Trustee shall, by
written notification to the Master Servicer and to the Company or the Trustee,
as applicable, terminate all of the rights and obligations of the Master
Servicer under the Pooling Agreement (other than any rights of the Master
Servicer as Certificateholder) covering such Trust Fund and in and to the
Mortgage Loans and the proceeds thereof, whereupon the Trustee or, upon notice
to the Company and with the Company's consent, its designee will succeed to all
responsibilities, duties and liabilities of the Master Servicer under such
Pooling Agreement (other than the obligation to purchase Mortgage Loans under
certain circumstances) and will be entitled to similar compensation
arrangements. In the event that the Trustee would be obligated to succeed the
Master Servicer but is unwilling so to act, it may appoint (or if it is unable
so to act, it shall appoint) or petition a court of competent jurisdiction for
the appointment of, an established mortgage loan servicing institution with a
net worth of at least $15,000,000 to act as successor to the Master Servicer
under the Pooling Agreement (unless otherwise set forth in the Pooling
Agreement). Pending such appointment, the Trustee is obligated to act in such
capacity. The Trustee and such successor may agree upon the servicing
compensation to be paid, which in no event may be greater than the compensation
to the initial Master Servicer under the Pooling Agreement.
No Certificateholder will have any right under a Pooling Agreement to
institute any proceeding with respect to such Pooling Agreement unless such
holder previously has given to the Trustee written notice of default and the
continuance thereof and unless the holders of Certificates evidencing not less
than 25% of the aggregate undivided interests (or, if applicable, voting rights)
in the related Trust Fund 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 a reasonable time after
receipt of such request and indemnity has neglected or refused to institute any
such proceeding. However, the Trustee will be under no obligation to exercise
any of the trusts or powers vested in it by the Pooling Agreement or to
institute, conduct or defend any litigation thereunder or in relation thereto at
the
63
<PAGE>
<PAGE>
request, order or direction of any of the holders of Certificates covered by
such Pooling Agreement, unless such Certificateholders have offered to the
Trustee reasonable security or indemnity against the costs, expenses and
liabilities which may be incurred therein or thereby.
The holders of Certificates representing at least 66% of the aggregate
undivided interests (or, if applicable, voting rights) evidenced by those
Certificates affected by a default or Event of Default may waive such default or
Event of Default (other than a failure by the Master Servicer to make an
advance); provided, however, that (a) a default or Event of Default under clause
(i) or (iv) under "--Events of Default" above may be waived only by all of the
holders of Certificates affected by such default or Event of Default and (b) no
waiver shall reduce in any manner the amount of, or delay the timing of,
payments received on Mortgage Loans which are required to be distributed to, or
otherwise materially adversely affect, any non-consenting Certificateholder.
Servicing Agreement
Unless otherwise provided in the related Prospectus Supplement for a
series of Notes, a "Servicing Default" under the related Servicing Agreement
generally will include: (i) any failure by the Master Servicer to make a
required deposit to the Certificate Account or, if the Master Servicer is so
required, to distribute to the holders of any class of Notes or Equity
Certificates of such series any required payment which continues unremedied for
five business days (or other period of time described in the related Prospectus
Supplement) after the giving of written notice of such failure to the Master
Servicer by the Trustee or the Issuer; (ii) any failure by the Master Servicer
duly to observe or perform in any material respect any other of its covenants or
agreements in the Servicing Agreement with respect to such series of Securities
which continues unremedied for 45 days after the giving of written notice of
such failure to the Master Servicer by the Trustee or the Issuer; (iii) certain
events of insolvency, readjustment of debt, marshaling of assets and liabilities
or similar proceedings regarding the Master Servicer and certain actions by the
Master Servicer indicating its insolvency or inability to pay its obligations
and (iv) any other Servicing Default as set forth in the Servicing Agreement.
So long as a Servicing Default remains unremedied, either the Company
or the Trustee may, by written notification to the Master Servicer and to the
Issuer or the Trustee or Trust Fund, as applicable, terminate all of the rights
and obligations of the Master Servicer under the Servicing Agreement (other than
any right of the Master Servicer as Noteholder or as holder of the Equity
Certificates and other than the right to receive servicing compensation and
expenses for servicing the Mortgage Loans during any period prior to the date of
such termination), whereupon the Trustee will succeed to all responsibilities,
duties and liabilities of the Master Servicer under such Servicing Agreement
(other than the obligation to purchase Mortgage Loans under certain
circumstances) and will be entitled to similar compensation arrangements. In the
event that the Trustee would be obligated to succeed the Master Servicer but is
unwilling so to act, it may appoint (or if it is unable so to act, it shall
appoint) or petition a court of competent jurisdiction for the appointment of an
approved mortgage servicing institution with a net worth of at least $15,000,000
to act as successor to the Master Servicer under the Servicing Agreement (unless
otherwise set forth in the Servicing Agreement). Pending such appointment, the
Trustee is obligated to act in such capacity. The Trustee and such successor may
agree upon the servicing compensation to be paid, which in no event may be
greater than the compensation to the initial Master Servicer under the Servicing
Agreement.
Indenture
Unless otherwise provided in the related Prospectus Supplement for a
series of Notes, an Event of Default under the Indenture generally will include:
(i) a default for five days or more (or other period of time described in the
related Prospectus Supplement) in the payment of any principal of or interest on
any Note of such series; (ii) failure to perform any other covenant of the
Company or the Trust Fund in the Indenture which continues for a period of
thirty days after notice thereof is given in accordance with the procedures
described in the related Prospectus Supplement; (iii) any representation or
warranty made by the Company or the Trust Fund in the Indenture or in any
certificate or other writing delivered pursuant thereto or in connection
therewith with respect to or affecting such series having been incorrect in a
material respect as of the time made, and such breach is not cured within thirty
days after notice thereof is given in accordance with the procedures described
in the related Prospectus Supplement; (iv) certain events of bankruptcy,
insolvency, receivership or liquidation of the Company or the Trust Fund; or (v)
any other Event of Default provided with respect to Notes of that series.
64
<PAGE>
<PAGE>
If an Event of Default with respect to the Notes of any series at the
time outstanding occurs and is continuing, 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 are Accrual
Securities, such portion of the principal amount as may be specified in the
terms of that series, as provided in the related Prospectus Supplement) of all
the Notes of such series to be due and payable immediately. Such declaration
may, under certain circumstances, be rescinded and annulled by the holders of a
majority in aggregate outstanding amount of the related Notes.
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 payments 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, unless (a) the holders of 100% of the
then aggregate outstanding amount of the Notes of such series consent to such
sale, (b) the proceeds of such sale or liquidation are sufficient to pay in full
the principal of and accrued interest, due and unpaid, on the outstanding Notes
of such series at the date of such sale or (c) the 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 then aggregate outstanding amount of the Notes of such series.
In the event that the Trustee liquidates the collateral in connection
with an Event of Default, 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 payments 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.
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 may be entitled to receive no more than an amount equal to the unpaid
principal amount thereof less the amount of such discount that is unamortized.
No Noteholder or holder of an Equity Certificate generally will have
any right under an Owner Trust Agreement or Indenture to institute any
proceeding with respect to such Agreement unless (a) such holder previously has
given to the Trustee written notice of default and the continuance thereof, (b)
the holders of Notes or Equity Certificates of any class evidencing not less
than 25% of the aggregate Percentage Interests constituting such class (i) have
made written request upon the Trustee to institute such proceeding in its own
name as Trustee thereunder and (ii) have offered to the Trustee reasonable
indemnity, (c) the Trustee has neglected or refused to institute any such
proceeding for 60 days after receipt of such request and indemnity and (d) no
direction inconsistent with such written request has been given to the Trustee
during such 60 day period by the Holders of a majority of the Note Balances of
such class. However, the Trustee will be under no obligation to exercise any of
the trusts or powers vested in it by the applicable Agreement or to institute,
conduct or defend any litigation thereunder or in relation thereto at the
request, order or direction of any of the holders of Notes or Equity
Certificates covered by such Agreement, unless such holders have offered to the
Trustee reasonable security or indemnity against the costs, expenses and
liabilities which may be incurred therein or thereby.
AMENDMENT
Each Pooling Agreement may be amended by the parties thereto, without
the consent of any of the holders of Certificates covered by such Pooling
Agreement, (i) to cure any ambiguity, (ii) to correct, modify or supplement any
provision therein which may be inconsistent with any other provision therein or
to correct any error, (iii) to change the timing and/or nature of deposits in
the Certificate Account, provided that (A) such change would not adversely
affect in any material respect the interests of any Certificateholder, as
evidenced by an opinion of counsel, and (B) such change would not adversely
affect the then-current rating of any rated classes of Certificates, as
evidenced by a letter from each applicable Rating Agency, (iv) if a REMIC
election has been made with respect to the related Trust Fund, to modify,
eliminate or add to any of its provisions (A) to such extent as shall be
necessary
65
<PAGE>
<PAGE>
to maintain the qualification of the Trust Fund as a REMIC or to avoid or
minimize the risk of imposition of any tax on the related Trust Fund, provided
that the Trustee has received an opinion of counsel to the effect that (1) such
action is necessary or desirable to maintain such qualification or to avoid or
minimize such risk, and (2) such action will not adversely affect in any
material respect the interests of any holder of Certificates covered by the
Pooling Agreement, or (B) to restrict the transfer of the REMIC Residual
Certificates, provided that the Company has determined that the then-current
ratings of the classes of the Certificates that have been rated will not be
adversely affected, as evidenced by a letter from each applicable Rating Agency,
and that any such amendment will not give rise to any tax with respect to the
transfer of the REMIC Residual Certificates to a non-Permitted Transferee, (v)
to make any other provisions with respect to matters or questions arising under
such Pooling Agreement which are not materially inconsistent with the provisions
thereof, provided that such action will not adversely affect in any material
respect the interests of any Certificateholder, or (vi) to amend specified
provisions that are not material to holders of any class of Certificates offered
hereunder.
The Pooling Agreement may also be amended by the parties thereto with
the consent of the holders of Certificates of each class affected thereby
evidencing, in each case, at least 66% of the aggregate Percentage Interests
constituting such class for the purpose of adding any provisions to or changing
in any manner or eliminating any of the provisions of such Pooling Agreement or
of modifying in any manner the rights of the holders of Certificates covered by
such Pooling Agreement, except that no such amendment may (i) reduce in any
manner the amount of, or delay the timing of, payments received on Mortgage
Loans which are required to be distributed on a Certificate of any class without
the consent of the holder of such Certificate or (ii) reduce the aforesaid
percentage of Certificates of any class the holders of which are required to
consent to any such amendment without the consent of the holders of all
Certificates of such class covered by such Pooling Agreement then outstanding.
Notwithstanding the foregoing, if a REMIC election has been made with
respect to the related Trust Fund, the Trustee will not be entitled to consent
to any amendment to a Pooling Agreement without having first received an opinion
of counsel to the effect that such amendment or the exercise of any power
granted to the Master Servicer, the Company, the Trustee or any other specified
person in accordance with such amendment will not result in the imposition of a
tax on the related Trust Fund or cause such Trust Fund to fail to qualify as a
REMIC.
With respect to each series of Notes, each related Servicing Agreement
or Indenture may be amended by the parties thereto without the consent of any of
the holders of the Notes covered by such Agreement, to cure any ambiguity, to
correct, modify or supplement any provision therein, or to make any other
provisions 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
holder of Notes covered by the Agreement. Each Agreement may also be amended by
the parties thereto with the consent of the holders of Notes evidencing not less
than 66% of the Voting Rights, for any purpose; provided, however, that no such
amendment may (i) reduce in any manner the amount of or delay the timing of,
payments received on Trust Fund Assets which are required to be distributed on
any Certificate without the consent of the holder of such Certificate, (ii)
adversely affect in any material respect the interests of the holders of any
class of Notes in a manner other than as described in (i), without the consent
of the holders of Notes of such class evidencing not less than 66% of the
aggregate Voting Rights of such class or (iii) reduce the aforesaid percentage
of Voting Rights required for the consent to any such amendment without the
consent of the holders of all Notes covered by such Agreement then outstanding.
The Voting Rights evidenced by any Certificate will be the portion of the voting
rights of all of the Notes in the related series allocated in the manner
described in the related Prospectus Supplement.
TERMINATION; RETIREMENT OF SECURITIES
The obligations created by the related Agreements for each series of
Securities (other than certain limited payment and notice obligations of the
Trustee and the Company, respectively) will terminate upon the payment to
Securityholders of that series of all amounts held in the Certificate Account or
by the Master Servicer and required to be paid to them pursuant to such
Agreements following the earlier of (i) the final payment or other liquidation
or disposition (or any advance with respect thereto) of the last Mortgage Loan,
REO Property and/or Mortgage Security subject thereto and (ii) the purchase by
the Master Servicer or the Company or (A) if specified in the related Prospectus
Supplement with respect to each series of Certificates, by the holder of the
REMIC Residual Certificates (see "Federal Income Tax Consequences" below) or (B)
if specified in the Prospectus Supplement with respect to each
66
<PAGE>
<PAGE>
series of Notes, by the holder of the Equity Certificates, from the Trust Fund
for such series of all remaining Mortgage Loans, REO Properties and/or Mortgage
Securities. In addition to the foregoing, the Master Servicer or the Company
will have the option to purchase, in whole but not in part, the Securities
specified in the related Prospectus Supplement in the manner set forth in the
related Prospectus Supplement. With respect to any series of Certificates, no
such purchase shall be made unless either (i) the aggregate principal balance of
the Certificates as of such date is equal to or less than the percentage
specified in the related Prospectus Supplement (which shall not be greater than
10%) of the aggregate principal balance of the Certificates as of the Closing
Date or (ii) the aggregate principal balance of the Mortgage Loans as of such
date is equal to or less than the percentage specified in the related Prospectus
Supplement (which shall not be greater than 10%) of the aggregate principal
balance of the Mortgage Loans as of the Cut-off Date. With respect to any Series
of Notes, no such purchase shall be made unless the aggregate principal balance
of the Notes as of such date is equal to or less than the percentage specified
in the related Prospectus Supplement (which shall not be greater than 25%) of
the aggregate principal balance of the Notes as of the Closing Date or a period
specified in the related Prospectus Supplement (which shall not be shorter than
seven years) has elapsed since the initial Distribution Date. Upon the purchase
of such Securities or at any time thereafter, at the option of the Master
Servicer or the Company, the assets of the Trust Fund may be sold, thereby
effecting a retirement of the Securities and the termination of the Trust Fund,
or the Securities so purchased may be held or resold by the Master Servicer or
the Company. In no event, however, will the trust created by the Pooling
Agreement continue beyond the expiration of 21 years from the death of the
survivor of certain persons named in such Pooling Agreement. Written notice of
termination of the Pooling Agreement will be given to each Securityholder, and
the final distribution will be made only upon surrender and cancellation of the
Securities at an office or agency appointed by the Trustee which will be
specified in the notice of termination. If the Securityholders are permitted to
terminate the trust under the applicable Pooling Agreement, a penalty may be
imposed upon the Securityholders based upon the fee that would be foregone by
the Master Servicer because of such termination.
Any such purchase of Mortgage Loans and property acquired in respect of
Mortgage Loans evidenced by a series of Securities shall be made at the option
of the Master Servicer, the Company or, if applicable, the holder of the REMIC
Residual Certificates or Equity Certificates at the 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 Master
Servicer, the Company or, if applicable, such holder to so purchase is subject
to the aggregate principal balance of the Mortgage Loans and/or Mortgage
Securities in the Trust Fund for that series as of the Distribution Date on
which the purchase proceeds are to be distributed to Securityholders being less
than the percentage specified in the related Prospectus Supplement of the
aggregate principal balance of such Mortgage Loans and/or Mortgage Securities at
the Cut-off Date for that series. The Prospectus Supplement for each series of
Securities will set forth the amounts that the holders of such Securities will
be entitled to receive upon such early retirement. Such early termination may
adversely affect the yield to holders of certain classes of such Securities.
With respect to any series of Certificates, an optional purchase of the Mortgage
Loans in the related Trust Fund may not result in such Certificates receiving an
amount equal to the principal balance thereof plus accrued and unpaid interest
and any undistributed shortfall thereon. If a REMIC election has been made, the
termination of the related Trust Fund will be effected in a manner consistent
with applicable federal income tax regulations and its status as a REMIC.
Following any optional termination, there will be no continuing direct
or indirect liability of the Trust or any certificateholder or noteholder as
sellers of the assets of the Trust Fund.
THE TRUSTEE
The Trustee under each Pooling Agreement and Indenture will be named in
the related Prospectus Supplement. The commercial bank, national banking
association, banking corporation or trust company that serves as Trustee may
have typical banking relationships with the Company and its affiliates. The
Trustee shall at all times be a corporation or an association organized and
doing business under the laws of any state or the United States of America,
authorized under such laws to exercise corporate trust powers, having a combined
capital and surplus of at least $50,000,000 and subject to supervision or
examination by federal or state authority.
67
<PAGE>
<PAGE>
DUTIES OF THE TRUSTEE
The Trustee for each series of Securities will make no representation
as to the validity or sufficiency of the related Agreements, the Securities or
any underlying Mortgage Loan, Mortgage Security or related document and will not
be accountable for the use or application by or on behalf of any Master Servicer
or Special Servicer of any funds paid to the Master Servicer or Special Servicer
in respect of the Securities or the underlying Mortgage Loans or Mortgage
Securities, or any funds deposited into or withdrawn from the Certificate
Account for such series or any other account by or on behalf of the Master
Servicer or Special Servicer. If no Event of Default has occurred and is
continuing, the Trustee for each series of Securities will be required to
perform only those duties specifically required under the related Pooling
Agreement or Indenture. However, upon receipt of any of the various
certificates, reports or other instruments required to be furnished to it
pursuant to the related Agreement, a Trustee will be required to examine such
documents and to determine whether they conform to the requirements of such
agreement.
CERTAIN MATTERS REGARDING THE TRUSTEE
As and to the extent described in the related Prospectus Supplement,
the fees and normal disbursements of any Trustee may be the expense of the
related Master Servicer or other specified person or may be required to be borne
by the related Trust Fund.
The Trustee for each series of Securities generally will be entitled to
indemnification, from amounts held in the Certificate Account for such series,
for any loss, liability or expense incurred by the Trustee in connection with
the Trustee's acceptance or administration of its trusts under the related
Pooling Agreement or Indenture; provided, however, that such indemnification
will not extend to any loss, liability, cost or expense incurred by reason of
willful misfeasance, bad faith or gross negligence on the part of the Trustee in
the performance of its obligations and duties thereunder, or by reason of its
reckless disregard of such obligations or duties.
RESIGNATION AND REMOVAL OF THE TRUSTEE
The Trustee may resign at any time, in which event the Company will be
obligated to appoint a successor Trustee. The Company may also remove the
Trustee if the Trustee ceases to be eligible to continue as such under the
Pooling Agreement or if the Trustee becomes insolvent. Upon becoming aware of
such circumstances, the Company will be obligated to appoint a successor
Trustee. The Trustee may also be removed at any time by the holders of
Securities evidencing not less than 51% of the aggregate undivided interests
(or, if applicable, voting rights) in the related Trust Fund. Any resignation or
removal of the Trustee and appointment of a successor Trustee will not become
effective until acceptance of the appointment by the successor Trustee.
YIELD CONSIDERATIONS
The yield to maturity of an Offered Certificate will depend on the
price paid by the holder for such Certificate, the Security Interest Rate on any
such Certificate entitled to payments of interest (which Security Interest Rate
may vary if so specified in the related Prospectus Supplement) and the rate and
timing of principal payments (including prepayments, defaults, liquidations and
repurchases) on the Mortgage Loans and the allocation thereof to reduce the
principal balance of such Certificate (or notional amount thereof if applicable)
and other factors.
A class of Securities may be entitled to payments of interest at a
fixed Security Interest Rate, a variable Security Interest Rate or adjustable
Security Interest Rate, or any combination of such Security Interest Rates, each
as specified in the related Prospectus Supplement. A variable Security Interest
Rate may be calculated based on the weighted average of the Mortgage Rates (in
each case, net of the per annum rate or rates applicable to the calculation of
servicing and administrative fees and any Spread (each, a "Net Mortgage Rate"))
of the related Mortgage Loans for the month preceding the Distribution Date if
so specified in the related Prospectus Supplement. As will be described in the
related Prospectus Supplement, the aggregate payments of interest on a class of
Securities, and the yield to maturity thereon, will be affected by the rate of
payment of principal on the Securities (or the rate of reduction in the notional
balance of Securities entitled only to payments of interest) and, in the case of
Securities evidencing
68
<PAGE>
<PAGE>
interests in ARM Loans, by changes in the Net Mortgage Rates on the ARM Loans.
See "Maturity and Prepayment Considerations" below. The yield on the Securities
will also be affected by liquidations of Mortgage Loans following Mortgagor
defaults and by purchases of Mortgage Loans in the event of breaches of
representations made in respect of such Mortgage Loans by the Company, the
Master Servicer and others, or conversions of ARM Loans to a fixed interest
rate. See "The Mortgage Pools--Representations by Sellers" and "Descriptions of
the Securities--Assignment of Trust Fund Assets" above. Holders of certain Strip
Securities or a class of Securities having a Security Interest Rate that varies
based on the weighted average Mortgage Rate of the underlying Mortgage Loans
will be affected by disproportionate prepayments and repurchases of Mortgage
Loans having higher Net Mortgage Rates or rates applicable to the Strip
Securities, as applicable.
With respect to any series of Securities, a period of time will elapse
between the date upon which payments on the related Mortgage Loans are due and
the Distribution Date on which such payments are passed through to
Securityholders. That delay will effectively reduce the yield that would
otherwise be produced if payments on such Mortgage Loans were distributed to
Securityholders on or near the date they were due.
In general, if a class of Securities is purchased at initial issuance
at a premium and payments of principal on the related Mortgage Loans occur at a
rate faster than anticipated at the time of purchase, the purchaser's actual
yield to maturity will be lower than that assumed at the time of purchase.
Similarly, if a class of Securities is purchased at initial issuance at a
discount and payments of principal on the related Mortgage Loans occur at a rate
slower than that assumed at the time of purchase, the purchaser's actual yield
to maturity will be lower than that originally anticipated. The effect of
principal prepayments, liquidations and purchases on yield will be particularly
significant in the case of a series of Securities having a class entitled to
payments of interest only or to payments of interest that are disproportionately
high relative to the principal payments to which such class is entitled. Such a
class will likely be sold at a substantial premium to its principal balance and
any faster than anticipated rate of prepayments will adversely affect the yield
to holders thereof. In certain circumstances extremely rapid prepayments may
result in the failure of such holders to recoup their original investment. In
addition, the yield to maturity on certain other types of classes of Securities,
including Accrual Securities, Securities with a Security Interest Rate which
fluctuates inversely with or at a multiple of an index or certain other classes
in a series including more than one class of Securities, may be relatively more
sensitive to the rate of prepayment on the related Mortgage Loans than other
classes of Securities.
The timing of changes in the rate of principal payments on or
repurchases of the Mortgage Loans may significantly affect an investor's actual
yield to maturity, even if the average rate of principal payments experienced
over time is consistent with an investor's expectation. In general, the earlier
a prepayment of principal on the underlying Mortgage Loans or a repurchase
thereof, the greater will be the effect on an investor's yield to maturity. As a
result, the effect on an investor's yield of principal payments and repurchases
occurring at a rate higher (or lower) than the rate anticipated by the investor
during the period immediately following the issuance of a series of Securities
would not be fully offset by a subsequent like reduction (or increase) in the
rate of principal payments.
When a principal prepayment in full is made on a Mortgage Loan, the
borrower is generally charged interest only for the period from the due date of
the preceding scheduled payment up to the date of such prepayment, instead of
for the full accrual period, that is, the period from the due date of the
preceding scheduled payment up to the due date for the next scheduled payment.
In addition, a partial principal prepayment may likewise be applied as of a date
prior to the next scheduled due date (and, accordingly, be accompanied by
interest thereon for less than the full accrual period). However, interest
accrued on any series of Securities and distributable thereon on any
Distribution Date will generally correspond to interest accrued on the principal
balance of Mortgage Loans for their respective full accrual periods.
Consequently, if a prepayment on any Mortgage Loan is distributable to
Securityholders on a particular Distribution Date, but such prepayment is not
accompanied by interest thereon for the full accrual period, the interest
charged to the borrower (net of servicing and administrative fees and any
Spread) may be less (such shortfall, a "Prepayment Interest Shortfall") than the
corresponding amount of interest accrued and otherwise payable on the related
Mortgage Loan. If and to the extent that any such shortfall is allocated to a
class of Offered Securities, the yield thereon will be adversely affected. The
Prospectus Supplement for a series of Securities will describe the manner in
which any such shortfalls will be allocated among the classes of such
Securities. If so specified in the related Prospectus Supplement, the Master
Servicer will be required to apply some or all of its servicing compensation for
the corresponding period to offset the amount of any such shortfalls. The
related Prospectus Supplement will also
69
<PAGE>
<PAGE>
describe any other amounts available to offset such shortfalls. See Servicing of
Mortgage Loans--Servicing and Other Compensation and Payment of Expenses;
Spread".
The Trust Fund with respect to any series may include Convertible
Mortgage Loans. As is the case with conventional, fixed-rate mortgage loans
originated in a high interest rate environment which may be subject to a greater
rate of principal prepayments when interest rates decrease, Convertible Mortgage
Loans may be subject to a greater rate of principal prepayments (or purchases by
the related Subservicer or the Master Servicer) due to their refinancing or
conversion to fixed interest rate loans in a low interest rate environment. For
example, if prevailing interest rates fall significantly, Convertible Mortgage
Loans could be subject to higher prepayment and conversion rates than if
prevailing interest rates remain constant because the availability of fixed-rate
or other adjustable-rate mortgage loans at competitive interest rates may
encourage Mortgagors to refinance their adjustable-rate mortgages to "lock in" a
lower fixed interest rate or to take advantage of the availability of such other
adjustable-rate mortgage loans, or, in the case of convertible adjustable-rate
mortgage loans, to exercise their option to convert the adjustable interest
rates to fixed interest rates. The conversion feature may also be exercised in a
rising interest rate environment as Mortgagors attempt to limit their risk of
higher rates. Such a rising interest rate environment may also result in an
increase in the rate of defaults on the Mortgage Loans. If the related
Subservicer or the Master Servicer purchases Convertible Mortgage Loans, a
Mortgagor's exercise of the conversion option will result in a distribution of
the principal portion thereof to the Securityholders, as described herein.
Alternatively, to the extent Subservicers or the Master Servicer fail to
purchase Converting Mortgage Loans, the Mortgage Pool will include fixed-rate
Mortgage Loans.
The rate of defaults on the Mortgage Loans will also affect the rate
and timing of principal payments on the Mortgage Loans and thus the yield on the
Securities. In general, defaults on Single Family Loans are expected to occur
with greater frequency in their early years. The rate of default on Single
Family Loans which are refinance or limited documentation mortgage loans, and on
Mortgage Loans, with high Loan-to-Value Ratios, may be higher than for other
types of Mortgage Loans. Furthermore, the rate and timing of prepayments,
defaults and liquidations on the Mortgage Loans will be affected by the general
economic condition of the region of the country in which the related Mortgaged
Properties are located. The risk of delinquencies and loss is greater and
prepayments are less likely in regions where a weak or deteriorating economy
exists, as may be evidenced by, among other factors, increasing unemployment or
falling property values. See "Risk Factors."
With respect to certain Mortgage Loans including ARM Loans, the
Mortgage Rate at origination may be below the rate that would result if the
index and margin relating thereto were applied at origination. Under the
applicable underwriting standards, the Mortgagor under each Mortgage Loan
generally will be qualified, or the Mortgage Loan otherwise approved, on the
basis of the Mortgage Rate in effect at origination. The repayment of any such
Mortgage Loan may thus be dependent on the ability of the mortgagor to make
larger level monthly payments following the adjustment of the Mortgage Rate. In
addition, the periodic increase in the amount paid by the Mortgagor of a Buydown
Mortgage Loan during or at the end of the applicable Buydown Period may create a
greater financial burden for the Mortgagor, who might not have otherwise
qualified for a mortgage under applicable underwriting guidelines, and may
accordingly increase the risk of default with respect to the related Mortgage
Loan.
The Mortgage Rates on certain ARM Loans subject to negative
amortization generally adjust monthly and their amortization schedules adjust
less frequently. During a period of rising interest rates as well as immediately
after origination (initial Mortgage Rates are generally lower than the sum of
the Indices applicable at origination and the related Note Margins), the amount
of interest accruing on the principal balance of such Mortgage Loans may exceed
the amount of the minimum scheduled monthly payment thereon. As a result, a
portion of the accrued interest on negatively amortizing Mortgage Loans may
become Deferred Interest which will be added to the principal balance thereof
and will bear interest at the applicable Mortgage Rate. The addition of any such
Deferred Interest to the principal balance of any related class or classes of
Securities will lengthen the weighted average life thereof and may adversely
affect yield to holders thereof, depending upon the price at which such
Securities were purchased. In addition, with respect to certain ARM Loans
subject to negative amortization, during a period of declining interest rates,
it might be expected that each minimum scheduled monthly payment on such a
Mortgage Loan would exceed the amount of scheduled principal and accrued
interest on the principal balance thereof, and since such excess will be applied
to reduce the principal balance of the related class or classes of Securities,
the weighted average life of such
70
<PAGE>
<PAGE>
Securities will be reduced and may adversely affect yield to holders thereof,
depending upon the price at which such Securities were purchased.
MATURITY AND PREPAYMENT CONSIDERATIONS
As indicated above under "The Mortgage Pools," the original terms to
maturity of the Mortgage Loans in a given Mortgage Pool will vary depending upon
the type of Mortgage Loans included in such Mortgage Pool. The Prospectus
Supplement for a series of Securities will contain information with respect to
the types and maturities of the Mortgage Loans in the related Mortgage Pool. All
of the Mortgage Loans may be prepaid without penalty in full or in part at any
time. The prepayment experience with respect to the Mortgage Loans in a Mortgage
Pool will affect the life and yield of the related series of Securities.
With respect to Balloon Loans, payment of the Balloon Payment (which,
based on the amortization schedule of such Mortgage Loans, is expected to be a
substantial amount) will generally depend on the Mortgagor's ability to obtain
refinancing of such Mortgage Loans or to sell the Mortgaged Property prior to
the maturity of the Balloon Loan. The ability to obtain refinancing will depend
on a number of factors prevailing at the time refinancing or sale is required,
including, without limitation, real estate values, the Mortgagor's financial
situation, prevailing mortgage loan interest rates, the Mortgagor's equity in
the related Mortgaged Property, tax laws and prevailing general economic
conditions. None of the Company, the Master Servicer, or any of their affiliates
will be obligated to refinance or repurchase any Mortgage Loan or to sell the
Mortgaged Property.
The extent of prepayments of principal of the Mortgage Loans may be
affected by a number of factors, including, without limitation, solicitations
and the availability of mortgage credit, the relative economic vitality of the
area in which the Mortgaged Properties are located. In addition, the rate of
principal payments on the Mortgage Loans may be affected by the existence of
Lock-out Periods and requirements that principal prepayments be accompanied by
prepayment premiums, as well as due-on-sale and due-on-encumbrance provisions,
and by the extent to which such provisions may be practicably enforced. See
"Servicing of Mortgage Loans--Collection and Other Servicing Procedures" and
"Certain Legal Aspects of the Mortgage Loans--Enforceability of Certain
Provisions" for a description of certain provisions of the Pooling Agreement and
certain legal developments that may affect the prepayment experience on the
Mortgage Loans.
The rate of prepayment on a pool of mortgage loans is also affected by
prevailing market interest rates for mortgage loans of a comparable type, term
and risk level. When the prevailing market interest rate is below a mortgage
coupon, a borrower may have an increased incentive to refinance its mortgage
loan. In addition, as prevailing market interest rates decline, even borrowers
with ARM Loans that have experienced a corresponding interest rate decline may
have an increased incentive to refinance for purposes of either (i) converting
to a fixed rate loan and thereby "locking in" such rate or (ii) taking advantage
of the initial "teaser rate" (a mortgage interest rate below what it would
otherwise be if the applicable index and gross margin were applied) on another
adjustable rate mortgage loan. Moreover, although the Mortgage Rates on ARM
Loans will be subject to periodic adjustments, such adjustments generally will
(i) not increase or decrease such Mortgage Rates by more than a fixed percentage
amount on each adjustment date, (ii) not increase such Mortgage Rates over a
fixed percentage amount during the life of any ARM Loan and (iii) be based on an
index (which may not rise and fall consistently with mortgage interest rates)
plus the related Note Margin (which may be different from margins being used at
the time for newly originated adjustable rate mortgage loans). As a result, the
Mortgage Rates on the ARM Loans at any time may not equal the prevailing rates
for similar, newly originated adjustable rate mortgage loans. In certain rate
environments, the prevailing rates on fixed-rate mortgage loans may be
sufficiently low in relation to the then-current Mortgage Rates on ARM Loans
that the rate of prepayment may increase as a result of refinancings. There can
be no certainty as to the rate of prepayments on the Mortgage Loans during any
period or over the life of any series of Securities.
If the applicable Pooling Agreement for a series of Securities provides
for a Pre-Funding Account or other means of funding the transfer of additional
Mortgage Loans to the related Trust Fund, as described under "Description of the
Securities--Pre-Funding Account" herein, and the Trust Fund is unable to acquire
such additional Mortgage Loans within any applicable time limit, the amounts set
aside for such purpose may be applied as principal payments on one or more
classes of Securities of such series. See "Risk Factors--Yield and Prepayment
Considerations."
71
<PAGE>
<PAGE>
There can be no assurance as to the rate of prepayment of the Mortgage
Loans. The Company is not aware of any publicly available statistics relating to
the principal prepayment experience of diverse portfolios of mortgage loans such
as the Mortgage Loans over an extended period of time. All statistics known to
the Company that have been compiled with respect to prepayment experience on
mortgage loans indicate that while some mortgage loans may remain outstanding
until their stated maturities, a substantial number will be paid prior to their
respective stated maturities. No representation is made as to the particular
factors that will affect the prepayment of the Mortgage Loans or as to the
relative importance of such factors.
Under certain circumstances, the Master Servicer, the Company or a
person specified in the related Prospectus Supplement (other than holder of any
Class of Offered Certificates, other than the REMIC Residual Certificates, if
offered) may have the option to purchase the assets in a Trust Fund and effect
early retirement of the related series of Securities. See "The
Agreements--Termination; Retirement of Securities."
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS
The following discussion contains summaries of certain legal aspects of
mortgage loans that are general in nature. Because such legal aspects are
governed in part by applicable state law (which laws may differ substantially),
the summaries do not purport to be complete nor to reflect the laws of any
particular state nor to encompass the laws of all states in which the Mortgaged
Properties may be situated. The summaries are qualified in their entirety by
reference to the applicable federal and state laws governing the Mortgage Loans
and Contracts.
SINGLE FAMILY LOANS
General. Each Single Family Loan will, and if applicable, Contracts (in
each case other than Cooperative Loans), be evidenced by a note or bond and
secured by an instrument granting a security interest in real property, which
may be a mortgage, deed of trust or a deed to secure debt, depending upon the
prevailing practice and law in the state in which the related Mortgaged Property
is located, and may have first, second or third priority. Mortgages and deeds to
secure debt are herein referred to as "mortgages." Contracts evidence both the
obligation of the obligor to repay the loan evidenced thereby and grant a
security interest in the related Manufactured Homes to secure repayment of such
loan. However, as Manufactured Homes have become larger and often have been
attached to their sites without any apparent intention by the borrowers to move
them, courts in many states have held that Manufactured Homes may, under certain
circumstances become subject to real estate title and recording laws. See "--
Contracts" below. In some states, a mortgage or deed of trust creates a lien
upon the real property encumbered by the mortgage or deed of trust. However, in
other states, the mortgage or deed of trust conveys legal title to the property
respectively, to the mortgagee or to a trustee for the benefit of the mortgagee
subject to a condition subsequent (i.e., the payment of the indebtedness secured
thereby). The lien created by the mortgage or deed of trust is not prior to the
lien for real estate taxes and assessments and other charges imposed under
governmental police powers. Priority between mortgages depends on their terms or
on the terms of separate subordination or inter-creditor agreements, the
knowledge of the parties in some cases and generally on the order of recordation
of the mortgage in the appropriate recording office. There are two parties to a
mortgage, the mortgagor, who is the borrower and homeowner, and the mortgagee,
who is the lender. Under the mortgage instrument, the mortgagor delivers to the
mortgagee a note or bond and the mortgage. In the case of a land trust, there
are three parties because title to the property is held by a land trustee under
a land trust agreement of which the borrower is the beneficiary; at origination
of a mortgage loan, the borrower executes a separate undertaking to make
payments on the mortgage note. Although a deed of trust is similar to a
mortgage, a deed of trust has three parties: the trustor who is the
borrower-homeowner; the beneficiary who is the lender; and a third-party grantee
called the trustee. Under a deed of trust, the borrower grants the property,
irrevocably until the debt is paid, in trust, generally with a power of sale, to
the trustee to secure payment of the obligation. The trustee's authority under a
deed of trust, the grantee's authority under a deed to secure debt and the
mortgagee's authority under a mortgage are governed by the law of the state in
which the real property is located, the express provisions of the deed of trust
or mortgage, and, in certain deed of trust transactions, the directions of the
beneficiary.
72
<PAGE>
<PAGE>
COOPERATIVE LOANS
If specified in the Prospectus Supplement relating to a series of
Certificates, the Mortgage Loans and Contracts may include Cooperative Loans.
Each debt instrument (a "COOPERATIVE NOTE") evidencing a Cooperative Loan will
be secured by a security interest in shares issued by the related corporation (a
"COOPERATIVE") that owns the related apartment building, which is a corporation
entitled to be treated as a housing cooperative under federal tax law, and in
the related proprietary lease or occupancy agreement granting exclusive rights
to occupy a specific dwelling unit in the Cooperative's building. The security
agreement will create a lien upon the shares of the Cooperative, the priority of
which will depend on, among other things, the terms of the particular security
agreement as well as the order of recordation and/or filing of the agreement (or
financing statements related thereto) in the appropriate recording office.
All Cooperative buildings relating to the Cooperative Loans are located
in the State of New York. Generally, each Cooperative owns in fee or has a
leasehold interest in all the real property and owns in fee or leases the
building and all separate dwelling units therein. The Cooperative is directly
responsible for property management and, in most cases, payment of real estate
taxes, other governmental impositions and hazard and liability insurance. If
there is an underlying mortgage (or mortgages) on the Cooperative's building or
underlying land, as is generally the case, or an underlying lease of the land,
as is the case in some instances, the Cooperative, as mortgagor or lessor, as
the case may be, is also responsible for fulfilling such mortgage or rental
obligations. An underlying mortgage loan is ordinarily obtained by the
Cooperative in connection with either the construction or purchase of the
Cooperative's building or the obtaining of capital by the Cooperative. The
interest of the occupant under proprietary leases or occupancy agreements as to
which that Cooperative is the landlord is generally subordinate to the interest
of the holder of an underlying mortgage and to the interest of the holder of a
land lease. If the Cooperative is unable to meet the payment obligations (i)
arising under an underlying mortgage, the mortgagee holding an underlying
mortgage could foreclose on that mortgage and terminate all subordinate
proprietary leases and occupancy agreements or (ii) arising under its land
lease, the holder of the landlord's interest under the land lease could
terminate it and all subordinate proprietary leases and occupancy agreements. In
addition, an underlying mortgage on a Cooperative may provide financing in the
form of a mortgage that does not fully amortize, with a significant portion of
principal being due in one final payment at maturity. The inability of the
Cooperative to refinance a mortgage and its consequent inability to make such
final payment could lead to foreclosure by the mortgagee. Similarly, a land
lease has an expiration date and the inability of the Cooperative to extend its
term or, in the alternative, to purchase the land, could lead to termination of
the Cooperative's interest in the property and termination of all proprietary
leases and occupancy agreements. In either event, a foreclosure by the holder of
an underlying mortgage or the termination of the underlying lease could
eliminate or significantly diminish the value of any collateral held by the
mortgagee who financed the purchase by an individual tenant-stockholder of
shares of the Cooperative or, in the case of the Mortgage Loans, the collateral
securing the Cooperative Loans.
Each Cooperative is owned by shareholders (referred to as
tenant-stockholders) who, through ownership of stock or shares in the
Cooperative, receive proprietary leases or occupancy agreements which confer
exclusive rights to occupy specific dwellings. Generally, a tenant-stockholder
of a Cooperative must make a monthly payment to the Cooperative pursuant to the
proprietary lease, which payment represents such tenant-stockholder's pro rata
share of the Cooperative's payments for its underlying mortgage, real property
taxes, maintenance expenses and other capital or ordinary expenses. An ownership
interest in a Cooperative and accompanying occupancy rights may be financed
through a Cooperative Loan evidenced by a Cooperative Note and secured by an
assignment of and a security interest in the occupancy agreement or proprietary
lease and a security interest in the related shares of the related Cooperative.
The mortgagee generally takes possession of the share certificate and a
counterpart of the proprietary lease or occupancy agreement and a financing
statement covering the proprietary lease or occupancy agreement and the
Cooperative shares is filed in the appropriate state and local offices to
perfect the mortgagee's interest in its collateral. Subject to the limitations
discussed below, upon default of the tenant-stockholder, the lender may sue for
judgment on the Cooperative Note, dispose of the collateral at a public or
private sale or otherwise proceed against the collateral or tenant-stockholder
as an individual as provided in the security agreement covering the assignment
of the proprietary lease or occupancy agreement and the pledge of Cooperative
shares. See "--Foreclosure on Shares of Cooperatives" below.
73
<PAGE>
<PAGE>
TAX ASPECTS OF COOPERATIVE OWNERSHIP
In general, a "tenant-stockholder" (as defined in Section 216(b)(2) of
the Code) of a corporation that qualifies as a "cooperative housing corporation"
within the meaning of Section 216(b)(1) of the Code 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 Section 216(a) of the Code to the
corporation under Sections 163 and 164 of the Code. In order for a corporation
to qualify under Section 216(b)(1) of the Code 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. By virtue of this
requirement, the status of a corporation for purposes of Section 216(b)(1) of
the Code 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 Section 216(a) of the Code with
respect to those years. In view of the significance of the tax benefits accorded
tenant-stockholders of a corporation that qualifies under Section 216(b)(1) of
the Code, the likelihood that such a failure would be permitted to continue over
a period of years appears remote.
CONTRACTS
Except as set forth below, under the laws of most states, manufactured
housing constitutes personal property and is subject to the motor vehicle
registration laws of the state or other jurisdiction in which the unit is
located. In a few states, where certificates of title are not required for
manufactured homes, security interests are perfected by the filing of a
financing statement under Article 9 of the UCC which has been adopted by all
states. Such financing statements are effective for five years and must be
renewed prior to the end of each five year period. The certificate of title laws
adopted by the majority of states provide that ownership of motor vehicles and
manufactured housing shall be evidenced by a certificate of title issued by the
motor vehicles department (or a similar entity) of such state. In the states
that have enacted certificate of title laws, a security interest in a unit of
manufactured housing, so long as it is not attached to land in so permanent a
fashion as to become a fixture, is generally perfected by the recording of such
interest on the certificate of title to the unit in the appropriate motor
vehicle registration office or by delivery of the required documents and payment
of a fee to such office, depending on state law.
The Master Servicer will be required under the related Pooling
Agreement or Servicing Agreement to effect such notation or delivery of the
required documents and fees, and to obtain possession of the certificate of
title, as appropriate under the laws of the state in which any Manufactured Home
is registered. In the event the Master Servicer fails, due to clerical errors or
otherwise, to effect such notation or delivery, or files the security interest
under the wrong law (for example, under a motor vehicle title statute rather
than under the UCC, in a few states), the Trustee may not have a first priority
security interest in the Manufactured Home securing a Contract. As manufactured
homes have become larger and often have been attached to their sites without any
apparent intention by the borrowers to move them, courts in many states have
held that manufactured homes may, under certain circumstances, become subject to
real estate title and recording laws. As a result, a security interest in a
manufactured home could be rendered subordinate to the interests of other
parties claiming an interest in the home under applicable state real estate law.
In order to perfect a security interest in a manufactured home under real estate
laws, the holder of the security interest must file either a "fixture filing"
under the provisions of the UCC or a real estate mortgage under the real estate
laws of the state where the home is located. These filings must be made in the
real estate records office of the county where the home is located. Generally,
Contracts will contain provisions prohibiting the obligor from permanently
attaching the Manufactured Home to its site. So long as the obligor does not
violate this agreement, a security interest in the Manufactured Home will be
governed by the certificate of title laws or the UCC, and the notation of the
security interest on the certificate of title or the filing of a UCC financing
statement will be effective to maintain the priority of the security interest in
the Manufactured Home. If, however, a Manufactured Home is permanently attached
to its site, other parties could obtain an interest in the Manufactured Home
that is prior to the security interest originally retained by the Seller and
transferred to the Company.
The Company will assign or cause to be assigned a security interest in
the Manufactured Homes to the Trustee, on behalf of the Securityholders. Neither
the Company, the Master Servicer nor the Trustee will amend the
74
<PAGE>
<PAGE>
certificates of title to identify the Trustee, on behalf of the Securityholders,
as the new secured party and, accordingly, the Company or the Seller will
continue to be named as the secured party on the certificates of title relating
to the Manufactured Homes. In most states, such assignment is an effective
conveyance of such security interest without amendment of any lien noted on the
related certificate of title and the new secured party succeeds to the Company's
rights as the secured party. However, in some states there exists a risk that,
in the absence of an amendment to the certificate of title, such assignment of
the security interest might not be held effective against creditors of the
Company or Seller.
In the absence of fraud, forgery or permanent affixation of the
Manufactured Home to its site by the Manufactured Home owner, or administrative
error by state recording officials, the notation of the lien of the Company on
the certificate of title or delivery of the required documents and fees will be
sufficient to protect the Trustee against the rights of subsequent purchasers of
a Manufactured Home or subsequent lenders who take a security interest in the
Manufactured Home. If there are any Manufactured Homes as to which the Company
has failed to perfect or cause to be perfected the security interest assigned to
the Trust Fund, such security interest would be subordinate to, among others,
subsequent purchasers for value of Manufactured Homes and holders of perfected
security interests. There also exists a risk in not identifying the Trustee, on
behalf of the Securityholders, as the new secured party on the certificate of
title that, through fraud or negligence, the security interest of the Trustee
could be released.
In the event that the owner of a Manufactured Home moves it to a state
other than the state in which such Manufactured Home initially is registered,
under the laws of most states the perfected security interest in the
Manufactured Home would continue for four months after such relocation and
thereafter until the owner re-registers the Manufactured Home in such state. If
the owner were to relocate a Manufactured Home to another state and re-register
the Manufactured Home in such state, and if the Company did not take steps to
re-perfect its security interest in such state, the security interest in the
Manufactured Home would cease to be perfected. A majority of states generally
require surrender of a certificate of title to re-register a Manufactured Home;
accordingly, the Company must surrender possession if it holds the certificate
of title to such Manufactured Home or, in the case of Manufactured Homes
registered in states that provide for notation of lien, the Company would
receive notice of surrender if the security interest in the Manufactured Home is
noted on the certificate of title. Accordingly, the Company would have the
opportunity to re-perfect its security interest in the Manufactured Home in the
state of relocation. In states that do not require a certificate of title for
registration of a manufactured home, re-registration could defeat perfection.
Similarly, when an obligor under a manufactured housing conditional sales
contract sells a manufactured home, the obligee must surrender possession of the
certificate of title or it will receive notice as a result of its lien noted
thereon and accordingly will have an opportunity to require satisfaction of the
related manufactured housing conditional sales contract before release of the
lien. Under each related Pooling Agreement or Servicing Agreement, the Master
Servicer will be obligated to take such steps, at the Master Servicer's expense,
as are necessary to maintain perfection of security interests in the
Manufactured Homes.
Under the laws of most states, liens for repairs performed on a
Manufactured Home take priority even over a perfected security interest. The
Company will obtain the representation of the related Seller that it has no
knowledge of any such liens with respect to any Manufactured Home securing a
Contract. However, such liens could arise at any time during the term of a
Contract. No notice will be given to the Trustee or Securityholders in the event
such a lien arises.
FORECLOSURE ON MORTGAGES AND CERTAIN CONTRACTS
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
which authorizes the trustee to sell the property upon any default by the
borrower under the terms of the note or deed of trust. In addition to any notice
requirements contained in a deed of trust, 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 notice of default and notice of
sale. In addition, the trustee must provide notice in some states to any other
individual having an interest of record in the real property, including any
junior lienholders. If the deed of trust is not reinstated within a specified
period, a notice of sale must be posted in a public place and, in most states,
published for a specific period of time in one or more newspapers in a specified
manner prior to the
75
<PAGE>
<PAGE>
date of trustee's sale. In addition, some state laws require that a copy of the
notice of sale be posted on the property and sent to all parties having an
interest of record in the real property.
In some states, the borrower-trustor has the right to reinstate the
loan at any time following default until shortly before the trustee's sale. In
general, in such states, the borrower, or any other person having a junior
encumbrance on the real estate, may, during a reinstatement period, cure the
default by paying the entire amount in arrears plus the costs and expenses
incurred in enforcing the obligation.
Foreclosure of a mortgage is generally accomplished by judicial action.
Generally, the action is initiated by the service of legal pleadings upon all
parties having an interest of record in the real property. Delays in completion
of the foreclosure may occasionally result from difficulties in locating
necessary parties. Judicial foreclosure proceedings are often not contested by
any of the applicable parties. If the mortgagee's right to foreclose is
contested, the legal proceedings necessary to resolve the issue can be
time-consuming.
In the case of foreclosure under either a mortgage or a deed of trust,
the sale by the referee or other designated officer or by the trustee is a
public sale. However, because of the difficulty a potential buyer at the sale
would have in determining the exact status of title and because the physical
condition of the property may have deteriorated during the foreclosure
proceedings, it is uncommon for a third party to purchase the property at a
foreclosure sale. Rather, it is common for the lender to purchase the property
from the trustee or referee for a credit bid less than or equal to the unpaid
principal amount of note plus the accrued and unpaid interest and the expense of
foreclosure, in which case the mortgagor's debt will be extinguished unless the
lender purchases the property for a lesser amount in order to preserve its right
against a borrower to seek a deficiency judgment and such remedy is available
under state law and the related loan documents. In the same states, there is a
statutory minimum purchase price which the lender may offer for the property and
generally, state law controls the amount of foreclosure costs and expenses,
including attorneys' fees, which may be recovered by a lender. Thereafter,
subject to the right of the borrower in some states to remain in possession
during the redemption period, the lender will assume the burdens of ownership,
including obtaining hazard insurance, paying taxes and making such repairs at
its own expense as are necessary to render the property suitable for sale.
Generally, the lender will obtain the services of a real estate broker and pay
the broker's commission in connection with the sale of the property. Depending
upon market conditions, the ultimate proceeds of the sale of the property may
not equal the lender's investment in the property and, in some states, the
lender may be entitled to a deficiency judgment. Any loss may be reduced by the
receipt of any mortgage insurance proceeds or other forms of credit enhancement
for a series of Certificates. See "Description of Credit Enhancement".
A junior mortgagee may not foreclose on the property securing a junior
mortgage unless it forecloses subject to the senior mortgages, in which case it
must either pay the entire amount due on the senior mortgages to the senior
mortgagees prior to or at the time of the foreclosure sale or undertake the
obligation to make payments on the senior mortgages in the event the mortgagor
is in default thereunder, in either event adding the amounts expended to the
balance due on the junior loan, and may be subrogated to the rights of the
senior mortgagees. In addition, in the event that the foreclosure of a junior
mortgage triggers the enforcement of a "due-on-sale" clause, the junior
mortgagee may be required to pay the full amount of the senior mortgages to the
senior mortgagees. Accordingly, with respect to those Single Family Loans which
are junior mortgage loans, if the lender purchases the property, the lender's
title will be subject to all senior liens and claims and certain governmental
liens. The proceeds received by the referee or trustee from the sale are applied
first to the costs, fees and expenses of sale and then in satisfaction of the
indebtedness secured by the mortgage or deed of trust under which the sale was
conducted. Any remaining proceeds are generally payable to the holders of junior
mortgages or deeds of trust and other liens and claims in order of their
priority, whether or not the borrower is in default. Any additional proceeds are
generally payable to the mortgagor or trustor. The payment of the proceeds to
the holders of junior mortgages may occur in the foreclosure action of the
senior mortgagee or may require the institution of separate legal proceeds.
In foreclosure, courts have imposed general equitable principles. The
equitable principles are generally designed to relieve the borrower from the
legal effect of its defaults under the loan documents. Examples of judicial
remedies that have been fashioned include judicial requirements that the lender
undertake affirmative and expensive actions to determine the causes for the
borrower's default and the likelihood that the borrower will be able to
reinstate the loan. In some cases, courts have substituted their judgment for
the lender's judgment and have required that
76
<PAGE>
<PAGE>
lenders reinstate loans or recast payment schedules in order to accommodate
borrowers who are suffering from temporary financial disability. In other cases,
courts have limited the right of a lender to foreclose if the default under the
mortgage instrument is not monetary, such as the borrower's failure to
adequately maintain the property or the borrower's execution of a second
mortgage or deed of trust affecting the property. Finally, some courts have been
faced with the issue of whether or not federal or state constitutional
provisions reflecting due process concerns for adequate notice require that
borrowers under deeds of trust or mortgages receive notices in addition to the
statutorily-prescribed minimums. 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 protection to the
borrower.
FORECLOSURE ON SHARES OF COOPERATIVES
The Cooperative shares owned by the tenant-stockholder, together with
the rights of the tenant-stockholder under the proprietary lease or occupancy
agreement, are pledged to the lender and are, in almost all cases, subject to
restrictions on transfer as set forth in the Cooperative's certificate of
incorporation and by-laws, as well as in the proprietary lease or occupancy
agreement. The proprietary lease or occupancy agreement, even while pledged, may
be cancelled by the Cooperative for failure by the tenant-stockholder to pay its
obligations or charges owed by such tenant-stockholder, including mechanics'
liens against the Cooperative's building incurred by such tenant-stockholder.
Generally, obligations and charges arising under a proprietary lease or
occupancy agreement which are owed to the Cooperative are made liens upon the
shares to which the proprietary lease or occupancy agreement relates. In
addition, the proprietary lease or occupancy agreement generally permits the
Cooperative to terminate such lease or agreement in the event the borrower
defaults in the performance of covenants thereunder. Typically, the lender and
the Cooperative enter into a recognition agreement which, together with any
lender protection provisions contained in the proprietary lease or occupancy
agreement, establishes the rights and obligations of both parties in the event
of a default by the tenant-stockholder on its obligations under the proprietary
lease or occupancy agreement. A default by the tenant-stockholder under the
proprietary lease or occupancy agreement will usually constitute a default under
the security agreement between the lender and the tenant-stockholder.
The recognition agreement generally provides that, in the event that
the tenant-stockholder has defaulted under the proprietary lease or occupancy
agreement, the Cooperative will take no action to terminate such lease or
agreement until the lender has been provided with notice of and an opportunity
to cure the default. The recognition agreement typically provides that if the
proprietary lease or occupancy agreement is terminated, the Cooperative will
recognize the lender's lien against proceeds from a sale of the shares and the
proprietary lease or occupancy agreement allocated to the dwelling, subject,
however, to the Cooperative's right to sums due under such proprietary lease or
occupancy agreement or which have become liens on the shares relating to the
proprietary lease or occupancy agreement. The total amount owed to the
Cooperative by the tenant-stockholder, which the lender generally cannot
restrict and does not monitor, could reduce the amount realized upon a sale of
the collateral below the outstanding principal balance of the Cooperative Loan
and accrued and unpaid interest thereon.
Recognition agreements also generally provide that in the event the
lender succeeds to the tenant-shareholder's shares and proprietary lease or
occupancy agreement as the result of realizing upon its collateral for a
Cooperative Loan, the lender must obtain the approval or consent of the board of
directors of the Cooperative as required by the proprietary lease before
transferring the Cooperative shares or assigning the proprietary lease. Such
approval or consent is usually based on the prospective purchaser's income and
net worth, among other factors, and may significantly reduce the number of
potential purchasers, which could limit the ability of the lender to sell and
realize upon the value of the collateral. Generally, the lender is not limited
in any rights it may have to dispossess the tenant-stockholder.
Because of the nature of Cooperative Loans, lenders do not require the
tenant-stockholder (i.e., the borrower) to obtain title insurance of any type.
Consequently, the existence of any prior liens or other imperfections of title
affecting the Cooperative's building or real estate also may adversely affect
the marketability of the shares allocated to the dwelling unit in the event of
foreclosure.
In New York, foreclosure on the Cooperative shares is accomplished by
public sale in accordance with the provisions of Article 9 of the New York
Uniform Commercial Code (the "UCC") and the security agreement relating
77
<PAGE>
<PAGE>
to those shares. Article 9 of the UCC requires that a sale be conducted in a
"commercially reasonable" manner. Whether a sale has been conducted in a
"commercially reasonable" manner will depend on the facts in each case. In
determining commercial reasonableness, a court will look to the notice given the
debtor and the method, manner, time, place and terms of the sale and the sale
price. Generally, a sale conducted according to the usual practice of banks
selling similar collateral in the same area 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.
REPOSSESSION WITH RESPECT TO CONTRACTS
General. Repossession of manufactured housing is governed by state law.
A few states have enacted legislation that requires that the debtor be given an
opportunity to cure its default (typically 30 days to bring the account current)
before repossession can commence. So long as a manufactured home has not become
so attached to real estate that it would be treated as a part of the real estate
under the law of the state where it is located, repossession of such home in the
event of a default by the obligor generally will be governed by the UCC (except
in Louisiana). Article 9 of the UCC provides the statutory framework for the
repossession of manufactured housing. While the UCC as adopted by the various
states may vary in certain small particulars, the general repossession procedure
established by the UCC is as follows:
(i) Except in those states where the debtor must receive
notice of the right to cure a default, repossession can commence
immediately upon default without prior notice. Repossession may be
effected either through self-help (peaceable retaking without court
order), voluntary repossession or through judicial process
(repossession pursuant to court-issued writ of replevin). The self-help
and/or voluntary repossession methods are more commonly employed, and
are accomplished simply by retaking possession of the manufactured
home. In cases in which the debtor objects or raises a defense to
repossession, a court order must be obtained from the appropriate state
court, and the manufactured home must then be repossessed in accordance
with that order. Whether the method employed is self-help, voluntary
repossession or judicial repossession, the repossession can be
accomplished either by an actual physical removal of the manufactured
home to a secure location for refurbishment and resale or by removing
the occupants and their belongings from the manufactured home and
maintaining possession of the manufactured home on the location where
the occupants were residing. Various factors may affect whether the
manufactured home is physically removed or left on location, such as
the nature and term of the lease of the site on which it is located and
the condition of the unit. In many cases, leaving the manufactured home
on location is preferable, in the event that the home is already set
up, because the expenses of retaking and redelivery will be saved.
However, in those cases where the home is left on location, expenses
for site rentals will usually be incurred.
(ii) Once repossession has been achieved, preparation for
the subsequent disposition of the manufactured home can commence. The
disposition may be by public or private sale provided the method,
manner, time, place and terms of the sale are commercially reasonable.
(iii) Sale proceeds are to be applied first to repossession
expenses (expenses incurred in retaking, storage, preparing for sale to
include refurbishing costs and selling) and then to satisfaction of the
indebtedness. While some states impose prohibitions or limitations on
deficiency judgments if the net proceeds from resale do not cover the
full amount of the indebtedness, the remainder may be sought from the
debtor in the form of a deficiency judgement in those states that do
not prohibit or limit such judgments. The deficiency judgment is a
personal judgment against the debtor for the shortfall. Occasionally,
after resale of a manufactured home and payment of all expenses and
indebtedness, there is a surplus of funds. In that case, the UCC
requires the party suing for the deficiency judgment to remit the
surplus to the debtor. Because the defaulting owner of a manufactured
home generally has very little capital or income available
78
<PAGE>
<PAGE>
following repossession, a deficiency judgment may not be sought in many
cases or, if obtained, will be settled at a significant discount in
light of the defaulting owner's strained financial condition.
Louisiana Law. Any contract secured by a manufactured home located in
Louisiana will be governed by Louisiana law rather than Article 9 of the UCC.
Louisiana laws provide similar mechanisms for perfection and enforcement of
security interests in manufactured housing used as collateral for an installment
sale contract or installment loan agreement.
Under Louisiana law, a manufactured home that has been permanently
affixed to real estate will nevertheless remain subject to the motor vehicle
registration laws unless the obligor and any holder of a security interest in
the property execute and file in the real estate records for the parish in which
the property is located a document converting the unit into real property. A
manufactured home that is converted into real property but is then removed from
its site can be converted back to personal property governed by the motor
vehicle registration laws if the obligor executes and files various documents in
the appropriate real estate records and all mortgagees under real estate
mortgages on the property and the land to which it was affixed file releases
with the motor vehicle commission.
So long as a manufactured home remains subject to the Louisiana motor
vehicle laws, liens are recorded on the certificate of title by the motor
vehicle commissioner and repossession can be accomplished by voluntary consent
of the obligor, executory process (repossession proceedings which must be
initiated through the courts but which involve minimal court supervision) or a
civil suit for possession. In connection with a voluntary surrender, the obligor
must be given a full release from liability for all amounts due under the
contract. In executory process repossessions, a sheriff's sale (without court
supervision) is permitted, unless the obligor brings suit to enjoin the sale,
and the lender is prohibited from seeking a deficiency judgment against the
obligor unless the lender obtained an appraisal of the manufactured home prior
to the sale and the property was sold for at least two-thirds of its appraised
value.
RIGHTS OF REDEMPTION
Single Family Properties. The purposes of a foreclosure action in
respect of a Single Family Property are to enable the lender to realize upon its
security and to bar the borrower, and all persons who have interests in the
property that are subordinate to that of the foreclosing lender, from exercise
of their "equity of redemption". The doctrine of equity of redemption provides
that, until the property encumbered by a mortgage has been sold in accordance
with a properly conducted foreclosure and foreclosure sale, those having
interests that are subordinate to that of the foreclosing lender have an equity
of redemption and may redeem the property by paying the entire debt with
interest. Those having an equity of redemption must generally be made parties
and joined in the foreclosure proceeding in order for their equity of redemption
to be terminated.
The equity of redemption is a common-law (non-statutory) right which
should be distinguished from post-sale statutory rights of redemption. In some
states, after sale pursuant to a deed of trust or foreclosure of a mortgage, the
borrower and foreclosed junior lienors are given a statutory period in which to
redeem the property. In some states, statutory redemption may occur only upon
payment of the foreclosure sale price. In other states, redemption may be
permitted if the former borrower pays only a portion of the sums due. The effect
of a statutory right of redemption is to diminish the ability of the lender to
sell the foreclosed property because the exercise of a right of redemption would
defeat the title of any purchase through a foreclosure. Consequently, the
practical effect of the redemption right is to force the lender to maintain the
property and pay the expenses of ownership until the redemption period has
expired. In some states, a post-sale statutory right of redemption may exist
following a judicial foreclosure, but not following a trustee's sale under a
deed of trust.
Manufactured Homes. While state laws do not usually require notice to
be given to debtors prior to repossession, many states do require delivery of a
notice of default and of the debtor's right to cure defaults before
repossession. The law in most states also requires that the debtor be given
notice of sale prior to the resale of the home so that the owner may redeem at
or before resale. In addition, the sale must comply with the requirements of the
UCC.
79
<PAGE>
<PAGE>
ANTI-DEFICIENCY LEGISLATION AND OTHER LIMITATIONS ON LENDERS
Single Family Loans. Certain states have imposed statutory prohibitions
which limit the remedies of a beneficiary under a deed of trust or a mortgagee
under a mortgage. In some states (including California), statutes limit the
right of the beneficiary or mortgagee to obtain a deficiency judgment against
the borrower following non-judicial foreclosure by power of sale. A deficiency
judgment is a personal judgment against the former borrower equal in most cases
to the difference between the net amount realized upon the public sale of the
real property and the amount due to the lender. In the case of a Mortgage Loan
secured by a property owned by a trust where the Mortgage Note is executed on
behalf of the trust, a deficiency judgment against the trust following
foreclosure or sale under a deed of trust, even if obtainable under applicable
law, may be of little value to the mortgagee or beneficiary if there are no
trust assets against which such deficiency judgment may be executed. Some state
statutes require the beneficiary or mortgagee to exhaust the security afforded
under a deed of trust or mortgage by foreclosure in an attempt to satisfy the
full debt before bringing a personal action against the borrower. In certain
other states, the lender has the option of bringing a personal action against
the borrower on the debt without first exhausting such security; however in some
of these states, the lender, following judgment on such personal action, may be
deemed to have elected a remedy and may be precluded from exercising remedies
with respect to the security. Consequently, the practical effect of the election
requirement, in those states permitting such election, is that lenders will
usually proceed against the security first rather than bringing a personal
action against the borrower. Finally, in certain other states, statutory
provisions limit any deficiency judgment against the former borrower following a
foreclosure to the excess of the outstanding debt over the fair value of the
property at the time of the public sale. The purpose of these statutes is
generally to prevent a beneficiary or mortgagee from obtaining a large
deficiency judgment against the former borrower as a result of low or no bids at
the judicial sale.
Generally, Article 9 of the UCC governs foreclosure on Cooperative
Shares and the related proprietary lease or occupancy agreement. Some courts
have interpreted Article 9 to prohibit or limit a deficiency award in certain
circumstances, including circumstances where the disposition of the collateral
(which, in the case of a Cooperative Loan, would be the shares of the
Cooperative and the related proprietary lease or occupancy agreement) was not
conducted in a commercially reasonable manner.
In addition to laws limiting or prohibiting deficiency judgments,
numerous other federal and state statutory provisions, including the federal
bankruptcy laws and state laws affording relief to debtors, may interfere with
or affect the ability of the secured mortgage lender to realize upon collateral
or enforce a deficiency judgment. For example, under the federal Bankruptcy
Code, as amended from time to time (Title 11 of the United States Code) (the
"Bankruptcy Code"), virtually all actions (including foreclosure actions and
deficiency judgment proceedings) to collect a debt are automatically stayed upon
the filing of the bankruptcy petition and, often, no interest or principal
payments are made during the course of the bankruptcy case. The delay and the
consequences thereof caused by such automatic stay can be significant. Also,
under the Bankruptcy Code, the filing of a petition in a bankruptcy by or on
behalf of a junior lienor may stay the senior lender from taking action to
foreclose out of such junior lien. Moreover, with respect to federal bankruptcy
law, a court with federal bankruptcy jurisdiction may permit a debtor through
his or her Chapter 11 or Chapter 13 rehabilitative plan to cure a monetary
default in respect of a mortgage loan on a debtor's residence by paying
arrearage within a reasonable time period and reinstating the original mortgage
loan payment schedule even though the lender accelerated the mortgage loan and
final judgment of foreclosure had been entered in state court (provided no sale
of the residence had yet occurred) prior to the filing of the debtor's petition.
Some courts with federal bankruptcy jurisdiction have approved plans, based on
the particular facts of the reorganization case, that effected the curing of a
mortgage loan default by paying arrearage over a number of years.
Courts with federal bankruptcy jurisdiction have also indicated that
the terms of a mortgage loan secured by property of the debtor may be modified.
These courts have allowed modifications that include reducing the amount of each
monthly payment, changing the rate of interest, altering the repayment schedule,
forgiving all or a portion of the debt and reducing the lender's security
interest to the value of the residence, thus leaving the lender a general
unsecured creditor for the difference between the value of the residence and the
outstanding balance of the loan. Generally, however, the terms of a mortgage
loan secured only by a mortgage on real property that is the debtor's principal
residence may not be modified pursuant to a plan confirmed pursuant to Chapter
13 except with respect to mortgage payment arrearages, which may be cured within
a reasonable time period.
80
<PAGE>
<PAGE>
Certain tax liens arising under the Code may, in certain circumstances,
have priority over the lien of a mortgage or deed of trust. In addition,
substantive requirements are imposed upon mortgage lenders in connection with
the origination and the servicing of mortgage loans by numerous federal and some
state consumer protection laws. These laws include the federal Truth-in-Lending
Act, Real Estate Settlement Procedures Act, Equal Credit Opportunity Act, Fair
Credit Billing Act, Fair Credit Reporting Act and related statutes. These
federal laws impose specific statutory liabilities upon lenders who originate
mortgage loans and who fail to comply with the provisions of the law. In some
cases, this liability may affect assignees of the mortgage loans.
Contracts. In addition to the laws limiting or prohibiting deficiency
judgments, numerous other statutory provisions, including federal bankruptcy
laws and related state laws, may interfere with or affect the ability of a
lender to realize upon collateral and/or enforce a deficiency judgment. For
example, in a Chapter 13 proceeding under the federal bankruptcy law, a court
may prevent a lender from repossessing a home, and, as part of the
rehabilitation plan, reduce the amount of the secured indebtedness to the market
value of the home at the time of bankruptcy (as determined by the court),
leaving the party providing financing as a general unsecured creditor for the
remainder of the indebtedness. A bankruptcy court may also reduce the monthly
payments due under a contract or change the rate of interest and time of
repayment of the indebtedness.
ENVIRONMENTAL LEGISLATION
Under the federal Comprehensive Environmental Response, Compensation
and Liability Act, as amended ("CERCLA"), and under state law in certain states,
a secured party which takes a deed-in-lieu of foreclosure, purchases a mortgaged
property at a foreclosure sale, or operates a mortgaged property may become
liable in certain circumstances for the costs of cleaning up hazardous
substances regardless of whether they have contaminated the property. CERCLA
imposes strict, as well as joint and several, liability on several classes of
potentially responsible parties, including current owners and operators of the
property who did not cause or contribute to the contamination. Furthermore,
liability under CERCLA is not limited to the original or unamortized principal
balance of a loan or to the value of the property securing a loan. Lenders may
be held liable under CERCLA as owners or operators unless they qualify for the
secured creditor exemption to CERCLA. This exemption exempts from the definition
of owners and operators those who, without participating in the management of a
facility, hold indicia of ownership primarily to protect a security interest in
the facility.
The Asset Conservation, Lender Liability and Deposit Insurance Act of
1996 (the "Conservation Act") amended, among other things, the provisions of
CERCLA with respect to lender liability and the secured creditor exemption. The
Conservation Act offers substantial protection to lenders by defining the
activities in which a lender can engage and still have the benefit of the
secured creditor exemption. In order for lender to be deemed to have
participated in the management of a mortgaged property, the lender must actually
participate in the operational affairs of the property of the borrower. The
Conservation Act provides that "merely having the capacity to influence, or
unexercised right to control" operations does not constitute participation in
management. A lender will lose the protection of the secured creditor exemption
only if it exercises decision-making control over the borrower's environmental
compliance and hazardous substance handling and disposal practices, or assumes
day-to-day management of all operational functions of the mortgaged property.
The Conservation Act also provides that a lender will continue to have the
benefit of the secured creditor exemption even if it forecloses on a mortgaged
property, purchases it at a foreclosure sale or accepts a deed-in-lieu of
foreclosure provided that the lender seeks to sell the mortgaged property at the
earliest practicable commercially reasonable time on commercially reasonable
terms.
Other federal and state laws in certain circumstances may impose
liability on a secured party which takes a deed-in-lieu of foreclosure,
purchases a mortgaged property at a foreclosure sale, or operates a mortgaged
property on which contaminants other than CERCLA hazardous substances are
present, including petroleum, agricultural chemicals, hazardous wastes,
asbestos, radon, and lead-based paint. Such cleanup costs may be substantial. It
is possible that such cleanup costs could become a liability of a Trust Fund and
reduce the amounts otherwise distributable to the holders of the related series
of Certificates. Moreover, certain federal statutes and certain states by
statute impose a lien for any cleanup costs incurred by such state on the
property that is the subject of such cleanup costs (an "ENVIRONMENTAL LIEN").
All subsequent liens on such property generally are subordinated to such an
Environmental Lien and, in some states, even prior recorded liens are
subordinated to Environmental Liens. In the
81
<PAGE>
<PAGE>
latter states, the security interest of the Trustee in a related parcel of real
property that is subject to such an Environmental Lien could be adversely
affected.
Traditionally, many residential mortgage lenders have not taken steps
to evaluate whether contaminants are present with respect to any mortgaged
property prior to the origination of the mortgage loan or prior to foreclosure
or accepting a deed-in-lieu of foreclosure. Accordingly, the Company has not
made and will not make such evaluations prior to the origination of the Secured
Contracts. Neither the Company nor any replacement Servicer will be required by
any Agreement to undertake any such evaluations prior to foreclosure or
accepting a deed-in-lieu of foreclosure. The Company does not make any
representations or warranties or assume any liability with respect to the
absence or effect of contaminants on any related real property or any casualty
resulting from the presence or effect of contaminants. However, the Company will
not be obligated to foreclose on related real property or accept a deed- in-lieu
of foreclosure if it knows or reasonably believes that there are material
contaminated conditions on such property. A failure so to foreclose may reduce
the amounts otherwise available to Certificateholders of the related series.
CONSUMER PROTECTION LAWS WITH RESPECT TO CONTRACTS
Numerous federal and state consumer protection laws impose substantial
requirements upon creditors involved in consumer finance. These laws include the
federal Truth-in-Lending Act, Regulation "Z", the Equal Credit Opportunity Act,
Regulation "B", the Fair Credit Reporting Act, and related statutes. These laws
can impose specific statutory liabilities upon creditors who fail to comply with
their provisions. In some cases, this liability may affect an assignee's ability
to enforce a contract.
Manufactured housing contracts often contain provisions obligating the
obligor to pay late charges if payments are not timely made. In certain cases,
federal and state law may specifically limit the amount of late charges that may
be collected. Unless otherwise provided in the related Prospectus Supplement,
under the related Pooling Agreement or Servicing Agreement, late charges will be
retained by the Master Servicer as additional servicing compensation, and any
inability to collect these amounts will not affect payments to Securityholders.
Courts have imposed general equitable principles upon repossession and
litigation involving deficiency balances. These equitable principles are
generally designed to relieve a consumer from the legal consequences of a
default.
In several cases, consumers have asserted that the remedies provided to
secured parties under the UCC and related laws violate the due process
protections provided under the 14th Amendment to the Constitution of the United
States. For the most part, courts have upheld the notice provisions of the UCC
and related laws as reasonable or have found that the repossession and resale by
the creditor does not involve sufficient state action to afford constitutional
protection to consumers.
The so-called "Holder-in-Due-Course" Rule of the Federal Trade
Commission (the "FTC Rule") has the effect of subjecting a seller (and certain
related creditors and their assignees) in a consumer credit transaction and any
assignee of the creditor to all claims and defenses which the debtor in the
transaction could assert against the seller of the goods. Liability under the
FTC Rule is limited to the amounts paid by a debtor on the contract, and the
holder of the contract may also be unable to collect amounts still due
thereunder. Most of the Contracts in a Trust Fund will be subject to the
requirements of the FTC Rule. Accordingly, the Trust Fund, as holder of the
Contracts, will be subject to any claims or defenses that the purchaser of the
related manufactured home may assert against the seller of the manufactured
home, subject to a maximum liability equal to the amounts paid by the obligor on
the Contract. If an obligor is successful in asserting any such claim or
defense, and if the Seller had or should have had knowledge of such claim or
defense, the Master Servicer will have the right to require the Seller to
repurchase the Contract because of a breach of its Seller's representation and
warranty that no claims or defenses exist that would affect the obligor's
obligation to make the required payments under the Contract. The Seller would
then have the right to require the originating dealer to repurchase the Contract
from it and might also have the right to recover from the dealer any losses
suffered by the Seller with respect to which the dealer would have been
primarily liable to the obligor.
82
<PAGE>
<PAGE>
ENFORCEABILITY OF CERTAIN PROVISIONS
Transfer of Single Family Properties. Unless the related Prospectus
Supplement indicates otherwise, the Single Family Loans generally contain
due-on-sale clauses. These clauses permit the lender to accelerate the maturity
of the loan if the borrower sells, transfers or conveys the property without the
prior consent of the lender. The enforceability of these clauses has been the
subject of legislation or litigation in many states, and in some cases the
enforceability of these clauses was limited or denied. However, the Garn-St
Germain Depository Institutions Act of 1982 (the "Garn-St Germain Act") preempts
state constitutional, statutory and case law that prohibits the enforcement of
due-on-sale clauses and permits lenders to enforce these clauses in accordance
with their terms, subject to certain limited exceptions. The Garn-St Germain Act
does "encourage" lenders to permit assumption of loans at the original rate of
interest or at some other rate less than the average of the original rate and
the market rate.
The Garn-St Germain Act also sets forth nine specific instances in
which a mortgage lender covered by the Garn-St Germain Act may not exercise a
due-on-sale clause, notwithstanding the fact that a transfer of the property may
have occurred. These include intra-family transfers, certain transfers by
operation of law, leases of fewer than three years and the creation of a junior
encumbrance. Regulations promulgated under the Garn-St Germain Act also prohibit
the imposition of a prepayment penalty upon the acceleration of a loan pursuant
to a due-on-sale clause.
The inability to enforce a due-on-sale clause may result in a mortgage
loan bearing an interest rate below the current market rate being assumed by the
buyer rather than being paid off, which may have an impact upon the average life
of the Mortgage Loans and the number of Mortgage Loans which may be outstanding
until maturity.
Transfer of Manufactured Homes. Generally, manufactured housing
contracts contain provisions prohibiting the sale or transfer of the related
manufactured homes without the consent of the obligee on the contract and
permitting the acceleration of the maturity of such contracts by the obligee on
the contract upon any such sale or transfer that is not consented to. Unless
otherwise provided in the related Prospectus Supplement, the Master Servicer
will, to the extent it has knowledge of such conveyance or proposed conveyance,
exercise or cause to be exercised its rights to accelerate the maturity of the
related Contracts through enforcement of due-on-sale clauses, subject to
applicable state law. In certain cases, the transfer may be made by a delinquent
obligor in order to avoid a repossession proceeding with respect to a
Manufactured Home.
In the case of a transfer of a Manufactured Home as to which the Master
Servicer desires to accelerate the maturity of the related Contract, the Master
Servicer's ability to do so will depend on the enforceability under state law of
the due-on-sale clause. The Garn-St Germain Act preempts, subject to certain
exceptions and conditions, state laws prohibiting enforcement of due-on-sale
clauses applicable to the Manufactured Homes. Consequently, in some cases the
Master Servicer may be prohibited from enforcing a due-on-sale clause in respect
of certain Manufactured Homes.
Late Payment Charges and Prepayment Restrictions. Notes and mortgages,
as well as manufactured housing conditional sales contracts and installment loan
agreements, may contain provisions that obligate the borrower to pay a late
charge or additional interest if payments are not timely made, and in some
circumstances, may prohibit prepayments for a specified period and/or condition
prepayments upon the borrower's payment of prepayment fees or yield maintenance
penalties. In certain states, there are or may be specific limitations upon the
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. In addition, the enforceability
of provisions that provide for prepayment fees or penalties upon an involuntary
prepayment is unclear under the laws of many states.
SUBORDINATE FINANCING
When the mortgagor encumbers mortgaged property with one or more junior
liens, the senior lender is subjected to additional risk. First, the mortgagor
may have difficulty servicing and repaying multiple loans. In addition, if the
junior loan permits recourse to the mortgagor (as junior loans often do) and the
senior loan does not, a mortgagor may be more likely to repay sums due on the
junior loan than those on the senior loan. Second, acts of the senior lender
that prejudice the junior lender or impair the junior lender's security may
create a superior equity
83
<PAGE>
<PAGE>
in favor of the junior lender. For example, if the mortgagor and the senior
lender agree to an increase in the principal amount of or the interest rate
payable on the senior loan, the senior lender may lose its priority to the
extent an existing junior lender is harmed or the mortgagor is additionally
burdened. Third, if the mortgagor defaults on the senior loan and/or any junior
loan or loans, the existence of junior loans and actions taken by junior lenders
can impair the security available to the senior lender and can interfere with or
delay the taking of action by the senior lender. Moreover, the bankruptcy of a
junior lender may operate to stay foreclosure or similar proceedings by the
senior lender.
INSTALLMENT CONTRACTS
The Trust Fund Assets may also consist of installment sales contracts.
Under an installment contract ("Installment Contract") the seller (hereinafter
referred to in this section as the "lender") retains legal title to the property
and enters into an agreement with the purchaser (hereinafter referred to in this
section as the "borrower") for the payment of the purchase price, plus interest,
over the term of such contract. Only after full performance by the borrower of
the Installment Contract is the lender obligated to convey title to the property
to the purchaser. As with mortgage or deed of trust financing, during the
effective period of the Installment Contract, the borrower is generally
responsible for the maintaining the property in good condition and for paying
real estate taxes, assessments and hazard insurance premiums associated with the
property.
The method of enforcing the rights of the lender under an Installment
Contract varies on a state-by-state basis depending upon the extent to which
state courts are willing, or able pursuant to state statute, to enforce the
contract strictly according to its terms. The terms of Installment Contracts
generally provide that upon a default by the borrower, the borrower loses his or
her right to occupy the property, the entire indebtedness is accelerated and the
buyer's equitable interest in the property is forfeited. The lender in such a
situation is not required to foreclose in order to obtain title to the property,
although in some cases a quiet title action is in order if the borrower has
filed the Installment Contract in local land records and an ejectment action may
be necessary to recover possession. In a few states, particularly in cases of
borrower default during the early years of an Installment Contract, the courts
will permit ejectment of the buyer and a forfeiture of his or her interest in
the property. However, most state legislatures have enacted provisions by
analogy to mortgage law protecting borrowers under Installment Contracts from
the harsh consequences of forfeiture. Under such statutes, a judicial or
nonjudicial foreclosure may be required, the lender may be required to give
notice of default and the borrower may be granted some grace period during which
the Installment Contract may be reinstated upon full payment of the defaulted
amount and the borrower may have a post-foreclosure statutory redemption right.
In other states, courts in equity may permit a borrower with significant
investment in the property under an Installment Contract for the sale of real
estate to share in the proceeds of sale of the property after the indebtedness
is repaid or may otherwise refuse to enforce the forfeiture clause.
Nevertheless, the lender's procedures for obtaining possession and clear title
under an Installment Contract in a given state are simpler and less time
consuming and costly than are the procedures for foreclosing and obtaining clear
title to a property subject to one or more liens.
APPLICABILITY OF USURY LAWS
Title V of the Depository Institutions Deregulation and Monetary
Control Act of 1980, enacted in March 1980 ("Title V"), provides that state
usury limitations shall not apply to certain types of residential first mortgage
loans originated by certain lenders after March 31, 1980. A similar federal
statute was in effect with respect to mortgage loans made during the first three
months of 1980. The Office of Thrift Supervision is authorized to issue rules
and regulations and to publish interpretations governing implementation of Title
V. The statute authorized any state to reimpose interest rate limits by
adopting, before April 1, 1983, a law or constitutional provision which
expressly rejects application of the federal law. In addition, even where Title
V is not so rejected, any state is authorized by the law to adopt a provision
limiting discount points or other charges on mortgage loans covered by Title V.
Certain states have taken action to reimpose interest rate limits or to limit
discount points or other charges.
Title V also provides that, subject to the following conditions, state
usury limitations shall not apply to any loan that is secured by a first lien on
certain kinds of manufactured housing. The Contracts would be covered if they
satisfy certain conditions, among other things, governing the terms of any
prepayments, late charges and deferral fees and requiring a 30-day notice period
prior to instituting any action leading to repossession of or foreclosure with
84
<PAGE>
<PAGE>
respect to the related unit. Title V authorized any state to reimpose
limitations on interest rates and finance charges by adopting before April 1,
1983 a law or constitutional provision which expressly rejects application of
the federal law. Fifteen states adopted such a law prior to the April 1, 1983
deadline. In addition, even where Title V was not so rejected, any state is
authorized by the law to adopt a provision limiting discount points or other
charges on loans covered by Title V. In any state in which application of Title
V was expressly rejected or a provision limiting discount points or other
charges has been adopted, no Contract which imposes finance charges or provides
for discount points or charges in excess of permitted levels has been included
in the Trust Fund.
Usury limits apply to junior mortgage loans in many states. Any
applicable usury limits in effect at origination will be reflected in the
maximum Mortgage Rates for ARM Loans, as set forth in the related Prospectus
Supplement.
As indicated above under "The Mortgage Pools--Representations by
Sellers," each Seller of a Mortgage Loan and a Contract will have represented
that such Mortgage Loan or Contract was originated in compliance with then
applicable state laws, including usury laws, in all material respects. However,
the Mortgage Rates on the Mortgage Loans will be subject to applicable usury
laws as in effect from time to time.
ALTERNATIVE MORTGAGE INSTRUMENTS
Alternative mortgage instruments, including adjustable rate mortgage
loans and early ownership mortgage loans, originated by non-federally chartered
lenders historically have been subjected to a variety of restrictions. Such
restrictions differed from state to state, resulting in difficulties in
determining whether a particular alternative mortgage instrument originated by a
state-chartered lender was in compliance with applicable law. These difficulties
were alleviated substantially as a result of the enactment of Title VIII of the
Garn-St Germain Act ("Title VIII"). Title VIII provides that, notwithstanding
any state law to the contrary, (i) state-chartered banks may originate
alternative mortgage instruments in accordance with regulations promulgated by
the Comptroller of the Currency with respect to origination of alternative
mortgage instruments by national banks, (ii) state-chartered credit unions may
originate alternative mortgage instruments in accordance with regulations
promulgated by the National Credit Union Administration with respect to
origination of alternative mortgage instruments by federal credit unions, and
(iii) all other non-federally chartered housing creditors, including
state-chartered savings and loan associations, state-chartered savings banks and
mutual savings banks and mortgage banking companies, may originate alternative
mortgage instruments in accordance with the regulations promulgated by the
Federal Home Loan Bank Board, predecessor to the Office of Thrift Supervision,
with respect to origination of alternative mortgage instruments by federal
savings and loan associations. Title VIII provides that any state may reject
applicability of the provisions of Title VIII by adopting, prior to October 15,
1985, a law or constitutional provision expressly rejecting the applicability of
such provisions. Certain states have taken such action.
FORMALDEHYDE LITIGATION WITH RESPECT TO CONTRACTS
A number of lawsuits are pending in the United States alleging personal
injury from exposure to the chemical formaldehyde, which is present in many
building materials, including such components of manufactured housing as plywood
flooring and wall paneling. Some of these lawsuits are pending against
manufacturers of manufactured housing, suppliers of component parts, and related
persons in the distribution process. The Company is aware of a limited number of
cases in which plaintiffs have won judgments in these lawsuits.
Under the FTC Rule, which is described above under "Consumer Protection
Laws", the holder of any Contract secured by a Manufactured Home with respect to
which a formaldehyde claim has been successfully asserted may be liable to the
obligor for the amount paid by the obligor on the related Contract and may be
unable to collect amounts still due under the Contract. In the event an obligor
is successful in asserting such a claim, the related Securityholders could
suffer a loss if (i) the related Seller fails or cannot be required to
repurchase the affected Contract for a breach of representation and warranty and
(ii) the Master Servicer or the Trustee were unsuccessful in asserting any claim
of contribution or subrogation on behalf of the Securityholders against the
manufacturer or other persons who were directly liable to the plaintiff for the
damages. Typical products liability insurance policies held by manufacturers and
component suppliers of manufactured homes may not cover liabilities arising from
formaldehyde
85
<PAGE>
<PAGE>
in manufactured housing, with the result that recoveries from such
manufacturers, suppliers or other persons may be limited to their corporate
assets without the benefit of insurance.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT OF 1940
Under the terms of the Soldiers' and Sailors' Civil Relief Act of 1940,
as amended (the "Relief Act"), a Mortgagor who enters military service after the
origination of such Mortgagor's Mortgage Loan and certain Contracts (including a
Mortgagor who was in reserve status and is called to active duty after
origination of the Mortgage Loan and certain Contracts), may not be charged
interest (including fees and charges) above an annual rate of 6% during the
period of such Mortgagor's active duty status, unless a court orders otherwise
upon application of the lender. The Relief Act applies to Mortgagors who are
members of the Army, Navy, Air Force, Marines, National Guard, Reserves, Coast
Guard, and officers of the U.S. Public Health Service assigned to duty with the
military. Because the Relief Act applies to Mortgagors who enter military
service (including reservists who are called to active duty) after origination
of the related Mortgage Loan and related Contract, no information can be
provided as to the number of loans that may be affected by the Relief Act.
Application of the Relief Act would adversely affect, for an indeterminate
period of time, the ability of the Master Servicer to collect full amounts of
interest on certain of the Mortgage Loans and Contracts. Any shortfall in
interest collections resulting from the application of the Relief Act or similar
legislation or regulations, which would not be recoverable from the related
Mortgage Loans and Contracts, would result in a reduction of the amounts
distributable to the holders of the related Securities, and would not be covered
by advances or by any Letter of Credit or any other form of credit enhancement
provided in connection with the related series of Securities. In addition, the
Relief Act imposes limitations that would impair the ability of the Master
Servicer to foreclose on an affected Mortgage Loan or enforce rights under a
Contract during the Mortgagor's period of active duty status, and, under certain
circumstances, during an additional three month period thereafter. Thus, in the
event that the Relief Act or similar legislation or regulations applies to any
Mortgage Loan and Contract which goes into default, there may be delays in
payment and losses on the related Securities in connection therewith. Any other
interest shortfalls, deferrals or forgiveness of payments on the Mortgage Loans
and Contracts resulting from similar legislation or regulations may result in
delays in payments or losses to Securityholders of the related series.
FORFEITURES IN DRUG AND RICO PROCEEDINGS
Federal law provides that property owned by persons convicted of
drug-related crimes or of criminal violations of the Racketeer Influenced and
Corrupt Organizations ("RICO") statute can be seized by the government if the
property was used in, or purchased with the proceeds of, such crimes. Under
procedures contained in the Comprehensive Crime Control Act of 1984 (the "Crime
Control Act"), the government may seize the property even before conviction. The
government must publish notice of the forfeiture proceeding and may give notice
to all parties "known to have an alleged interest in the property", including
the holders of mortgage loans.
A lender may avoid forfeiture of its interest in the property if it
establishes that: (i) its mortgage was executed and recorded before commission
of the crime upon which the forfeiture is based, or (ii) the lender was, at the
time of execution of the mortgage, "reasonably without cause to believe" that
the property was used in, or purchased with the proceeds of, illegal drug or
RICO activities.
JUNIOR MORTGAGES
Some of the Mortgage Loans or Contracts may be secured by mortgages or
deeds of trust which are junior to senior mortgages or deeds of trust which are
not part of the Trust Fund. The rights of the Securityholders, as mortgagee
under a junior mortgage, are subordinate to those of the mortgagee under the
senior mortgage, including the prior rights of the senior mortgagee to receive
hazard insurance and condemnation proceeds and to cause the property securing
the Mortgage Loan or Contract to be sold upon default of the mortgagor, which
may extinguish the junior mortgagee's lien unless the junior mortgagee asserts
its subordinate interest in the property in foreclosure litigation and, in
certain cases, either reinitiates or satisfies the defaulted senior loan or
loans. A junior mortgagee may satisfy a defaulted senior loan in full or, in
some states, may cure such default and bring the senior loan current thereby
reinstating the senior loan, in either event usually 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. Where applicable law or the terms of the senior mortgage or
deed of trust do not require
86
<PAGE>
<PAGE>
notice of default to the junior mortgagee, the lack of any such notice may
prevent the junior mortgagee from exercising any right to reinstate the loan
which applicable law may provide.
The standard form of the mortgage or deed of trust 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 or deed of trust, 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 underlying 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 junior mortgages in the order
of their priority.
Another provision sometimes found in the form of the mortgage or deed
of trust used by institutional lenders obligates the mortgagor to pay before
delinquency all taxes and assessments on the property and, when due, all
encumbrances, charges and liens on the property which are prior to the mortgage
or deed of trust, to provide and maintain fire insurance on the property, to
maintain and repair the property and not to commit or permit any waste thereof,
and to appear in and defend any action or proceeding purporting to affect the
property or the rights of the mortgagee under the mortgage. Upon a failure of
the mortgagor to perform any of these obligations, the mortgagee or beneficiary
is given the right under certain mortgages or deeds of trust to perform the
obligation itself, at its election, with the mortgagor agreeing to reimburse the
mortgagee for any sums expended by the mortgagee on behalf of the mortgagor. All
sums so expended by a senior mortgagee become part of the indebtedness secured
by the senior mortgage.
NEGATIVE AMORTIZATION LOANS
A recent case decided by the United States Court of Appeals, First
Circuit, held that state restrictions on the compounding of interest are not
preempted by the provisions of the Depository Institutions Deregulation and
Monetary Control Act of 1980 ("DIDMC") and as a result, a mortgage loan that
provided for negative amortization violated New Hampshire's requirement that
first mortgage loans provide for computation of interest on a simple interest
basis. The holding was limited to the effect of DIDMC on state laws regarding
the compounding of interest and the court did not address the applicability of
the Alternative Mortgage Transaction Parity Act of 1982, which authorizes lender
to make residential mortgage loans that provide for negative amortization. The
First Circuit's decision is binding authority only on Federal District Courts in
Maine, New Hampshire, Massachusetts, Rhode Island and Puerto Rico.
FEDERAL INCOME TAX CONSEQUENCES
GENERAL
The following is a general discussion of the anticipated material
federal income tax consequences of the purchase, ownership and disposition of
Offered Securities offered hereunder. This discussion has been prepared based on
the advice of, and to the extent it relates to matters of law or legal
conclusions with respect thereto, represents the opinion of Thacher Proffitt &
Wood, counsel to the Company. This discussion is directed solely to
Securityholders that hold the Securities as capital assets within the meaning of
Section 1221 of the Internal Revenue Code of 1986 (the "Code") (although
portions thereof may also apply to Securityholders who do not hold Securities as
"capital assets") and does not purport to discuss all federal income tax
consequences that may be applicable to the individual circumstances of
particular categories of investors, some of which (such as banks, insurance
companies and foreign investors) may be subject to special treatment under the
Code. Further, the authorities on which this discussion, and the opinion
referred to below, are based are subject to change or differing interpretations,
which could apply retroactively. Prospective investors should note that no
rulings have been or will be sought from the Internal Revenue Service (the
"IRS") with respect to any of the federal income tax consequences discussed
below, and no assurance can be given the IRS will not take contrary positions.
Taxpayers and preparers of tax returns (including those filed by any REMIC or
other issuer) should be aware that under applicable Treasury regulations a
provider of advice on
87
<PAGE>
<PAGE>
specific issues of law is not considered an income tax return preparer unless
the advice (i) is given with respect to events that have occurred at the time
the advice is rendered and is not given with respect to the consequences of
contemplated actions, and (ii) is directly relevant to the determination of an
entry on a tax return. Accordingly, taxpayers should consult their own tax
advisors and tax return preparers regarding the preparation of any item on a tax
return, even where the anticipated tax treatment has been discussed herein. In
addition to the federal income tax consequences described herein, potential
investors should consider the state and local tax consequences, if any, of the
purchase, ownership and disposition of the Securities. See "State and Other Tax
Consequences." Securityholders are advised to consult their own tax advisors
concerning the federal, state, local or other tax consequences to them of the
purchase, ownership and disposition of the Securities offered hereunder. To the
extent there is a material change to the tax consequences as disclosed herein, a
tax opinion will be filed as an exhibit to a post-effective amendment or in a
Current Report on Form 8-K.
The following discussion addresses securities of three general types:
(i) certificates ("REMIC Certificates") representing interests in a Trust Fund,
or a portion thereof, that the Trustee, the Master Servicer or another specified
party (the "REMIC Administrator") will elect to have treated as a real estate
mortgage investment conduit ("REMIC") under Sections 860A through 860G (the
"REMIC Provisions") of the Code, (ii) notes representing indebtedness of a trust
fund as to which no REMIC election will be made and (iii) certificates ("Grantor
Trust Certificates") representing interests in a Trust Fund ("Grantor Trust
Fund") as to which no REMIC election will be made. The Prospectus Supplement for
each series of Certificates will indicate whether a REMIC election (or
elections) will be made for the related Trust Fund and, if such an election is
to be made, will identify all "regular interests" and "residual interests" in
the REMIC. For purposes of this tax discussion, references to a "Securityholder"
or a "holder" are to the beneficial owner of a Security.
The following discussion is based in part upon the rules governing
original issue discount that are set forth in Sections 1271-1273 and 1275 of the
Code and in the Treasury regulations issued thereunder (the "OID Regulations"),
and in part upon the REMIC Provisions and the Treasury regulations issued
thereunder (the "REMIC Regulations"). The OID Regulations do not adequately
address certain issues relevant to, and in some instances provide that they are
not applicable to, securities such as the Certificates.
REMICS
Classification of REMICS. On or prior to the date of the related
Prospectus Supplement with respect to the proposed issuance of each series of
REMIC Certificates, Thacher Proffitt & Wood, counsel to the Company, will
deliver its opinion (and will file such opinion under Form 8-K) generally to the
effect that, assuming compliance with all provisions of the related Pooling
Agreement, for federal income tax purposes, the related Trust Fund (or each
applicable portion thereof) will qualify as a REMIC and the REMIC Certificates
offered with respect thereto will be considered to evidence ownership of
"regular interests" ("REMIC Regular Certificates") or "residual interests"
("REMIC Residual Certificates") in that REMIC within the meaning of the REMIC
Provisions.
If an entity electing to be treated as a REMIC fails to comply with one
or more of the ongoing requirements of the Code for such status during any
taxable year, the Code provides that the entity will not be treated as a REMIC
for such year and thereafter. In that event, such entity may be taxable as a
corporation under Treasury regulations, and the related REMIC Certificates may
not be accorded the status or given the tax treatment described below. Although
the Code authorizes the Treasury Department to issue regulations providing
relief in the event of an inadvertent termination of REMIC status, no such
regulations have been issued. Any such relief, moreover, may be accompanied by
sanctions, such as the imposition of a corporate tax on all or a portion of the
Trust Fund's income for the period in which the requirements for such status are
not satisfied. The Pooling Agreement with respect to each REMIC will include
provisions designed to maintain the Trust Fund's status as a REMIC under the
REMIC Provisions. It is not anticipated that the status of any Trust Fund as a
REMIC will be inadvertently terminated.
Characterization of Investments in REMIC Certificates. In general, the
REMIC Certificates will be "real estate assets" within the meaning of Section
856(c)(5)(A) of the Code and assets described in Section 7701(a)(19)(C) of the
Code in the same proportion that the assets of the REMIC underlying such
Certificates would be so treated. Moreover, if 95% or more of the assets of the
REMIC qualify for any of the foregoing treatments at all times during a calendar
year, the REMIC Certificates will qualify for the corresponding status in their
entirety for that calendar
88
<PAGE>
<PAGE>
year. Interest (including original issue discount) on the REMIC Regular
Certificates and income allocated to the class of REMIC Residual Certificates
will be interest described in Section 856(c)(3)(B) of the Code to the extent
that such Certificates are treated as "real estate assets" within the meaning of
Section 856(c)(4)(A) of the Code. In addition, the REMIC Regular Certificates
will be "qualified mortgages" within the meaning of Section 860G(a)(3) of the
Code if transferred to another REMIC on its startup day in exchange for regular
or residual interests therein. The determination as to the percentage of the
REMIC's assets that constitute assets described in the foregoing sections of the
Code will be made with respect to each calendar quarter based on the average
adjusted basis of each category of the assets held by the REMIC during such
calendar quarter. The REMIC Administrator will report those determinations to
Certificateholders in the manner and at the times required by applicable
Treasury regulations.
The assets of the REMIC will include, in addition to Mortgage Loans,
payments on Mortgage Loans held pending distribution on the REMIC Certificates
and any property acquired by foreclosure held pending sale, and may include
amounts in reserve accounts. It is unclear whether property acquired by
foreclosure held pending sale and amounts in reserve accounts would be
considered to be part of the Mortgage Loans, or whether such assets (to the
extent not invested in assets described in the foregoing sections) otherwise
would receive the same treatment as the Mortgage Loans for purposes of all of
the foregoing sections. In addition, in some instances Mortgage Loans may not be
treated entirely as assets described in the foregoing sections of the Code. If
so, the related Prospectus Supplement will describe the Mortgage Loans that may
not be so treated. The REMIC Regulations do provide, however, that cash received
from payments on Mortgage Loans held pending distribution is considered part of
the Mortgage Loans for purposes of Section 856(c)(4)(A) of the Code.
Furthermore, foreclosure property will qualify as "real estate assets" under
Section 856(c)(4)(A) of the Code.
Tiered REMIC Structures. For certain series of REMIC Certificates, 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.
As to each such series of REMIC Certificates, in the opinion of counsel to the
Company, assuming compliance with all provisions of the related Pooling
Agreement, the Tiered REMICs will each qualify as a REMIC and the REMIC
Certificates issued by the Tiered REMICs will be considered to evidence
ownership of REMIC Regular Certificates or REMIC Residual Certificates in the
related REMIC within the meaning of the REMIC Provisions.
Solely for purposes of determining whether the REMIC Certificates will
be "real estate assets" within the meaning of Section 856(c)(5)(A) of the Code,
and "loans secured by an interest in real property" under Section 7701(a)(19)(C)
of the Code, and whether the income on such Certificates is interest described
in Section 856(c)(3)(B) of the Code, the Tiered REMICs will be treated as one
REMIC.
Taxation of Owners of REMIC Regular Certificates.
General. Except as otherwise stated in this discussion, REMIC Regular
Certificates will be treated for federal income tax purposes as debt instruments
issued by the REMIC and not as ownership interests in the REMIC or its assets.
Moreover, holders of REMIC Regular Certificates that otherwise report income
under a cash method of accounting will be required to report income with respect
to REMIC Regular Certificates under an accrual method.
Original Issue Discount. Certain REMIC Regular Certificates may be
issued with "original issue discount" within the meaning of Section 1273(a) of
the Code. Any holders of REMIC Regular Certificates issued with original issue
discount generally will be required to include original issue discount in income
as it accrues, in accordance with the "constant yield" method described below,
in advance of the receipt of the cash attributable to such income. In addition,
Section 1272(a)(6) of the Code provides special rules applicable to REMIC
Regular Certificates and certain other debt instruments issued with original
issue discount. Regulations have not been issued under that section.
The Code requires that a reasonable prepayment assumption be used with
respect to Mortgage Loans held by a REMIC in computing the accrual of original
issue discount on REMIC Regular Certificates issued by that REMIC, and that
adjustments be made in the amount and rate of accrual of such discount to
reflect differences between the actual prepayment rate and the prepayment
assumption. The prepayment assumption is to be determined in a manner prescribed
in Treasury regulations; as noted above, those regulations have not been issued.
The Conference Committee Report accompanying the Tax Reform Act of 1986 (the
"Committee Report") indicates that
89
<PAGE>
<PAGE>
the regulations will provide that the prepayment assumption used with respect to
a REMIC Regular Certificate must be the same as that used in pricing the initial
offering of such REMIC Regular Certificate. The prepayment assumption (the
"Prepayment Assumption") used in reporting original issue discount for each
series of REMIC Regular Certificates will be consistent with this standard and
will be disclosed in the related Prospectus Supplement. However, neither the
Company, the Master Servicer nor the Trustee will make any representation that
the Mortgage Loans will in fact prepay at a rate conforming to the Prepayment
Assumption or at any other rate.
The original issue discount, if any, on a REMIC Regular Certificate
will be the excess of its stated redemption price at maturity over its issue
price. The issue price of a particular class of REMIC Regular Certificates will
be the first cash price at which a substantial amount of REMIC Regular
Certificates of that class is sold (excluding sales to bond houses, brokers and
underwriters). If less than a substantial amount of a particular class of REMIC
Regular Certificates is sold for cash on or prior to the date of their initial
issuance (the "Closing Date"), the issue price for such class will be the fair
market value of such class on the Closing Date. Under the OID Regulations, the
stated redemption price of a REMIC Regular Certificate is equal to the total of
all payments to be made on such Certificate other than "qualified stated
interest." "Qualified stated interest" is interest that is unconditionally
payable at least annually (during the entire term of the instrument) at a single
fixed rate, or at a "qualified floating rate," an "objective rate," a
combination of a single fixed rate and one or more "qualified floating rates" or
one "qualified inverse floating rate," or a combination of "qualified floating
rates" that does not operate in a manner that accelerates or defers interest
payments on such REMIC Regular Certificate.
In the case of REMIC Regular Certificates bearing adjustable interest
rates, the determination of the total amount of original issue discount and the
timing of the inclusion thereof will vary according to the characteristics of
such REMIC Regular Certificates. If the original issue discount rules apply to
such Certificates, the related Prospectus Supplement will describe the manner in
which such rules will be applied with respect to those Certificates in preparing
information returns to the Certificateholders and the Internal Revenue Service
(the "IRS").
Certain classes of the REMIC Regular Certificates may provide for the
first interest payment with respect to such Certificates to be made more than
one month after the date of issuance, a period which is longer than the
subsequent monthly intervals between interest payments. Assuming the "accrual
period" (as defined below) for original issue discount is each monthly period
that ends on the day prior to each Distribution Date, in some cases, as a
consequence of this "long first accrual period," some or all interest payments
may be required to be included in the stated redemption price of the REMIC
Regular Certificate and accounted for as original issue discount. Because
interest on REMIC Regular Certificates must in any event be accounted for under
an accrual method, applying this analysis would result in only a slight
difference in the timing of the inclusion in income of the yield on the REMIC
Regular Certificates.
In addition, if the accrued interest to be paid on the first
Distribution Date is computed with respect to a period that begins prior to the
Closing Date, a portion of the purchase price paid for a REMIC Regular
Certificate will reflect such accrued interest. In such cases, information
returns to the Certificateholders and the IRS will be based on the position that
the portion of the purchase price paid for the interest accrued with respect to
periods prior to the Closing Date is treated as part of the overall cost of such
REMIC Regular Certificate (and not as a separate asset the cost of which is
recovered entirely out of interest received on the next Distribution Date) and
that portion of the interest paid on the first Distribution Date in excess of
interest accrued for a number of days corresponding to the number of days from
the Closing Date to the first Distribution Date should be included in the stated
redemption price of such REMIC Regular Certificate. However, the OID Regulations
state that all or some portion of such accrued interest may be treated as a
separate asset the cost of which is recovered entirely out of interest paid on
the first Distribution Date. It is unclear how an election to do so would be
made under the OID Regulations and whether such an election could be made
unilaterally by a Certificateholder.
Notwithstanding the general definition of original issue discount,
original issue discount on a REMIC Regular Certificate will be considered to be
de minimis if it is less than 0.25% of the stated redemption price of the REMIC
Regular Certificate multiplied by its weighted average life. For this purpose,
the weighted average life of the REMIC Regular Certificate is computed as the
sum of the amounts determined, as to each payment included in the stated
redemption price of such REMIC Regular Certificate, by multiplying (i) the
number of complete years (rounding down for partial years) from the issue date
until such payment is expected to be made (presumably taking into account the
90
<PAGE>
<PAGE>
Prepayment Assumption) by (ii) a fraction, the numerator of which is the amount
of the payment, and the denominator of which is the stated redemption price at
maturity of such REMIC Regular Certificate. Under the OID Regulations, original
issue discount of only a de minimis amount (other than de minimis original issue
discount attributable to a so-called "teaser" interest rate or an initial
interest holiday) will be included in income as each payment of stated principal
is made, based on the product of the total amount of such de minimis original
issue discount and a fraction, the numerator of which is the amount of such
principal payment and the denominator of which is the outstanding stated
principal amount of the REMIC Regular Certificate. The OID Regulations also
would permit a Certificateholder to elect to accrue de minimis original issue
discount into income currently based on a constant yield method. See "Taxation
of Owners of REMIC Regular Certificates--Market Discount" for a description of
such election under the OID Regulations.
If original issue discount on a REMIC Regular Certificate is in excess
of a de minimis amount, the holder of such Certificate must include in ordinary
gross income the sum of the "daily portions" of original issue discount for each
day during its taxable year on which it held such REMIC Regular Certificate,
including the purchase date but excluding the disposition date. In the case of
an original holder of a REMIC Regular Certificate, the daily portions of
original issue discount will be determined as follows.
As to each "accrual period," that is, each period that ends on a date
that corresponds to the day prior to each Distribution Date and begins on the
first day following the immediately preceding accrual period (or in the case of
the first such period, begins on the Closing Date), a calculation will be made
of the portion of the original issue discount that accrued during such accrual
period. The portion of original issue discount that accrues in any accrual
period will equal the excess, if any, of (i) the sum of (A) the present value,
as of the end of the accrual period, of all of the distributions remaining to be
made on the REMIC Regular Certificate, if any, in future periods and (B) the
distributions made on such REMIC Regular Certificate during the accrual period
of amounts included in the stated redemption price, over (ii) the adjusted issue
price of such REMIC Regular Certificate at the beginning of the accrual period.
The present value of the remaining distributions referred to in the preceding
sentence will be calculated (i) assuming that distributions on the REMIC Regular
Certificate will be received in future periods based on the Mortgage Loans being
prepaid at a rate equal to the Prepayment Assumption, (ii) using a discount rate
equal to the original yield to maturity of the Certificate and (iii) taking into
account events (including actual prepayments) that have occurred before the
close of the accrual period. For these purposes, the original yield to maturity
of the Certificate will be calculated based on its issue price and assuming that
distributions on the Certificate will be made in all accrual periods based on
the Mortgage Loans being prepaid at a rate equal to the Prepayment Assumption.
The adjusted issue price of a REMIC Regular Certificate at the beginning of any
accrual period will equal the issue price of such Certificate, increased by the
aggregate amount of original issue discount that accrued with respect to such
Certificate in prior accrual periods, and reduced by the amount of any
distributions made on such REMIC Regular Certificate in prior accrual periods of
amounts included in the stated redemption price. The original issue discount
accruing during any accrual period, computed as described above, will be
allocated ratably to each day during the accrual period to determine the daily
portion of original issue discount for such day.
A subsequent purchaser of a REMIC Regular Certificate that purchases
such Certificate at a cost (excluding any portion of such cost attributable to
accrued qualified stated interest) less than its remaining stated redemption
price will also be required to include in gross income the daily portions of any
original issue discount with respect to such Certificate. However, each such
daily portion will be reduced, if such cost is in excess of its "adjusted issue
price," in proportion to the ratio such excess bears to the aggregate original
issue discount remaining to be accrued on such REMIC Regular Certificate. The
adjusted issue price of a REMIC Regular Certificate on any given day equals the
sum of (i) the adjusted issue price (or, in the case of the first accrual
period, the issue price) of such Certificate at the beginning of the accrual
period which includes such day and (ii) the daily portions of original issue
discount for all days during such accrual period prior to such day.
Market Discount. A Certificateholder that purchases a REMIC Regular
Certificate at a market discount, that is, in the case of a REMIC Regular
Certificate issued without original issue discount, at a purchase price less
than its remaining stated principal amount, or in the case of a REMIC Regular
Certificate issued with original issue discount, at a purchase price less than
its adjusted issue price will recognize gain upon receipt of each distribution
representing stated redemption price. In particular, under Section 1276 of the
Code such a Certificateholder generally will be required to allocate the portion
of each such distribution representing stated redemption price first to accrued
91
<PAGE>
<PAGE>
market discount not previously included in income, and to recognize ordinary
income to that extent. A Certificateholder may elect to include market discount
in income currently as it accrues rather than including it on a deferred basis
in accordance with the foregoing. If made, such election will apply to all
market discount bonds acquired by such Certificateholder on or after the first
day of the first taxable year to which such election applies. In addition, the
OID Regulations permit a Certificateholder to elect to accrue all interest,
discount (including de minimis market or original issue discount) in income as
interest, and to amortize premium, based on a constant yield method. If such an
election were made with respect to a REMIC Regular Certificate with market
discount, the Certificateholder would be deemed to have made an election to
include currently market discount in income with respect to all other debt
instruments having market discount that such Certificateholder acquires during
the taxable year of the election or thereafter, and possibly previously acquired
instruments. Similarly, a Certificateholder that made this election for a
Certificate that is acquired at a premium would be deemed to have made an
election to amortize bond premium with respect to all debt instruments having
amortizable bond premium that such Certificateholder owns or acquires. See
"Taxation of Owners of REMIC Regular Certificates--Premium" below. Each of these
elections to accrue interest, discount and premium with respect to a Certificate
on a constant yield method or as interest would be irrevocable, except with the
approval of the IRS.
However, market discount with respect to a REMIC Regular Certificate
will be considered to be de minimis for purposes of Section 1276 of the Code if
such market discount is less than 0.25% of the remaining stated redemption price
of such REMIC Regular Certificate multiplied by the number of complete years to
maturity remaining after the date of its purchase. In interpreting a similar
rule with respect to original issue discount on obligations payable in
installments, the OID Regulations refer to the weighted average maturity of
obligations, and it is likely that the same rule will be applied with respect to
market discount, presumably taking into account the Prepayment Assumption. If
market discount is treated as de minimis under this rule, it appears that the
actual discount would be treated in a manner similar to original issue discount
of a de minimis amount. See "Taxation of Owners of REMIC Regular
Certificates--Original Issue Discount" above. Such treatment would result in
discount being included in income at a slower rate than discount would be
required to be included in income using the method described above.
Section 1276(b)(3) of the Code specifically authorizes the Treasury
Department to issue regulations providing for the method for accruing market
discount on debt instruments, the principal of which is payable in more than one
installment. Until regulations are issued by the Treasury Department, certain
rules described in the Committee Report apply. The Committee Report indicates
that in each accrual period market discount on REMIC Regular Certificates should
accrue, at the Certificateholder's option: (i) on the basis of a constant yield
method, (ii) in the case of a REMIC Regular Certificate issued without original
issue discount, in an amount that bears the same ratio to the total remaining
market discount as the stated interest paid in the accrual period bears to the
total amount of stated interest remaining to be paid on the REMIC Regular
Certificate as of the beginning of the accrual period, or (iii) in the case of a
REMIC Regular Certificate issued with original issue discount, in an amount that
bears the same ratio to the total remaining market discount as the original
issue discount accrued in the accrual period bears to the total original issue
discount remaining on the REMIC Regular Certificate at the beginning of the
accrual period. Moreover, the Prepayment Assumption used in calculating the
accrual of original issue discount is also used in calculating the accrual of
market discount. Because the regulations referred to in this paragraph have not
been issued, it is not possible to predict what effect such regulations might
have on the tax treatment of a REMIC Regular Certificate purchased at a discount
in the secondary market.
To the extent that REMIC Regular Certificates provide for monthly or
other periodic distributions throughout their term, the effect of these rules
may be to require market discount to be includible in income at a rate that is
not significantly slower than the rate at which such discount would accrue if it
were original issue discount. Moreover, in any event a holder of a REMIC Regular
Certificate generally will be required to treat a portion of any gain on the
sale or exchange of such Certificate as ordinary income to the extent of the
market discount accrued to the date of disposition under one of the foregoing
methods, less any accrued market discount previously reported as ordinary
income.
Further, under Section 1277 of the Code a holder of a REMIC Regular
Certificate may be required to defer a portion of its interest deductions for
the taxable year attributable to any indebtedness incurred or continued to
purchase or carry a REMIC Regular Certificate purchased with market discount.
For these purposes, the de minimis rule referred to above applies. Any such
deferred interest expense would not exceed the market discount that accrues
92
<PAGE>
<PAGE>
during such taxable year and is, in general, allowed as a deduction not later
than the year in which such market discount is includible in income. If such
holder elects to include market discount in income currently as it accrues on
all market discount instruments acquired by such holder in that taxable year or
thereafter, the interest deferral rule described above will not apply.
Premium. A REMIC Regular Certificate purchased at a cost (excluding any
portion of such cost attributable to accrued qualified stated interest) greater
than its remaining stated redemption price will be considered to be purchased at
a premium. The holder of such a REMIC Regular Certificate may elect under
Section 171 of the Code to amortize such premium under the constant yield method
over the life of the Certificate. If made, such an election will apply to all
debt instruments having amortizable bond premium that the holder owns or
subsequently acquires. Amortizable premium will be treated as an offset to
interest income on the related debt instrument, rather than as a separate
interest deduction. The OID Regulations also permit Certificateholders to elect
to include all interest, discount and premium in income based on a constant
yield method, further treating the Certificateholder as having made the election
to amortize premium generally. See "Taxation of Owners of REMIC Regular
Certificates--Market Discount" above. The Committee Report states that the same
rules that apply to accrual of market discount (which rules will require use of
a Prepayment Assumption in accruing market discount with respect to REMIC
Regular Certificates without regard to whether such Certificates have original
issue discount) will also apply in amortizing bond premium under Section 171 of
the Code.
Realized Losses. Under Section 166 of the Code, both corporate holders
of the REMIC Regular Certificates and noncorporate holders of the REMIC Regular
Certificates that acquire such Certificates in connection with a trade or
business should be allowed to deduct, as ordinary losses, any losses sustained
during a taxable year in which their Certificates become wholly or partially
worthless as the result of one or more realized losses on the Mortgage Loans.
However, it appears that a noncorporate holder that does not acquire a REMIC
Regular Certificate in connection with a trade or business will not be entitled
to deduct a loss under Section 166 of the Code until such holder's Certificate
becomes wholly worthless (i.e., until its outstanding principal balance has been
reduced to zero) and that the loss will be characterized as a short-term capital
loss.
Each holder of a REMIC Regular Certificate will be required to accrue
interest and original issue discount with respect to such Certificate, without
giving effect to any reductions in distributions attributable to defaults or
delinquencies on the Mortgage Loans or the Underlying Certificates until it can
be established that any such reduction ultimately will not be recoverable. As a
result, the amount of taxable income reported in any period by the holder of a
REMIC Regular Certificate could exceed the amount of economic income actually
realized by the holder in such period. Although the holder of a REMIC Regular
Certificate eventually will recognize a loss or reduction in income attributable
to previously accrued and included income that as the result of a realized loss
ultimately will not be realized, the law is unclear with respect to the timing
and character of such loss or reduction in income.
Taxation of Owners of REMIC Residual Certificates
General. Although a REMIC is a separate entity for federal income tax
purposes, a REMIC generally is not subject to entity-level taxation, except with
regard to prohibited transactions and certain other transactions. See
"-Prohibited Transactions Tax and Other Taxes" below. Rather, the taxable income
or net loss of a REMIC is generally taken into account by the holder of the
REMIC Residual Certificates. Accordingly, the REMIC Residual Certificates will
be subject to tax rules that differ significantly from those that would apply if
the REMIC Residual Certificates were treated for federal income tax purposes as
direct ownership interests in the Mortgage Loans or as debt instruments issued
by the REMIC.
A holder of a REMIC Residual Certificate generally will be required to
report its daily portion of the taxable income or, subject to the limitations
noted in this discussion, the net loss of the REMIC for each day during a
calendar quarter that such holder owned such REMIC Residual Certificate. For
this purpose, the taxable income or net loss of the REMIC will be allocated to
each day in the calendar quarter ratably using a "30 days per month/90 days per
quarter/360 days per year" convention unless otherwise disclosed in the related
Prospectus Supplement. The daily amounts so allocated will then be allocated
among the REMIC Residual Certificateholders in proportion to their respective
ownership interests on such day. Any amount included in the gross income or
allowed as a loss of any REMIC Residual Certificateholder by virtue of this
paragraph will be treated as ordinary income or loss. The taxable
93
<PAGE>
<PAGE>
income of the REMIC will be determined under the rules described below in
"Taxable Income of the REMIC" and will be taxable to the REMIC Residual
Certificateholders without regard to the timing or amount of cash distributions
by the REMIC. Ordinary income derived from REMIC Residual Certificates will be
"portfolio income" for purposes of the taxation of taxpayers subject to
limitations under Section 469 of the Code on the deductibility of "passive
losses."
A holder of a REMIC Residual Certificate that purchased such
Certificate from a prior holder of such Certificate also will be required to
report on its federal income tax return amounts representing its daily share of
the taxable income (or net loss) of the REMIC for each day that it holds such
REMIC Residual Certificate. Those daily amounts generally will equal the amounts
of taxable income or net loss determined as described above. The Committee
Report indicates that certain modifications of the general rules may be made, by
regulations, legislation or otherwise to reduce (or increase) the income of a
REMIC Residual Certificateholder that purchased such REMIC Residual Certificate
from a prior holder of such Certificate at a price greater than (or less than)
the adjusted basis (as defined below) such REMIC Residual Certificate would have
had in the hands of an original holder of such Certificate. The REMIC
Regulations, however, do not provide for any such modifications.
Any payments received by a holder of a REMIC Residual Certificate in
connection with the acquisition of such REMIC Residual Certificate will be taken
into account in determining the income of such holder for federal income tax
purposes. Although it appears likely that any such payment would be includible
in income immediately upon its receipt, the IRS might assert that such payment
should be included in income over time according to an amortization schedule or
according to some other method. Because of the uncertainty concerning the
treatment of such payments, holders of REMIC Residual Certificates should
consult their tax advisors concerning the treatment of such payments for income
tax purposes.
The amount of income REMIC Residual Certificateholders will be required
to report (or the tax liability associated with such income) may exceed the
amount of cash distributions received from the REMIC for the corresponding
period. Consequently, REMIC Residual Certificateholders should have other
sources of funds sufficient to pay any federal income taxes due as a result of
their ownership of REMIC Residual Certificates or unrelated deductions against
which income may be offset, subject to the rules relating to "excess inclusions"
and "noneconomic" residual interests discussed below. The fact that the tax
liability associated with the income allocated to REMIC Residual
Certificateholders may exceed the cash distributions received by such REMIC
Residual Certificateholders for the corresponding period may significantly
adversely affect such REMIC Residual Certificateholders' after-tax rate of
return. Such disparity between income and distributions may not be offset by
corresponding losses or reductions of income attributable to the REMIC Residual
Certificateholder until subsequent tax years and, then, may not be completely
offset due to changes in the Code, tax rates or character of the income or loss.
Taxable Income of the REMIC. The taxable income of the REMIC will equal
the income from the Mortgage Loans and other assets of the REMIC plus any
cancellation of indebtedness income due to the allocation of realized losses to
REMIC Regular Certificates, less the deductions allowed to the REMIC for
interest (including original issue discount and reduced by any premium on
issuance) on the REMIC Regular Certificates (and any other class of REMIC
Certificates constituting "regular interests" in the REMIC not offered hereby),
amortization of any premium on the Mortgage Loans, bad debt losses with respect
to the Mortgage Loans and, except as described below, for servicing,
administrative and other expenses.
For purposes of determining its taxable income, the REMIC will have an
initial aggregate basis in its assets equal to the sum of the issue prices of
all REMIC Certificates (or, if a class of REMIC Certificates is not sold
initially, their fair market values). Such aggregate basis will be allocated
among the Mortgage Loans and the other assets of the REMIC in proportion to
their respective fair market values. The issue price of any REMIC Certificates
offered hereby will be determined in the manner described above under
"--Taxation of Owners of REMIC Regular Certificates--Original Issue Discount."
The issue price of a REMIC Certificate received in exchange for an interest in
the Mortgage Loans or other property will equal the fair market value of such
interests in the Mortgage Loans or other property. Accordingly, if one or more
classes of REMIC Certificates are retained initially rather than sold, the REMIC
Administrator may be required to estimate the fair market value of such
interests in order to determine the basis of the REMIC in the Mortgage Loans and
other property held by the REMIC.
94
<PAGE>
<PAGE>
Subject to possible application of the de minimis rules, the method of
accrual by the REMIC of original issue discount income and market discount
income with respect to Mortgage Loans that it holds will be equivalent to the
method for accruing original issue discount income for holders of REMIC Regular
Certificates (that is, under the constant yield method taking into account the
Prepayment Assumption). However, a REMIC that acquires loans at a market
discount must include such market discount in income currently, as it accrues,
on a constant yield basis. See "--Taxation of Owners of REMIC Regular
Certificates" above, which describes a method for accruing such discount income
that is analogous to that required to be used by a REMIC as to Mortgage Loans
with market discount that it holds.
A Mortgage Loan will be deemed to have been acquired with discount (or
premium) to the extent that the REMIC's basis therein, determined as described
in the preceding paragraph, is less than (or greater than) its stated redemption
price. Any such discount will be includible in the income of the REMIC as it
accrues, in advance of receipt of the cash attributable to such income, under a
method similar to the method described above for accruing original issue
discount on the REMIC Regular Certificates. It is anticipated that each REMIC
will elect under Section 171 of the Code to amortize any premium on the Mortgage
Loans. Premium on any Mortgage Loan to which such election applies may be
amortized under a constant yield method, presumably taking into account a
Prepayment Assumption. Further, such an election would not apply to any Mortgage
Loan originated on or before September 27, 1985. Instead, premium on such a
Mortgage Loan should be allocated among the principal payments thereon and be
deductible by the REMIC as those payments become due or upon the prepayment of
such Mortgage Loan.
A REMIC will be allowed deductions for interest (including original
issue discount) on the REMIC Regular Certificates (including any other class of
REMIC Certificates constituting "regular interests" in the REMIC not offered
hereby) equal to the deductions that would be allowed if the REMIC Regular
Certificates (including any other class of REMIC Certificates constituting
"regular interests" in the REMIC not offered hereby) were indebtedness of the
REMIC. Original issue discount will be considered to accrue for this purpose as
described above under "--Taxation of Owners of REMIC Regular
Certificates--Original Issue Discount," except that the de minimis rule and the
adjustments for subsequent holders of REMIC Regular Certificates (including any
other class of REMIC Certificates constituting "regular interests" in the REMIC
not offered hereby) described therein will not apply.
If a class of REMIC Regular Certificates is issued at a price in excess
of the stated redemption price of such class (such excess "Issue Premium"), the
net amount of interest deductions that are allowed the REMIC in each taxable
year with respect to the REMIC Regular Certificates of such class will be
reduced by an amount equal to the portion of the Issue Premium that is
considered to be amortized or repaid in that year. Although the matter is not
entirely certain, it is likely that Issue Premium would be amortized under a
constant yield method in a manner analogous to the method of accruing original
issue discount described above under "--Taxation of Owners of REMIC Regular
Certificates--Original Issue Discount."
As a general rule, the taxable income of a REMIC will be determined in
the same manner as if the REMIC were an individual having the calendar year as
its taxable year and using the accrual method of accounting. However, no item of
income, gain, loss or deduction allocable to a prohibited transaction will be
taken into account. See "--Prohibited Transactions Tax and Other Taxes" below.
Further, the limitation on miscellaneous itemized deductions imposed on
individuals by Section 67 of the Code (which allows such deductions only to the
extent they exceed in the aggregate two percent of the taxpayer's adjusted gross
income) will not be applied at the REMIC level so that the REMIC will be allowed
deductions for servicing, administrative and other non-interest expenses in
determining its taxable income. All such expenses will be allocated as a
separate item to the holders of REMIC Certificates, subject to the limitation of
Section 67 of the Code. See "--Possible Pass-Through of Miscellaneous Itemized
Deductions" below. If the deductions allowed to the REMIC exceed its gross
income for a calendar quarter, such excess will be the net loss for the REMIC
for that calendar quarter.
Basis Rules, Net Losses and Distributions. The adjusted basis of a
REMIC Residual Certificate will be equal to the amount paid for such REMIC
Residual Certificate, increased by amounts included in the income of the REMIC
Residual Certificateholder and decreased (but not below zero) by distributions
made, and by net losses allocated, to such REMIC Residual Certificateholder.
95
<PAGE>
<PAGE>
A REMIC Residual Certificateholder is not allowed to take into account
any net loss for any calendar quarter to the extent such net loss exceeds such
REMIC Residual Certificateholder's adjusted basis in its REMIC Residual
Certificate as of the close of such calendar quarter (determined without regard
to such net loss). Any loss that is not currently deductible by reason of this
limitation may be carried forward indefinitely to future calendar quarters and,
subject to the same limitation, may be used only to offset income from the REMIC
Residual Certificate. The ability of REMIC Residual Certificateholders to deduct
net losses may be subject to additional limitations under the Code, as to which
REMIC Residual Certificateholders should consult their tax advisors.
Any distribution on a REMIC Residual Certificate will be treated as a
non-taxable return of capital to the extent it does not exceed the holder's
adjusted basis in such REMIC Residual Certificate. To the extent a distribution
on a REMIC Residual Certificate exceeds such adjusted basis, it will be treated
as gain from the sale of such REMIC Residual Certificate. Holders of certain
REMIC Residual Certificates may be entitled to distributions early in the term
of the related REMIC under circumstances in which their bases in such REMIC
Residual Certificates will not be sufficiently large that such distributions
will be treated as nontaxable returns of capital. Their bases in such REMIC
Residual Certificates will initially equal the amount paid for such REMIC
Residual Certificates and will be increased by their allocable shares of taxable
income of the REMIC. However, such bases increases may not occur until the end
of the calendar quarter, or perhaps the end of the calendar year, with respect
to which such REMIC taxable income is allocated to the REMIC Residual
Certificateholders. To the extent such REMIC Residual Certificateholders'
initial bases are less than the distributions to such REMIC Residual
Certificateholders, and increases in such initial bases either occur after such
distributions or (together with their initial bases) are less than the amount of
such distributions, gain will be recognized to such REMIC Residual
Certificateholders on such distributions and will be treated as gain from the
sale of their REMIC Residual Certificates.
The effect of these rules is that a REMIC Residual Certificateholder
may not amortize its basis in a REMIC Residual Certificate, but may only recover
its basis through distributions, through the deduction of any net losses of the
REMIC or upon the sale of its REMIC Residual Certificate. See "--Sales of REMIC
Certificates" below. For a discussion of possible modifications of these rules
that may require adjustments to income of a holder of a REMIC Residual
Certificate other than an original holder in order to reflect any difference
between the cost of such REMIC Residual Certificate to such REMIC Residual
Certificateholder and the adjusted basis such REMIC Residual Certificate would
have in the hands of an original holder, see "--Taxation of Owners of REMIC
Residual Certificates--General" above.
Excess Inclusions. Any "excess inclusions" with respect to a REMIC
Residual Certificate will be subject to federal income tax in all events.
In general, the "excess inclusions" with respect to a REMIC Residual
Certificate for any calendar quarter will be the excess, if any, of (i) the
daily portions of REMIC taxable income allocable to such REMIC Residual
Certificate over (ii) the sum of the "daily accruals" (as defined below) for
each day during such quarter that such REMIC Residual Certificate was held by
such REMIC Residual Certificateholder. The daily accruals of a REMIC Residual
Certificateholder will be determined by allocating to each day during a calendar
quarter its ratable portion of the product of the "adjusted issue price" of the
REMIC Residual Certificate at the beginning of the calendar quarter and 120% of
the "long-term Federal rate" in effect on the Closing Date. For this purpose,
the adjusted issue price of a REMIC Residual Certificate as of the beginning of
any calendar quarter will be equal to the issue price of the REMIC Residual
Certificate, increased by the sum of the daily accruals for all prior quarters
and decreased (but not below zero) by any distributions made with respect to
such REMIC Residual Certificate before the beginning of such quarter. The issue
price of a REMIC Residual Certificate is the initial offering price to the
public (excluding bond houses and brokers) at which a substantial amount of the
REMIC Residual Certificates were sold. The "long-term Federal rate" is an
average of current yields on Treasury securities with a remaining term of
greater than nine years, computed and published monthly by the IRS. Although it
has not done so, the Treasury has authority to issue regulations that would
treat the entire amount of income accruing on a REMIC Residual Certificate as an
excess inclusion if the REMIC Residual Certificates are considered to have
"significant value."
For REMIC Residual Certificateholders, an excess inclusion (i) will not
be permitted to be offset by deductions, losses or loss carryovers from other
activities, (ii) will be treated as "unrelated business taxable income" to an
otherwise tax-exempt organization and (iii) will not be eligible for any rate
reduction or exemption under any
96
<PAGE>
<PAGE>
applicable tax treaty with respect to the 30% United States withholding tax
imposed on distributions to REMIC Residual Certificateholders that are foreign
investors. See, however, "--Foreign Investors in REMIC Certificates," below.
Furthermore, for purposes of the alternative minimum tax, excess
inclusions will not be permitted to be offset by the alternative tax net
operating loss deduction and alternative minimum taxable income may not be less
than the taxpayer's excess inclusions. The latter rule has the effect of
preventing nonrefundable tax credits from reducing the taxpayer's income tax to
an amount lower than the tentative minimum tax on excess inclusions.
In the case of any REMIC Residual Certificates held by a real estate
investment trust, the aggregate excess inclusions with respect to such REMIC
Residual Certificates, reduced (but not below zero) by the real estate
investment trust taxable income (within the meaning of Section 857(b)(2) of the
Code, excluding any net capital gain), will be allocated among the shareholders
of such trust in proportion to the dividends received by such shareholders from
such trust, and any amount so allocated will be treated as an excess inclusion
with respect to a REMIC Residual Certificate as if held directly by such
shareholder. Treasury regulations yet to be issued could apply a similar rule to
regulated investment companies, common trust funds and certain cooperatives; the
REMIC Regulations currently do not address this subject.
Noneconomic REMIC Residual Certificates. Under the REMIC Regulations,
transfers of "noneconomic" REMIC Residual Certificates will be disregarded for
all federal income tax purposes if "a significant purpose of the transfer was to
enable the transferor to impede the assessment or collection of tax." If such
transfer is disregarded, the purported transferor will continue to remain liable
for any taxes due with respect to the income on such "noneconomic" REMIC
Residual Certificate. The REMIC Regulations provide that a REMIC Residual
Certificate is noneconomic unless, based on the Prepayment Assumption and on any
required or permitted clean up calls, or required liquidation provided for in
the REMIC's organizational documents, (1) the present value of the expected
future distributions (discounted using the "applicable Federal rate" for
obligations whose term ends on the close of the last quarter in which excess
inclusions are expected to accrue with respect to the REMIC Residual
Certificate, which rate is computed and published monthly by the IRS) on the
REMIC Residual Certificate equals at least the present value of the expected tax
on the anticipated excess inclusions, and (2) the transferor reasonably expects
that the transferee will receive distributions with respect to the REMIC
Residual Certificate at or after the time the taxes accrue on the anticipated
excess inclusions in an amount sufficient to satisfy the accrued taxes.
Accordingly, all transfers of REMIC Residual Certificates that may constitute
noneconomic residual interests will be subject to certain restrictions under the
terms of the related Pooling Agreement that are intended to reduce the
possibility of any such transfer being disregarded. Such restrictions will
require each party to a transfer to provide an affidavit that no purpose of such
transfer is to impede the assessment or collection of tax, including certain
representations as to the financial condition of the prospective transferee, as
to which the transferor is also required to make a reasonable investigation to
determine such transferee's historic payment of its debts and ability to
continue to pay its debts as they come due in the future. Prior to purchasing a
REMIC Residual Certificate, prospective purchasers should consider the
possibility that a purported transfer of such REMIC Residual Certificate by such
a purchaser to another purchaser at some future date may be disregarded in
accordance with the above-described rules which would result in the retention of
tax liability by such purchaser.
The related Prospectus Supplement will disclose whether offered REMIC
Residual Certificates may be considered "noneconomic" residual interests under
the REMIC Regulations; provided, however, that any disclosure that a REMIC
Residual Certificate will not be considered "noneconomic" will be based upon
certain assumptions, and the Company will make no representation that a REMIC
Residual Certificate will not be considered "noneconomic" for purposes of the
above-described rules. See "--Foreign Investors in REMIC Certificates--REMIC
Residual Certificates" below for additional restrictions applicable to transfers
of certain REMIC Residual Certificates to foreign persons.
Mark-to-Market Rules. On December 24, 1996, the IRS released final
regulations (the "Mark-to-Market Regulations") relating to the requirement that
a securities dealer mark to market securities held for sale to customers. This
mark-to-market requirement applies to all securities owned by a dealer, except
to the extent that the dealer has specifically identified a security as held for
investment. The Mark-to-Market Regulations provide that for purposes of this
mark-to-market requirement, a Residual Certificate issued after January 4, 1995
is not treated as a security and
97
<PAGE>
<PAGE>
thus may not be marked to market. Prospective purchasers of a Residual
Certificate should consult their tax advisors regarding the possible application
of the mark-to-market requirement to Residual Certificates.
Possible Pass-Through of Miscellaneous Itemized Deductions. Fees and
expenses of a REMIC generally will be allocated to the holders of the related
REMIC Residual Certificates. The applicable Treasury regulations indicate,
however, that in the case of a REMIC that is similar to a single class grantor
trust, all or a portion of such fees and expenses should be allocated to the
holders of the related REMIC Regular Certificates. Except as stated in the
related Prospectus Supplement, such fees and expenses will be allocated to
holders of the related REMIC Residual Certificates in their entirety and not to
the holders of the related REMIC Regular Certificates.
With respect to REMIC Residual Certificates or REMIC Regular
Certificates the holders of which receive an allocation of fees and expenses in
accordance with the preceding discussion, if any holder thereof is an
individual, estate or trust, or a "pass-through entity" beneficially owned by
one or more individuals, estates or trusts, (i) an amount equal to such
individual's, estate's or trust's share of such fees and expenses will be added
to the gross income of such holder and (ii) such individual's, estate's or
trust's share of such fees and expenses will be treated as a miscellaneous
itemized deduction allowable subject to the limitation of Section 67 of the
Code, which permits such deductions only to the extent they exceed in the
aggregate two percent of a taxpayer's adjusted gross income. In addition,
Section 68 of the Code provides that the amount of itemized deductions otherwise
allowable for an individual whose adjusted gross income exceeds a specified
amount will be reduced by the lesser of (i) 3% of the excess of the individual's
adjusted gross income over such amount or (ii) 80% of the amount of itemized
deductions otherwise allowable for the taxable year. The amount of additional
taxable income reportable by REMIC Certificateholders that are subject to the
limitations of either Section 67 or Section 68 of the Code may be substantial.
Furthermore, in determining the alternative minimum taxable income of such a
holder of a REMIC Certificate that is an individual, estate or trust, or a
"pass-through entity" beneficially owned by one or more individuals, estates or
trusts, no deduction will be allowed for such holder's allocable portion of
servicing fees and other miscellaneous itemized deductions of the REMIC, even
though an amount equal to the amount of such fees and other deductions will be
included in such holder's gross income. Accordingly, such REMIC Certificates may
not be appropriate investments for individuals, estates, or trusts, or
pass-through entities beneficially owned by one or more individuals, estates or
trusts. Such prospective investors should consult with their tax advisors prior
to making an investment in such Certificates.
Sales of REMIC Certificates. If a REMIC Certificate is sold, the
selling Certificateholder will recognize gain or loss equal to the difference
between the amount realized on the sale and its adjusted basis in the REMIC
Certificate. The adjusted basis of a REMIC Regular Certificate generally will
equal the cost of such REMIC Regular Certificate to such Certificateholder,
increased by income reported by such Certificateholder with respect to such
REMIC Regular Certificate (including original issue discount and market discount
income) and reduced (but not below zero) by distributions on such REMIC Regular
Certificate received by such Certificateholder and by any amortized premium. The
adjusted basis of a REMIC Residual Certificate will be determined as described
under "--Taxation of Owners of REMIC Residual Certificates--Basis Rules, Net
Losses and Distributions." Except as provided in the following four paragraphs,
any such gain or loss will be capital gain or loss, provided such REMIC
Certificate is held as a capital asset (generally, property held for investment)
within the meaning of Section 1221 of the Code.
Gain from the sale of a REMIC Regular Certificate that might otherwise
be capital gain will be treated as ordinary income to the extent such gain does
not exceed the excess, if any, of (i) the amount that would have been includible
in the seller's income with respect to such REMIC Regular Certificate assuming
that income had accrued thereon at a rate equal to 110% of the "applicable
Federal rate" (generally, a rate based on an average of current yields on
Treasury securities having a maturity comparable to that of the Certificate
based on the application of the Prepayment Assumption to such Certificate, which
rate is computed and published monthly by the IRS), determined as of the date of
purchase of such REMIC Regular Certificate, over (ii) the amount of ordinary
income actually includible in the seller's income prior to such sale. In
addition, gain recognized on the sale of a REMIC Regular Certificate by a seller
who purchased such REMIC Regular Certificate at a market discount will be
taxable as ordinary income in an amount not exceeding the portion of such
discount that accrued during the period such REMIC Certificate was held by such
holder, reduced by any market discount included in income under the rules
described above under "--Taxation of Owners of REMIC Regular
Certificates--Market Discount" and "--Premium."
98
<PAGE>
<PAGE>
REMIC Certificates will be "evidences of indebtedness" within the
meaning of Section 582(c)(1) of the Code, so that gain or loss recognized from
the sale of a REMIC Certificate by a bank or thrift institution to which such
section applies will be ordinary income or loss.
A portion of any gain from the sale of a REMIC Regular Certificate that
might otherwise be capital gain may be treated as ordinary income to the extent
that such Certificate is held as part of a "conversion transaction" within the
meaning of Section 1258 of the Code. A conversion transaction generally is one
in which the taxpayer has taken two or more positions in the same or similar
property that reduce or eliminate market risk, if substantially all of the
taxpayer's return is attributable to the time value of the taxpayer's net
investment in such transaction. The amount of gain so realized in a conversion
transaction that is recharacterized as ordinary income generally will not exceed
the amount of interest that would have accrued on the taxpayer's net investment
at 120% of the appropriate "applicable Federal rate" (which rate is computed and
published monthly by the IRS) at the time the taxpayer enters into the
conversion transaction, subject to appropriate reduction for prior inclusion of
interest and other ordinary income items from the transaction.
Finally, a taxpayer may elect to have net capital gain taxed at
ordinary income rates rather than capital gains rates in order to include such
net capital gain in total net investment income for the taxable year, for
purposes of the rule that limits the deduction of interest on indebtedness
incurred to purchase or carry property held for investment to a taxpayer's net
investment income.
Except as may be provided in Treasury regulations yet to be issued, if
the seller of a REMIC Residual Certificate reacquires such REMIC Residual
Certificate, or acquires any other residual interest in a REMIC or any similar
interest in a "taxable mortgage pool" (as defined in Section 7701(i) of the
Code) during the period beginning six months before, and ending six months
after, the date of such sale, such sale will be subject to the "wash sale" rules
of Section 1091 of the Code. In that event, any loss realized by the REMIC
Residual Certificateholder on the sale will not be deductible, but instead will
be added to such REMIC Residual Certificateholder's adjusted basis in the
newly-acquired asset.
Prohibited Transactions and Other Possible REMIC Taxes. The Code
imposes a tax on REMICs equal to 100% of the net income derived from "prohibited
transactions" (a "Prohibited Transactions Tax"). In general, subject to certain
specified exceptions a prohibited transaction means the disposition of a
Mortgage Loan, the receipt of income from a source other than a Mortgage Loan or
certain other permitted investments, the receipt of compensation for services,
or gain from the disposition of an asset purchased with the payments on the
Mortgage Loans for temporary investment pending distribution on the REMIC
Certificates. It is not anticipated that any REMIC will engage in any prohibited
transactions in which it would recognize a material amount of net income.
In addition, certain contributions to a REMIC made after the day on
which the REMIC issues all of its interests could result in the imposition of a
tax on the REMIC equal to 100% of the value of the contributed property (a
"Contributions Tax"). Each Pooling Agreement will include provisions designed to
prevent the acceptance of any contributions that would be subject to such tax.
REMICs also are subject to federal income tax at the highest corporate
rate on "net income from foreclosure property," determined by reference to the
rules applicable to real estate investment trusts. "Net income from foreclosure
property" generally means gain from the sale of a foreclosure property that is
inventory property and gross income from foreclosure property other than
qualifying rents and other qualifying income for a real estate investment trust.
It is not anticipated that any REMIC will recognize "net income from foreclosure
property" subject to federal income tax.
It is not anticipated that any material state or local income or
franchise tax will be imposed on any REMIC.
To the extent permitted by then applicable laws, any Prohibited
Transactions Tax, Contributions Tax, tax on "net income from foreclosure
property" or state or local income or franchise tax that may be imposed on the
REMIC will be borne by the related Master Servicer or Trustee in either case out
of its own funds, provided that the Master Servicer or the Trustee, as the case
may be, has sufficient assets to do so, and provided further that such tax
arises out of a breach of the Master Servicer's or the Trustee's obligations, as
the case may be, under the related
99
<PAGE>
<PAGE>
Pooling Agreement and in respect of compliance with applicable laws and
regulations. Any such tax not borne by the Master Servicer or the Trustee will
be charged against the related Trust Fund resulting in a reduction in amounts
payable to holders of the related REMIC Certificates.
Tax and Restrictions on Transfers of REMIC Residual Certificates to
Certain Organizations. If a REMIC Residual Certificate is transferred to a
"disqualified organization" (as defined below), a tax would be imposed in an
amount (determined under the REMIC Regulations) equal to the product of (i) the
present value (discounted using the "applicable Federal rate" for obligations
whose term ends on the close of the last quarter in which excess inclusions are
expected to accrue with respect to the REMIC Residual Certificate, which rate is
computed and published monthly by the IRS) of the total anticipated excess
inclusions with respect to such REMIC Residual Certificate for periods after the
transfer and (ii) the highest marginal federal income tax rate applicable to
corporations. The anticipated excess inclusions must be determined as of the
date that the REMIC Residual Certificate is transferred and must be based on
events that have occurred up to the time of such transfer, the Prepayment
Assumption and any required or permitted clean up calls or required liquidation
provided for in the REMIC's organizational documents. Such a tax generally would
be imposed on the transferor of the REMIC Residual Certificate, except that
where such transfer is through an agent for a disqualified organization, the tax
would instead be imposed on such agent. However, a transferor of a REMIC
Residual Certificate would in no event be liable for such tax with respect to a
transfer if the transferee furnishes to the transferor an affidavit that the
transferee is not a disqualified organization and, as of the time of the
transfer, the transferor does not have actual knowledge that such affidavit is
false. Moreover, an entity will not qualify as a REMIC unless there are
reasonable arrangements designed to ensure that (i) residual interests in such
entity are not held by disqualified organizations and (ii) information necessary
for the application of the tax described herein will be made available.
Restrictions on the transfer of REMIC Residual Certificates and certain other
provisions that are intended to meet this requirement will be included in the
Pooling Agreement, and will be discussed more fully in any Prospectus Supplement
relating to the offering of any REMIC Residual Certificate.
In addition, if a "pass-through entity" (as defined below) includes in
income excess inclusions with respect to a REMIC Residual Certificate, and a
disqualified organization is the record holder of an interest in such entity,
then a tax will be imposed on such entity equal to the product of (i) the amount
of excess inclusions on the REMIC Residual Certificate that are allocable to the
interest in the pass-through entity held by such disqualified organization and
(ii) the highest marginal federal income tax rate imposed on corporations. A
pass-through entity will not be subject to this tax for any period, however, if
each record holder of an interest in such pass-through entity furnishes to such
pass-through entity (i) such holder's social security number and a statement
under penalties of perjury that such social security number is that of the
record holder or (ii) a statement under penalties of perjury that such record
holder is not a disqualified organization. For taxable years beginning after
December 31, 1997, notwithstanding the preceding two sentences, in the case of a
REMIC Residual Certificate held by an "electing large partnership," all
interests in such partnership shall be treated as held by disqualified
organizations (without regard to whether the record holders of the partnership
furnish statements described in the preceding sentence) and the amount that is
subject to tax under the second preceding sentence is excluded from the gross
income of the partnership allocated to the partners (in lieu of allocating to
the partners a deduction for such tax paid by the partnership).
For these purposes, a "disqualified organization" means (i) the United
States, any State or political subdivision thereof, any foreign government, any
international organization, or any agency or instrumentality of the foregoing
(but would not include instrumentalities described in Section 168(h)(2)(D) of
the Code or the Federal Home Loan Mortgage Corporation), (ii) any organization
(other than a cooperative described in Section 521 of the Code) that is exempt
from federal income tax, unless it is subject to the tax imposed by Section 511
of the Code or (iii) any organization described in Section 1381(a)(2)(C) of the
Code. For these purposes, a "pass-through entity" means any regulated investment
company, real estate investment trust, trust, partnership or certain other
entities described in Section 860E(e)(6) of the Code. In addition, a person
holding an interest in a pass-through entity as a nominee for another person
will, with respect to such interest, be treated as a pass-through entity.
Termination. A REMIC will terminate immediately after the Distribution
Date following receipt by the REMIC of the final payment in respect of the
Mortgage Loans or upon a sale of the REMIC's assets following the adoption by
the REMIC of a plan of complete liquidation. The last distribution on a REMIC
Regular Certificate will be treated as a payment in retirement of a debt
instrument. In the case of a REMIC Residual Certificate, if the last
distribution on such REMIC Residual Certificate is less than the REMIC Residual
Certificateholder's adjusted basis
100
<PAGE>
<PAGE>
in such Certificate, such REMIC Residual Certificateholder should (but may not)
be treated as realizing a loss equal to the amount of such difference, and such
loss may be treated as a capital loss.
Reporting and Other Administrative Matters. Solely for purposes of the
administrative provisions of the Code, the REMIC will be treated as a
partnership and REMIC Residual Certificateholders will be treated as partners.
The REMIC Administrator (or other party described in the related Prospectus
Supplement) will file REMIC federal income tax returns on behalf of the related
REMIC, and under the terms of the related Agreement, will either (i) be
irrevocably appointed by the holders of the largest percentage interest in the
related REMIC Residual Certificates as their agent to perform all of the duties
of the "tax matters person" with respect to the REMIC in all respects or (ii)
will be designated as and will act as the "tax matters person" with respect to
the related REMIC in all respects and will hold at least a nominal amount of
REMIC Residual Certificates.
The REMIC Administrator, as the tax matters person or as agent for the
tax matters person, subject to certain notice requirements and various
restrictions and limitations, generally will have the authority to act on behalf
of the REMIC and the REMIC Residual Certificateholders in connection with the
administrative and judicial review of items of income, deduction, gain or loss
of the REMIC, as well as the REMIC's classification. REMIC Residual
Certificateholders generally will be required to report such REMIC items
consistently with their treatment on the REMIC's tax return and may in some
circumstances be bound by a settlement agreement between the REMIC
Administrator, as either tax matters person or as agent for the tax matters
person, and the IRS concerning any such REMIC item. Adjustments made to the
REMIC tax return may require a REMIC Residual Certificateholder to make
corresponding adjustments on its return, and an audit of the REMIC's tax return,
or the adjustments resulting from such an audit, could result in an audit of a
REMIC Residual Certificateholder's return. Any person that holds a REMIC
Residual Certificate as a nominee for another person may be required to furnish
the REMIC, in a manner to be provided in Treasury regulations, with the name and
address of such person and other information.
Reporting of interest income, including any original issue discount,
with respect to REMIC Regular Certificates is required annually, and may be
required more frequently under Treasury regulations. These information reports
generally are required to be sent to individual holders of REMIC Regular
Interests and the IRS; holders of REMIC Regular Certificates that are
corporations, trusts, securities dealers and certain other non-individuals will
be provided interest and original issue discount income information and the
information set forth in the following paragraph upon request in accordance with
the requirements of the applicable regulations. The information must be provided
by the later of 30 days after the end of the quarter for which the information
was requested, or two weeks after the receipt of the request. The REMIC must
also comply with rules requiring a REMIC Regular Certificate issued with
original issue discount to disclose on its face the amount of original issue
discount and the issue date, and requiring such information to be reported to
the IRS. Reporting with respect to the REMIC Residual Certificates, including
income, excess inclusions, investment expenses and relevant information
regarding qualification of the REMIC's assets will be made as required under the
Treasury regulations, generally on a quarterly basis.
As applicable, the REMIC Regular Certificate information reports will
include a statement of the adjusted issue price of the REMIC Regular Certificate
at the beginning of each accrual period. In addition, the reports will include
information required by regulations with respect to computing the accrual of any
market discount. Because exact computation of the accrual of market discount on
a constant yield method would require information relating to the holder's
purchase price that the REMIC may not have, such regulations only require that
information pertaining to the appropriate proportionate method of accruing
market discount be provided. See "--Taxation of Owners of REMIC Regular
Certificates--Market Discount."
The responsibility for complying with the foregoing reporting rules
will be borne by the REMIC Administrator or other party designated in the
related Prospectus Supplement.
Backup Withholding With Respect to REMIC Certificates. Payments of
interest and principal, as well as payments of proceeds from the sale of REMIC
Certificates, may be subject to the "backup withholding tax" under Section 3406
of the Code at a rate of 31% if recipients of such payments fail to furnish to
the payor certain information, including their taxpayer identification numbers,
or otherwise fail to establish an exemption from such tax. Any amounts deducted
and withheld from a distribution to a recipient would be allowed as a credit
against such
101
<PAGE>
<PAGE>
recipient's federal income tax. Furthermore, certain penalties may be imposed by
the IRS on a recipient of payments that is required to supply information but
that does not do so in the proper manner.
Foreign Investors in REMIC Certificates. A REMIC Regular
Certificateholder that is not a "United States person" (as defined below) and is
not subject to federal income tax as a result of any direct or indirect
connection to the United States in addition to its ownership of a REMIC Regular
Certificate will not be subject to United States federal income or withholding
tax in respect of a distribution on a REMIC Regular Certificate, provided that
the holder complies to the extent necessary with certain identification
requirements (including delivery of a statement, signed by the Certificateholder
under penalties of perjury, certifying that such Certificateholder is not a
United States person and providing the name and address of such
Certificateholder). For these purposes, "United States person" means a citizen
or resident of the United States, a corporation, partnership or other entity
created or organized in, or under the laws of, the United States or any
political subdivision thereof (except, in the case of a partnership, to the
extent provided in regulations), or an estate whose income is subject to United
States federal income tax regardless of its source, or a trust if a court within
the United States is able to exercise primary supervision over the
administration of the trust and one or more United States fiduciaries have the
authority to control all substantial decisions of the trust. To the extent
prescribed in regulations by the Secretary of the Treasury, which regulations
have not yet been issued, a trust which was in existence on August 20, 1996
(other than a trust treated as owned by the grantor under subpart E of part I of
subchapter J of chapter 1 of the Code), and which was treated as a United States
person on August 19, 1996, may elect to continue to be treated as a United
States person notwithstanding the previous sentence. It is possible that the IRS
may assert that the foregoing tax exemption should not apply with respect to a
REMIC Regular Certificate held by a REMIC Residual Certificateholder that owns
directly or indirectly a 10% or greater interest in the REMIC Residual
Certificates. If the holder does not qualify for exemption, distributions of
interest, including distributions in respect of accrued original issue discount,
to such holder may be subject to a tax rate of 30%, subject to reduction under
any applicable tax treaty.
In addition, the foregoing rules will not apply to exempt a United
States shareholder of a controlled foreign corporation from taxation on such
United States shareholder's allocable portion of the interest income received by
such controlled foreign corporation.
Further, it appears that a REMIC Regular Certificate would not be
included in the estate of a non-resident alien individual and would not be
subject to United States estate taxes. However, Certificateholders who are
non-resident alien individuals should consult their tax advisors concerning this
question.
Except as stated in the related Prospectus Supplement, transfers of
REMIC Residual Certificates to investors that are not United States persons will
be prohibited under the related Pooling Agreement.
NOTES
On or prior to the date of the related Prospectus Supplement with
respect to the proposed issuance of each series of Notes, Thacher Proffitt &
Wood, counsel to the Company, will deliver its opinion (and will file such
opinion under Form 8-K) to the effect that, assuming compliance with all
provisions of the Indenture, Owner Trust Agreement and certain related
documents, for federal income tax purposes (i) the Notes will be treated as
indebtedness and (ii) the Issuer, as created pursuant to the terms and
conditions of the Owner Trust Agreement, will not be characterized as an
association (or publicly traded partnership) taxable as a corporation or as a
taxable mortgage pool. The following discussion is based in part upon the OID
Regulations. The OID Regulations do not adequately address certain issues
relevant to, and in some instances provide that they are not applicable to,
securities such as the Notes. For purposes of this tax discussion, references to
a "Noteholder" or a "holder" are to the beneficial owner of a Note.
Status as Real Property Loans
Notes held by a domestic building and loan association will not
constitute "loans . . . secured by an interest in real property" within the
meaning of Code section 7701(a)(19)(C)(v); and (ii) Notes held by a real estate
investment trust will not constitute "real estate assets" within the meaning of
Code section 856(c)(4)(A) and interest on Notes will not be considered "interest
on obligations secured by mortgages on real property" within the meaning of Code
section 856(c)(3)(B).
102
<PAGE>
<PAGE>
Taxation of Noteholders
Notes generally will be subject to the same rules of taxation as REMIC
Regular Certificates issued by a REMIC, as described above, except that (i)
income reportable on the Notes is not required to be reported under the accrual
method unless the holder otherwise used the accrual method and (ii) the special
rule treating a portion of the gain on sale or exchange of a REMIC Regular
Certificate as ordinary income is inapplicable to the Notes. See
"--REMICs--Taxation of Owners of REMIC Regular Certificates" and "--Sales of
REMIC Certificates."
GRANTOR TRUST FUNDS
Classification of Grantor Trust Funds. On or prior to the date of the
related Prospectus Supplement with respect to the proposed issuance of each
series of Grantor Trust Certificates, Thacher Proffitt & Wood, counsel to the
Company, will deliver its opinion (and will file such opinion under Form 8-K)
generally to the effect that, assuming compliance with all provisions of the
related Pooling Agreement, the related Grantor Trust Fund will be classified as
a grantor trust under subpart E, part I of subchapter J of Chapter 1 of the Code
and not as a partnership or an association taxable as a corporation.
For purposes of the following discussion, a Grantor Trust Certificate
representing an undivided equitable ownership interest in the principal of the
Mortgage Loans constituting the related Grantor Trust Fund, together with
interest thereon at a pass-through rate, will be referred to as a "Grantor Trust
Fractional Interest Certificate." A Grantor Trust Certificate representing
ownership of all or a portion of the difference between interest paid on the
Mortgage Loans constituting the related Grantor Trust Fund (net of normal
administration fees and any Spread) and interest paid to the holders of Grantor
Trust Fractional Interest Certificates issued with respect to such Grantor Trust
Fund will be referred to as a "Grantor Trust Strip Certificate." A Grantor Trust
Strip Certificate may also evidence a nominal ownership interest in the
principal of the Mortgage Loans constituting the related Grantor Trust Fund.
Characterization of Investments in Grantor Trust Certificates.
Grantor Trust Fractional Interest Certificates. In the case of Grantor
Trust Fractional Interest Certificates, except as disclosed in the related
Prospectus Supplement, counsel to the Company will deliver an opinion that, in
general, Grantor Trust Fractional Interest Certificates will represent interests
in (i) "loans . . . secured by an interest in real property" within the meaning
of Section 7701(a)(19)(C)(v) of the Code; (ii) "obligation[s] (including any
participation or Certificate of beneficial ownership therein) which . . . [are]
principally secured by an interest in real property" within the meaning of
Section 860G(a)(3) of the Code; and (iii) "real estate assets" within the
meaning of Section 856(c)(4)(A) of the Code. In addition, counsel to the Company
will deliver an opinion that interest on Grantor Trust Fractional Interest
Certificates will to the same extent be considered "interest on obligations
secured by mortgages on real property or on interests in real property" within
the meaning of Section 856(c)(3)(B) of the Code.
Grantor Trust Strip Certificates. Even if Grantor Trust Strip
Certificates evidence an interest in a Grantor Trust Fund consisting of Mortgage
Loans that are "loans . . . secured by an interest in real property" within the
meaning of Section 7701(a)(19)(C)(v) of the Code, and "real estate assets"
within the meaning of Section 856(c)(4)(A) of the Code, and the interest on
which is "interest on obligations secured by mortgages on real property" within
the meaning of Section 856(c)(3)(B) of the Code, it is unclear whether the
Grantor Trust Strip Certificates, and the income therefrom, will be so
characterized. However, the policies underlying such sections (namely, to
encourage or require investments in mortgage loans by thrift institutions and
real estate investment trusts) may suggest that such characterization is
appropriate. Counsel to the Company will not deliver any opinion on these
questions. Prospective purchasers to which such characterization of an
investment in Grantor Trust Strip Certificates is material should consult their
tax advisors regarding whether the Grantor Trust Strip Certificates, and the
income therefrom, will be so characterized.
The Grantor Trust Strip Certificates will be "obligation[s] (including
any participation or Certificate of beneficial ownership therein) which . . .
[are] principally secured by an interest in real property" within the meaning
of Section 860G(a)(3)(A) of the Code.
103
<PAGE>
<PAGE>
Taxation of Owners of Grantor Trust Fractional Interest Certificates.
Holders of a particular series of Grantor Trust Fractional Interest Certificates
generally will be required to report on their federal income tax returns their
shares of the entire income from the Mortgage Loans (including amounts used to
pay reasonable servicing fees and other expenses) and will be entitled to deduct
their shares of any such reasonable servicing fees and other expenses. Because
of stripped interests, market or original issue discount, or premium, the amount
includible in income on account of a Grantor Trust Fractional Interest
Certificate may differ significantly from the amount distributable thereon
representing interest on the Mortgage Loans. Under Section 67 of the Code, an
individual, estate or trust holding a Grantor Trust Fractional Interest
Certificate directly or through certain pass-through entities will be allowed a
deduction for such reasonable servicing fees and expenses only to the extent
that the aggregate of such holder's miscellaneous itemized deductions exceeds
two percent of such holder's adjusted gross income. In addition, Section 68 of
the Code provides that the amount of itemized deductions otherwise allowable for
an individual whose adjusted gross income exceeds a specified amount will be
reduced by the lesser of (i) 3% of the excess of the individual's adjusted gross
income over such amount or (ii) 80% of the amount of itemized deductions
otherwise allowable for the taxable year. The amount of additional taxable
income reportable by holders of Grantor Trust Fractional Interest Certificates
who are subject to the limitations of either Section 67 or Section 68 of the
Code may be substantial. Further, Certificateholders (other than corporations)
subject to the alternative minimum tax may not deduct miscellaneous itemized
deductions in determining such holder's alternative minimum taxable income.
Although it is not entirely clear, it appears that in transactions in which
multiple classes of Grantor Trust Certificates (including Grantor Trust Strip
Certificates) are issued, such fees and expenses should be allocated among the
classes of Grantor Trust Certificates using a method that recognizes that each
such class benefits from the related services. In the absence of statutory or
administrative clarification as to the method to be used, it currently is
intended to base information returns or reports to the IRS and
Certificateholders on a method that allocates such expenses among classes of
Grantor Trust Certificates with respect to each period based on the
distributions made to each such class during that period.
The federal income tax treatment of Grantor Trust Fractional Interest
Certificates of any series will depend on whether they are subject to the
"stripped bond" rules of Section 1286 of the Code. Grantor Trust Fractional
Interest Certificates may be subject to those rules if (i) a class of Grantor
Trust Strip Certificates is issued as part of the same series of Certificates or
(ii) the Company or any of its affiliates retains (for its own account or for
purposes of resale) a right to receive a specified portion of the interest
payable on the Mortgage Loans. Further, the IRS has ruled that an unreasonably
high servicing fee retained by a seller or servicer will be treated as a
retained ownership interest in mortgages that constitutes a stripped coupon. For
purposes of determining what constitutes reasonable servicing fees for various
types of mortgages the IRS has established certain "safe harbors." The servicing
fees paid with respect to the Mortgage Loans for certain series of Grantor Trust
Certificates may be higher than the "safe harbors" and, accordingly, may not
constitute reasonable servicing compensation. The related Prospectus Supplement
will include information regarding servicing fees paid to the Master Servicer,
any subservicer or their respective affiliates necessary to determine whether
the preceding "safe harbor" rules apply.
If Stripped Bond Rules Apply. If the stripped bond rules apply, each
Grantor Trust Fractional Interest Certificate will be treated as having been
issued with "original issue discount" within the meaning of Section 1273(a) of
the Code, subject, however, to the discussion below regarding the treatment of
certain stripped bonds as market discount bonds and the discussion regarding de
minimis market discount. See "--Taxation of Owners of Grantor Trust Fractional
Interest Certificates--Market Discount" below. Under the stripped bond rules,
the holder of a Grantor Trust Fractional Interest Certificate (whether a cash or
accrual method taxpayer) will be required to report interest income from its
Grantor Trust Fractional Interest Certificate for each month in an amount equal
to the income that accrues on such Certificate in that month calculated under a
constant yield method, in accordance with the rules of the Code relating to
original issue discount.
The original issue discount on a Grantor Trust Fractional Interest
Certificate will be the excess of such Certificate's stated redemption price
over its issue price. The issue price of a Grantor Trust Fractional Interest
Certificate as to any purchaser will be equal to the price paid by such
purchaser for the Grantor Trust Fractional Interest Certificate. The stated
redemption price of a Grantor Trust Fractional Interest Certificate will be the
sum of all payments to be made on such Certificate, other than "qualified stated
interest," if any, as well as such Certificate's share of reasonable servicing
fees and other expenses. See "--Taxation of Owners of Grantor Trust Fractional
Interest Certificates--If Stripped Bond Rules Do Not Apply" for a definition of
"qualified stated interest." In general, the amount of such income that accrues
in any month would equal the product of such holder's adjusted basis in such
104
<PAGE>
<PAGE>
Grantor Trust Fractional Interest Certificate at the beginning of such month
(see "Sales of Grantor Trust Certificates") and the yield of such Grantor Trust
Fractional Interest Certificate to such holder. Such yield would be computed at
the rate (compounded based on the regular interval between payment dates) that,
if used to discount the holder's share of future payments on the Mortgage Loans,
would cause the present value of those future payments to equal the price at
which the holder purchased such Certificate. In computing yield under the
stripped bond rules, a Certificateholder's share of future payments on the
Mortgage Loans will not include any payments made in respect of any ownership
interest in the Mortgage Loans retained by the Company, the Master Servicer, any
subservicer or their respective affiliates, but will include such
Certificateholder's share of any reasonable servicing fees and other expenses.
To the extent the Grantor Trust Fractional Interest Certificates
represent an interest in any pool of debt instruments the yield on which may be
affected by reason of prepayments, for taxable years beginning after August 5,
1997, Section 1272(a)(6) of the Code requires (i) the use of a reasonable
prepayment assumption in accruing original issue discount and (ii) adjustments
in the accrual of original issue discount when prepayments do not conform to the
prepayment assumption. It is unclear whether those provisions would be
applicable to the Grantor Trust Fractional Interest Certificates that do not
represent an interest in any pool of debt instruments the yield on which may be
affected by reason of prepayments, or for taxable years beginning prior to
August 5, 1997 or whether use of a reasonable prepayment assumption may be
required or permitted without reliance on these rules. It is also uncertain, if
a prepayment assumption is used, whether the assumed prepayment rate would be
determined based on conditions at the time of the first sale of the Grantor
Trust Fractional Interest Certificate or, with respect to any holder, at the
time of purchase of the Grantor Trust Fractional Interest Certificate by that
holder. Certificateholders are advised to consult their own tax advisors
concerning reporting original issue discount with respect to Grantor Trust
Fractional Interest Certificates and, in particular, whether a prepayment
assumption should be used in reporting original issue discount.
In the case of a Grantor Trust Fractional Interest Certificate acquired
at a price equal to the principal amount of the Mortgage Loans allocable to such
Certificate, the use of a prepayment assumption generally would not have any
significant effect on the yield used in calculating accruals of interest income.
In the case, however, of a Grantor Trust Fractional Interest Certificate
acquired at a discount or premium (that is, at a price less than or greater than
such principal amount, respectively), the use of a reasonable prepayment
assumption would increase or decrease such yield, and thus accelerate or
decelerate, respectively, the reporting of income.
If a prepayment assumption is not used, then when a Mortgage Loan
prepays in full, the holder of a Grantor Trust Fractional Interest Certificate
acquired at a discount or a premium generally will recognize ordinary income or
loss equal to the difference between the portion of the prepaid principal amount
of the Mortgage Loan that is allocable to such Certificate and the portion of
the adjusted basis of such Certificate that is allocable to such
Certificateholder's interest in the Mortgage Loan. If a prepayment assumption is
used, it appears that no separate item of income or loss should be recognized
upon a prepayment. Instead, a prepayment should be treated as a partial payment
of the stated redemption price of the Grantor Trust Fractional Interest
Certificate and accounted for under a method similar to that described for
taking account of original issue discount on REMIC Regular Certificates. See
"--REMICs--Taxation of Owners of REMIC Regular Certificates--Original Issue
Discount." It is unclear whether any other adjustments would be required to
reflect differences between an assumed prepayment rate and the actual rate of
prepayments.
It is currently intended to base information reports or returns to the
IRS and Certificateholders in transactions subject to the stripped bond rules on
a prepayment assumption (the "Prepayment Assumption") that will be disclosed in
the related Prospectus Supplement and on a constant yield computed using a
representative initial offering price for each class of Certificates. However,
neither the Company, the Master Servicer nor the Trustee will make any
representation that the Mortgage Loans will in fact prepay at a rate conforming
to such Prepayment Assumption or any other rate and Certificateholders should
bear in mind that the use of a representative initial offering price will mean
that such information returns or reports, even if otherwise accepted as accurate
by the IRS, will in any event be accurate only as to the initial
Certificateholders of each series who bought at that price.
Under Treasury regulation Section 1.1286-1, certain stripped bonds are
to be treated as market discount bonds and, accordingly, any purchaser of such a
bond is to account for any discount on the bond as market discount rather than
original issue discount. This treatment only applies, however, if immediately
after the most recent disposition of the bond by a person stripping one or more
coupons from the bond and disposing of the bond or coupon (i) there
105
<PAGE>
<PAGE>
is no original issue discount (or only a de minimis amount of original issue
discount) or (ii) the annual stated rate of interest payable on the original
bond is no more than one percentage point lower than the gross interest rate
payable on the original mortgage loan (before subtracting any servicing fee or
any stripped coupon). If interest payable on a Grantor Trust Fractional Interest
Certificate is more than one percentage point lower than the gross interest rate
payable on the Mortgage Loans, the related Prospectus Supplement will disclose
that fact. If the original issue discount or market discount on a Grantor Trust
Fractional Interest Certificate determined under the stripped bond rules is less
than 0.25% of the stated redemption price multiplied by the weighted average
maturity of the Mortgage Loans, then such original issue discount or market
discount will be considered to be de minimis. Original issue discount or market
discount of only a de minimis amount will be included in income in the same
manner as de minimis original issue and market discount described in
"Characteristics of Investments in Grantor Trust Certificates--If Stripped Bond
Rules Do Not Apply" and "--Market Discount" below.
If Stripped Bond Rules Do Not Apply. Subject to the discussion below on
original issue discount, if the stripped bond rules do not apply to a Grantor
Trust Fractional Interest Certificate, the Certificateholder will be required to
report its share of the interest income on the Mortgage Loans in accordance with
such Certificateholder's normal method of accounting. The original issue
discount rules will apply to a Grantor Trust Fractional Interest Certificate to
the extent it evidences an interest in Mortgage Loans issued with original issue
discount.
The original issue discount, if any, on the Mortgage Loans will equal
the difference between the stated redemption price of such Mortgage Loans and
their issue price. Under the OID Regulations, the stated redemption price is
equal to the total of all payments to be made on such Mortgage Loan other than
"qualified stated interest." "Qualified stated interest" is interest that is
unconditionally payable at least annually at a single fixed rate, or at a
"qualified floating rate," an "objective rate," a combination of a single fixed
rate and one or more "qualified floating rates" or one "qualified inverse
floating rate," or a combination of "qualified floating rates" that does not
operate in a manner that accelerates or defers interest payments on such
Mortgage Loan. In general, the issue price of a Mortgage Loan will be the amount
received by the borrower from the lender under the terms of the Mortgage Loan,
less any "points" paid by the borrower, and the stated redemption price of a
Mortgage Loan will equal its principal amount, unless the Mortgage Loan provides
for an initial below-market rate of interest or the acceleration or the deferral
of interest payments. The determination as to whether original issue discount
will be considered to be de minimis will be calculated using the same test
described in the REMIC discussion. See "--Taxation of Owners of REMIC Regular
Certificates--Original Issue Discount" above.
In the case of Mortgage Loans bearing adjustable or variable interest
rates, the related Prospectus Supplement will describe the manner in which such
rules will be applied with respect to those Mortgage Loans by the Master
Servicer or the Trustee in preparing information returns to the
Certificateholders and the IRS.
If original issue discount is in excess of a de minimis amount, all
original issue discount with respect to a Mortgage Loan will be required to be
accrued and reported in income each month, based on a constant yield. Section
1272(a)(6) of the Code requires that a prepayment assumption be made in
computing yield with respect to any pool of debt instruments the yield on which
may be affected by reason of prepayments. Accordingly, for certificates backed
by such pools, it is intended to base information reports and returns to the IRS
and Certificateholders for taxable years beginning after August 5, 1997, on the
use of a prepayment assumption. However, in the case of certificates not backed
by such pools or with respect to taxable years beginning prior to August 5,
1997, it currently is not intended to base such reports and returns on the use
of a prepayment assumption. Certificateholders are advised to consult their own
tax advisors concerning whether a prepayment assumption should be used in
reporting original issue discount with respect to Grantor Trust Fractional
Interest Certificates. Certificateholders should refer to the related Prospectus
Supplement with respect to each series to determine whether and in what manner
the original issue discount rules will apply to Mortgage Loans in such series.
A purchaser of a Grantor Trust Fractional Interest Certificate that
purchases such Grantor Trust Fractional Interest Certificate at a cost less than
such Certificate's allocable portion of the aggregate remaining stated
redemption price of the Mortgage Loans held in the related Trust Fund will also
be required to include in gross income such Certificate's daily portions of any
original issue discount with respect to such Mortgage Loans. However, each such
daily portion will be reduced, if the cost of such Grantor Trust Fractional
Interest Certificate to such purchaser is in excess of such Certificate's
allocable portion of the aggregate "adjusted issue prices" of the Mortgage Loans
held in
106
<PAGE>
<PAGE>
the related Trust Fund, approximately in proportion to the ratio such excess
bears to such Certificate's allocable portion of the aggregate original issue
discount remaining to be accrued on such Mortgage Loans. The adjusted issue
price of a Mortgage Loan on any given day equals the sum of (i) the adjusted
issue price (or, in the case of the first accrual period, the issue price) of
such Mortgage Loan at the beginning of the accrual period that includes such day
and (ii) the daily portions of original issue discount for all days during such
accrual period prior to such day. The adjusted issue price of a Mortgage Loan at
the beginning of any accrual period will equal the issue price of such Mortgage
Loan, increased by the aggregate amount of original issue discount with respect
to such Mortgage Loan that accrued in prior accrual periods, and reduced by the
amount of any payments made on such Mortgage Loan in prior accrual periods of
amounts included in its stated redemption price.
In addition to its regular reports, the Master Servicer or the Trustee,
except as provided in the related Prospectus Supplement, will provide to any
holder of a Grantor Trust Fractional Interest Certificate such information as
such holder may reasonably request from time to time with respect to original
issue discount accruing on Grantor Trust Fractional Interest Certificates. See
"Grantor Trust Reporting" below.
Market Discount. If the stripped bond rules do not apply to the Grantor
Trust Fractional Interest Certificate, a Certificateholder may be subject to the
market discount rules of Sections 1276 through 1278 of the Code to the extent an
interest in a Mortgage Loan is considered to have been purchased at a "market
discount," that is, in the case of a Mortgage Loan issued without original issue
discount, at a purchase price less than its remaining stated redemption price
(as defined above), or in the case of a Mortgage Loan issued with original issue
discount, at a purchase price less than its adjusted issue price (as defined
above). If market discount is in excess of a de minimis amount (as described
below), the holder generally will be required to include in income in each month
the amount of such discount that has accrued (under the rules described in the
next paragraph) through such month that has not previously been included in
income, but limited, in the case of the portion of such discount that is
allocable to any Mortgage Loan, to the payment of stated redemption price on
such Mortgage Loan that is received by (or, in the case of accrual basis
Certificateholders, due to) the Trust Fund in that month. A Certificateholder
may elect to include market discount in income currently as it accrues (under a
constant yield method based on the yield of the Certificate to such holder)
rather than including it on a deferred basis in accordance with the foregoing
under rules similar to those described in "--Taxation of Owners of REMIC Regular
Certificates--Market Discount" above.
Section 1276(b)(3) of the Code authorized the Treasury Department to
issue regulations providing for the method for accruing market discount on debt
instruments, the principal of which is payable in more than one installment.
Until such time as regulations are issued by the Treasury Department, certain
rules described in the Committee Report will apply. Under those rules, in each
accrual period market discount on the Mortgage Loans should accrue, at the
Certificateholder's option: (i) on the basis of a constant yield method, (ii) in
the case of a Mortgage Loan issued without original issue discount, in an amount
that bears the same ratio to the total remaining market discount as the stated
interest paid in the accrual period bears to the total stated interest remaining
to be paid on the Mortgage Loan as of the beginning of the accrual period, or
(iii) in the case of a Mortgage Loan issued with original issue discount, in an
amount that bears the same ratio to the total remaining market discount as the
original issue discount accrued in the accrual period bears to the total
original issue discount remaining at the beginning of the accrual period. The
prepayment assumption, if any, used in calculating the accrual of original issue
discount is to be used in calculating the accrual of market discount. The effect
of using a prepayment assumption could be to accelerate the reporting of such
discount income. Because the regulations referred to in this paragraph have not
been issued, it is not possible to predict what effect such regulations might
have on the tax treatment of a Mortgage Loan purchased at a discount in the
secondary market.
Because the Mortgage Loans will provide for periodic payments of stated
redemption price, 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 would
be included in income if it were original issue discount.
Market discount with respect to Mortgage Loans may be considered to be
de minimis and, if so, will be includible in income under de minimis rules
similar to those described above in "-REMICs-Taxation of Owners of REMIC Regular
Certificates-Original Issue Discount" with the exception that it is less likely
that a prepayment assumption will be used for purposes of such rules with
respect to the Mortgage Loans.
107
<PAGE>
<PAGE>
Further, under the rules described in "--REMICs--Taxation of Owners of
REMIC Regular Certificates--Market Discount," above, any discount that is not
original issue discount and exceeds a de minimis amount may require the deferral
of interest expense deductions attributable to accrued market discount not yet
includible in income, unless an election has been made to report market discount
currently as it accrues. This rule applies without regard to the origination
dates of the Mortgage Loans.
Premium. If a Certificateholder is treated as acquiring the underlying
Mortgage Loans at a premium, that is, at a price in excess of their remaining
stated redemption price, such Certificateholder may elect under Section 171 of
the Code to amortize using a constant yield method the portion of such premium
allocable to Mortgage Loans originated after September 27, 1985. Amortizable
premium is treated as an offset to interest income on the related debt
instrument, rather than as a separate interest deduction. However, premium
allocable to Mortgage Loans originated before September 28, 1985 or to Mortgage
Loans for which an amortization election is not made, should be allocated among
the payments of stated redemption price on the Mortgage Loan and be allowed as a
deduction as such payments are made (or, for a Certificateholder using the
accrual method of accounting, when such payments of stated redemption price are
due).
It is unclear whether a prepayment assumption should be used in
computing amortization of premium allowable under Section 171 of the Code. If
premium is not subject to amortization using a prepayment assumption and a
Mortgage Loan prepays in full, the holder of a Grantor Trust Fractional Interest
Certificate acquired at a premium should recognize a loss, equal to the
difference between the portion of the prepaid principal amount of the Mortgage
Loan that is allocable to the Certificate and the portion of the adjusted basis
of the Certificate that is allocable to the Mortgage Loan. If a prepayment
assumption is used to amortize such premium, it appears that such a loss would
be unavailable. Instead, if a prepayment assumption is used, a prepayment should
be treated as a partial payment of the stated redemption price of the Grantor
Trust Fractional Interest Certificate and accounted for under a method similar
to that described for taking account of original issue discount on REMIC Regular
Certificates. See "REMICs--Taxation of Owners of REMIC Regular
Certificates--Original Issue Discount." It is unclear whether any other
adjustments would be required to reflect differences between the prepayment
assumption used, and the actual rate of prepayments.
Taxation of Owners of Grantor Trust Strip Certificates. The "stripped
coupon" rules of Section 1286 of the Code will apply to the Grantor Trust Strip
Certificates. Except as described above in "Characterization of Investments in
Grantor Trust Certificates--If Stripped Bond Rules Apply," no regulations or
published rulings under Section 1286 of the Code have been issued and some
uncertainty exists as to how it will be applied to securities such as the
Grantor Trust Strip Certificates. Accordingly, holders of Grantor Trust Strip
Certificates should consult their own tax advisors concerning the method to be
used in reporting income or loss with respect to such Certificates.
The OID Regulations do not apply to "stripped coupons," although they
provide general guidance as to how the original issue discount sections of the
Code will be applied. In addition, the discussion below is subject to the
discussion under "--Possible Application of Contingent Payment Rules" and
assumes that the holder of a Grantor Trust Strip Certificate will not own any
Grantor Trust Fractional Interest Certificates.
Under the stripped coupon rules, it appears that original issue
discount will be required to be accrued in each month on the Grantor Trust Strip
Certificates based on a constant yield method. In effect, each holder of Grantor
Trust Strip Certificates would include as interest income in each month an
amount equal to the product of such holder's adjusted basis in such Grantor
Trust Strip Certificate at the beginning of such month and the yield of such
Grantor Trust Strip Certificate to such holder. Such yield would be calculated
based on the price paid for that Grantor Trust Strip Certificate by its holder
and the payments remaining to be made thereon at the time of the purchase, plus
an allocable portion of the servicing fees and expenses to be paid with respect
to the Mortgage Loans. See "Characterization of Investments in Grantor Trust
Certificates--If Stripped Bond Rules Apply" above.
As noted above, Section 1272(a)(6) of the Code requires that a
prepayment assumption be used in computing the accrual of original issue
discount with respect to certain categories of debt instruments, and that
adjustments be made in the amount and rate of accrual of such discount when
prepayments do not conform to such prepayment assumption. To the extent the
Grantor Trust Strip Certificates represent an interest in any pool of debt
instruments the yield on which may be affected by reason of prepayments, those
provisions will apply to the Grantor Trust Strip
108
<PAGE>
<PAGE>
Certificates for taxable years beginning after August 5, 1997. It is unclear
whether those provisions would be applicable to the Grantor Trust Strip
Certificates that do not represent an interest in any such pool or for taxable
years beginning prior to August 5, 1997, or whether use of a prepayment
assumption may be required or permitted in the absence of such provisions. It is
also uncertain, if a prepayment assumption is used, whether the assumed
prepayment rate would be determined based on conditions at the time of the first
sale of the Grantor Trust Strip Certificate or, with respect to any subsequent
holder, at the time of purchase of the Grantor Trust Strip Certificate by that
holder.
The accrual of income on the Grantor Trust Strip Certificates will be
significantly slower if a prepayment assumption is permitted to be made than if
yield is computed assuming no prepayments. It currently is intended to base
information returns or reports to the IRS and Certificateholders on the
Prepayment Assumption disclosed in the related Prospectus Supplement and on a
constant yield computed using a representative initial offering price for each
class of Certificates. However, neither the Company, the Master Servicer nor the
Trustee will make any representation that the Mortgage Loans will in fact prepay
at a rate conforming to the Prepayment Assumption or at any other rate and
Certificateholders should bear in mind that the use of a representative initial
offering price will mean that such information returns or reports, even if
otherwise accepted as accurate by the IRS, will in any event be accurate only as
to the initial Certificateholders of each series who bought at that price.
Prospective purchasers of the Grantor Trust Strip Certificates should consult
their own tax advisors regarding the use of the Prepayment Assumption.
It is unclear under what circumstances, if any, the prepayment of a
Mortgage Loan will give rise to a loss to the holder of a Grantor Trust Strip
Certificate. If a Grantor Trust Strip Certificate is treated as a single
instrument (rather than an interest in discrete mortgage loans) and the effect
of prepayments is taken into account in computing yield with respect to such
Grantor Trust Strip Certificate, it appears that no loss may be available as a
result of any particular prepayment unless prepayments occur at a rate faster
than the Prepayment Assumption. However, if a Grantor Trust Strip Certificate is
treated as an interest in discrete Mortgage Loans, or if the Prepayment
Assumption is not used, then when a Mortgage Loan is prepaid, the holder of a
Grantor Trust Strip Certificate should be able to recognize a loss equal to the
portion of the adjusted issue price of the Grantor Trust Strip Certificate that
is allocable to such Mortgage Loan.
Possible Application of Contingent Payment Rules. The coupon stripping
rules' general treatment of stripped coupons is to regard them as newly issued
debt instruments in the hands of each purchaser. To the extent that payments on
the Grantor Trust Strip Certificates would cease if the Mortgage Loans were
prepaid in full, the Grantor Trust Strip Certificates could be considered to be
debt instruments providing for contingent payments. Under the OID Regulations,
debt instruments providing for contingent payments are not subject to the same
rules as debt instruments providing for noncontingent payments. Regulations were
promulgated on June 14, 1996, regarding contingent payment debt instruments (the
"Contingent Payment Regulations"), but it appears that Grantor Trust Strip
Certificates, to the extent subject to Section 1272(a)(6) of the Code, as
described above, or due to their similarity to other mortgage-backed securities
(such as REMIC regular interests and debt instruments subject to Section
1272(a)(6) of the Code) that are expressly excepted from the application of the
Contingent Payment Regulations, are or may be excepted from such regulations.
Like the OID Regulations, the Contingent Payment Regulations do not specifically
address securities, such as the Grantor Trust Strip Certificates, that are
subject to the stripped bond rules of Section 1286 of the Code.
If the contingent payment rules under the Contingent Payment
Regulations were to apply, the holder of a Grantor Trust Strip Certificate would
be required to apply the "noncontingent bond method." Under the "noncontingent
bond method," the issuer of a Grantor Trust Strip Certificate determines a
projected payment schedule on which interest will accrue. Holders of Grantor
Trust Strip Certificates are bound by the issuer's projected payment schedule.
The projected payment schedule consists of all noncontingent payments and a
projected amount for each contingent payment based on the projected yield (as
described below) of the Grantor Trust Strip Certificate. The projected amount of
each payment is determined so that the projected payment schedule reflects the
projected yield. The projected amount of each payment must reasonably reflect
the relative expected values of the payments to be received by the holder of a
Grantor Trust Strip Certificate. The projected yield referred to above is a
reasonable rate, not less than the "applicable Federal rate" that, as of the
issue date, reflects general market conditions, the credit quality of the
issuer, and the terms and conditions of the Mortgage Loans. The holder of a
Grantor Trust Strip Certificate would be required to include as interest income
in each month the adjusted issue price of the Grantor Trust Strip Certificate at
the beginning of the period multiplied by the projected yield, and would add to,
or subtract from,
109
<PAGE>
<PAGE>
such income any variation between the payment actually received in such month
and the payment originally projected to be made in such month.
Assuming that a prepayment assumption were used, if the Contingent
Payment Regulations or their principles were applied to Grantor Trust Strip
Certificates, the amount of income reported with respect thereto would be
substantially similar to that described under "Taxation of Owners of Grantor
Trust Strip Certificates". Certificateholders should consult their tax advisors
concerning the possible application of the contingent payment rules to the
Grantor Trust Strip Certificates.
Sales of Grantor Trust Certificates. Any gain or loss equal to the
difference between the amount realized on the sale or exchange of a Grantor
Trust Certificate and its adjusted basis, recognized on such sale or exchange of
a Grantor Trust Certificate by an investor who holds such Grantor Trust
Certificate as a capital asset, will be capital gain or loss, except to the
extent of accrued and unrecognized market discount, which will be treated as
ordinary income, and (in the case of banks and other financial institutions)
except as provided under Section 582(c) of the Code. The adjusted basis of a
Grantor Trust Certificate generally will equal its cost, increased by any income
reported by the seller (including original issue discount and market discount
income) and reduced (but not below zero) by any previously reported losses, any
amortized premium and by any distributions with respect to such Grantor Trust
Certificate.
Gain or loss from the sale of a Grantor Trust Certificate may be
partially or wholly ordinary and not capital in certain circumstances. Gain
attributable to accrued and unrecognized market discount will be treated as
ordinary income, as will gain or loss recognized by banks and other financial
institutions subject to Section 582(c) of the Code. Furthermore, a portion of
any gain that might otherwise be capital gain may be treated as ordinary income
to the extent that the Grantor Trust Certificate is held as part of a
"conversion transaction" within the meaning of Section 1258 of the Code. A
conversion transaction generally is one in which the taxpayer has taken two or
more positions in the same or similar property that reduce or eliminate market
risk, if substantially all of the taxpayer's return is attributable to the time
value of the taxpayer's net investment in such transaction. The amount of gain
realized in a conversion transaction that is recharacterized as ordinary income
generally will not exceed the amount of interest that would have accrued on the
taxpayer's net investment at 120% of the appropriate "applicable Federal rate"
(which rate is computed and published monthly by the IRS) at the time the
taxpayer enters into the conversion transaction, subject to appropriate
reduction for prior inclusion of interest and other ordinary income items from
the transaction. Finally, a taxpayer may elect to have net capital gain taxed at
ordinary income rates rather than capital gains rates in order to include such
net capital gain in total net investment income for that taxable year, for
purposes of the rule that limits the deduction of interest on indebtedness
incurred to purchase or carry property held for investment to a taxpayer's net
investment income.
Grantor Trust Reporting. The Master Servicer or the Trustee will
furnish to each holder of a Grantor Trust Fractional Interest Certificate with
each distribution a statement setting forth the amount of such distribution
allocable to principal on the underlying Mortgage Loans and to interest thereon
at the related Pass-Through Rate. In addition, the Master Servicer or the
Trustee will furnish, within a reasonable time after the end of each calendar
year, to each holder of a Grantor Trust Certificate who was such a holder at any
time during such year, information regarding the amount of servicing
compensation received by the Master Servicer and sub-servicer (if any) and such
other customary factual information as the Master Servicer or the Trustee deems
necessary or desirable to enable holders of Grantor Trust Certificates to
prepare their tax returns and will furnish comparable information to the IRS as
and when required by law to do so. Because the rules for accruing discount and
amortizing premium with respect to the Grantor Trust Certificates are uncertain
in various respects, there is no assurance the IRS will agree with the Trust
Fund's information reports of such items of income and expense. Moreover, such
information reports, even if otherwise accepted as accurate by the IRS, will in
any event be accurate only as to the initial Certificateholders that bought
their Certificates at the representative initial offering price used in
preparing such reports.
Except as disclosed in the related Prospectus Supplement, the
responsibility for complying with the foregoing reporting rules will be borne by
the Master Servicer or the Trustee.
Backup Withholding. In general, the rules described in
"--REMICS--Backup Withholding with Respect to REMIC Certificates" will also
apply to Grantor Trust Certificates.
110
<PAGE>
<PAGE>
Foreign Investors. In general, the discussion with respect to REMIC
Regular Certificates in "REMICS--Foreign Investors in REMIC Certificates"
applies to Grantor Trust Certificates except that Grantor Trust Certificates
will, except as disclosed in the related Prospectus Supplement, be eligible for
exemption from U.S. withholding tax, subject to the conditions described in such
discussion, only to the extent the related Mortgage Loans were originated after
July 18, 1984.
To the extent that interest on a Grantor Trust Certificate would be
exempt under Sections 871(h)(1) and 881(c) of the Code from United States
withholding tax, and the Grantor Trust Certificate is not held in connection
with a Certificateholder's trade or business in the United States, such Grantor
Trust Certificate will not be subject to United States estate taxes in the
estate of a non-resident alien individual.
STATE AND OTHER TAX CONSEQUENCES
In addition to the federal income tax consequences described in
"Federal Income Tax Consequences", potential investors should consider the state
and local tax consequences of the acquisition, ownership, and disposition of the
Securities offered hereunder. State tax law may differ substantially from the
corresponding federal tax law, and the discussion above does not purport to
describe any aspect of the tax laws of any state or other jurisdiction.
Therefore, prospective investors should consult their own tax advisors with
respect to the various tax consequences of investments in the Securities offered
hereunder.
ERISA CONSIDERATIONS
Sections 404 and 406 of the Employee Retirement Income Security Act of
1974, as amended ("ERISA"), impose certain fiduciary and prohibited transaction
restrictions on employee pension and welfare benefit plans subject to ERISA
("ERISA Plans") and on certain other retirement plans and arrangements,
including individual retirement accounts and annuities, Keogh plans and bank
collective investment funds and insurance company general and separate accounts
in which such ERISA Plans are invested. Section 4975 of the Code imposes
essentially the same prohibited transaction restrictions on tax-qualified
retirement plans described in Section 401(a) of the Code and on Individual
Retirement Accounts described in Section 408 of the Code (collectively, "Tax
Favored Plans"). ERISA and the Code prohibit a broad range of transactions
involving assets of ERISA Plans and Tax Favored Plans (collectively, "Plans")
and persons who have certain specified relationships to such Plans ("Parties in
Interest" within the meaning of ERISA or "Disqualified Persons" within the
meaning of the Code, collectively "Parties in Interest"), unless a statutory or
administrative exemption is available with respect to any such transaction.
Certain employee benefit plans, such as governmental plans (as defined
in Section 3(32) of ERISA), and, if no election has been made under Section
410(d) of the Code, church plans (as defined in Section 3(33) of ERISA) are not
subject to ERISA requirements. Accordingly, assets of such plans may be invested
in the Securities without regard to the ERISA considerations described below,
subject to the provisions of other applicable federal, state and local law. Any
such plan which is qualified and exempt from taxation under Sections 401(a) and
501(a) of the Code, however, is subject to the prohibited transaction rules set
forth in Section 503 of the Code.
Certain transactions involving the Trust Fund might be deemed to
constitute prohibited transactions under ERISA and the Code with respect to a
Plan that purchases the Securities, if the Mortgage Loans and other assets
included in a Trust Fund are deemed to be assets of the Plan. The U.S.
Department of Labor (the "DOL") has promulgated regulations at 29 C.F.R.
ss.2510.3-101 (the "DOL Regulations") defining the term "Plan Assets" for
purposes of applying the general fiduciary responsibility provisions of ERISA
and the prohibited transaction provisions of ERISA and the Code. Under the DOL
Regulations, generally, when a Plan acquires an "equity interest" in another
entity (such as the Trust Fund), the underlying assets of that entity may be
considered to be Plan Assets unless certain exceptions apply. Exceptions
contained in the DOL Regulations provide that a Plan's assets will not include
an undivided interest in each asset of an entity in which such Plan makes an
equity investment if: (1) the entity is an operating company; (2) the equity
investment made by the Plan is either a "publicly-offered security" that is
"widely held," both as defined in the DOL Regulations, or a security issued by
an investment company registered under the Investment Company Act of 1940, as
amended; or (3) Benefit Plan Investors do not own 25% or more in value of
111
<PAGE>
<PAGE>
any class of equity securities issued by the entity. For this purpose, "Benefit
Plan Investors" include Plans, as well as any "employee benefit plan" (as
defined in Section 3(3) or ERISA) which is not subject to Title I of ERISA, such
as governmental plans (as defined in Section 3(32) of ERISA) and church plans
(as defined in Section 3(33) of ERISA) which have not made an election under
Section 410(d) of the Code, and any entity whose underlying assets include Plan
Assets by reason of a Plan's investment in the entity. In addition, the DOL
Regulations provide that the term "equity interest" means any interest in an
entity other than an instrument which is treated as indebtedness under
applicable local law and which has no "substantial equity features." Under the
DOL Regulations, Plan Assets will be deemed to include an interest in the
instrument evidencing the equity interest of a Plan (such as a Certificate or a
Note with "substantial equity features"), and, because of the factual nature of
certain of the rules set forth in the DOL Regulations, Plan Assets may be deemed
to include an interest in the underlying assets of the entity in which a Plan
acquires an interest (such as the Trust Fund). Without regard to whether the
Notes are characterized as equity interests, the purchase, sale and holding of
Notes by or on behalf of a Plan could be considered to give rise to a prohibited
transaction if the Issuer, the Trustee or any of their respective affiliates is
or becomes a Party in Interest with respect to such Plan. Neither Plans nor
persons investing Plan Assets should acquire or hold Securities in reliance upon
the availability of any exception under the DOL Regulations.
ERISA generally imposes on Plan fiduciaries certain general fiduciary
requirements, including those of investment prudence and diversification and the
requirement that a Plan's investments be made in accordance with the documents
governing the Plan. Any person who has discretionary authority or control with
respect to the management or disposition of Plan Assets and any person who
provides investment advice with respect to such Plan Assets for a fee is a
fiduciary of the investing Plan. If the Mortgage Loans and other assets included
in the Trust Fund were to constitute Plan Assets, then any party exercising
management or discretionary control with respect to those Plan Assets may be
deemed to be a Plan "fiduciary," and thus subject to the fiduciary
responsibility provisions of ERISA and the prohibited transaction provisions of
ERISA and Section 4975 of the Code with respect to any investing Plan. In
addition, the acquisition or holding of Securities by or on behalf of a Plan or
with Plan Assets, as well as the operation of the Trust Fund, may constitute or
involve a prohibited transaction under ERISA and the Code unless a statutory or
administrative exemption is available.
The DOL issued an individual prohibited transactions exemption
("Exemption") to certain underwriters, which generally exempts from the
application of the prohibited transaction provisions of Section 406 of ERISA,
and the excise taxes imposed on such prohibited transactions pursuant to Section
4975(a) and (b) of the Code, certain transactions, among others, relating to the
servicing and operation of mortgage pools and the initial purchase, holding and
subsequent resale of mortgage pass-through certificates underwritten by an
Underwriter (as hereinafter defined), provided that certain conditions set forth
in the Exemption are satisfied. For purposes of this Section "ERISA
Considerations", the term "Underwriter" shall include (a) the underwriter, (b)
any person directly or indirectly, through one or more intermediaries,
controlling, controlled by or under common control with the underwriter and (c)
any member of the underwriting syndicate or selling group of which a person
described in (a) or (b) is a manager or co-manager with respect to a class of
Securities.
The Exemption sets forth six general conditions which must be satisfied
for the Exemption to apply. First, the acquisition of Securities by a Plan or
with Plan Assets must be on terms that are at least as favorable to the Plan as
they would be in an arm's-length transaction with an unrelated party. Second,
the Exemption only applies to Securities evidencing rights and interests that
are not subordinated to the rights and interests evidenced by other Securities
of the same trust. Third, the Securities at the time of acquisition by a Plan or
with Plan Assets must be rated in one of the three highest generic rating
categories by Standard & Poor's Structured Rating Group, Moody's Investors
Service, Inc., Duff & Phelps Credit Rating Co. or Fitch Investors Service, L.P.
(collectively, the "Exemption Rating Agencies"). Fourth, the Trustee cannot be
an affiliate of any member of the "Restricted Group" which consists of any
Underwriter, the Company, the Master Servicer, the Special Servicer, any
Sub-Servicer and any obligor with respect to assets included in the Trust Fund
constituting more than 5% of the aggregate unamortized principal balance of the
assets in the Trust Fund as of the date of initial issuance of the Securities.
Fifth, the sum of all payments made to and retained by the Underwriter(s) must
represent not more than reasonable compensation for underwriting the Securities;
the sum of all payments made to and retained by the Company pursuant to the
assignment of the assets to the related Trust Fund must represent not more than
the fair market value of such obligations; and the sum of all payments made to
and retained by the Master Servicer, the Special Servicer and any Sub-Servicer
must represent not more than reasonable compensation for such person's services
under the related Agreement and
112
<PAGE>
<PAGE>
reimbursement of such person's reasonable expenses in connection therewith.
Sixth, the Exemption states that the investing Plan or Plan Asset investor must
be an accredited investor as defined in Rule 501(a)(1) of Regulation D of the
Commission under the Securities Act of 1933, as amended.
The Exemption also requires that the Trust Fund meet the following
requirements: (i) the Trust Fund must consist solely of assets of the type that
have been included in other investment pools; (ii) Securities evidencing
interests in such other investment pools must have been rated in one of the
three highest generic categories of one of the Exemption Rating Agencies for at
least one year prior to the acquisition of Securities by or on behalf of a Plan
or with Plan Assets; and (iii) Securities evidencing interests in such other
investment pools must have been purchased by investors other than Plans for at
least one year prior to any acquisition of Securities by or on behalf of a Plan
or with Plan Assets.
A fiduciary of a Plan or any person investing Plan Assets to purchase a
Certificate must make its own determination that the conditions set forth above
will be satisfied with respect to such Certificate.
If the general conditions of the Exemption are satisfied, the Exemption
may provide an exemption from the restrictions imposed by Sections 406(a) and
407(a) of ERISA, and the excise taxes imposed by Sections 4975(a) and (b) of the
Code by reason of Sections 4975(c)(1)(A) through (D) of the Code, in connection
with the direct or indirect sale, exchange or transfer of Securities in the
initial issuance of such Securities or the direct or indirect acquisition or
disposition in the secondary market of Securities by a Plan or with Plan Assets
or the continued holding of Securities acquired by a Plan or with Plan Assets
pursuant to either of the foregoing. However, no exemption is provided from the
restrictions of Sections 406(a)(1)(E), 406(a)(2) and 407 of ERISA for the
acquisition or holding of a Security on behalf of an "Excluded Plan" by any
person who has discretionary authority or renders investment advice with respect
to the assets of such Excluded Plan. For purposes of the Securities, an Excluded
Plan is a Plan sponsored by any member of the Restricted Group.
If certain specific conditions of the Exemption are also satisfied, the
Exemption may provide an exemption from the restrictions imposed by Sections
406(b)(1) and (b)(2) of ERISA, and the excise taxes imposed by Sections 4975(a)
and (b) of the Code by reason of Section 4975(c)(1)(E) of the Code, in
connection with (1) the direct or indirect sale, exchange or transfer of
Securities in the initial issuance of Securities between the Depositor or an
Underwriter and a Plan when the person who has discretionary authority or
renders investment advice with respect to the investment of Plan Assets in the
Securities is (a) a mortgagor with respect to 5% or less of the fair market
value of the Trust Fund Assets or (b) an affiliate of such a person, (2) the
direct or indirect acquisition or disposition in the secondary market of
Securities by a Plan or with Plan Assets and (3) the continued holding of
Securities acquired by a Plan or with Plan Assets pursuant to either of the
foregoing.
Further, if certain specific conditions of the Exemption are satisfied,
the Exemption may provide an exemption from the restrictions imposed by Sections
406(a), 406(b) and 407 of ERISA, and the excise taxes imposed by Sections
4975(a) and (b) of the Code by reason of Section 4975(c) of the Code for
transactions in connection with the servicing, management and operation of the
Trust Fund. The Depositor expects that the specific conditions of the Exemption
required for this purpose will be satisfied with respect to the Securities so
that the Exemption would provide an exemption from the restrictions imposed by
Sections 406(a) and (b) of ERISA (as well as the excise taxes imposed by
Sections 4975(a) and (b) of the Code by reason of Section 4975(c) of the Code)
for transactions in connection with the servicing, management and operation of
the Trust Fund, provided that the general conditions of the Exemption are
satisfied.
The Exemption also may provide an exemption from the restrictions
imposed by Sections 406(a) and 407(a) of ERISA, and the excise taxes imposed by
Section 4975(a) and (b) of the Code by reason of Sections 4975(c)(1)(A) through
(D) of the Code if such restrictions are deemed to otherwise apply merely
because a person is deemed to be a Party in Interest with respect to an
investing Plan by virtue of providing services to the Plan (or by virtue of
having certain specified relationships to such a person) solely as a result of
the Plan's ownership of Securities.
On July 21, 1997, the DOL published in the Federal Register an
amendment to the Exemption, which will extend exemptive relief to certain
mortgage-backed and asset-backed securities transactions using pre-funding
accounts for trusts issuing pass-through certificates. With respect to the
Certificates, the amendment will generally allow
113
<PAGE>
<PAGE>
Mortgage Loans supporting payments to Certificateholders, and having a value
equal to no more than 25% of the total principal amount of the Certificates
being offered by a Trust Fund, to be transferred to such Trust Fund within a
period no longer than 90 days or three months following the Closing Date
("Pre-Funding Period") instead of requiring that all such Mortgage Loans be
either identified or transferred on or before the Closing Date. In general, the
relief applies to the purchase, sale and holding of Certificates which otherwise
qualify for the Exemption, provided that the following general conditions are
met:
(1) the ratio of the amount allocated to the Pre-Funding
Account to the total principal amount of the Certificates being offered
("Pre-Funding Limit") must be less than or equal to: (i) 40% for
transactions occurring on or after January 1, 1992 but prior to May 23,
1997 and (ii) 25% for transactions occurring on or after May 23, 1997;
(2) all additional Mortgage Loans transferred to the related
Trust Fund after the Closing Date ("Subsequent Mortgage Loans") must
meet the same terms and conditions for eligibility as the original
Mortgage Loans used to create the Trust Fund, which terms and
conditions have been approved by one of the Exemption Rating Agencies;
(3) the transfer of such Subsequent Mortgage Loans to the
Trust Fund during the Pre-Funding Period must not result in the
Certificates to be covered by the Exemptions receiving a lower credit
rating from an Exemption Rating Agency upon termination of the
Pre-Funding Period than the rating that was obtained at the time of the
initial issuance of the Certificates by the Trust Fund;
(4) solely as a result of the use of pre-funding, the weighted
average annual percentage interest rate (the "Average Interest Rate")
for all of the Mortgage Loans and Subsequent Mortgage Loans in the
Trust Fund at the end of the Pre-Funding Period must not be more than
100 basis points lower than the Average Interest Rate for the Mortgage
Loans which were transferred to the Trust Fund on the Closing Date;
(5) for transactions occurring on or after May 23, 1997,
either:
(i) the characteristics of the Subsequent Mortgage Loans
must be monitored by an insurer or other credit support provider which
is independent of the Depositor; or
(ii)an independent accountant retained by the Depositor
must provide the Depositor with a letter (with copies provided to the
Exemption Rating Agency rating the Certificates, the Underwriter and
the Trustee) stating whether or not the characteristics of the
Subsequent Mortgage Loans conform to the characteristics described in
the Prospectus or Prospectus Supplement and/or Agreement. In preparing
such letter, the independent accountant must use the same type of
procedures as were applicable to the Mortgage Loans which were
transferred to the Trust Fund as of the Closing Date;
(6) the Pre-Funding Period must end no later than three months
or 90 days after the Closing Date or earlier in certain circumstances
if the Pre-Funding Accounts falls below the minimum level specified in
the Agreement or an event of default occurs;
(7) amounts transferred to any Pre-Funding Accounts and/or
capitalized interest account used in connection with the pre-funding
may be invested only in investments which are permitted by the
Exemption Rating Agencies rating the Certificates and must:
(i) be direct obligations of, or obligations fully
guaranteed as to timely payment of principal and interest by, the
United States or any agency or instrumentality thereof (provided that
such obligations are backed by the full faith and credit of the United
States); or
(ii) have been rated (or the obligor has been rated) in
one of the three highest generic rating categories by one of the
Exemption Rating Agencies ("ERISA Permitted Investments");
(8) the Prospectus or Prospectus Supplement must describe the
duration of the Pre-Funding Period;
114
<PAGE>
<PAGE>
(9) the Trustee (or any agent with which the Trustee contracts
to provide trust services) must be a substantial financial institution
or trust company experienced in trust activities and familiar with its
duties, responsibilities and liabilities with ERISA. The Trustee, as
legal owner of the Trust Fund, must enforce all the rights created in
favor of Certificateholders of the Trust Fund, including employee
benefit plans subject to ERISA.
In addition to the Exemption, a Plan fiduciary or other Plan Asset
investor should consider the availability of certain class exemptions granted by
the DOL ("Class Exemptions"), which may provide relief from certain of the
prohibited transaction provisions of ERISA and the related excise tax provisions
of the Code, including Prohibited Transaction Class Exemption ("PTCE") 83-1,
regarding transactions involving mortgage pool investment trusts; PTCE 84-14,
regarding transactions effected by a "qualified professional asset manager";
PTCE 90-1, regarding transactions by insurance company pooled separate accounts;
PTCE 91-38, regarding investments by bank collective investment funds; PTCE
95-60, regarding transactions by insurance company general accounts; and PTCE
96-23, regarding transactions effected by an "in-house asset manager."
In addition to any exemption that may be available under PTCE 95-60 for
the purchase and holding of the Securities by an insurance company general
account, the Small Business Job Protection Act of 1996 added a new Section
401(c) to ERISA, which provides certain exemptive relief from the provisions of
Part 4 of Title I of ERISA and Section 4975 of the Code, including the
prohibited transaction restrictions imposed by ERISA and the related excise
taxes imposed by the Code, for transactions involving an insurance company
general account. Pursuant to Section 401(c) of ERISA, the DOL issued proposed
regulations ("Proposed 401(c) Regulations") on December 22, 1997 which propose
guidance for the purpose of determining, in cases where insurance policies
supported by an insurer's general account are issued to or for the benefit of a
Plan on or before December 31, 1998, which general account assets constitute
Plan Assets. Section 401(c) of ERISA generally provides that, until the date
which is 18 months after the 401(c) Regulations become final, no person shall be
subject to liability under Part 4 of Title I of ERISA and Section 4975 of the
Code on the basis of a claim that the assets of an insurance company general
account constitute Plan Assets, unless (i) as otherwise provided by the
Secretary of Labor in the 401(c) Regulations to prevent avoidance of the
regulations or (ii) an action is brought by the Secretary of Labor for certain
breaches of fiduciary duty which would also constitute a violation of federal or
state criminal law. In addition, because Section 401(c) does not relate to
insurance company separate accounts, separate account assets are still treated
as Plan Assets of any Plan invested in such separate account. Insurance
companies contemplating the investment of general account assets in the
Securities should consult with their legal counsel with respect to the
applicability of Section 401(c) of ERISA, including the general account's
ability to continue to hold the Securities after the date which is 18 months
after the date the Proposed 401(c) Regulations become final.
REPRESENTATION FROM PLANS INVESTING IN NOTES WITH "SUBSTANTIAL EQUITY FEATURES"
OR CERTAIN CERTIFICATES
Because the exemptive relief afforded by the Exemption (or any similar
exemption that might be available) will not apply to the purchase, sale or
holding of certain Securities, such as Notes with "substantial equity features,"
Subordinate Securities, REMIC Residual Certificates, any Securities which are
not rated in one of the three highest generic rating categories by the Exemption
Rating Agencies transfers of any such Securities to a Plan, to a trustee or
other person acting on behalf of any Plan, or to any other person investing Plan
Assets to effect such acquisition will not be registered by the Trustee unless
the transferee provides the Company, the Trustees and the Master Servicer with
an opinion of counsel satisfactory to the Company, the Trustee (or Indenture
Trustee in the case of transfer of Notes) and the Master Servicer, which opinion
will not be at the expense of the Company, the Trustee (or the Indenture Trustee
in the case of the transfer of Notes) or the Master Servicer, that the purchase
of such Securities by or on behalf of such Plan is permissible under applicable
law, will not constitute or result in any non-exempt prohibited transaction
under ERISA or Section 4975 of the Code and will not subject the Company, the
Trustee (or the Indenture Trustee in the case of the transfer of Notes) or the
Master Servicer to any obligation in addition to those undertaken in the related
Agreement.
In lieu of such opinion of counsel, the transferee may provide a
certification substantially to the effect that the purchase of Securities by or
on behalf of such Plan is permissible under applicable law, will not constitute
or result in any non-exempt prohibited transaction under ERISA or Section 4975
of the Code and will not subject the Company, the Trustees or the Master
Servicer to any obligation in addition to those undertaken in the Agreement and
the
115
<PAGE>
<PAGE>
following statements are correct: (i) the transferee is an insurance company,
(ii) the source of funds used to purchase such Securities is an "insurance
company general account" (as such term is defined in PTCE 95-60), (iii) the
conditions set forth in PTCE 95-60 have been satisfied and (iv) there is no Plan
with respect to which the amount of such general account's reserves and
liabilities for contracts held by or on behalf of such Plan and all other Plans
maintained by the same employer (or any "affiliate" thereof, as defined in PTCE
95-60) or by the same employee organization exceed 10% of the total of all
reserves and liabilities of such general account (as determined under PTCE
95-60) as of the date of the acquisition of such Securities.
An opinion of counsel or certification will not be required with
respect to the purchase of DTC registered Securities. Any purchaser of a DTC
registered Security will be deemed to have represented by such purchase that
either (a) such purchaser is not a Plan and is not purchasing such Securities on
behalf of, or with Plan Assets of, any Plan or (b) the purchase of any such
Security by or on behalf of, or with Plan Assets of, any Plan is permissible
under applicable law, will not result in any non-exempt prohibited transaction
under ERISA or Section 4975 of the Code and will not subject the Company, the
Trustee or the Master Servicer to any obligation in addition to those undertaken
in the related Agreement.
TAX EXEMPT INVESTORS
A Plan that is exempt from federal income taxation pursuant to Section
501 of the Code (a "TAX-EXEMPT INVESTOR") nonetheless will be subject to federal
income taxation to the extent that its income is "unrelated business taxable
income" ("UBTI") within the meaning of Section 512 of the Code. All "excess
inclusion" of a REMIC allocated to a REMIC Residual Certificate and held by a
Tax-Exempt investor will be considered UBTI and thus will be subject to federal
income tax. See "Federal Income Tax Consequences -- Taxation of Owners of REMIC
Residual Certificates -- Excess Inclusions."
CONSULTATION WITH COUNSEL
There can be no assurance that any DOL exemption will apply with
respect to any particular Plan that acquires the Securities or, even if all the
conditions specified therein were satisfied, that any such exemption would apply
to transactions involving the Trust Fund. Prospective Plan investors should
consult with their legal counsel concerning the impact of ERISA and the Code and
the potential consequences to their specific circumstances prior to making an
investment in the Securities. Neither the Company, the Trustees, the Master
Servicer nor any of their respective affiliates will make any representation to
the effect that the Securities satisfy all legal requirements with respect to
the investment therein by Plans generally or any particular Plan or to the
effect that the Securities are an appropriate investment for Plans generally or
any particular Plan.
BEFORE PURCHASING THE SECURITIES, A FIDUCIARY OF A PLAN OR OTHER PLAN
ASSET INVESTOR SHOULD ITSELF CONFIRM THAT (A) ALL THE SPECIFIC AND GENERAL
CONDITIONS SET FORTH IN THE EXEMPTION, ONE OF THE CLASS EXEMPTIONS OR SECTION
401(C) OF ERISA WOULD BE SATISFIED AND (B) IN THE CASE OF A CERTIFICATE
PURCHASED UNDER THE EXEMPTION, THE CERTIFICATE CONSTITUTES A "CERTIFICATE" FOR
PURPOSES OF THE EXEMPTION. IN ADDITION TO MAKING ITS OWN DETERMINATION AS TO THE
AVAILABILITY OF THE EXEMPTIVE RELIEF PROVIDED IN THE EXEMPTION, ONE OF THE CLASS
EXEMPTIONS OR SECTION 410(C) OF ERISA, THE PLAN FIDUCIARY SHOULD CONSIDER ITS
GENERAL FIDUCIARY OBLIGATIONS UNDER ERISA IN DETERMINING WHETHER TO PURCHASE THE
SECURITIES ON BEHALF OF A PLAN.
LEGAL INVESTMENT MATTERS
Each class of Certificates offered hereby and by the related Prospectus
Supplement will be rated at the date of issuance in one of the four highest
rating categories by at least one Rating Agency. If so specified in the related
Prospectus Supplement, each such class that is rated in one of the two highest
rating categories by at least one Rating Agency will constitute "mortgage
related securities" for purposes of the Secondary Mortgage Market Enhancement
Act of 1984 ("SMMEA"), and, as such, 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 whose authorized investments are subject to state
regulation to the same extent that, under applicable law, obligations issued by
or
116
<PAGE>
<PAGE>
guaranteed as to principal and interest by the United States or any agency or
instrumentality thereof constitute legal investments for such entities. Under
SMMEA, if a State enacted legislation on or prior to October 3, 1991
specifically limiting the legal investment authority of any such entities with
respect to "mortgage related securities," such securities will constitute legal
investments for entities subject to such legislation only to the extent provided
therein. Certain States have enacted legislation which overrides the preemption
provisions of SMMEA. SMMEA provides, however, that in no event will the
enactment of any such legislation affect the validity of any contractual
commitment to purchase, hold or invest in "mortgage related securities," or
require the sale or other disposition of such securities, so long as such
contractual commitment was made or such securities acquired prior to the
enactment of such legislation.
SMMEA also amended the legal investment authority of
federally-chartered depository institutions as follows: federal savings and loan
associations and federal savings banks may invest in, sell or otherwise deal
with "mortgage related securities" without limitation as to the percentage of
their assets represented thereby, federal credit unions may invest in such
securities, and national banks may purchase such securities for their own
account without regard to the limitations generally applicable to investment
securities set forth in 12 U.S.C. 24 (Seventh), subject in each case to such
regulations as the applicable federal regulatory authority may prescribe.
The Federal Financial Institutions Examination Council has issued a
supervisory policy statement (the "Policy Statement") applicable to all
depository institutions, setting forth guidelines for and significant
restrictions on investments in "high-risk mortgage securities." The Policy
Statement has been adopted by the Federal Reserve Board, the Office of the
Comptroller of the Currency, the FDIC and the OTS with an effective date of
February 10, 1992. The Policy Statement generally indicates that a mortgage
derivative product will be deemed to be high risk if it exhibits greater price
volatility than a standard fixed rate thirty-year mortgage security. According
to the Policy Statement, prior to purchase, a depository institution will be
required to determine whether a mortgage derivative product that it is
considering acquiring is high-risk, and if so that the proposed acquisition
would reduce the institution's overall interest rate risk. Reliance on analysis
and documentation obtained from a securities dealer or other outside party
without internal analysis by the institution would be unacceptable. There can be
no assurance as to which classes of Offered Securities will be treated as
high-risk under the Policy Statement.
The predecessor to the Office of Thrift Supervision ("OTS") issued a
bulletin, entitled, "Mortgage Derivative Products and Mortgage Swaps", which is
applicable to thrift institutions regulated by the OTS. The bulletin established
guidelines for the investment by savings institutions in certain "high-risk"
mortgage derivative securities and limitations on the use of such securities by
insolvent, undercapitalized or otherwise "troubled" institutions. According to
the bulletin, such "high-risk" mortgage derivative securities include securities
having certain specified characteristics, which may include certain classes of
Offered Securities. In addition, the National Credit Union Administration has
issued regulations governing federal credit union investments which prohibit
investment in certain specified types of securities, which may include certain
classes of Offered Securities. Similar policy statements have been issued by
regulators having jurisdiction over other types of depository institutions.
Certain classes of Certificates offered hereby, including any class
that is not rated in one of the two highest rating categories by at least one
Rating Agency, will not constitute "mortgage related securities" for purposes of
SMMEA. Any such class of Certificates will be identified in the related
Prospectus Supplement. Prospective investors in such classes of Certificates, in
particular, should consider the matters discussed in the following paragraph.
There may be other restrictions on the ability of certain investors
either to purchase certain classes of Offered Securities or to purchase any
class of Offered Securities representing more than a specified percentage of the
investors' assets. The Company will make no representations as to the proper
characterization of any class of Offered Securities for legal investment or
other purposes, or as to the ability of particular investors to purchase any
class of Certificates under applicable legal investment restrictions. These
uncertainties may adversely affect the liquidity of any class of Certificates.
Accordingly, all investors whose investment activities are subject to legal
investment laws and regulations, regulatory capital requirements or review by
regulatory authorities should consult with their own legal advisors in
determining whether and to what extent the Offered Securities of any class
thereof constitute legal investments or are subject to investment, capital or
other restrictions, and, if applicable, whether SMMEA has been overridden in any
jurisdiction relevant to such investor.
117
<PAGE>
<PAGE>
USE OF PROCEEDS
Substantially all of the net proceeds to be received from the sale of
Certificates will be applied by the Company to finance the purchase of, or to
repay short-term loans incurred to finance the purchase of, the Mortgage Loans
and/or Mortgage Securities in the respective Mortgage Pools and to pay other
expenses. The Company expects that it will make additional sales of securities
similar to the Offered Securities from time to time, but the timing and amount
of any such additional offerings will be dependent upon a number of factors,
including the volume of mortgage loans purchased by the Company, prevailing
interest rates, availability of funds and general market conditions.
METHODS OF DISTRIBUTION
The Certificates offered hereby and by the related Prospectus
Supplements will be offered in series through one or more of the methods
described below. The Prospectus Supplement prepared for each series will
describe the method of offering being utilized for that series and will state
the net proceeds to the Company from such sale.
The Company intends that Offered Securities will be offered through the
following methods from time to time and that offerings may be made concurrently
through more than one of these methods or that an offering of the Offered
Securities of a particular series may be made through a combination of two or
more of these methods. Such methods are as follows:
1. By negotiated firm commitment or best efforts underwriting
and public re-offering by underwriters;
2. By placements by the Company with institutional investors
through dealers; and
3. By direct placements by the Company with institutional
investors.
If underwriters are used in a sale of any Offered Securities (other
than in connection with an underwriting on a best efforts basis), such
Certificates will be acquired by the underwriters for their own account and may
be resold from time to time in one or more transactions, including negotiated
transactions, at fixed public offering prices or at varying prices to be
determined at the time of sale or at the time of commitment therefor. Such
underwriters may be broker-dealers affiliated with the Company whose identities
and relationships to the Company will be as set forth in the related Prospectus
Supplement. The managing underwriter or underwriters with respect to the offer
and sale of the Offered Securities of a particular series will be set forth on
the cover of the Prospectus Supplement relating to such series and the members
of the underwriting syndicate, if any, will be named in such Prospectus
Supplement.
In connection with the sale of the Offered Securities, underwriters may
receive compensation from the Company or from purchasers of such Certificates in
the form of discounts, concessions or commissions. Underwriters and dealers
participating in the distribution of the Offered Securities may be deemed to be
underwriters in connection with such Certificates, and any discounts or
commissions received by them from the Company and any profit on the resale of
Offered Securities by them may be deemed to be underwriting discounts and
commissions under the Securities Act of 1933, as amended (the "Securities Act").
It is anticipated that the underwriting agreement pertaining to the
sale of Offered Securities of any series will provide that the obligations of
the underwriters will be subject to certain conditions precedent, that the
underwriters will be obligated to purchase all such Certificates if any are
purchased (other than in connection with an underwriting on a best efforts
basis) and that, in limited circumstances, the Company will indemnify the
several underwriters and the underwriters will indemnify the Company against
certain civil liabilities, including liabilities under the Securities Act or
will contribute to payments required to be made in respect thereof.
The Prospectus Supplement with respect to any series offered by
placements through dealers will contain information regarding the nature of such
offering and any agreements to be entered into between the Company and
purchasers of Offered Securities of such series.
118
<PAGE>
<PAGE>
The Company anticipates that the Certificates offered hereby will be
sold primarily to institutional investors or sophisticated non-institutional
investors. Purchasers of Offered 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 such Certificates. Holders of Offered Securities should consult with
their legal advisors in this regard prior to any such reoffer or sale.
LEGAL MATTERS
Certain legal matters, including certain federal income tax matters, in
connection with the Securities of each series will be passed upon for the
Company by Thacher Proffitt & Wood, 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 any class of Offered Securities
that they shall have been rated not lower than investment grade, that is, in one
of the four highest rating categories, by at least one Rating Agency.
Ratings on mortgage pass-through certificates and mortgage-backed notes
address the likelihood of receipt by the holders thereof of all collections on
the underlying mortgage assets to which such holders are entitled. These ratings
address the structural, legal and issuer-related aspects associated with such
certificates and notes, the nature of the underlying mortgage assets and the
credit quality of the guarantor, if any. Ratings on mortgage pass-through
certificates and mortgage-backed notes do not represent any assessment of the
likelihood of principal prepayments by borrowers or of the degree by which such
prepayments might differ from those originally anticipated. As a result,
Securityholders might suffer a lower than anticipated yield, and, in addition,
holders of stripped interest securities in extreme cases might fail to recoup
their initial investments.
A security rating is not a recommendation to buy, sell or hold
securities and may be subject to revision or withdrawal at any time by the
assigning rating organization.
119
<PAGE>
<PAGE>
INDEX OF PRINCIPAL DEFINITIONS
<TABLE>
<CAPTION>
Page
----
<S> <C>
401(c) Regulations..............................................................................................115
Accrual Certificates......................................................................................9, 38, 46
Accrued Certificate Interest.....................................................................................46
Affiliated Sellers...............................................................................................24
Agreement........................................................................................................37
ARM Loans........................................................................................................25
Available Distribution Amount....................................................................................45
Average Interest Rate...........................................................................................114
Balloon Loans................................................................................................11, 26
Balloon Payment..................................................................................................26
Bankruptcy Code..................................................................................................80
Bankruptcy Loss..................................................................................................50
Beneficial Owner.................................................................................................39
Buydown Account..................................................................................................27
Buydown Agreement................................................................................................43
Buydown Funds....................................................................................................27
Buydown Mortgage Loans...........................................................................................27
Buydown Period...................................................................................................27
Certificate Account..............................................................................................42
Certificate Registrar............................................................................................39
Certificates......................................................................................................1
Class Exemptions................................................................................................115
Closing Date.....................................................................................................90
Code.........................................................................................................10, 87
Commission........................................................................................................6
Committee Report.................................................................................................89
Company........................................................................................................1, 7
Conservation Act.................................................................................................81
Contingent Payment Regulations..................................................................................109
Contracts........................................................................................................23
Contributions Tax................................................................................................99
Convertible Mortgage Loan........................................................................................27
Cooperative Note.................................................................................................73
Crime Control Act................................................................................................86
Debt Service Reduction...........................................................................................54
Defaulted Mortgage Loss..........................................................................................50
Deferred Interest................................................................................................25
Deficient Valuation..............................................................................................54
Deleted Mortgage Loan............................................................................................31
Designated Seller Transaction....................................................................................24
Determination Date...............................................................................................45
Distribution Date ...............................................................................................12
DOL.............................................................................................................111
DOL Regulations.................................................................................................111
DTC..............................................................................................................39
DTC Registered Securities........................................................................................39
Due Period.......................................................................................................47
Equity Certificates...............................................................................................8
ERISA...................................................................................................15, 20, 111
ERISA Permitted Investments.....................................................................................114
ERISA Plans.................................................................................................20, 111
</TABLE>
120
<PAGE>
<PAGE>
<TABLE>
<S> <C>
Event of Default.................................................................................................64
Excess Interest..................................................................................................51
Exchange Act......................................................................................................6
Excluded Plan...................................................................................................113
Exemption Rating Agencies.......................................................................................112
Extraordinary Losses.............................................................................................50
FDIC.............................................................................................................24
FHA..............................................................................................................23
FHA Loans........................................................................................................23
FHLMC............................................................................................................29
Financial Guaranty Insurance Policy..............................................................................51
FNMA.............................................................................................................29
Fraud Loss.......................................................................................................50
FTC Rule.........................................................................................................82
Garn-St Germain Act..............................................................................................83
Grantor Trust Certificates...................................................................................16, 88
Grantor Trust Fractional Interest Certificate...................................................................103
Grantor Trust Fund...............................................................................................88
Grantor Trust Strip Certificate.................................................................................103
High LTV Loans...................................................................................................27
Holder...........................................................................................................39
Housing Act......................................................................................................29
Indenture......................................................................................................1, 8
Index............................................................................................................25
Installment Contract.............................................................................................84
Insurance Proceeds...............................................................................................42
Insurer..........................................................................................................51
Intermediaries...................................................................................................39
IRS..............................................................................................................90
Issue Premium....................................................................................................95
Issuer.........................................................................................................7, 8
Letter of Credit. ...............................................................................................53
Letter of Credit Bank............................................................................................53
Liquidated Mortgage Loan.........................................................................................35
Liquidation Proceeds.........................................................................................42, 43
Loan-to-Value Ratio..............................................................................................26
Lock-out Expiration Date.........................................................................................26
Lock-out Period..................................................................................................26
Loss.............................................................................................................58
Manufactured Homes...............................................................................................23
Manufacturer's Invoice Price.....................................................................................27
Master Servicer............................................................................................2, 7, 32
Mortgage Loans.............................................................................................1, 8, 10
Mortgage Notes...................................................................................................23
Mortgage Pool.................................................................................................1, 10
Mortgage Rate....................................................................................................25
Mortgage Securities..........................................................................................11, 24
Mortgaged Property...............................................................................................10
Mortgages........................................................................................................23
Mortgagor........................................................................................................22
Multifamily Property.............................................................................................10
Net Mortgage Rate................................................................................................68
Nonrecoverable Advance...........................................................................................48
Note Interest Rate................................................................................................9
Note Margin......................................................................................................25
</TABLE>
121
<PAGE>
<PAGE>
<TABLE>
<S> <C>
Note Registrar...................................................................................................39
Notes.............................................................................................................1
Offered Certificates..........................................................................................7, 38
Offered Notes.....................................................................................................7
Offered Securities.............................................................................................1, 7
OID Regulations..................................................................................................88
OTS.............................................................................................................117
Overcollateralization............................................................................................51
Owner Trust....................................................................................................7, 8
Owner Trustee..................................................................................................7, 8
Participants.....................................................................................................39
Parties in Interest.............................................................................................111
Pass-Through Rate.................................................................................................9
Percentage Interest..............................................................................................45
Permitted Investments............................................................................................42
Plan Assets.....................................................................................................111
Plans.......................................................................................................20, 111
Policy Statement................................................................................................117
Pool Insurer.....................................................................................................43
Pooling Agreement..........................................................................................1, 8, 61
Pre-Funding Account..........................................................................................38, 47
Pre-Funding Limit...............................................................................................114
Pre-Funding Period..............................................................................................114
Prepayment Assumption.......................................................................................90, 105
Prepayment Interest Shortfall....................................................................................69
Prepayment Penalty...............................................................................................26
Primary Insurance Policy.........................................................................................58
Primary Insurer..................................................................................................58
Prohibited Transactions Tax......................................................................................99
Prospectus Supplement.............................................................................................1
PTCE............................................................................................................115
PTCE 83-1.......................................................................................................115
Purchase Obligation..............................................................................................57
Purchase Price...................................................................................................30
Qualified Substitute Mortgage Loan...............................................................................31
Rating Agency....................................................................................................15
Realized Losses..................................................................................................49
Record Date......................................................................................................45
Related Proceeds.................................................................................................48
Relief Act.......................................................................................................86
REMIC......................................................................................................2, 9, 88
REMIC Administrator..............................................................................................88
REMIC Certificates...............................................................................................88
REMIC Provisions.................................................................................................88
REMIC Regular Certificates...................................................................................16, 88
REMIC Regulations................................................................................................88
REMIC Residual Certificates..................................................................................16, 88
REO Mortgage Loan................................................................................................35
REO Property.....................................................................................................34
Reserve Fund.....................................................................................................54
RICO.............................................................................................................86
RTC..............................................................................................................24
Securities.....................................................................................................1, 7
Securities Act...............................................................................................6, 118
Security.........................................................................................................62
</TABLE>
122
<PAGE>
<PAGE>
<TABLE>
<S> <C>
Security Interest Rate............................................................................................9
Security Register................................................................................................39
Security Registrar...............................................................................................39
Securityholder...................................................................................................39
Securityholders...................................................................................................1
Seller...........................................................................................................11
Sellers.......................................................................................................1, 24
Senior Certificates...........................................................................................9, 38
Senior Liens.....................................................................................................26
Senior/Subordinate Series........................................................................................38
Servicing Agreement..............................................................................................28
Servicing Default................................................................................................64
Servicing Standard...............................................................................................33
Single Family Loans..............................................................................................23
Single Family Property...........................................................................................23
SMMEA.......................................................................................................15, 116
Special Hazard Instrument........................................................................................50
Special Hazard Insurance Policy..................................................................................53
Special Hazard Insurer...........................................................................................53
Special Hazard Loss..............................................................................................50
Special Hazard Losses............................................................................................53
Special Servicer..............................................................................................7, 34
SPFC.............................................................................................................61
Spread............................................................................................................8
Strip Certificates............................................................................................9, 38
Subordinate Certificates......................................................................................9, 38
Subsequent Mortgage Loans.......................................................................................114
Subservicer......................................................................................................34
Subservicers.....................................................................................................28
Tax Favored Plans.......................................................................................15, 20, 111
Tax-Exempt Investor.............................................................................................116
Tiered REMICs....................................................................................................89
Title V..........................................................................................................84
Title VIII.......................................................................................................85
Trust Agreement...................................................................................................7
Trust Fund.....................................................................................................1, 8
Trust Fund Assets.................................................................................................1
Trustee...........................................................................................................8
UBTI............................................................................................................116
UCC..............................................................................................................77
Unaffiliated Sellers.............................................................................................24
Underwriter.....................................................................................................112
United States person............................................................................................102
VA...............................................................................................................23
VA Loans.........................................................................................................23
Value............................................................................................................26
WMC Mortgage......................................................................................................7
</TABLE>
123
<PAGE>
<PAGE>
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS
SUPPLEMENT AND THE PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY
OR BY THE UNDERWRITERS. THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS DO NOT
CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE
SECURITIES OFFERED HEREBY TO ANYONE IN ANY JURISDICTION IN WHICH THE PERSON
MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANYONE TO WHOM
IT IS UNLAWFUL TO MAKE ANY SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF
THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL,
UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT INFORMATION HEREIN OR
THEREIN IS CORRECT AS OF ANY TIME SINCE THE DATE OF THIS PROSPECTUS SUPPLEMENT
OR THE PROSPECTUS.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
PROSPECTUS SUPPLEMENT
<S> <C>
Summary of Prospectus Supplement.............................S-5
Risk Factors................................................S-21
Description of the Mortgage Pool............................S-25
The Seller and the Master Servicer..........................S-37
WMC Mortgage Corp.'s Loan Program...........................S-38
Description of Certificates.................................S-44
Certain Yield and Prepayment Considerations............... S-56
Pooling Agreement...........................................S-64
Description of the Purchase Agreement.......................S-66
Use of Proceeds.............................................S-66
Certain Federal Income Tax Consequences.....................S-66
Method of Distribution......................................S-68
Legal Opinions..............................................S-69
Ratings.....................................................S-69
Legal Investment............................................S-70
ERISA Considerations........................................S-71
Global Clearance, Settlement and Tax Documentation
Procedures...................................................I-1
PROSPECTUS
Available Information..........................................6
Reports to Securityholders.....................................6
Incorporation of Certain Information by Reference..............6
Summary of Prospectus..........................................7
Risk Factors..................................................18
The Mortgage Pools............................................23
Servicing of Mortgage Loans...................................32
Description of the Securities.................................37
Description of Credit Enhancement.............................49
Purchase Obligations..........................................57
Primary Mortgage Insurance, Hazard Insurance;
Claims Thereunder.............................................58
The Company...................................................61
The Agreements................................................61
Yield Considerations..........................................68
Maturity and Prepayment Considerations........................71
Certain Legal Aspects of Mortgage Loans.......................72
Federal Income Tax Consequences...............................87
State And Other Tax Consequences.............................111
ERISA Considerations.........................................111
Legal Investment Matters.....................................116
Use of Proceeds..............................................118
Methods of Distribution......................................118
Legal Matters................................................119
Financial Information........................................119
Rating.......................................................119
Index of Principal Definitions...............................120
</TABLE>
UNTIL NINETY DAYS AFTER THE DATE OF THIS PROSPECTUS SUPPLEMENT, ALL
DEALERS EFFECTING TRANSACTIONS IN THE OFFERED CERTIFICATES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS
SUPPLEMENT AND PROSPECTUS. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE
OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS SUPPLEMENT AND PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
$800,000,000
WMC MORTGAGE PASS-
THROUGH CERTIFICATES
SERIES 1998-B
WMC SECURED ASSETS CORP.,
COMPANY
WMC MORTGAGE CORP.,
MASTER SERVICER AND SELLER
$80,000,000 NOTIONAL AMOUNT
CLASS A-IO CERTIFICATES
VARIABLE PASS-THROUGH RATE
$400,000,000 CLASS A-1 CERTIFICATES
VARIABLE PASS-THROUGH RATE
$232,000,000 CLASS A-2 CERTIFICATES
VARIABLE PASS-THROUGH RATE
$64,000,000 CLASS M-1 CERTIFICATES
VARIABLE PASS-THROUGH RATE
$56,000,000 CLASS M-2 CERTIFICATES
VARIABLE PASS-THROUGH RATE
$48,000,000 CLASS B CERTIFICATES
VARIABLE PASS-THROUGH RATE
_______________________
PROSPECTUS SUPPLEMENT
_______________________
BEAR, STEARNS & CO. INC.
CREDIT SUISSE FIRST BOSTON
NATIONSBANC MONTGOMERY
SECURITIES LLC
LEHMAN BROTHERS
FIRST UNION CAPITAL MARKETS
AUGUST 28, 1998
STATEMENT OF DIFFERENCES
------------------------
The section symbol shall be expressed as................................. 'SS'
