AS FILED WITH THE COMMISSION ON JULY 23, 1998
Registration No. 333-_____
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM S-3
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
----------------
WMC SECURED ASSETS CORP.
(Exact name of Registrant as specified in its Charter)
Delaware
(State of Incorporation)
(I.R.S. Employer Identification Number)
6320 Canoga Avenue, Suite 1300
Woodland Hills, California 91367
(818) 592-2610
(Address and telephone number of Registrant's principal executive offices)
Scott McAfee
WMC Secured Assets Corp.
6320 Canoga Avenue, Suite 1300
Woodland Hills, California 91367
(818) 592-2610
(Name, address and telephone number of agent for service)
----------------
Copies to:
Kathryn Cruze, Esq.
Thacher Proffitt & Wood
Two World Trade Center
New York, New York 10048
================================================================================
Approximate date of commencement of proposed sale to the public: From
time to time on or after the effective date of this Registration Statement, as
determined by market conditions.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. |_|
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, other than securities offered only in connection with
dividend or interest reinvestment plans, please check the following box. |X|
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. |_|
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
======================================================================================================================
PROPOSED PROPOSED
MAXIMUM MAXIMUM
OFFERING AGGREGATE AMOUNT OF
AMOUNT PRICE OFFERING REGISTRATION
TTITE OF SECURITIES BEING REGISTERED TO BE REGISTERED PER UNIT (1) PRICE (1) FEE(2)
------------------------------------ ---------------- ------------ --------- ------
<S> <C> <C> <C> <C>
Mortgage Pass-Through Certificates and
Mortgage-Backed Notes, issued in series $2,000,000,000 100% $2,000,000,000 $529,820
======================================================================================================================
</TABLE>
<PAGE>
(1) Estimated solely for the purpose of calculating the registration fee.
(2) $204,000,000 aggregate principal amount of Mortgage Pass-Through
Certificates registered by the Registrant under Registration Statement No.
333-41173 referred to below and not previously sold are consolidated in this
Registration Statement pursuant to Rule 429. All registration fees in connection
with such unsold amount of Mortgage Pass-Through Certificates have been
previously paid by the Registrant under the foregoing Registration Statement.
Accordingly, the total amount registered under this Registration Statement as so
consolidated as of the date of this filing is $2,000,000,000.
--------------------------
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that the Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission acting pursuant to said Section 8(a),
may determine.
Pursuant to Rule 429 of the Securities Act of 1933, the prospectus which is a
part of this Registration Statement is a combined prospectus and includes all
the information required in a prospectus relating to the securities covered by
Registration Statement No. 333-41173 previously filed by the Registrant. This
Registration Statement, which relates to $2,000,000,000 aggregate principal
amount of Mortgage Pass-Through Certificates, constitutes Post-Effective
Amendment Number 1 to Registration Statement No. 333-41173.
================================================================================
<PAGE>
EXPLANATORY NOTE
This Registration Statement includes (i) a basic prospectus, (ii) an
illustrative form of prospectus supplement for use in an offering of Mortgage
Pass-Through Certificates consisting of senior and subordinate certificate
classes ("Version 1"), (iii) an illustrative form of prospectus supplement for
use in an offering of Mortgage Pass-Through Certificates which provides for
credit support in the form of a letter of credit ("Version 2") and (iv) an
illustrative form of prospectus supplement for use in an offering of
Mortgage-Backed Notes ("Version 3").
<PAGE>
<TABLE>
<CAPTION>
CROSS REFERENCE SHEET FURNISHED PURSUANT TO RULE 404(A)
ITEM AND CAPTION IN FORM S-3 LOCATION IN PROSPECTUS
---------------------------- ----------------------
<S> <C> <C>
1. Forepart of Registration Statement and Outside Front
Cover Page of Prospectus....................................... Forepart of Registration Statement and Outside Front
Cover Page of Prospectus
2. Inside Front and Outside Back Cover Pages of
Prospectus..................................................... Inside Front Cover Page of Prospectus and Outside
Back Cover Page of Prospectus
3. Summary Information, Risk Factors and Ratio of Earnings
to Fixed Charges............................................... Summary of Prospectus; Risk Factors
4. Use of Proceeds.................................................. Use of Proceeds
5. Determination of Offering Price.................................. *
6. Dilution......................................................... *
7. Selling Security Holders......................................... *
8. Plan of Distribution............................................. Methods of Distribution
9. Description of the Securities to be Registered................... Summary of Prospectus; The Mortgage Pools; Yield
Considerations; Maturity and Prepayment
Considerations; Description of the Securities**
10. Interests of Named Experts and Counsel........................... *
11. Material Changes................................................. Financial Information
12. Incorporation of Certain Information by Reference................ Incorporation of Certain Information by Reference
13. Disclosure of Commission Position on Indemnification
for Securities Act Liabilities................................. See page II-1
- --------------------
</TABLE>
* Answer negative or item inapplicable.
** To be completed from time to time by Prospectus Supplement.
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PRELIMINARY PROSPECTUS SUPPLEMENT SHALL NOT CONSTITUTE AN OFFER
TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF
THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY
SUCH STATE.
VERSION 1
=========
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS SUPPLEMENT DATED JULY 23, 1998
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED ____________, 19__)
$----------------
WMC SECURED ASSETS CORP.
COMPANY
[NAME OF MASTER SERVICER]
MASTER SERVICER
MORTGAGE PASS-THROUGH CERTIFICATES, SERIES 19__-__
$__________ ____% Class A-1 Certificates
$__________ ____% Class A-2 Certificates
$__________ ____% Class A-3 Certificates
$__________ ____% Class A-4 Certificates
$ 0 ____%* Class A-5 Certificates
$__________ ____% Class A-6 Certificates
$ 0 Variable Rate* Class A-7 Certificates
*Accrual of interest based on the related Notional Amount as described herein.
PROSPECTIVE INVESTORS SHOULD REVIEW THE INFORMATION SET FORTH UNDER "RISK
FACTORS" ON PAGE S-__ OF THE PROSPECTUS SUPPLEMENT AND THE INFORMATION SET FORTH
UNDER "RISK FACTORS" ON PAGE __ OF THE PROSPECTUS FOR A DISCUSSION OF MATERIAL
RISKS AFFECTING INVESTMENT IN THE SECURITIES BEFORE PURCHASING ANY OF THE CLASS
A CERTIFICATES.
CERTAIN LOSSES INCURRED DUE TO DEFAULTS ON THE MORTGAGE LOANS AND NOT COVERED BY
THE SUBORDINATE CERTIFICATES WILL BE ALLOCATED ON A PRO RATA BASIS BETWEEN THE
CLASS A-1, CLASS A-5 AND CLASS A-6 CERTIFICATES (COLLECTIVELY, THE "TIERED
CERTIFICATES"), ON THE ONE HAND, AND THE CLASS A-2, CLASS A-3, CLASS A-4 AND
VARIABLE STRIP CERTIFICATES, ON THE OTHER, AS MORE PARTICULARLY DESCRIBED
HEREIN. ANY SUCH LOSSES SO ALLOCATED TO THE TIERED CERTIFICATES WILL BE
ALLOCATED FIRST TO THE CLASS A-6 CERTIFICATES UNTIL THE CERTIFICATE PRINCIPAL
BALANCE THEREOF IS REDUCED TO ZERO, AND THEN ON A PRO RATA BASIS TO THE CLASS
A-1 CERTIFICATES AND CLASS A-5 CERTIFICATES, AS MORE PARTICULARLY DESCRIBED
HEREIN. THE RIGHTS OF THE HOLDERS OF THE
<PAGE>
-2-
SUBORDINATE CERTIFICATES TO RECEIVE DISTRIBUTIONS WITH RESPECT TO THE MORTGAGE
LOANS WILL BE SUBORDINATE TO THE RIGHTS OF THE HOLDERS OF THE SENIOR
CERTIFICATES.
The Series 19__-__ Mortgage Pass-Through Certificates will include the
following seven classes (the "Senior Certificates"): (i) Class A-1 Certificates,
Class A-2 Certificates, Class A-3 Certificates, Class A-4 Certificates, (ii)
Class A-5 Certificates (the "Fixed Strip Certificates"), (iii) Class A-6
Certificates and (iv) Class A-7 Certificates (the "Variable Strip
Certificates"). In addition to the Senior Certificates, the Series 19__-__
Mortgage Pass-Through Certificates will also consist of one class of subordinate
certificates which is designated as the Class B Certificates (the "Subordinate
Certificates") and one class of residual certificates which is designated as the
Class R Certificates (the "Residual Certificates" and, collectively with the
Senior Certificates and the Subordinate Certificates, the "Certificates"). Only
the Senior Certificates (the "Offered Certificates") are offered hereby.
The Senior Certificates in the aggregate will evidence an initial
undivided interest of approximately _____% in a trust fund (the "Trust Fund")
consisting primarily of a pool of certain conventional fixed-rate one- to
four-family first lien loans (the "Mortgage Loans") to be deposited by WMC
Secured Assets Corp. (the "Company") into the Trust Fund for the benefit of the
Certificateholders. Certain characteristics of the Mortgage Loans are described
herein under "Description of the Mortgage Pool."
[Approximately ___% (by principal balance as of the Cut-off Date) of
the Mortgage Loans will be "sub-prime" mortgage loans as described herein. 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
the Subordinate Certificates, may affect the yield to maturity of the Senior
Certificates.]
Distributions on the Senior Certificates will be made on the ____ day
of each month or, if such day is not a business day, then on the next business
day, commencing on ____________, 19__ (each, a "Distribution Date"). As more
fully described herein, interest distributions on the Senior Certificates will
be based on the Certificate Principal Balance thereof (or the Notional Amount
(as defined herein) in the case of the Fixed Strip Certificates and Variable
Strip Certificates) and the then applicable Pass-Through Rate thereof, which
will be variable for the Variable Strip Certificates and fixed for all other
classes of Certificates. Distributions in respect of principal of the Senior
Certificates will be allocated among the various classes of the Senior
Certificates as described herein under "Description of the
Certificates--Principal Distributions."
<PAGE>
-3-
There is currently no secondary market for the Senior Certificates.
__________________________________ (the "Underwriter") intends to make a
secondary market in the Senior Certificates, but is not obligated to do so.
There can be no assurance that a secondary market for the Senior Certificates
will develop or, if it does develop, that it will continue. The Senior
Certificates will not be listed on any securities exchange.
It is a condition of the issuance of the Senior Certificates that they
be rated "___" by _________________________ and "____" by ____________________.
As described herein, a "real estate mortgage investment conduit"
("REMIC") election will be made in connection with the Trust Fund for federal
income tax purposes. Each class of Senior Certificates will constitute "regular
interests" in the REMIC. See "Federal Income Tax Consequences" herein and in the
Prospectus.
THE YIELD TO MATURITY ON THE SENIOR CERTIFICATES WILL DEPEND ON THE
RATE AND TIMING OF PRINCIPAL PAYMENTS (INCLUDING AS A RESULT OF PREPAYMENTS,
DEFAULTS AND LIQUIDATIONS) ON THE MORTGAGE LOANS. THE MORTGAGE LOANS GENERALLY
MAY BE PREPAID IN FULL OR IN PART AT ANY TIME WITHOUT PENALTY. THE YIELD TO
INVESTORS ON THE SENIOR CERTIFICATES MAY BE ADVERSELY AFFECTED BY ANY SHORTFALLS
IN INTEREST COLLECTED ON THE MORTGAGE LOANS DUE TO PREPAYMENTS, LIQUIDATIONS OR
OTHERWISE. THE YIELD TO INVESTORS ON THE FIXED STRIP CERTIFICATES AND THE
VARIABLE STRIP CERTIFICATES WILL BE EXTREMELY SENSITIVE TO THE RATE AND TIMING
OF PRINCIPAL PAYMENTS (INCLUDING PREPAYMENTS) AND DEFAULTS ON THE MORTGAGE
LOANS, WHICH RATE MAY FLUCTUATE SIGNIFICANTLY OVER TIME. A RAPID RATE OF
PRINCIPAL PAYMENTS ON THE MORTGAGE LOANS COULD RESULT IN THE FAILURE OF
INVESTORS IN SUCH CERTIFICATES TO RECOVER THEIR INITIAL INVESTMENTS. SEE
"CERTAIN YIELD AND PREPAYMENT CONSIDERATIONS" HEREIN AND "YIELD CONSIDERATIONS"
IN THE PROSPECTUS.
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 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 OFFERED OR ANY OF THEIR AFFILIATES.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
-4-
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.
The Offered Certificates will be purchased from the Company by the
Underwriter and will be offered by the Underwriter from time to time to the
public in negotiated transactions or otherwise at varying prices to be
determined at the time of sale. The proceeds to the Company from the sale of the
Offered Certificates will be equal to _________% of the initial aggregate
principal balance of the Offered Certificates, plus accrued interest thereon
from ___________ 1, 19__ (the "Cut-off Date"), net of any expenses payable by
the Company.
The Offered Certificates are offered by the Underwriter subject to
prior sale, when, as and if delivered to and accepted by the Underwriter and
subject to certain other conditions. The Underwriter reserves the right to
withdraw, cancel or modify such offer and to reject any order in whole or in
part. It is expected that delivery of the Offered Certificates will be made on
or about ____________, 19__ at the office of __________________________________,
_______________, _____________________ against payment therefor in immediately
available funds.
[Name of Underwriter]
[Date of Prospectus Supplement]
<PAGE>
-5-
THE CERTIFICATES OFFERED BY THIS PROSPECTUS SUPPLEMENT CONSTITUTE PART
OF A SEPARATE SERIES OF CERTIFICATES BEING OFFERED BY THE COMPANY PURSUANT TO
ITS PROSPECTUS DATED ____________, 19__, OF WHICH THIS PROSPECTUS SUPPLEMENT IS
A PART AND WHICH ACCOMPANIES THIS PROSPECTUS SUPPLEMENT. THE PROSPECTUS CONTAINS
IMPORTANT INFORMATION REGARDING THIS OFFERING WHICH IS NOT CONTAINED HEREIN, AND
PROSPECTIVE INVESTORS ARE URGED TO READ THE PROSPECTUS AND THIS PROSPECTUS
SUPPLEMENT IN FULL. SALES OF THE OFFERED CERTIFICATES MAY NOT BE CONSUMMATED
UNLESS THE PURCHASER HAS RECEIVED BOTH THIS PROSPECTUS SUPPLEMENT AND THE
PROSPECTUS.
UNTIL __________, 19__, 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 ACTING AS UNDERWRITERS
AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
<PAGE>
-6-
SUMMARY
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere herein and in the Prospectus.
Capitalized terms used herein and not otherwise defined herein have the meanings
assigned in the Prospectus.
Title of Securities.............. Mortgage Pass-Through Certificates, Series
19__-__.
Company.......................... WMC Secured Assets Corp. (the "Company"), a
wholly-owned subsidiary of WMC Mortgage Corp.
("WMC"). See "The Company" in the Prospectus.
Seller[s]........................ [Name[s] of the Seller[s]] (the "Seller[s]").
See ["Name[s] of Seller[s]"] herein.
Master Servicer.................. [Name of Master Servicer] (the "Master
Servicer"). See "Pooling and Servicing
Agreement--The Master Servicer" herein.
Trustee.......................... _______________, ___________________
___________________ (the "Trustee").
Cut-off Date..................... ____________ 1, 19__ (the "Cut-off Date").
Delivery Date.................... On or about ____________, 19__ (the
"Delivery Date").
Denominations.................... The Senior Certificates will be issued in
registered, certificated form, in minimum
denominations of $______ (or in minimum
Notional Amounts of $_____ in the case of the
Fixed Strip Certificates or Variable Strip
Certificates) and integral multiples of
$_____ in excess thereof.
The Mortgage Pool................ The Mortgage Pool will consist of a pool of
conventional, fixed-rate, fully amortizing
mortgage loans (the "Mortgage Loans") with an
aggregate principal balance as of the Cut-off
Date of approximately $___________ [(subject
to a variation of plus or minus 5%)]. The
<PAGE>
-7-
Mortgage Loans are secured by first liens on
one- to four-family residential real
properties (each, a "Mortgaged Property").
The Mortgage Loans have individual principal
balances at origination of at least $______
but not more than $_________ with an average
principal balance at origination of
approximately $_________. The Mortgage Loans
have terms to maturity from the date of
origination or modification of not more than
__ years, and a weighted average remaining
term to stated maturity of approximately ___
months as of the Cut-off Date. The Mortgage
Loans will bear interest at Mortgage Rates of
at least ____% per annum but not more than
_____% per annum, with a weighted average
Mortgage Rate of approximately _______% per
annum as of the Cut-off Date. For a further
description of the Mortgage Loans, see
"Description of the Mortgage Pool" herein.
The Senior Certificates.......... The Senior Certificates in the aggregate
evidence an initial interest of approximately
_____% in a trust fund (the "Trust Fund")
consisting primarily of the Mortgage Pool.
The Senior Certificates will be issued
pursuant to a Pooling and Servicing
Agreement, to be dated as of the Cut-off
Date, among the Company, the Master Servicer,
and the Trustee (the "Pooling and Servicing
Agreement"). The Senior Certificates will
have the following Pass-Through Rates and
Certificate Principal Balances as of the
Cut-off Date:
Class A-1 Certificates ____% $__________
Class A-2 Certificates ____% $__________
Class A-3 Certificates ____% $__________
Class A-4 Certificates ____% $__________
Class A-5 Certificates ____% $ 0
Class A-6 Certificates ____% $__________
Class A-7 Certificates Variable Rate $ 0
<PAGE>
-8-
The Offered Certificates are subject to
various priorities for payment of interest
and principal as described herein. For a
description of the allocation of interest and
principal distributions among the Senior
Certificates, see "Summary--Interest
Distributions," "--Principal Distributions,"
"Description of the Certificates--Interest
Distributions" and "--Principal Distributions
on the Senior Certificates" herein.
Interest Distributions........... The Pass-Through Rates on the Senior
Certificates (other than the Variable Strip
Certificates) are fixed and set forth on the
cover hereof. The Pass-Through Rate on the
Variable Strip Certificates on each
Distribution Date will equal the weighted
average, as determined on the Due Date in the
month preceding the month in which such
Distribution Date occurs, of the Pool Strip
Rates on each of the Mortgage Loans. The Pool
Strip Rate on each Mortgage Loan is equal to
the Net Mortgage Rate thereon minus ____%.
The Net Mortgage Rate on each Mortgage Loan
is equal to the Mortgage Rate thereon minus
the rate per annum at which the related
master servicing fees accrue (the "Servicing
Fee Rate"). The Pool Strip Rates on the
Mortgage Loans range between _____% and
_____%. The initial Pass-Through Rate on the
Variable Strip Certificates is approximately
_____%. The Fixed Strip Certificates and
Variable Strip Certificates have no
Certificate Principal Balance and will accrue
interest at the then applicable Pass-Through
Rate on the Notional Amount (as defined
herein).
Holders of the Senior Certificates will be
entitled to receive on each Distribution
Date, to the extent of the Available
Distribution
<PAGE>
-9-
Amount (as defined herein) for such
Distribution Date, interest distributions in
an amount equal to the aggregate of all
Accrued Certificate Interest (as defined
below) with respect to such Certificates for
such Distribution Date and, to the extent not
previously paid, for all prior Distribution
Dates (the "Senior Interest Distribution
Amount").
With respect to any Distribution Date, the
Accrued Certificate Interest in respect of
each class of Senior Certificates will be
equal to one month's interest accrued at the
applicable Pass- Through Rate on the
Certificate Principal Balance (or, in the
case of the Fixed Strip Certificates and
Variable Strip Certificates, the Notional
Amount (as defined below)) of the
Certificates of such class immediately prior
to such Distribution Date, less any interest
shortfalls not covered by Subordination (as
defined herein) and allocated to the
Certificates of such class as described
herein, including any Prepayment Interest
Shortfall (as defined herein), if any, for
such Distribution Date.
If the Senior Interest Distribution Amount
for any Distribution Date is less than the
Available Distribution Amount for such date,
then such shortfall shall be allocated among
the respective classes of Senior Certificates
as described herein, and the unpaid Accrued
Certificate Interest in respect of the
Certificates of each such class will be
payable to the holders thereof on subsequent
Distribution Dates, to the extent of
available funds.
The Notional Amount of the Fixed Strip
Certificates and Variable Strip Certificates
as of any date of determination is equal to
the aggregate Certificate Principal Balance
of the Certificates of all classes, including
the Subordinate Certificates, as of such
date. See
<PAGE>
-10-
"Description of the Certificates--Interest
Distributions" herein.
References herein to the Notional Amount of
the Fixed Strip Certificates and Variable
Strip Certificates are used solely for
certain calculations and do not represent the
right of the holders of the Fixed Strip
Certificates and Variable Strip Certificates
to receive distributions of such amount.
Principal Distributions.......... Holders of the Senior Certificates will be
entitled to receive on each Distribution
Date, in the manner and priority set forth
herein, to the extent of the portion of the
Available Distribution Amount remaining after
the Senior Interest Distribution Amount is
distributed to the holders of the Senior
Certificates, a distribution allocable to
principal which will, as more fully described
herein, include (i) the Senior Percentage (as
defined herein) of scheduled principal
payments due on the Mortgage Loans and of the
principal portion of any unscheduled
collections of principal (other than
mortgagor prepayments and amounts received in
connection with a Final Disposition (as
defined herein) of a Mortgage Loan described
in clause (ii) below), including repurchases
of the Mortgage Loans, (ii) in connection
with the Final Disposition of a Mortgage Loan
that did not incur any Excess Special Hazard
Losses, Excess Fraud Losses, Excess
Bankruptcy Losses or Extraordinary Losses
(each as defined herein), an amount equal to
the lesser of (a) the Senior Percentage of
the Stated Principal Balance (as defined
herein) of such Mortgage Loan and (b) the
Senior Accelerated Distribution Percentage
(as defined herein) of the related
collections, including any Insurance Proceeds
and Liquidation Proceeds, to the extent
applied as recoveries of principal and (iii)
the Senior Accelerated Distribution
<PAGE>
-11-
Percentage (as defined below) of mortgagor
prepayments on each Mortgage Loan.
Distributions in respect of principal of the
Senior Certificates on any Distribution Date
will be allocated among the classes then
entitled to such distributions, as described
herein. See "Summary--Special Prepayment
Considerations" and "--Special Yield
Considerations" and "Certain Yield and
Prepayment Considerations" herein. The Fixed
Strip Certificates and Variable Strip
Certificates will not be entitled to receive
any principal distributions.
The Senior Percentage initially will be
approximately _____% and will be recalculated
after each Distribution Date as described
herein to reflect the entitlement of the
holders of the Senior Certificates to
subsequent distributions allocable to
principal. For each Distribution Date
occurring prior to the Distribution Date in
________, ________, the Senior Accelerated
Distribution Percentage will equal 100%.
Thereafter, as further described herein,
during certain periods, subject to certain
loss and delinquency criteria described
herein, the Senior Accelerated Distribution
Percentage may be 100% or otherwise
disproportionately large relative to the
Senior Percentage. See "Description of the
Certificates--Principal Distributions on the
Senior Certificates" herein.
Advances......................... The Master Servicer is required to make
advances ("Advances") in respect of
delinquent payments of principal and interest
on the Mortgage Loans, subject to the
limitations described herein. See
"Description of the Certificates--Advances"
herein and in the Prospectus.
Allocation of Losses;
<PAGE>
-12-
Subordination.................... Subject to the limitations set forth below,
Realized Losses (as more particularly
described herein) on the Mortgage Loans will
be allocated first to the Subordinate
Certificates and then to the Senior
Certificates. The subordination provided by
the Subordinate Certificates will cover
Realized Losses on the Mortgage Loans that
constitute Defaulted Mortgage Losses, Special
Hazard Losses, Fraud Losses and Bankruptcy
Losses (each as defined in the Prospectus) to
the extent described herein. The aggregate
amounts of Special Hazard Losses, Fraud
Losses and Bankruptcy Losses which may be
allocated to the Subordinate Certificates are
initially limited to $__________, $_________
and $_______, respectively. All of the
foregoing amounts are subject to periodic
reduction as described herein. In the event
the Certificate Principal Balance of the
Subordinate Certificates is reduced to zero,
all additional losses will be borne by the
Senior Certificateholders. In addition, any
Special Hazard Losses, Fraud Losses and
Bankruptcy Losses, in excess of the
respective amounts of coverage therefor will
be borne by the holders of Senior
Certificates and Subordinate Certificates on
a pro rata basis. Any Default Losses (as
defined herein) incurred on the Mortgage
Loans and not covered by the Subordinate
Certificates will be allocated on a pro rata
basis between the Class A-1, Class A-5 and
Class A-6 Certificates (the "Tiered
Certificates"), on the one hand, and the
Class A-2, Class A-3, Class A-4 and Variable
Strip Certificates, on the other, as more
particularly described herein. Any such
losses so allocated to the Tiered
Certificates will be allocated first to the
Class A-6 Certificates until the Certificate
Principal Balance thereof is reduced to zero
and then on a pro rata basis between the
Class A-1 Certificates and the Class A-5
Certificates, as more particularly described
herein. Because
<PAGE>
-13-
principal distributions are paid to certain
classes of Senior Certificates before other
classes, holders of classes of Senior
Certificates having a later priority of
payment bear a greater risk of such losses
than holders of classes of Senior
Certificates having earlier priorities for
distribution of principal. See "Description
of the Certificates--Allocation of Losses;
Subordination" herein.
Subordinate Certificates......... The Class B Certificates (the "Subordinate
Certificates") have an aggregate initial
Certificate Principal Balance of
approximately $__________, evidencing an
initial Subordinate Percentage of
approximately ____%, and a Pass-Through Rate
of ____%. The Subordinate Certificates are
not being offered hereby.
Optional Termination............. At its option, on any Distribution Date when
the aggregate principal balance of the
Mortgage Loans is less than [__]% of the
aggregate principal balance of the Mortgage
Loans as of the Cut-off Date, the Master
Servicer or the Company may (i) purchase from
the Trust Fund all remaining Mortgage Loans
and other assets thereof, and thereby effect
early retirement of the Certificates or (ii)
purchase in whole, but not in part, the
Certificates. See "Pooling and Servicing
Agreement--Termination" herein and "The
Pooling Agreement--Termination; Retirement of
Certificates" in the Prospectus.
Special Prepayment
Considerations................. The rate and timing of principal payments on
the Senior Certificates will depend on the
rate and timing of principal payments
(including by reason of prepayments, defaults
and liquidations) on the Mortgage Loans. As
is the case with mortgage-backed securities
generally, the Senior Certificates are
subject to
<PAGE>
-14-
substantial inherent cash-flow uncertainties
because the Mortgage Loans may be prepaid at
any time. Generally, when prevailing interest
rates increase, prepayment rates on mortgage
loans tend to decrease, resulting in a slower
return of principal to investors at a time
when reinvestment at such higher prevailing
rates would be desirable. Conversely, when
prevailing interest rates decline, prepayment
rates on mortgage loans tend to increase,
resulting in a faster return of principal to
investors at a time when reinvestment at
comparable yields may not be possible.
[The multiple class structure of the Senior
Certificates results in the allocation of
prepayments among certain classes as follows
[TO BE INCLUDED AS APPROPRIATE]:]
[SEQUENTIALLY PAYING CLASSES: [All] classes
of the Senior 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
rates of prepayments 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 Certificates with a later
priority of payment will be affected by the
rates of prepayments experienced both before
and after the commencement of principal
distributions on such classes.]
[PAC CERTIFICATES: Principal distributions on
the PAC Certificates generally will be
payable in amounts determined based on
schedules as described herein, assuming that
the prepayments on the Mortgage Loans occur
each month at a constant level between
approximately ___% SPA and approximately ___%
SPA and based on certain other assumptions.
However, as discussed herein,
<PAGE>
-15-
actual principal distributions may be greater
or less than the described amounts. If the
prepayments on the Mortgage Loans occur at a
level below or above the PAC Targeted Range,
the amount of principal distributions may
deviate from the described amounts and the
weighted average lives of the remaining PAC
Certificates may be extended or shortened.
The classes of PAC Certificates with later
priorities of payment are less likely to
benefit from the stabilization of principal
distributions provided by the Companion
Certificates as described herein) than the
PAC Certificates with earlier priorities of
payment. Investors in the PAC Certificates
should be aware that the stabilization
provided by the Companion Certificates is
limited.]
[TAC CERTIFICATES: Principal distributions on
the TAC Certificates generally will be
payable thereon in the amounts determined by
using the schedules described herein,
assuming that prepayments on the Mortgage
Loans occur each month at a constant level of
approximately ___% SPA, and based on certain
other assumption. However, as discussed
herein, actual principal distributions may be
greater or less than the described amounts,
because it is highly unlikely that the actual
prepayment speed of the Mortgage Loans each
month will remain at or near ___% SPA. If the
Companion Certificates are retired before all
of the TAC Certificates are retired, the rate
of principal distributions and the weighted
average lives of the remaining TAC
Certificates will become significantly more
sensitive to changes in the prepayment speed
of the Mortgage Loans, and principal
distributions thereon will be more likely to
deviate from the described amounts.]
[COMPANION CERTIFICATES: Because all amounts
available for principal distributions
<PAGE>
-16-
among the Senior Certificates in any given
month will be applied first to the [PAC]
[TAC] Certificates up to the described
amounts and any excess other such amounts
will be applied to the Companion
Certificates, the rate of principal
distributions on, and the weighted average
lives of the Companion Certificates will be
more sensitive to changes in the rates of
prepayment of the Mortgage Loans than the
rate of principal distributions on and the
weighted average lives of the [PAC] [TAC]
Certificates.
See "Description of the
Certificates--Principal Distributions on the
Senior Certificates," and "Certain Yield and
Prepayment Considerations" herein, and
"Maturity and Prepayment Considerations" in
the Prospectus.
Special Yield
Considerations................. The yield to maturity on each class of the
Senior Certificates will depend on the rate
and timing of principal payments (including
by reason of prepayments, defaults and
liquidations) on the Mortgage Loans and the
allocation thereof to reduce the Certificate
Principal Balance or Notional Amount of such
class. The yield to maturity on each class of
the Senior Certificates will also depend on
the Pass-Through Rate and any adjustments
thereto (as applicable) and the purchase
price for such Certificates. The yield to
investors on any class of Senior Certificates
will be adversely affected by any allocation
thereto of Prepayment Interest Shortfalls on
the Mortgage Loans, which are expected to
result from the distribution of interest only
to the date of prepayment (rather than a full
month's interest) in connection with
prepayments in full and the lack of any
distribution of interest on the amount of any
partial prepayments. Prepayment Interest
Shortfalls resulting from principal
prepayments in full in any calendar
<PAGE>
-17-
month will not adversely affect the yield to
investors in the Offered Certificates to the
extent such prepayment interest shortfalls
are covered by the Master Servicer as
discussed herein.
In general, if a class of Senior Certificates
is purchased at a premium and principal
distributions thereon occur at a rate faster
than anticipated at the time of purchase, the
investor's actual yield to maturity will be
lower than that assumed at the time of
purchase. Conversely, if a class of Senior
Certificates is purchased at a discount and
principal distributions thereon occur at a
rate slower than that assumed at the time of
purchase, the investor's actual yield to
maturity will be lower than that assumed at
the time of purchase.
The Senior Certificates were structured based
on a number of assumptions, including a
prepayment assumption of ___% SPA and
corresponding weighted average lives as set
forth herein under "Special Prepayment
Considerations." The prepayment, yield and
other assumptions for the respective classes
that are to be offered hereunder will vary as
determined at the time of sale.
[The multiple class structure of the Senior
Certificates causes the yield of certain
classes to be particularly sensitive to
changes in the prepayment speed of the
Mortgage Loans and other factors, as follows
[TO BE INCLUDED AS APPROPRIATE]:]
[INTEREST STRIP AND INVERSE FLOATER CLASSES:
The yield to investors on the [identify
classes] will be extremely sensitive to the
rate and timing of principal payments on the
Mortgage Loans (including by reason of
prepayments, defaults and liquidations),
which may fluctuate
<PAGE>
-18-
significantly over time. A rapid rate of
principal payments on the Mortgage Loans
could result in the failure of investors in
the [identify interest strip and inverse
floater strip classes] to recover their
initial investments, and a slower than
anticipated rate of principal payments on the
Mortgage Loans could adversely affect the
yield to investors on the [identify non-strip
inverse floater classes].]
[VARIABLE STRIP CERTIFICATES: In addition to
the foregoing, the yield on the Variable
Strip Certificates will be materially
adversely affected to a greater extent than
the yields on the other Senior Certificates
if the Mortgage Loans with higher Mortgage
Rates prepay faster than the Mortgage Loans
with lower Mortgage Rates, because holders of
the Variable Strip Certificates generally
have rights to relatively larger portions of
interest payments on the Mortgage Loans with
higher Mortgage Rates than on Mortgage Loans
with lower Mortgage Rates.]
[ADJUSTABLE RATE (INCLUDING INVERSE FLOATER)
CLASSES: The yield to investors on the
[identify floating rate classes] will be
sensitive, and the yield to investors on the
[identify inverse floater classes] will be
extremely sensitive, to fluctuations in the
level of [the Index]. THE PASS-THROUGH RATE
ON THE [IDENTIFY INVERSE FLOATER CLASSES]
WILL VARY INVERSELY WITH, AND AT A MULTIPLE
OF, [THE INDEX].]
[INVERSE FLOATER COMPANION CLASSES: In
addition to the foregoing, in the event of
relatively low prevailing interest rates
(including [the Index]) and relatively high
rates of principal prepayments over an
extended period, while investors in the
[identify inverse floater companion classes]
may then be experiencing a high current yield
on such Certificates, such yield may be
realized only
<PAGE>
-19-
over a relatively short period, and it is
unlikely that such investors would be able to
reinvest such principal prepayments on such
Certificates at a comparable yield.]
[RESIDUAL CERTIFICATES: Holders of the
Residual Certificates are entitled to receive
distributions of principal and interest as
described herein; however, holders of such
Certificates may have tax liabilities with
respect to their Certificates during the
early years of the term of the REMIC that
substantially exceed the principal and
interest payable thereon during such periods.
See "Certain Yield and Prepayment
Considerations," especially "--Additional
Yield Considerations Applicable Solely to the
Residual Certificates" herein, "Federal
Income Tax Consequences" herein and in the
Prospectus and "Yield Considerations" in the
Prospectus.]
See "Certain Yield and Prepayment
Considerations" [, especially "--Yield
Considerations," "--Additional Yield
Considerations Applicable Solely to the
Residual Certificates" and "Federal Income
Tax Consequences"] herein, and "Yield
Considerations" in the Prospectus.
Federal Income
Tax Consequences............... An election will be made to treat the Trust
Fund as a real estate mortgage investment
conduit ("REMIC") for federal income tax
purposes. Upon the issuance of the Offered
Certificates, __________ ___________, counsel
to the Company, will deliver its opinion
generally to the effect that, assuming
compliance with all provisions of the Pooling
and Servicing Agreement, for federal income
tax purposes, the Trust Fund will qualify as
a REMIC within the meaning of Sections 860A
<PAGE>
-20-
through 860G of the Internal Revenue Code of
1986 (the "Code").
For federal income tax purposes, the Class R
Certificates will be the sole Class of
"residual interests" in the Trust Fund and
the Senior Certificates and the Subordinate
Certificates will constitute the "regular
interests" in the Trust Fund and will
generally be treated as representing
ownership of debt instruments in the Trust
Fund.
For federal income tax reporting purposes,
the _______ Certificates will not, and the
___________________ Certificates will, be
treated as having been issued with original
issue discount. The prepayment assumption
that will be used in determining the rate of
accrual of original issue discount, market
discount and premium, if any, for federal
income tax purposes will be ___% SPA (as
defined herein). No representation is made
that the Mortgage Loans will prepay at that
rate or at any other rate.
For further information regarding the federal
income tax consequences of investing in the
Offered Certificates see "Federal Income Tax
Consequences" herein and in the Prospectus.
Ratings.......................... It is a condition of the issuance of the
Senior Certificates that they be rated "___"
by ________ ________________ and "___" by
_________________________. 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 of the
Fixed Strip Certificates and Variable Strip
Certificates do not address the possibility
that
<PAGE>
-21-
the holders of such Certificates may fail to
fully recover their initial investments. See
"Certain Yield and Prepayment Considerations"
and "Ratings" herein and "Yield
Considerations" in the Prospectus.
Legal Investment................. The Senior Certificates will constitute
"mortgage related securities" for purposes of
the Secondary Mortgage Market Enhancement Act
of 1984 ("SMMEA") for so long as they are
rated in at least the second highest rating
category by one or more nationally recognized
statistical rating agencies. Institutions
whose investment activities are subject to
legal investment laws and regulations,
regulatory capital requirements or review by
regulatory authorities may be subject to
restrictions on investment in the Offered
Certificates and should consult with their
legal advisors. 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, Offered 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") which provides
certain certifications or opinions of
counsel, or, for purchasers of a DTC
registered Security, is deemed to provide
certain representations . A fiduciary of a
Plan should consider whether the purchase of
an Offered Certificate 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.
<PAGE>
-22-
[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 Certificates:]
[Appropriate Risk Factors as necessary. The following are sample risk factors
for this version of the Prospectus Supplement]
[GENERAL
The yields to maturity and the aggregate amount of distributions on the
Senior 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. 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 Mortgagor prepayments thereon by the Mortgagors, liquidations of
defaulted Mortgage Loans and purchases of Mortgage Loans due to certain breaches
of representations and warranties. The timing of changes in the rate of
prepayments, liquidations and purchases 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. Since the rate and timing of
principal payments on the Mortgage Loans will depend on future events and on a
variety of factors, no assurance can be given as to such rate or the timing of
principal payments on the Senior Certificates.
As described under "Description of the Certificates--Principal
Distributions on the Senior Certificates" herein, during certain periods all or
a disproportionately large percentage of Mortgagor prepayments on the Mortgage
Loans will be allocated to the Senior Certificates, and during certain periods
no Mortgagor prepayments or, relative to their respective percentage interests
in the Trust Fund, a disproportionately small portion of Mortgagor prepayments
on the Mortgage Loans will be distributed on the Subordinate Certificates.
Prepayments, liquidations and purchases of the Mortgage Loans will result in
distributions to holders of the Senior 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 and
servicing decisions. In addition, if prevailing mortgage rates fell
significantly below the Mortgage Rates on the Mortgage Loans, the rate of
prepayments (including refinancings) would be expected to increase. Conversely,
if prevailing mortgage rates rose significantly above the Mortgage Rates on the
Mortgage Loans, the rate of prepayments on the Mortgage Loans would be expected
to decrease.]
<PAGE>
-23-
[SUBORDINATION
The rights of the holders of the Subordinate Certificates to receive
distributions with respect to the Mortgage Loans will be subordinate to the
rights of the holders of the Senior Certifi cates. In addition, certain losses
incurred due to defaults on the Mortgage Loans and not covered by the
Subordinate Certificates will be allocated on a pro rata basis between the Class
A-1, Class A-5 and Class A-6 Certificates (collectively, the "Tiered
Certificates"), on the one hand, and the Class A-2, Class A-3, Class A-4 and
Variable Strip Certificates, on the other, as more particularly described
herein. Any such losses so allocated to the Tiered Certificates will be
allocated first to the Class A-6 Certificates until the Certificate Principal
Balance thereof is reduced to zero, and then on a pro rata basis to the Class
A-1 Certificates and Class A-5 Certificates, as more particularly described
herein.]
[UNDERWRITING STANDARDS OF CERTAIN OF THE MORTGAGE LOANS
Approximately ___% (by principal balance as of the Cut-off Date) of the
Mortgage Loans will 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 the Subordinate
Certificates, may affect the yield to maturity of the Senior Certificates.]
DESCRIPTION OF THE MORTGAGE POOL
GENERAL
The Mortgage Pool will consist of Mortgage Loans with an aggregate
principal balance outstanding as of the Cut-off Date of $____________. The
Mortgage Loans will consist of conventional, fixed-rate, fully-amortizing, level
monthly payment first lien Mortgage Loans with terms to maturity of not more
than ___ years from the due date of the first monthly payment. On or before the
Delivery Date, the Company will acquire the Mortgage Loans to be included in the
Mortgage Pool from WMC Mortgage Corp. ("WMC Mortgage"), an affiliate of the
Company [, which in turn acquired them pursuant to various mortgage loan
purchase agreements between WMC Mortgage and [_________] (the "Sellers")]. The
Seller[s] will make certain representations and warranties with respect to the
Mortgage Loans and, as more particularly described in the Prospectus, will have
certain repurchase or substitution obligations in connection with a breach of
any such representation and warranty, as well as in connection with an omission
or defect in respect of certain constituent documents required to be delivered
with respect to the Mortgage
<PAGE>
-24-
Loans, in any event if such breach, omission or defect cannot be cured and it
materially and adversely affects the interests of Certificateholders. Neither
the Company nor any other entity or person will have any responsibility to
purchase or replace any Mortgage Loan if a Seller is obligated but fails to do
so. See "Description of the Mortgage Pool--Representations by Sellers" and
"Description of the Certificates--Assignment of Trust Fund Assets" in the
Prospectus and "--The Seller" below. The Mortgage Loans will have been
originated or acquired by the [Sellers] in accordance with the underwriting
criteria described herein. See "--Underwriting" below. All percentages of the
Mortgage Loans described herein are approximate percentages (except as otherwise
indicated) by aggregate principal balance as of the Cut-off Date.
None of the Mortgage Loans will have been originated prior to
__________________ or will have a maturity date later than __________________.
No Mortgage Loan will have a remaining term to maturity as of the Cut-off Date
of less than ____ months. The weighted average remaining term to maturity of the
Mortgage Loans as of the Cut-off Date will be approximately ____ months. The
weighted average original term to maturity of the Mortgage Loans as of the
Cut-off Date will be approximately ____ months.
As of the Cut-off Date, no Mortgage Loan will be one month or more
delinquent in payment of principal and interest.
Approximately _____% of the Mortgage Loans in the Mortgage Pool will
have been purchased from ______________, and each of _______ other Sellers sold
more than ____% but less than ____% of the Mortgage Loans to WMC Mortgage.
Except as indicated in the preceding sentence, no Seller sold more than ____% of
the Mortgage Loans to WMC Mortgage.
No Mortgage Loan provides for deferred interest or negative
amortization.
None of the Mortgage Loans in the Mortgage Pool will be Buydown
Mortgage Loans.
Set forth below is a description of certain additional characteristics
of the Mortgage Loans as of the Cut-off Date (except as otherwise indicated).
All percentages of the Mortgage Loans are approximate percentages by aggregate
principal balance as of the Cut-off Date.
<PAGE>
-25-
MORTGAGE RATES
Number of Aggregate Percentage
Mortgage Rates (%) Mortgage Loans Principal Balance of Mortgage Pool
- ------------------ -------------- ----------------- ----------------
....................... $ %
.......................
.......................
.......................
.......................
.......................
.......................
.......................
.......................
.......................
.......................
.......................
.......................
--- -----------
Total............ $ . %
=== =========== ======
As of the Cut-off Date, the weighted average Mortgage Rate of the Mortgage Loans
was approximately ______% per annum.
CUT-OFF DATE MORTGAGE LOAN PRINCIPAL BALANCES
Number of Aggregate Percentage
Principal Balance Mortgage Loans Principal Balance of Mortgage Pool
- ---------------------- -------------- ----------------- ----------------
$...................... $ %
.......................
.......................
.......................
.......................
.......................
.......................
.......................
- -......................
- -......................
- -...................... .
--- ------------ ------
Total............ $ . %
=== ============ ======
As of the Cut-off Date, the average unpaid principal balance of the
Mortgage Loans will be approximately $_______.
<PAGE>
-26-
ORIGINAL LOAN-TO-VALUE RATIOS
Number of Aggregate Percentage
Loan-to-Value Ratio Mortgage Loans Principal Balance of Mortgage Pool
- ------------------- -------------- ----------------- ----------------
....................... $ %
.......................
.......................
.......................
.......................
.......................
.......................
.......................
....................... .
--- ------------ -------
Total............ $ . %
=== ============ =======
The weighted average Loan-to-Value Ratio at origination of the Mortgage
Loans will have been approximately ____%.
GEOGRAPHIC DISTRIBUTIONS OF MORTGAGED PROPERTIES
Number of Aggregate Percentage of
State Mortgage Loans Principal Balance Mortgage Pool
- ----- -------------- ----------------- -------------
[NAME OF STATE]........ $ %
[NAME OF STATE]........
[NAME OF STATE]........
[NAME OF STATE]........
[NAME OF STATE]........
Other (1).............. .
--- ------------ -----
Total........ $ . %
=== ============ =====
(1) "Other" includes states and the District of Columbia with less than __%
concentrations individually.
[No more than ____% of the Mortgage Loans will be secured by Mortgaged
Properties located in any one zip code area].
<PAGE>
-27-
<TABLE>
<CAPTION>
MORTGAGED PROPERTY TYPES
Number of Aggregate Percentage of
Property Mortgage Loans Principal Balance Mortgage Pool
- -------- -------------- ----------------- -------------
<S> <C> <C> <C>
Single-family detached............... $ %
Planned Unit Developments (detached).
Two- to four-family units............
Condo Low-Rise (less than 5 stories).
Condo Mid-Rise (5 to 8 stories)......
Condo High-Rise (9 stories or more)..
Townhouse............................
Planned Unit Developments (attached).
Leasehold............................ .
---- ------------ -------
Total..................... $ . %
=== ============ =======
</TABLE>
MORTGAGE LOAN PURPOSES
Number of Aggregate Percentage of
Loan Purpose Mortgage Loans Principal Balance Mortgage Pool
- ------------ -------------- ----------------- -------------
Purchase............... $ %
Rate/Term Refinance....
Equity Refinance....... .
--- ----------- ------
Total............ $ . %
=== =========== ======
The weighted average Loan-to-Value Ratio at origination of equity
refinance Mortgage Loans will have been ____%. The weighted average
Loan-to-Value Ratio at origination of rate and term refinance Mortgage Loans
will have been ____%.
<PAGE>
-28-
MORTGAGE LOAN DOCUMENTATION
Number of Aggregate Percentage of
Type of Program Mortgage Loans Principal Balance Mortgage Pool
- --------------- -------------- ----------------- -------------
Full................... $ %
Reduced................ .
--- ------------- ------
Total............ $ . %
=== ============ ======
The weighted average Loan-to-Value Ratio at origination of the Mortgage
Loans which were underwritten under a reduced loan documentation program will
have been ____%. No more than ____% of such reduced loan documentation Mortgage
Loans will be secured by Mortgaged Properties located in California.
OCCUPANCY TYPES
Number Aggregate Percentage of
Occupancy Mortgage Loans Principal Balance Mortgage Pool
- --------- -------------- ----------------- -------------
Primary Residence...... $ %
Second/Vacation........
Non Owner-occupied..... .
--- ------------- ------
Total............ $ . %
=== ============ ======
[Specific information with respect to the Mortgage Loans will be
available to purchasers of the Certificates on or before the time of issuance of
such Certificates. If not included in the Prospectus Supplement, such
information will be included in the Form 8-K.]
UNDERWRITING
[Underwriting standards as appropriate. The following underwriting
standards are those presently applicable for WMC for adjustable rate mortgage
loans].
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
<PAGE>
-29-
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 loan-to-value ratio at
origination ("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
three documentation type categories established by Equity Services: Full
Documentation, Lite Documentation and Stated 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 category), 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 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) unless such appraisal was completed by Lenders Service Inc., Strategic
Mortgage Services, Nationwide Appraisals, Valuation Information Technology or
G.S. Hansen & Associates, a review of such appraisal by a WMC-approved review
appraiser, which review, depending upon the original principal balance and LTV
of the related mortgaged property, may consist of a second 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 and Stated Documentation categories, (iii) condominium, vacation
and second home and manufactured housing mortgaged property types, (iv) Super
Jumbo Loans and (v) refinance mortgage loans). The WMC Guidelines permit
combined LTVs ("CLTV") of up to 100% first and second lien mortgage loans (lower
in the case of risk categories below "C"), provided that mortgage loans with
LTVs of 90% or more 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% and Stated
Documentation mortgage loans with LTVs of up to 80%, (ii) limited to 20% of the
loan amount
<PAGE>
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after payment of all revolving debt for mortgage loans with LTVs over 85% and
(iii) limited to $125,000 on mortgage loans in risk categories "D" and "Z".
All mortgage loans originated under the WMC Guidelines are based on
loan application packages submitted through mortgage brokerage companies or
WMC's retail branches. 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 5%, measured by outstanding
principal balance, of the subprime 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.
In the case of mortgage loans originated under the Full Documentation category,
the WMC Guidelines require documentation of income (which may consist of (i)
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. 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 and that assets listed on the application be
consistent with stated income.
The general collateral requirements in the WMC Guidelines specify that
a mortgaged property not have a 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
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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.
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 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, the borrower's use of proceeds (purchase or
refinance), the documentation type (Full Documentation or Stated Documentation)
and other factors. Lite Documentation mortgage loans are generally acceptable at
5% greater LTV than Stated Documentation mortgage loans, up to a maximum of 80%
LTV. 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
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for the origination of mortgage loans secured by mortgages on condominiums,
vacation and second homes, manufactured housing and two- to four-family
properties.
RISK CATEGORY "A-"
Maximum loan amount: $600,000 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; 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 60%.
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.
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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.
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Debt Ratio: 50% to 60%.
RISK CATEGORY "D"
Maximum loan amount: $400,000 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: a poor consumer credit history during the preceding 12
months is permitted.
Liens/charge-offs: permitted at Equity Services' discretion.
Bankruptcy: permitted if discharged at least one day prior to origination of the
loan.
NODs/foreclosures: NOD outstanding less than 150 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%.
RISK CATEGORY "Z"
Maximum loan amount: $300,000 for Full Documentation; $200,000 for Stated
Documentation; $200,000 for non-owner-occupied mortgaged property.
Mortgage payment history: mortgage payment history not considered as a factor
for this risk category.
Consumer credit history: a poor consumer credit history during the preceding 12
months is permitted.
Liens/charge-offs: permitted at Equity Services' discretion.
Bankruptcy: permitted if discharged at least one day prior to origination of the
loan.
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NODs/foreclosures: NOD outstanding 150 or more days at the time of origination
of the loan is permitted.
Maximum LTV: 65% for Full Documentation and owner-occupied mortgaged property;
60% for Full Documentation and non-owner-occupied mortgaged property; 60% for
Stated Documentation and owner-occupied mortgaged property; 60% for Stated
Documentation and non-owner-occupied mortgaged property.
Debt Ratio: 60%.
QUALITY CONTROL PROCEDURES HIGHLIGHTS
Each month, WMC's quality control department conducts a review and
verification of approximately 5% 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 1/2% 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.
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The collection department is structured in such a way that the most
experienced collectors are responsible for the accounts which are most
delinquent. Accounts which are 10-29 days delinquent are handled by collectors
with a minimum of two 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 Aspecial 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.
WMC utilizes an automatic telephone dialer (DAVOX) for sequence calling
and an on-line servicing system (LSAMS). Telephone calls are initiated from the
10th day of delinquency; late notices are sent after the 15th day of
delinquency; notices of intent to foreclose or demand notices are generally sent
after the 60th day of delinquency. Between the 30th and 45th day of delinquency,
broker price opinions ("BPOs") are ordered and the account analysis process
begins. Senior lienholder, tax and mortgage insurance status is confirmed.
Borrower contact is maintained for the possibility of a recovery or curing the
delinquency. Accounts are prioritized by the degree of delinquency and
transferred at the end of each month, if appropriate, to the next level of
collection action. After all collection efforts have been exhausted, the
foreclosure committee (consisting of the Collection Manager, Senior Vice
President of Loan Service and an origination designee (if available) approves
foreclosure action.
In all workout situations, the borrower is asked to provide current
financial information and must complete a new loan application. WMC obtains a
current credit report and updated appraisal (drive-by or BPO). All information
is used to determine a workout decision.
Collector assignments are controlled and monitored daily by the
Collection Manager. The Collection Manager reviews each collector=s workload,
and telephone activity is adjusted as necessary. Reports are generated daily and
month-end recap activity is discussed with the Senior Vice President of Loan
Service. The Senior Vice President is responsible for corporate reporting on a
monthly basis.]
DELINQUENCY AND FORECLOSURE EXPERIENCE
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[Delinquency and foreclosure experience as appropriate. The following
disclosure is presently applicable for WMC:
LIMITED SUBPRIME SERVICING EXPERIENCE
Until recently, Equity Services sold its subprime product on a
whole-loan, servicing- released basis to secondary market investors.
Consequently, there is currently no meaningful information regarding the
delinquency and loss experience relating to WMC's subprime mortgage portfolio.
In addition, WMC historically has serviced only conforming or prime quality
mortgage loans, and the majority of that servicing portfolio has been or will be
sold in connection with the acquisition of WMC by Apollo. WMC intends to modify
and expand the existing servicing platform to serve the subprime market.]
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 Cut-off Date, as adjusted for the scheduled
principal payments due on or before such date. Prior to the issuance of the
Senior Certificates, 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 Senior 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 Senior 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.
A Current Report on Form 8-K will be available to purchasers
of the Senior Certificates and will be filed, together with the Pooling and
Servicing Agreement, with the Securities and Exchange Commission within fifteen
days after the initial issuance of the Senior Certificates. 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.
See "The Mortgage Pools" and "Certain Legal Aspects of
Mortgage Loans" in the Prospectus.
DESCRIPTION OF THE CERTIFICATES
GENERAL
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The Series 19__-_ Mortgage Pass-Through Certificates will
include the following seven classes (the "Senior Certificates"): (i) Class A-1
Certificates, Class A-2 Certificates, Class A-3 Certificates and Class A-4
Certificates, (ii) Class A-5 Certificates (the "Fixed Strip Certificates"),
(iii) Class A-6 Certificates and (iv) Class A-7 Certificates (the "Variable
Strip Certificates"). In addition to the Senior Certificates, the Series 19__-_
Mortgage Pass-Through Certificates will also consist of one class of subordinate
certificates which is designated as the Class B Certificates (the "Subordinate
Certificates") and one class of residual certificates which is designated as the
Class R Certificates (the "Residual Certificates"). Only the Senior Certificates
(the "Offered Certificates") are offered hereby.
The Senior Certificates (together with the Subordinate
Certificates and Residual 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 (as
described in the Prospectus) and belonging to the Trust Fund; (iii) property
acquired by foreclosure of such Mortgage Loans or deed in lieu of foreclosure;
and (iv) any applicable insurance policies and all proceeds thereof.
AVAILABLE DISTRIBUTION AMOUNT
The "Available Distribution Amount" for any Distribution Date
will generally consist of (i) the aggregate amount of scheduled payments on the
Mortgage Loans due on the related Due Date and received on or prior to the
related Determination Date, after deduction of the related master servicing fees
(the "Servicing Fees"), (ii) certain unscheduled payments, including Mortgagor
prepayments on the Mortgage Loans, Insurance Proceeds, Liquidation Proceeds and
proceeds from repurchases of and substitutions for the Mortgage Loans occurring
during the preceding calendar month and (iii) all Advances made for such
Distribution Date, in each case net of amounts reimbursable therefrom to the
Master Servicer. In addition to the foregoing amounts, with respect to
unscheduled collections, not including Mortgagor prepayments, the Master
Servicer may elect to treat such amounts as included in the Available
Distribution Amount for the Distribution Date in the month of receipt, but is
not obligated to do so. With respect to any Distribution Date, (i) the "Due
Date" is the first day of the month in which such Distribution Date occurs and
(ii) the "Determination Date" is the [__th] day of the month in which such
Distribution Date occurs or, if such day is not a business day, the immediately
succeeding business day. See "Description of the Certificates--Distributions" in
the Prospectus.
INTEREST DISTRIBUTIONS
Holders of the Senior Certificates will be entitled to receive
on each Distribution Date, to the extent of the Available Distribution Amount
for such Distribution Date, interest distributions in an amount equal to the
aggregate of all Accrued Certificate Interest with respect
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to such Certificates for such Distribution Date and, to the extent not
previously paid, for all prior Distribution Dates (the "Senior Interest
Distribution Amount"). On each Distribution Date, the Available Distribution
Amount for such Distribution Date will be applied to make interest distributions
on the various classes of Senior Certificates pro rata in accordance with the
respective amounts of Accrued Certificate Interest then payable with respect
thereto, provided, however, that, in the case of the Tiered Certificates,
following the Credit Support Depletion Date, such distributions shall be made in
the priority set forth in the _____th paragraph under the heading "Principal
Distributions". With respect to any Distribution Date, the Accrued Certificate
Interest in respect of each class of Senior Certificates will be equal to one
month's interest accrued at the applicable Pass-Through Rate on the Certificate
Principal Balance (or, in the case of the Fixed Strip Certificates and Variable
Strip Certificates, the Notional Amount) of the Certificates of such class
immediately prior to such Distribution Date; in each case less interest
shortfalls, if any, for such Distribution Date not covered by the Subordination
provided by the Subordinate Certificates, including in each case (i) any
Prepayment Interest Shortfall (as defined below), (ii) the interest portions (in
each case, adjusted to the related Net Mortgage Rate) of Realized Losses
(including Special Hazard Losses, in excess of the Special Hazard Amount
("Excess Special Hazard Losses"), Fraud Losses in excess of the Fraud Loss
Amount ("Excess Fraud Losses"), Bankruptcy Losses in excess of the Bankruptcy
Amount ("Excess Bankruptcy Losses") and losses occasioned by war, civil
insurrection, certain governmental actions, nuclear reaction and certain other
risks ("Extraordinary Losses")) not covered by the Subordination (which, with
respect to the pro rata portion thereof allocated to the Tiered Certificates, to
the extent such losses are Default Losses, will be allocated first to the Class
A-6 Certificates and second to the Class A-1 Certificates and Class A-5
Certificates), (iii) the interest portion of any Advances that were made with
respect to delinquencies that were ultimately determined to be Excess Special
Hazard Losses, Excess Fraud Losses, Excess Bankruptcy Losses or Extraordinary
Losses and (iv) any other interest shortfalls not covered by Subordination,
including interest shortfalls relating to the Relief Act (as defined in the
Prospectus) or similar legislating on or regulations, all allocated as described
below. Accrued Certificate Interest is calculated on the basis of a 360-day year
consisting of twelve 30-day months.
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 preceding calendar month, to the extent not offset by
the Master Servicer's application of servicing compensation as described below.
Such shortfalls will result because interest on prepayments in full is collected
only to the date of prepayment, and because no interest is collected on
prepayments in part, as such prepayments are applied to reduce the outstanding
principal balance of the related Mortgage Loan as of the Due Date in the month
of prepayment.
If the Available Distribution Amount for any Distribution Date
is less than the Accrued Certificate Interest payable on the Senior Certificates
for such Distribution Date, the
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shortfall will be allocated among the holders of all classes of Senior
Certificates in proportion to the respective amounts of Accrued Certificate
Interest for such Distribution Date on each such class, and will be
distributable to holders of the Certificates of such classes, on subsequent
Distribution Dates, to the extent of available funds, provided, however, that
following the Credit Support Depletion Date, distributions will be made to the
Tiered Certificates in the priority set forth in the _____ paragraph under the
heading "--Principal Distributions on the Senior Certificates" and therefore the
pro rata portion of such shortfall that is allocated to the Tiered Certificates
will be allocated first to the Class A-6 Certificates. Any such amounts so
carried forward will not bear interest.
The Pass-Through Rates on each class of Senior Certificates,
other than the Variable Strip Certificates, are fixed and are set forth on the
cover hereof. The Pass-Through Rate on the Variable Strip Certificates for each
Distribution Date will equal the weighted average, as determined as of the Due
Date in the month preceding the month in which such Distribution Date occurs, of
the Pool Strip Rates on each of the Mortgage Loans in the Mortgage Pool. The
"Pool Strip Rate" on any Mortgage Loan is equal to the Net Mortgage Rate thereon
minus ___%. The "Net Mortgage Rate" on each Mortgage Loan is equal to the
Mortgage Rate thereon minus the Servicing Fee Rate. The initial Pass-Through
Rate on the Variable Strip Certificates is approximately _____% per annum.
As described herein, the Accrued Certificate Interest
allocable to each class of Senior Certificates is based on the Certificate
Principal Balance thereof or, in the case of the Variable Strip Certificates, on
the Notional Amount. The Certificate Principal Balance of any Senior Certificate
as of any date of determination is equal to the initial Certificate Principal
Balance thereof reduced by the aggregate of (a) all amounts allocable to
principal previously distributed with respect to such Certificate and (b) any
reductions in the Certificate Principal Balance thereof deemed to have occurred
in connection with allocations of Realized Losses (as defined herein) in the
manner described herein. The Notional Amount of the Fixed Strip Certificates and
Variable Strip Certificates as of any date of determination is equal to the
aggregate Certificate Principal Balance of the Certificates of all classes
(including the Subordinate Certificates) as of such date. Reference to the
Notional Amount of the Fixed Strip Certificates or Variable Strip Certificates
is solely for convenience in certain calculations and does not represent the
right to receive any distributions allocable to principal.
PRINCIPAL DISTRIBUTIONS ON THE SENIOR CERTIFICATES
Holders of the Senior Certificates will be entitled to receive
on each Distribution Date, to the extent of the portion of the Available
Distribution Amount remaining after the Senior Interest Distribution Amount is
distributed to such holders, a distribution allocable to principal in the
following amount (the "Senior Principal Distribution Amount"):
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(i) the product of (A) the then applicable Senior
Percentage and (B) the aggregate of the following amounts:
(1) the principal portion of all scheduled
monthly payments on the Mortgage Loans due on the
related Due Date, whether or not received on or prior
to the related Determination Date, less the principal
portion of Debt Service Reductions (as defined below)
which together with other Bankruptcy Losses are in
excess of the Bankruptcy Amount;
(2) the principal portion of all proceeds of
the repurchase of any Mortgage Loan (or, in the case
of a substitution, certain amounts representing a
principal adjustment) as required by the Pooling and
Servicing Agreement during the preceding calendar
month;
(3) the principal portion of all other
unscheduled collections received during the preceding
calendar month (other than full and partial principal
prepayments made by the respective mortgagors and any
amounts received in connection with a Final
Disposition (as defined below) of a Mortgage Loan
described in clause (ii) below), to the extent
applied as recoveries of principal;
(ii) in connection with the Final Disposition of a
Mortgage Loan (x) that occurred in the preceding calendar
month and (y) that did not result in any Excess Special Hazard
Losses, Excess Fraud Losses, Excess Bankruptcy Losses or
Extraordinary Losses, an amount equal to the lesser of (a) the
then-applicable Senior Percentage of the Stated Principal
Balance of such Mortgage Loan immediately prior to such
Distribution Date and (b) the then-applicable Senior
Accelerated Distribution Percentage (as defined below) of the
related collections, including Insurance Proceeds and
Liquidation Proceeds, to the extent applied as recoveries of
principal;
(iii) the then applicable Senior Accelerated Distribution
Percentage of the aggregate of all full and partial principal
prepayments made by the respective mortgagors during the
preceding calendar month; and
(iv) any amounts allocable to principal for any previous
Distribution Date (calculated pursuant to clauses (i) through
(iii) above) that remain undistributed to the extent that any
such amounts are not attributable to Realized Losses which
were allocated to the Subordinate Certificates.
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A "Final Disposition" of a defaulted Mortgage Loan is deemed
to have occurred upon a determination by the Master Servicer that it has
received all Insurance Proceeds, Liquidation Proceeds and other payments or cash
recoveries which the Master Servicer reasonably and in good faith expects to be
finally recoverable with respect to such Mortgage Loan.
The "Stated Principal Balance" of any Mortgage Loan as of any
date of determination is equal to the principal balance thereof as of the
Cut-off Date, after application of all scheduled principal payments due on or
before the Cut-off Date, whether or not received, reduced by all amounts
allocable to principal that have been distributed to Certificateholders with
respect to such Mortgage Loan on or before such date, and as further reduced to
the extent that the principal portion of any Realized Loss thereon has been
allocated to one or more classes of Certificates on or before the date of
determination.
The Senior Percentage, which initially will equal
approximately _____% and will in no event exceed 100%, will be adjusted for each
Distribution Date to be the percentage equal to the aggregate Certificate
Principal Balance of the Senior Certificates immediately prior to such
Distribution Date divided by the aggregate Stated Principal Balance of all of
the Mortgage Loans immediately prior to such Distribution Date. The Subordinate
Percentage as of any date of determination is equal to 100% minus the Senior
Percentage as of such date.
The Senior Accelerated Distribution Percentage for any
Distribution Date occurring prior to the Distribution Date in _________,
_________ will be 100%. The Senior Accelerated Distribution Percentage for any
Distribution Date occurring after _____, ____ will be as follows: for any
Distribution Date during in the sixth year after the Delivery Date, the Senior
Percentage for such Distribution Date plus 70% of the Subordinate Percentage for
such Distribution Date; for any Distribution Date during the seventh year after
the Delivery Date, the Senior Percentage for such Distribution Date plus 60% of
the Subordinate Percentage for such Distribution Date; for any Distribution Date
during the eighth year after the Delivery Date, the Senior Percentage for such
Distribution Date plus 40% of the Subordinate Percentage for such Distribution
Date; for any Distribution Date during the ninth year after the Delivery Date,
the Senior Percentage for such Distribution Date plus 20% of the Subordinate
Percentage for such Distribution Date; and for any Distribution Date thereafter,
the Senior Percentage for such Distribution Date (unless on any such
Distribution Date the Senior Percentage exceeds the initial Senior Percentage,
in which case the Senior Accelerated Distribution Percentage for such
Distribution Date will once again equal 100%). Any scheduled reduction to the
Senior Prepayment Percentage described above shall not be made as of any
Distribution Date unless either (a)(i) the outstanding principal balance of the
Mortgage Loans delinquent __ days or more (including foreclosure and REO
Property) averaged over the last ___ months, as a percentage of the aggregate
outstanding principal balance of all Mortgage Loans averaged over the last ___
months, does not exceed _% and (ii) Realized Losses on the Mortgage Loans to
date for such Distribution Date, if occurring during the sixth, seventh, eighth,
ninth or tenth year (or any year thereafter) after __________ 19__, are less
than __%,
<PAGE>
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__%, __%, __% or __%, respectively, of the initial Certificate Principal Balance
of the Subordinate Certificates or (b)(i) the aggregate outstanding principal
balance of the Mortgage Loans delinquent __ days or more (including foreclosure
and REO Property) averaged over the last ___ months, as a percentage of the
aggregate outstanding principal balance of all Mortgage Loans averaged over the
last ___ months, does not exceed __% and (ii) Realized Losses on the Mortgage
Loans to date are less than __% of the initial Certificate Principal Balance of
the Subordinate Certificates.]
Distributions of the Senior Principal Distribution Amount to
the Senior Certificates (other than the Fixed Strip Certificates and Variable
Strip Certificates) will be made (to the extent of the Available Distribution
Amount remaining after distributions of the Senior Interest Distribution Amount
as described under "--Interest Distributions"), as follows:
(a) prior to the occurrence of the Credit Support
Depletion Date (as defined below):
(i) first, concurrently, to the Class A-1
and Class A-6 Certificates, with the amount to be
distributed allocated as between such classes on a
pro rata basis in proportion to the respective
Certificate Principal Balances thereof, until the
Certificate Principal Balance of each such class is
reduced to zero;
(ii) second, to the Class A-2 Certificates
until the Certificate Principal Balance thereof is
reduced to zero;
(iii) third, to the Class A-3 Certificates
until the Certificate Principal Balance thereof is
reduced to zero; and
(iv) fourth, to the Class A-4 Certificates
until the Certificate Principal Balance thereof is
reduced to zero.
(b) On each Distribution Date occurring on or after
the Credit Support Depletion Date, all priorities relating to
sequential distributions in respect of principal among the
various classes of Senior Certificates will be disregarded,
and the Senior Principal Distribution Amount will be
distributed to all classes of Senior Certificates pro rata in
accordance with their respective outstanding Certificate
Principal Balances; provided, that the aggregate amount
distributable to the Class A-1, Class A-5 and Class A-6
Certificates (the "Tiered Certificates") in respect of Accrued
Certificate Interest thereon and in respect of their pro rata
portion of the Senior Principal Distribution Amount shall be
distributed among the Tiered Certificates in the amounts and
priority as follows: first, to the Class A-1
<PAGE>
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Certificates and the Class A-5 Certificates, up to an amount
equal to, and pro rata based on, the Accrued Certificate
Interest thereon; second to the Class A-1 Certificates, up to
an amount equal to the Optimal Principal Distribution Amount
thereof (as defined below), in reduction of the Certificate
Principal Balances thereof; third to the Class A-6
Certificates, up to an amount equal to the Accrued Certificate
Interest thereon; and fourth to the Class A-6 Certificates the
remainder of the amount so distributable among the Tiered
Certificates.
(c) The "Optimal Principal Distribution Amount" is
equal to the product of (i) the then applicable Optimal
Percentage and (ii) the Senior Principal Distribution Amount.
The "Optimal Percentage" is equal to a fraction, expressed as
a percentage, the numerator of which is the aggregate
Certificate Principal Balance of the Class A-1 Certificates
immediately prior to the applicable Distribution Date and the
denominator of which is the aggregate Certificate Principal
Balance of all of the Senior Certificates immediately prior to
such Distribution Date.
The "Credit Support Depletion Date" is the first Distribution
Date on which the Senior Percentage equals 100%.
The Master Servicer may elect to treat Insurance Proceeds,
Liquidation Proceeds and other unscheduled collections (not including
prepayments by the Mortgagors) received in any calendar month as included in the
Available Distribution Amount and the Senior Principal Distribution Amount for
the Distribution Date in the month of receipt, but is not obligated to do so. If
the Master Servicer so elects, such amounts will be deemed to have been received
(and any related Realized Loss shall be deemed to have occurred) on the last day
of the month prior to the receipt thereof.
ALLOCATION OF LOSSES; SUBORDINATION
The Subordination provided to the Senior Certificates by the
Subordinate Certificates will cover Realized Losses on the Mortgage Loans that
are Defaulted Mortgage Losses, Fraud Losses, Bankruptcy Losses (each as defined
in the Prospectus) and Special Hazard Losses (as defined herein) to the extent
described herein. Any such Realized Losses which do not constitute Excess
Special Hazard Losses, Excess Fraud Losses, Excess Bankruptcy Losses or
Extraordinary Losses will be allocated first to the Subordinate Certificates
until the Certificate Principal Balance of the Subordinate Certificates has been
reduced to zero, and then except as provided below on a pro rata basis to the
Senior Certificates based on their then outstanding Certificate Principal
Balance or the Accrued Certificate Interest thereon, as applicable. Any
allocation of a Realized Loss (other than a Debt Service Reduction) to a Senior
Certificate will be made by reducing the Certificate Principal Balance thereof,
in the case of the principal portion of such Realized Loss, and the Accrued
Certificate Interest thereon, in the case of the interest portion
<PAGE>
-45-
of such Realized Loss, by the amount so allocated as of the Distribution Date
occurring in the month following the calendar month in which such Realized Loss
was incurred. Allocations of Realized Losses which are Default Losses (as
defined below) to Senior Certificates will be made on a pro rata basis, based on
their then outstanding Certificate Principal Balances, or the Accrued
Certificate Interest thereon, as applicable, between the Tiered Certificates, on
the one hand, and the Class A-2, Class A-3, Class A-4 and Variable Strip
Certificates, on the other. Any such Realized Losses so allocated to the Tiered
Certificates will be allocated first to the Class A-6 Certificates until the
Certificate Principal Balance thereof or the Accrued Certificate Interest
thereon, as appropriate, is reduced to zero and then to the Class A-1
Certificates and Class A-5 Certificates on a pro rata basis. "Default Losses"
are Realized Losses that are attributable to the mortgagor's failure to make any
payment of principal or interest as required under the Mortgage Note, and do not
include Special Hazard Losses (or any other loss resulting from damage to a
Mortgaged Property), Bankruptcy Losses, Fraud Losses, or other losses of a type
not covered by the Subordination. Allocations of Debt Service Reductions to the
Subordinate Certificates will result from the priority of distributions to the
Senior Certificateholders of the Available Distribution Amount as described
under the captions "--Interest Distributions" and "--Principal Distributions on
the Senior Certificates" herein. Any Excess Special Hazard Losses, Excess Fraud
Losses, Excess Bankruptcy Losses or Extraordinary Losses will be allocated on a
pro rata basis between the Senior Certificates and the Subordinate Certificates
(any such Realized Losses so allocated to the Senior Certificates, as well as
any Realized Losses that are not Default Losses which are allocated to the
Senior Certificates, will be allocated without priority among the various
classes of Senior Certificates).
With respect to any defaulted Mortgage Loan that is finally
liquidated, through foreclosure sale, disposition of the related Mortgaged
Property if acquired on behalf of the Certificateholders by deed in lieu of
foreclosure, or otherwise, the amount of loss realized, if any, will generally
equal the portion of the unpaid principal balance remaining, if any, plus
interest thereon through the last day of the month in which such Mortgage Loan
was finally liquidated, after application of all amounts recovered (net of
amounts reimbursable to the Master Servicer for Advances and certain expenses,
including attorneys' fees) towards interest and principal owing on the Mortgage
Loan. Such amount of loss realized and any Special Hazard Losses, Fraud Losses
and Bankruptcy Losses are referred to herein as "Realized Losses." As used
herein, "Debt Service Reductions" means reductions in the amount of monthly
payments due to certain bankruptcy proceedings, but does not include any
forgiveness of principal.
In order to maximize the likelihood of distribution in full of
the Senior Interest Distribution Amount and the Senior Principal Distribution
Amount, holders of Senior Certificates will have a prior right, on each
Distribution Date, to the Available Distribution Amount, to the extent necessary
to satisfy the Senior Interest Distribution Amount and the Senior Principal
Distribution Amount. The Senior Principal Distribution Amount is subject to
adjustment on each Distribution Date to reflect the then applicable Senior
Percentage and the Senior Accelerated
<PAGE>
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Distribution Percentage, as described herein under "--Principal Distributions"
on the Senior Certificates, each of which may be increased (to not more than
100%) in the event of delinquencies or Realized Losses on the Mortgage Loans.
The application of the Senior Accelerated Distribution Percentage (when it
exceeds the Senior Percentage) to determine the Senior Principal Distribution
Amount will accelerate the amortization of the Senior Certificates relative to
the actual amortization of the Mortgage Loans. To the extent that the Senior
Certificates are amortized faster than the Mortgage Loans, the percentage
interest evidenced by the Senior Certificates in the Trust Fund will be
decreased (with a corresponding increase in the interest in the Trust Fund
evidenced by the Subordinate Certificates), thereby increasing, as a relative
matter, the Subordination afforded by the Subordinate Certificates. Similarly,
holders of Class A-1 Certificates and Class A-5 Certificates will have a prior
right, on each Distribution Date occurring on or after the Credit Support
Depletion Date, to that portion of the Available Distribution Amount allocated
to the Tiered Certificates, to the extent necessary to satisfy the Accrued
Certificate Interest on the Class A-1 Certificates and Class A-5 Certificates.
Therefore, any shortfalls in the amounts that would otherwise be distributable
to Class A-1 Certificateholders and Class A-5 Certificateholders, whether
resulting from Mortgage Loan delinquencies or Realized Losses, will be borne by
the holders of the Class A-6 Certificates for so long as the Class A-6
Certificates are outstanding.
The aggregate amount of Realized Losses which may be allocated
in connection with Special Hazard Losses (the "Special Hazard Amount") through
Subordination shall initially be equal to $_________. As of any date of
determination following the Cut-off Date, the Special Hazard Amount shall equal
$_________ less the sum of (i) any amounts allocated through Subordination in
respect of Special Hazard Losses and (ii) the Adjustment Amount. The Adjustment
Amount will be equal to an amount calculated pursuant to the terms of the
Pooling and Servicing Agreement. As used in this Prospectus Supplement, "Special
Hazard Losses" has the same meaning set forth in the Prospectus, except that
Special Hazard Losses will not include and the Subordination will not cover
Extraordinary Losses, and Special Hazard Losses will not exceed the lesser of
the cost of repair or replacement of the related Mortgaged Properties.
The aggregate amount of Realized Losses which may be allocated
to the Subordinate Certificates in connection with Fraud Losses (the "Fraud Loss
Amount") through Subordination shall initially be equal to $_________. As of any
date of determination after the Cut-off Date the Fraud Loss Amount shall equal
(i) up to and including the [first] anniversary of the Cut-off Date, an amount
equal to ____% of the aggregate principal balance of all of the Mortgage Loans
as of the Cut-off Date minus the aggregate amounts allocated solely to the
Subordinate Certificates through Subordination with respect to Fraud Losses up
to such date of determination, and (ii) from the [first] through [fifth]
anniversary of the Cut-off Date, an amount equal to (a) the lesser of (1) the
Fraud Loss Amount as of the most recent anniversary of the Cut-off Date and (2)
____% of the aggregate principal balance of all of the Mortgage Loans as of the
most recent anniversary of the Cut-off Date minus (b) the aggregate amounts
allocated solely
<PAGE>
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to the Subordinate Certificates through Subordination with respect to Fraud
Losses since the most recent anniversary of the Cut-off Date up to such date of
determination. On or after the fifth anniversary of the Cut-off Date, the Fraud
Loss Amount shall be zero and Fraud Losses shall not be allocated through
Subordination.
The aggregate amount of Realized Losses which may be allocated
solely to the Subordinate Certificates in connection with Bankruptcy Losses (the
"Bankruptcy Amount") Subordination will initially be equal to $_________. As of
any day of determination on or after the [first] anniversary of the Cut-off
Date, the Bankruptcy Amount will equal the excess, if any, of (i) the lesser of
(a) the Bankruptcy Amount as of the business day next preceding the most recent
anniversary of the Cut-off Date (the "Relevant Anniversary") and (b) an amount
calculated pursuant to the terms of the Pooling and Servicing Agreement, which
amount as calculated will provide for a reduction in the Bankruptcy Amount, over
(ii) the aggregate amount of Bankruptcy Losses allocated solely to the
Subordinate Certificates through Subordination since the Relevant Anniversary.
Notwithstanding the foregoing, the provisions relating to
Subordination will not be applicable in connection with a Bankruptcy Loss so
long as the Master Servicer has notified the Trustee in writing that the Master
Servicer is diligently pursuing any remedies that may exist in connection with
the representations and warranties made regarding the related Mortgage Loan and
either (i) the related Mortgage Loan is not in default with regard to payments
due thereunder or (ii) delinquent payments of principal and interest under the
related Mortgage Loan and any premiums on any applicable Primary Hazard
Insurance Policy and any related escrow payments in respect of such Mortgage
Loan are being advanced on a current basis by the Master Servicer, in either
case without giving effect to the particular Bankruptcy Loss.
The Special Hazard Amount, Fraud Amount and Bankruptcy Amount
are subject to further reduction with the consent of the Rating Agencies.
ADVANCES
Prior to each Distribution Date, the Master Servicer is
required to make advances (each an "Advance") for the benefit of
Certificateholders (out of its own funds or funds held in the Certificate
Account (as described in the Prospectus) for future distribution or withdrawal)
with respect to any payments of principal and interest (net of the related
Servicing Fees) which were due on the Mortgage Loans on the immediately
preceding Due Date and delinquent on the business day next preceding the related
Determination Date.
Such Advances are required to be made only to the extent they
are deemed by the Master Servicer to be recoverable from related late
collections, Insurance Proceeds, Liquidation Proceeds or amounts otherwise
payable to the holders of the Subordinate Certificates as described
<PAGE>
-48-
below. The purpose of making such Advances is to maintain a regular cash flow to
the Certificateholders, rather than to guarantee or insure against losses. The
Master Servicer will not be required to make any Advances with respect to
reductions in the amount of the monthly payments on the Mortgage Loans due to
Debt Service Reductions or the application of the Relief Act or similar
legislation or regulations. Any failure by the Master Servicer to make an
Advance as required under the Pooling and Servicing Agreement will constitute an
Event of Default thereunder, in which case the Trustee, as successor Master
Servicer, will be obligated to make any such Advance, in accordance with the
terms of the Pooling and Servicing Agreement.
All Advances will be reimbursable to the Master Servicer on a
first priority basis from either (a) late collections, Insurance Proceeds and
Liquidation Proceeds from the Mortgage Loan as to which such unreimbursed
Advance was made or (b) as to any Advance that remains unreimbursed in whole or
in part following the final liquidation of the related Mortgage Loan, from any
amounts otherwise distributable on the Subordinate Certificates; provided,
however, that only the Subordinate Percentage of such Advances are reimbursable
from amounts otherwise distributable on the Subordinate Certificates in the
event that such Advances were made with respect to delinquencies which
ultimately were determined to be Excess Special Hazard Losses, Excess Fraud
Losses, Excess Bankruptcy Losses or Extraordinary Losses and the Senior
Percentage of such Advances which may not be so reimbursed from amounts
otherwise distributable on the Subordinate Certificates may be reimbursed to the
Master Servicer out of any funds in the related Certificate Account prior to
distributions on the Senior Certificates. In the latter event, the aggregate
amount otherwise distributable on the Senior Certificates will be reduced by an
amount equal to the Senior Percentage of such Advances. In addition, if the
Certificate Principal Balance of the Subordinate Certificates has been reduced
to zero, any Advances previously made which are deemed by the Master Servicer to
be nonrecoverable from related late collections, Insurance Proceeds and
Liquidation Proceeds may be reimbursed to the Master Servicer out of any funds
in the related Certificate Account prior to distributions on the Senior
Certificates.
CERTAIN YIELD AND PREPAYMENT CONSIDERATIONS
GENERAL
The effective yield to the holders of the Offered Certificates
will be lower than the yield otherwise produced by the applicable Pass-Through
Rate and purchase price because monthly distributions will not be made to such
holders until the 25th day (or if such day is not a business day, then on the
next succeeding business day) of the month following the month in which interest
accrues on the Mortgage Loans (without any additional distributions of interest
or earnings thereon in respect of such delay). See "Yield Considerations" in the
Prospectus.
<PAGE>
-49-
The yields 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. 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 purchases of Mortgage
Loans due to certain breaches of representations and warranties. The timing of
changes in the rate of prepayments, liquidations and purchases 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. Since the rate and
timing of principal payments on the Mortgage Loans will depend on future events
and on a variety of factors (as described herein and in the Prospectus under
"Yield Considerations" and "Maturity and Prepayment Considerations"), no
assurance can be given as to such rate or the timing of principal payments on
the Offered Certificates.
The Mortgage Loans generally may be prepaid by the Mortgagors
at any time without payment of any prepayment fee or penalty. The Mortgage Loans
generally contain due-on-sale clauses. As described under "Description of the
Certificates--Principal Distributions on the Senior Certificates" herein, during
certain periods all or a disproportionately large percentage of principal
prepayments on the Mortgage Loans will be allocated among the Senior
Certificates. Prepayments, liquidations and purchases of the Mortgage Loans will
result in distributions to holders of the Offered 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 and servicing decisions. In addition, if prevailing
mortgage rates fell significantly below the Mortgage Rates on the Mortgage
Loans, the rate of prepayments (including refinancings) would be expected to
increase. Conversely, if prevailing mortgage rates rose significantly above the
Mortgage Rates on the Mortgage Loans, the rate of prepayments on the Mortgage
Loans would be expected to decrease.
The rate of defaults on the Mortgage Loans will also affect
the rate and timing of principal payments on the Mortgage Loans. In general,
defaults on mortgage loans are expected to occur with greater frequency in their
early years. The rate of default on Mortgage Loans which are refinance or
limited documentation mortgage loans, and on Mortgage Loans with high
Loan-to-Value Ratios, may be higher than for other types of Mortgage Loans.
Furthermore, the rate and timing of prepayments, defaults and liquidations on
the Mortgage Loans will be affected by the general economic condition of the
region of the country in which the related Mortgaged Properties are located. The
risk of delinquencies and loss is greater and prepayments are less likely
<PAGE>
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in regions where a weak or deteriorating economy exists, as may be evidenced by,
among other factors, increasing unemployment or falling property values. See
"Maturity and Prepayment Considerations" in the Prospectus.
Because the Mortgage Rates on the Mortgage Loans and the
Pass-Through Rates on the Senior Certificates (other than the Variable Strip
Certificates) are fixed, such rates will not change in response to changes in
market interest rates. The Pass-Through Rate on the Variable Strip Certificates
is based on the weighted average of the Pool Strip Rates on the Mortgage Loans,
and such rates will also not change in response to changes in market interest
rates. Accordingly, if market interest rates or market yields for securities
similar to the Senior Certificates were to rise, the market value of the Senior
Certificates may decline. In addition, if prevailing mortgage rates fell
significantly below the Mortgage Rates on the Mortgage Loans, the rate of
prepayments (including refinancings) would be expected to increase. Conversely,
if prevailing mortgage rates rose significantly above the Mortgage Rates on the
Mortgage Loans, the rate of prepayment on the Mortgage Loans would be expected
to decrease.
The amount of interest otherwise payable to holders of the
Senior Certificates will be reduced by any interest shortfalls not covered by
Subordination, including Prepayment Interest Shortfalls. Such shortfalls will
not be offset by a reduction in the Servicing Fees payable to the Master
Servicer or otherwise. See "Yield Considerations" in the Prospectus and
"Description of the Certificates--Interest Distributions" herein for a
discussion of the effect that principal prepayments on the Mortgage Loans may
have on the yield to maturity of the Senior Certificates and certain possible
shortfalls in the collection of interest.
The timing of changes in the rate of prepayments, liquidations
and 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. Because all
or a disproportionate percentage of principal prepayments will be allocated to
the Senior Certificates during not less than the first nine years after the
Delivery Date, the rate of prepayments on the Mortgage Loans during this period
may significantly affect the yield to maturity of the Senior Certificates.
In addition, the yield to maturity of the Senior Certificates
will depend on the price paid by the holders of the Senior Certificates and the
related Pass-Through Rate. The extent to which the yield to maturity of a Senior
Certificate may vary from the anticipated yield thereon will depend upon the
degree to which it is purchased at a discount or premium and the degree to which
the timing of payments thereon is sensitive to prepayments.
Because principal distributions are paid to certain classes of
Senior Certificates before other classes, holders of classes of Senior
Certificates having a later priority of payment bear a greater risk of losses
than holders of classes of Senior Certificates having earlier priorities
<PAGE>
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for distribution of principal. In addition, the Class A-6 Certificates bear a
greater risk of losses than the other Tiered Certificates because Default Losses
on the Mortgage Loans not covered by the Subordination which are allocated to
the Tiered Certificates are allocated first to the Class A-6 Certificates prior
to allocation to the Class A-1 and Class A-5 Certificates to the extent
described herein. For additional considerations relating to the yield on the
Certificates, see "Yield Considerations" and "Maturity and Prepayment
Considerations" in the Prospectus.
The assumed final Distribution Date with respect to each class
of Senior Certificates is _____ __, 20__. The assumed final Distribution Date is
the Distribution Date immediately following the latest scheduled maturity date
of any Mortgage Loan in the Mortgage Pool.
Weighted average life refers to the average amount of time
that will elapse from the date of issuance of a security until a dollar amount
in payment of principal equal to the original principal balance of such security
(less losses) is distributed to the investor. The weighted average life of the
Senior 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.
Prepayments on mortgage loans are commonly measured relative
to a prepayment standard or model. The model used in this Prospectus Supplement,
the standard prepayment assumption ("SPA"), represents an assumed rate of
prepayment each month relative to the then outstanding principal balance of a
pool of new mortgage loans. A prepayment assumption of 100% SPA assumes constant
prepayment rates of 0.2% per annum of the then outstanding principal balance of
such mortgage loans in the first month of the life of the mortgage loans and an
additional 0.2% per annum in each month thereafter until the thirtieth month.
Beginning in the thirtieth month and in each month thereafter during the life of
the mortgage loans, 100% SPA assumes a constant prepayment rate of 6% per annum
each month. As used in the table below, "0% SPA" assumes prepayment rates equal
to 0% of SPA (no prepayments). Correspondingly, "___% SPA" assumes prepayment
rates equal to ___% of SPA, and so forth. SPA does not purport to be a
historical description of prepayment experience or a prediction of the
anticipated rate of prepayment of any pool of mortgage loans, including the
Mortgage Loans.
The table set forth below has been prepared on the basis of
certain assumptions as described below regarding the weighted average
characteristics of the Mortgage Loans that are expected to be included in the
Trust Fund as described under "Description of the Mortgage Pool" herein and the
performance thereof. The table assumes, among other things, that: (i) as of the
date of issuance of the Senior Certificates, the aggregate principal balance of
the Mortgage Loans is approximately $____________ and each Mortgage Loan has a
Mortgage Rate of _____% per annum, an original term of ___ months, a remaining
term to maturity of ___ months and a related Servicing Fee calculated at ___%
per annum, (ii) the scheduled monthly payment for each Mortgage Loan has been
based on its outstanding balance, Mortgage Rate and remaining term to
<PAGE>
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maturity, such that the Mortgage Loan will amortize in amounts sufficient for
repayment thereof over its remaining term to maturity, (iii) none of the
Sellers, the Master Servicer or the Company will repurchase any Mortgage Loan,
as described under "The Mortgage Loan Pools--Representations by Sellers" and
"Description of the Certificates--Assignment of the Trust Fund Assets" in the
Prospectus, and the Master Servicer will not exercise its option to purchase the
Mortgage Loans and thereby cause a termination of the Trust Fund, (iv) there are
no delinquencies or Realized Losses on the Mortgage Loans, and scheduled monthly
payments on the Mortgage Loans will be timely received together with
prepayments, if any, at the respective constant percentages of SPA set forth in
the table, (v) there is no Prepayment Interest Shortfall or any other interest
shortfall in any month, (vi) payments on the Mortgage Loans earn no reinvestment
return; (vii) there are no additional ongoing Trust Fund expenses payable out of
the Trust Fund; and (viii) the Certificates will be purchased on _____________
__, 199_.
The actual characteristics and performance of the Mortgage
Loans will differ from the assumptions used in constructing the table set forth
below, which is hypothetical in nature and is provided only to give a general
sense of how the principal cash flows might behave under varying prepayment
scenarios. For example, it is very unlikely that the Mortgage Loans will prepay
at a constant level of SPA until maturity or that all of the Mortgage Loans will
prepay at the same level of SPA. Moreover, the diverse remaining terms to
maturity of the Mortgage Loans could produce slower or faster principal
distributions than indicated in the table at the various constant percentages of
SPA specified, even if the weighted average remaining term to maturity of the
Mortgage Loans is as assumed. Any difference between such assumptions and the
actual characteristics and performance of the Mortgage Loans, or actual
prepayment or loss experience, will affect the percentages of initial
Certificate Principal Balances outstanding over time and the weighted average
lives of the classes of Offered Certificates.
Subject to the foregoing discussion and assumptions, the
following table indicates the weighted average life of each class of Offered
Certificates (other than the Fixed Strip Certificates and Variable Strip
Certificates), and sets forth the percentages of the initial Certificate
Principal Balance of each such class of Offered Certificates that would be
outstanding after each of the dates shown at various percentages of SPA.
<PAGE>
-53-
<TABLE>
<CAPTION>
PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING
AT THE FOLLOWING PERCENTAGES OF SPA
Class A-1 Class A-2 Class A-3
------------------------------ ----------------------------- ---------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
DISTRIBUTION DATE % % % % % % % % % % % % % % %
----- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Initial Percentage
</TABLE>
Weighted Average Life in Years (**)....
___________
* Indicates a number that is greater than zero but less than
.5%.
** The weighted average life of a Certificate of any class is
determined by (i) multiplying the amount of each net
distribution in reduction of 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 the sum by the aggregate of the
net distributions described in (i) above.
THIS TABLE HAS BEEN PREPARED BASED ON THE ASSUMPTIONS
DESCRIBED IN THE THIRD PARAGRAPH PRECEDING THIS TABLE (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.
<PAGE>
-54-
PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING
AT THE FOLLOWING PERCENTAGES OF SPA
Class A-4 Class A-6
--------------------------- ----------------------------
DISTRIBUTION DATE % % % % % % % % % %
--------------------------- ----------------------------
Initial Percentage
Weighted Avg. Life in Years (**)
__________
* Indicates a number that is greater than zero but less than
.5%.
** The weighted average life of a Certificate of any class is
determined by (i) multiplying the amount of each net
distribution in reduction of 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 the sum by the aggregate of the
net distributions described in (i) above.
THIS TABLE HAS BEEN PREPARED BASED ON THE ASSUMPTIONS
DESCRIBED IN THE THIRD PARAGRAPH PRECEDING THIS TABLE (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.
(TABLE CONTINUED FROM PREVIOUS PAGE.)
<PAGE>
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FIXED STRIP CERTIFICATES AND VARIABLE STRIP CERTIFICATES YIELD CONSIDERATIONS
The following tables indicate the sensitivity of the pre-tax
yield to maturity on the Fixed Strip Certificates and Variable Strip
Certificates to various rates of prepayment on the Mortgage Loans by projecting
the monthly aggregate payments of interest on the Fixed Strip Certificates and
Variable Strip Certificates and the corresponding pre-tax yields on a corporate
bond equivalent basis, based on distributions being made with respect to the
Mortgage Loans that are assumed to be included in the Trust Fund, as described
in the assumptions stated in clauses (i) through (viii) of the third paragraph
preceding the table entitled "Percent of Initial Certificate Principal Balance
Outstanding at the Following Percentages of SPA" under the heading "Certain
Yield and Prepayment Considerations--General" herein, including the assumptions
regarding the characteristics and performance of the Mortgage Loans which differ
from the actual characteristics and performance thereof and assuming the
aggregate purchase prices set forth below and assuming further that the
Pass-Through Rate and Notional Amount of the Fixed Strip Certificates and
Variable Strip Certificates are as set forth herein. Any differences between
such assumptions and the actual characteristics and performance of the Mortgage
Loans and of the Certificates may result in yields being different from those
shown in such tables. Discrepancies between assumed and actual characteristics
and performance underscore the hypothetical nature of the tables, which are
provided only to give a general sense of the sensitivity of yields in varying
prepayment scenarios.
PRE-TAX YIELD TO MATURITY ON THE FIXED
STRIP CERTIFICATES AND THE VARIABLE STRIP CERTIFICATES
AT THE FOLLOWING PERCENTAGES OF SPA
Assumed Fixed Strip Certificates
Purchase -------------------------------
Price* % % % % %
------ --- --- --- --- ---
*Expressed as a percentage of the Initial Notional Amount
<PAGE>
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Assumed Variable Strip Certificates
Purchase -------------------------------
Price* % % % % %
------ --- --- --- --- ---
*Expressed as a percentage of the Initial Notional Amount
The pre-tax yields set forth in the preceding tables were
calculated by determining the monthly discount rates which, when applied to the
assumed streams of cash flows to be paid on the Fixed Strip Certificates and
Variable Strip Certificates, would cause the discounted present value of such
assumed streams of cash flows to equal the assumed purchase prices listed as
percentages of the initial Notional Amounts in the table for the Fixed Strip
Certificates and Variable Strip Certificates, respectively. Yields shown are
corporate bond equivalent and are based on the assumed prices given in the
tables. The prices shown do not include accrued interest but an amount of
accrued interest consistent with the assumptions was computed and was used to
arrive at these yields. Implicit in the use of any discounted present value or
internal rate of return calculation such as these is the assumption that cash
flows are reinvested at the discount rate or internal rate of return. Thus these
calculations do not take into account the different interest rates at which
investors may be able to reinvest funds received by them as distributed on the
Fixed Strip Certificates or Variable Strip Certificates. Consequently these
yields do not purport to reflect the return on any investment in the Fixed Strip
Certificates or Variable Strip Certificates when such reinvestment rates are
considered.
The preceding tables are based on a set of assumptions that
vary from other information provided herein. The differences between such
assumptions and the actual characteristics of the Mortgage Loans and of the
Certificates may result in actual yields being different from those shown in
such tables. For example, the Pass-Through Rate on the Variable Strip
Certificates, which is assumed to be fixed throughout the life of the
Certificates, will actually be likely to change from one period to the next, and
the rate assumed may be different from the actual initial Pass-Through Rate on
the Variable Strip Certificates. Such discrepancies between assumed and actual
characteristics underscore the hypothetical nature of the tables, which are
provided to give a general sense of the sensitivity of yields in varying
prepayment scenarios.
Notwithstanding the assumed prepayment rates reflected in the
preceding tables, it is highly unlikely that the Mortgage Loans will prepay at a
constant rate until maturity or that all of the Mortgage Loans will be prepaid
according to one particular pattern. For this reason, and because the timing of
cash flows is critical to determining yields, the pre-tax yields on the Fixed
Strip Certificates and Variable Strip Certificates are likely to differ from
those shown in
<PAGE>
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such table, even if all of the Mortgage Loans prepay at the indicated
percentages of SPA over any given time period or over the entire life of the
Certificates. No representation is made as to the actual rate of principal
payment on the Mortgage Loans for any period or over the life of the Senior
Certificates or as to the yield on the Senior Certificates. In addition, the
various remaining terms to maturity of the Mortgage Loans could produce slower
or faster principal distributions than indicated in the preceding tables at the
various constant percentages of SPA specified, even if the weighted average
remaining term to maturity of the Mortgage Loans is ___ months. Investors are
urged to make their investment decisions based on their determinations as to
anticipated rates of prepayment under a variety of scenarios.
For additional considerations relating to the yield on the
Certificates, see "Yield Considerations" and "Maturity and Prepayment
Considerations" in the Prospectus.
POOLING AND SERVICING AGREEMENT
GENERAL
The Certificates will be issued, and the Mortgage Loans
serviced and administered, pursuant to a Pooling and Servicing Agreement (the
"Pooling and Servicing Agreement") dated as of __________ 1, 19__, among the
Company, the Master Servicer, and _____________________, as trustee (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 and Servicing Agreement and the Senior Certificates. The Trustee will
appoint ____________________ to serve as Custodian in connection with the
Certificates. The Senior Certificates will be transferable and exchangeable at
the corporate trust office of the Trustee, which will serve as Certificate
Registrar and will be responsible for making distributions on the Senior
Certificates and forwarding monthly reports with respect thereto to the holders
of such Certificates. In addition to the circumstances described in the
Prospectus, the Company may terminate the Trustee for cause under certain
circumstances. The fees payable to the Trustee will be payable directly from the
Certificate Account. The Company will provide a prospective or actual
Certificateholder without charge, on written request, a copy (without exhibits)
of the Pooling and Servicing Agreement. Requests should be addressed to the
President, WMC Secured Assets Corp., 6320 Canoga Avenue, Woodland Hills,
California 91367. See "Description of the Certificates," "Servicing of Mortgage
Loans" and "The Pooling Agreement" in the Prospectus.
THE MASTER SERVICER
[Name of Master Servicer] [WMC Mortgage Corp. ("WMC
Mortgage"), an affiliate of the Company], will act as master servicer (in such
capacity, the "Master Servicer") for the Certificates pursuant to the Pooling
and Servicing Agreement.
<PAGE>
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[Further disclosure as appropriate. The following disclosure
is for WMC Mortgage only, but will be similar to the disclosure if the Master
Servicer is a different entity.]
[There can be no assurance that the delinquency and
foreclosure experience set forth above will be representative of the results
that may be experienced with respect to the Mortgage
Loans.]
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
The Servicing Fees for each Mortgage Loan are payable out of
the interest payments on such Mortgage Loan. The Servicing Fees in respect of
each Mortgage Loan will accrue at _____% per annum (the "Servicing Fee Rate") on
the outstanding principal balance of each Mortgage Loan. The Master Servicer is
obligated to pay certain ongoing expenses associated with the Trust Fund and
incurred by the Master Servicer in connection with its responsibilities under
the Pooling and Servicing Agreement. 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 for
information regarding expenses payable by the Master Servicer.
VOTING RIGHTS
Certain actions specified in the Prospectus that may be taken
by holders of Certificates evidencing a specified percentage of all undivided
interests in the Trust Fund may be taken by holders of Certificates entitled in
the aggregate to such percentage of the Voting Rights. __% of all Voting Rights
will be allocated among all holders of the Certificates (other than the Fixed
Strip Certificates, Variable Strip Certificates and Residual Certificates) in
proportion to their then outstanding Certificate Principal Balances, and _%, _%
and _% of all Voting Rights will be allocated among holders of the Fixed Strip
Certificates, Variable Strip Certificates and Class R Certificates,
respectively, in proportion to the percentage interests evidenced by their
respective Certificates. The Pooling and Servicing Agreement will be subject to
amendment without the consent of the holders of the Residual Certificates in
certain circumstances.
TERMINATION
The circumstances under which the obligations created by the
Pooling and Servicing Agreement will terminate in respect of the Senior
Certificates are described in "The Pooling Agreement--Termination; Retirement of
Certificates" in the Prospectus. The Master Servicer or the Company will have
the option on any Distribution Date on which the aggregate principal balance of
the Mortgage Loans is less than ___% of the aggregate principal balance of the
Mortgage Loans as of the Cut-off Date either (i) to purchase all remaining
Mortgage Loans and other assets in the Trust Fund, thereby effecting early
retirement of the Senior Certificates or (ii)
<PAGE>
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purchase in whole, but not in part, the Certificates other than the Residual
Certificates. Any such purchase of Mortgage Loans and other assets of the Trust
Fund shall be made at a price equal to the sum of (a) 100% of the unpaid
principal balance of each Mortgage Loan (or, the fair market value of the
related underlying Mortgaged Properties with respect to defaulted Mortgage Loans
as to which title to such underlying Mortgaged Properties has been acquired if
such fair market value is less than such unpaid principal balance) (net of any
unreimbursed Advance attributable to principal) as of the Distribution Date on
which the purchase proceeds are to be distributed plus (b) accrued interest
thereon at the Net Mortgage Rate to, but not including, the first day of the
month of repurchase.
Upon presentation and surrender of the Senior Certificates in
connection with the termination of the Trust Fund or a purchase of Certificates
under the circumstances described above, the holders of the Senior Certificates
will receive an amount equal to the Certificate Principal Balance of such class
plus one month's interest thereon (or with respect to the Variable Strip
Certificates, one month's interest on the Notional Amount) at the applicable
Pass-Through Rate plus any previously unpaid Accrued Certificate Interest
subject to the priority in "Description of the Certificates--Interest
Distributions" and "--Principal Distributions on the Senior Certificates".
FEDERAL INCOME TAX CONSEQUENCES
Upon the issuance of the Offered Certificates, Thacher
Proffitt & Wood, counsel to the Depositor, will deliver its opinion generally to
the effect that, assuming compliance with all provisions of the Pooling and
Servicing Agreement, for federal income tax purposes, the Trust Fund will
qualify as a REMIC under Sections 860A through 860G (the "REMIC Provisions") of
the Internal Revenue Code of 1986 (the "Code"). For federal income tax purposes,
(i) the Residual Certificates are the sole Class of "residual interests" in the
Trust Fund; and (ii) the Certificates constitute the "regular interests" in the
Trust Fund. See "Federal Income Tax Consequences--REMICs" in the Prospectus.
For federal income tax reporting purposes, the Certificates
will not and the Certificates will be treated as having been issued with
original issue discount. The prepayment assumption that will be used in
determining the rate of accrual of original issue discount, market discount and
premium, if any, 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 % SPA. No representation is made that the Mortgage Loans will
prepay at that rate or at any other rate. See "Federal Income Tax
Consequences-REMICs-Taxation of Owners of REMIC Regular Certificates--Original
Issue Discount," "--Market Discount" and "--Premium" in the Prospectus.
<PAGE>
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The Internal Revenue Service (the "IRS") has issued
regulations (the "OID Regulations") under Sections 1271 to 1275 of the Code
generally addressing the treatment of debt instruments issued with original
issue discount. Purchasers of the Offered Certificates should be aware that the
OID Regulations and Section 1272(a)(6) of the Code do not adequately address
certain issues relevant to, or are not applicable to, securities such as the
Offered Certificates. In addition, there is considerable uncertainty concerning
the application of the OID Regulations to REMIC Regular Certificates that
provide for payments based on an adjustable rate such as the Offered
Certificates. Because of the uncertainties concerning the application of Section
1272(a)(6) of the Code to such Certificates and because the rules of the OID
Regulations relating to debt instruments having an adjustable rate of interest
are limited in their application in ways that could preclude their application
to such Certificates even in the absence of Section 1272(a)(6) of the Code, the
IRS could assert that the Certificates should be treated as having been issued
with original issue discount or that one or more of such Class of Certificates
should be governed by the rules applicable to debt instruments having contingent
payments or by some other method not yet set forth in regulations. Prospective
purchasers of the Offered Certificates are advised to consult their tax advisors
concerning the tax treatment of such Certificates.
It appears that a reasonable method of reporting original
issue discount with respect to the Offered Certificates generally would be to
report all income with respect to such Certificates as original issue discount
for each period, computing such original issue discount (i) by assuming that the
value of the Index will remain constant for purposes of determining the original
yield to maturity of, and projecting future distributions on, each class of such
Certificates, thereby treating such Certificates as fixed rate instruments to
which the original issue discount computation rules described herein can be
applied, and (ii) by accounting for any positive or negative variation in the
actual value of the Index in any period from its assumed value as a current
adjustment to original issue discount with respect to such period.
If the rules of the OID Regulations were applied literally to
the Offered Certificates, it appears that such rules would (i) require that the
weighted average interest rate paid on such Certificates be modified and treated
as if it were an adjustable rate based on the Index (plus or minus a fixed
number of basis points) rather than a fixed rate prior to the first adjustment
date of each Mortgage Loan, with the adjustable rate being such that the fair
market value of such Certificates would not be affected by the substitution of
the adjustable rate for the fixed rate, (ii) accrue original discount, if any,
on the Certificates as so modified by assuming that the Index will remain
constant for purposes of determining the constant yield to maturity of, and the
cash flow projections on, the Certificates as so modified and (iii) make a
positive (or negative) adjustment to interest income in any period in which the
actual interest paid on such Certificates (including interest paid at a fixed
rate prior to the first adjustment date of each Mortgage Loan) were greater or
less than the interest assumed to be paid thereon (including the interest
assumed to be paid thereon at an adjustable rate prior to the first adjustment
date).
<PAGE>
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The OID Regulations appear to permit in some circumstances the
holder of a debt instrument to recognize original issue discount under a method
that differs from that of the issuer. Accordingly, it is possible that holders
of the Offered Certificates may be able to select a method for recognizing
original issue discount that differs from that used in preparing reports to
holders of Offered Certificates and the IRS. Prospective purchasers of Offered
Certificates issued with original issue discount are advised to consult their
tax advisors concerning the tax treatment of such Certificates in this regard.
Under Section 166 of the Code, both corporate holders of the
Offered Certificates and noncorporate holders of the Offered 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 or distribution shortfalls on the Mortgage
Loans that are allocable to such Offered Certificates. However, it appears that
a noncorporate holder that does not acquire an Offered Certificate in connection
with its trade or business will not be entitled to deduct a loss under Section
166 of the Code until such holder's Certificate becomes demonstrably wholly
worthless and that the loss will be characterized as a short-term capital loss.
Each holder of an Offered Certificate will be required to
accrue original issue discount with respect to such Certificate without giving
effect to any reductions in distributions attributable to a default or
delinquency on the Mortgage Loans until it can be established that any such
reduction ultimately will not be recoverable. As a result, the amount of income
required to be reported for tax purposes in any period by the holder of such a
Certificate could exceed the amount of economic income actually realized by the
holder in such period. Although the holder of such a Certificate eventually will
recognize a loss or a 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.
The Offered Certificates will be treated as "qualifying real
property loans" within the meaning of Section 593(d) of the Code, assets
described in Section 7701(a)(19)(C) of the Code and "real estate assets" within
the meaning of Section 856(c)(5)(A) of the Code. In addition, interest
(including original issue discount, if any) on the Offered 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)(5)(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. See "Federal Income Tax
Consequences-REMICs-Characterization of Investments in REMIC Certificates" in
the Prospectus.
To the extent permitted by then applicable law, any
"prohibited transactions tax," "contributions tax," tax on "net income from
foreclosure property" or state or local income or
<PAGE>
-62-
franchise tax that may be imposed on the Trust Fund will be borne by the 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 Pooling
and Servicing Agreement and in respect of compliance with then applicable law.
Any such tax not borne by the Master Servicer or the Trustee will be payable out
of the Trust Fund which may reduce the amounts otherwise payable to holders of
the Offered Certificates. See "Federal Income Tax Considerations-REMICs-
Prohibited Transactions Tax and Other Taxes" in the Prospectus.
For further information regarding the federal income tax
consequences of investing in the Subordinate Certificates, see "Federal Income
Tax Consequences--REMICs" in the Prospectus.
[SPECIAL TAX CONSIDERATIONS APPLICABLE TO RESIDUAL CERTIFICATES
The Residual Certificates will be subject to tax rules that
differ significantly from those that would apply if the Residual Certificates
were treated for federal income tax purposes as direct ownership interest in the
Mortgage Loans or as debt instruments issued by the Trust Fund. For further
information regarding the federal income tax consequences of investing in the
Residual Certificates, see "Federal Income Tax Consequences--REMICS--Taxation of
Owners of REMIC Residual Certificates" in the Prospectus.
The IRS has issued regulations under the provisions of the
Code related to REMICs (the "REMIC Regulations") that significantly affect
holders of the Residual Certificates. The REMIC Regulations impose restrictions
on the transfer or acquisition of certain residual interests, including the
Residual Certificates. The REMIC Regulations include restrictions that apply to:
(i) thrift institutions holding residual interests lacking "significant value"
and (ii) the transfer of "noneconomic" residual interests to United States
persons. Pursuant to the Pooling and Servicing Agreement, the Residual
Certificates may not be transferred to non-United States persons.
The REMIC Regulations provide for the determination of whether
a residual interest has "significant value" for purposes of applying the rules
relating to "excess inclusions" with respect to residual interests. Based on the
REMIC Regulations, the Residual Certificates do not have significant value and,
accordingly, thrift institutions and their affiliates will be prevented from
using their unrelated losses or loss carryovers to offset any excess inclusions
with respect to the Residual Certificates, which will be in an amount equal to
all or virtually all of the taxable income includible by holders of the Residual
Certificates. See "Federal Income Tax Consequences--Taxation of Owners of REMIC
Residual Certificates--Excess Inclusions" in the Prospectus.
<PAGE>
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The REMIC Regulations also provide that a transfer to a United
States person of "noneconomic" residual interests will be disregarded for all
federal income tax purposes, and that the purported transferor of "noneconomic"
residual interests will continue to remain liable for any taxes due with respect
to the taxable income on such residual interests, if "a significant purpose of
the transfer was to enable the transferor to impede the assessment or collection
of tax." Based on the REMIC Regulations, the Residual Certificates will
constitute "noneconomic" residual interests during some or all of their term for
purposes of the REMIC Regulations and, accordingly, unless no significant
purpose of a transfer is to enable the transferor to impede the assessment or
collection of tax, transfers of the Residual Certificates may be disregarded and
purported transferors may remain liable for any taxes due with respect to the
income on the Residual Certificates. All transfers of the Residual Certificates
will be subject to certain restrictions under the terms of the Pooling and
Servicing Agreement that are intended to reduce the possibility of any such
transfer being disregarded to the extent that the Residual Certificates
constitute noneconomic residual interests. Such transfers are prohibited under
the Pooling and Servicing Agreement. See "Federal Income Tax
Consequences--Taxation of Owners of REMIC Residual Certificates--Noneconomic
REMIC Residual Certificates" in the Prospectus.
As discussed above and in the Prospectus, the rules for
accrual of original issue discount with respect to the Senior and Subordinate
Certificates are subject to significant complexity and uncertainty. See "Federal
Income Tax Consequences" in the Prospectus. Because original issue discount on
such classes of Certificates will be deducted by the Trust Fund in determining
its taxable income, any changes required by the IRS in the application of those
rules to such Certificates may significantly affect the timing of original issue
discount deductions to the Trust Fund and therefore the amount of the Trust
Fund's taxable income allocable to holders of the Residual Certificates.
The Residual Certificateholders will be required to report an
amount of taxable income with respect to the earlier accrual periods of the term
of the REMIC that significantly exceeds the amount of cash distributions
received by such Residual Certificateholders from the REMIC with respect to such
periods. Furthermore, the tax on such income will exceed the cash distributions
with respect to such periods. Consequently, Residual Certificateholders should
have other sources of funds sufficient to pay any federal income taxes due as a
result of their ownership of Residual Certificates. In addition, the required
inclusion of this amount of income during the REMIC's earlier accrual periods
and the deferral of corresponding tax losses or deductions until later accrual
periods or until the ultimate sale or disposition of a Residual Certificate (or
possibly later under the "wash sale" rules of Section 1091 of the Code) may
cause the Residual Certificateholders' after-tax rate of return to be zero or
negative even if the Residual Certificateholder's pre-tax rate of return is
positive. That is, on a present value basis, the Residual Certificateholders'
resulting tax liabilities could substantially exceed the sum of any tax benefits
and the amount of any cash distributions on such Residual Certificates over
their life.
<PAGE>
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An individual, trust or estate that holds (whether directly or
indirectly through certain pass-through entities) a Residual Certificate,
particularly a Residual Certificate, may have significant additional gross
income with respect to, but may be subject to limitations on the deductibility
of, servicing and trustee's fees and other administrative expenses properly
allocable to the REMIC in computing such Certificateholder's regular tax
liability and will not be able to deduct such fees or expenses to any extent in
computing such Certificateholder's alternative minimum tax liability. Such
expenses will be allocated for federal income tax information reporting purposes
entirely to the Residual Certificates. However, it is possible that the IRS may
require all or some portion of such fees and expense to be allocable to the
Residual Certificates. See "Federal Income Tax Consequences--REMICs--Taxation of
Owners of REMIC Residual Certificates--Possible Pass-Through of Miscellaneous
Itemized Deductions" in the Prospectus.
The Trustee will be designated as the "tax matters person" as
defined in Treasury Regulation Section 301.6231(a)(7)-1T with respect to the
Trust Fund, and in connection therewith will be required to hold not less than a
0.01% Percentage Interest of the Residual Certificates.
Purchasers of the Residual Certificates are strongly advised
to consult their own tax advisors as to the economic and tax consequences of
investment in such Residual Certificates.
For further information regarding the federal income tax
consequences of investing in the Residual Certificates, see "Yield
Considerations--Additional Yield Considerations Applicable Solely to the
Residual Certificates" herein and "Federal Income Tax
Consequences--REMICs--Taxation of Owners of REMIC Residual Certificates" in the
Prospectus.]
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in the
Underwriting Agreement dated __________, 19__, the Underwriter has agreed to
purchase and the Company has agreed to sell to the Underwriter each class of
Senior Certificates.
The Underwriting Agreement provides that the obligation of the
Underwriter to pay for and accept delivery of the Senior Certificates is subject
to, among other things, the receipt of certain legal opinions and to the
conditions, among others, that no stop order suspending the effectiveness of the
Company's Registration Statement shall be in effect, and that no proceedings for
such purpose shall be pending before or threatened by the Securities and
Exchange Commission.
The distribution of the Senior Certificates by the Underwriter
may be effected from time to time in one or more negotiated transactions, or
otherwise, at varying prices to be determined at the time of sale. Proceeds to
the Company from the sale of the Senior
Certificates,
<PAGE>
-65-
before deducting expenses payable by the Company, will be _________% of the
aggregate Certificate Principal Balance of the Senior Certificates plus accrued
interest thereon from the Cut-off Date. The Underwriter may effect such
transactions by selling the Senior Certificates to or through dealers, and such
dealers may receive compensation in the form of underwriting discounts,
concessions or commissions from the Underwriter for whom they act as agent. In
connection with the sale of the Senior Certificates, the Underwriter may be
deemed to have received compensation from the Company in the form of
underwriting compensation. The Underwriter and any dealers that participate with
the Underwriter in the distribution of the Senior Certificates may be deemed to
be underwriters and any profit on the resale of the Senior Certificates
positioned by them may be deemed to be underwriting discounts and commissions
under the Securities Act of 1933.
The Underwriting Agreement provides that the Company will
indemnify the Underwriter, and that under limited circumstances the Underwriter
will indemnify the Company, against certain civil liabilities under the
Securities Act of 1933, or contribute to payments required to be made in respect
thereof.
There can be no assurance that a secondary market for the
Senior Certificates will develop or, if it does develop, that it will continue.
The primary source of information available to investors concerning the Senior
Certificates will be the monthly statements discussed in the Prospectus under
"Description of the Certificates - Reports to Certificateholders," which will
include information as to the outstanding principal balance of the Senior
Certificates and the status of the applicable form of credit enhancement. There
can be no assurance that any additional information regarding the Senior
Certificates will be available through any other source. In addition, the
Company is not aware of any source through which price information about the
Senior Certificates will be generally available on an ongoing basis. The limited
nature of such information regarding the Senior Certificates may adversely
affect the liquidity of the Senior Certificates, even if a secondary market for
the Senior Certificates becomes available.
LEGAL OPINIONS
Certain legal matters relating to the Certificates will be
passed upon for the Company by _________________________________, ________ and
for the Underwriter by
___________________________.
RATINGS
It is a condition to the issuance of the Senior Certificates
that they be rated not lower than "___" by _________________ ___________
("_________________") and "___" by ____________________________ ("_______").
<PAGE>
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The ratings of _______ on mortgage pass-through certificates
address the likelihood of the receipt by Certificateholders of all distributions
on the underlying mortgage loans to which they are entitled. _______ 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 rating does not
address the possibility that Certificateholders might suffer a lower than
anticipated yield.
_________________ ratings on mortgage pass-through
certificates also address the likelihood of the receipt by Certificateholders of
payments required under the Pooling and Servicing Agreement. _________________
ratings take into consideration the credit quality of the mortgage pool,
structural and legal aspects associated with the Certificates, and the extent to
which the payment stream in the mortgage pool is adequate to make payments
required under the Certificates. _________________ rating on the Certificates
does not, however, constitute a statement regarding frequency of prepayments on
the mortgages. See "Certain Yield and Prepayment Considerations" herein.
The Company has not requested a rating on the Senior
Certificates by any rating agency other than _______ and ________. However,
there can be no assurance as to whether any other rating agency will rate the
Senior 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 Senior
Certificates by _______ and ____________.
A security rating is not a recommendation to buy, sell or hold
securities and may be subject to revision or withdrawal at any time by the
assigning rating organization. Each security rating should be evaluated
independently of any other security rating. The rating of the Fixed Strip
Certificates or Variable Strip Certificates does not address the possibility
that the holders of such Certificates may fail to fully recover their initial
investment. In the event that the rating initially assigned to the Senior
Certificates is subsequently lowered for any reason, no person or entity is
obligated to provide any additional support or credit enhancement with respect
to the Senior Certificates.
LEGAL INVESTMENT
The Senior Certificates will constitute "mortgage related
securities" for purposes of the Secondary Mortgage Market Enhancement Act of
1984 ("SMMEA") so long as they are rated in at least the second highest rating
category by one of the Rating Agencies, and, as such, are legal investments for
certain entities to the extent provided in SMMEA. SMMEA provides, however, that
states could override its provisions on legal investment and restrict or
condition investment in mortgage related securities by taking statutory action
on or prior to October 3, 1991. Certain states have enacted legislation which
overrides the preemption provisions of SMMEA.
<PAGE>
-67-
The Company makes no representations as to the proper
characterization of any class of the Offered Certificates for legal investment
or other purposes, or as to the ability of particular investors to purchase any
class of the Offered Certificates under applicable legal investment
restrictions. These uncertainties may adversely affect the liquidity of any
class of Offered Certificates. Accordingly, all institutions whose investment
activities are subject to legal investment laws and regulations, regulatory
capital requirements or review by regulatory authorities should consult with
their legal advisors in determining whether and to what extent any class of the
Offered Certificates constitutes a legal investment or is subject to investment,
capital or other restrictions.
See "Legal Investment Matters" in the Prospectus.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), imposes certain requirements on employee benefit plans and
collective investment funds and separate accounts in which such plans or
arrangements are invested to which it applies and on those persons who are
fiduciaries with respect to such benefit plans. Certain employee benefit plans,
such as governmental plans (as defined in Section 3(32) of ERISA) and certain
church plans (as defined in Section 3(33) of ERISA), are not subject to ERISA.
In accordance with ERISA's general fiduciary standards, before investing in a
Certificate a benefit plan fiduciary should determine whether such investment is
permitted under the governing benefit plan instruments, is appropriate for the
benefit plan in view of its overall investment policy and the composition and
diversification of its portfolio and should consider the ERISA provisions
regarding the delegation of fiduciary responsibility with respect to plan
assets.
In addition, employee benefit plans (as defined in Section
3(3) of ERISA) subject to ERISA and individual retirement accounts or certain
types of Keogh plans not subject to ERISA but subject to Section 4975 of the
Code (each a "Plan") are prohibited from engaging in a broad range of
transactions involving Plan assets and persons having certain specified
relationships to a Plan ("Parties in Interest" and "Disqualified Persons"). Such
transactions are treated as "prohibited transactions" under Section 406 of ERISA
and excise taxes are imposed upon such persons by Section 4975 of the Code. The
Company, the Seller, the Servicers, the Underwriter and the Trustee and certain
of their affiliates might be considered "parties in interest" or "disqualified
persons" with respect to a Plan. If so, the acquisition or holding or transfer
of Certificates by or on behalf of such Plan could be considered to give rise to
a "prohibited transaction" within the meaning of ERISA and the Code unless an
exemption is available. Furthermore, if an investing Plan's assets were deemed
to include an interest in the Mortgage Loans and any other assets of the Trust
Fund and not merely an interest in the Certificates, transactions occurring in
the operation, management and servicing of the Trust Fund and its assets,
including in the servicing of the Mortgage Loans might constitute prohibited
transactions unless
<PAGE>
-68-
an administrative exemption applies. One exemption which may be applicable to
these potential prohibited transactions is noted below. See "ERISA
Considerations" in the Prospectus.
[The Department of Labor has granted to the Underwriter an
administrative exemption (Prohibited Transaction Exemption _____, the
"Exemption") from certain of the prohibited transaction rules of ERISA (Sections
406(a), 406(b)(1), 406(b)(2) and 407(a) of ERISA, and the excise taxes imposed
pursuant to Sections 4975(a) and (b) of the Code) with respect to the initial
purchase, the holding and the subsequent resale in the secondary market by Plans
of pass-through certificates representing a beneficial undivided ownership
interest in the assets of a trust that consist of certain receivables, loans and
other obligations that meet the conditions and requirements of the Exemption
which may be applicable to the Senior Certificates if the Underwriter or any of
its affiliates is either the sole underwriter or the manager or co-manager of
the underwriting syndicate, or a selling or placement agent. For a discussion of
the conditions which must be satisfied for the Exemption to apply to the
purchase, holding and transfer of the Senior Certificates and the operation,
management and servicing of the Trust Fund and its assets, see "ERISA
Considerations" in the Prospectus.]
The Underwriter believes that all of the conditions for
exemptive relief under the Exemption generally will be satisfied with respect to
the Senior Certificates, except for those which are dependent on facts unknown
to the Underwriter or which it cannot control, such as those relating to the
circumstances of the Plan investor or the Plan fiduciary in making the
investment decision.
Before purchasing a Senior Certificate in reliance on the
Exemption or any other exemption, a fiduciary of a Plan should confirm that all
applicable requirements would be satisfied. Any Plan fiduciary considering the
purchase of a Senior Certificate should consult with its counsel with respect to
the potential applicability of ERISA and the Code to such investment. Moreover,
each Plan fiduciary should determine whether, under the general fiduciary
standards of investment prudence and diversification, an investment in the
Senior Certificates is appropriate for the Plan, taking into account the overall
investment policy of the Plan and the composition of the Plan's investment
portfolio. Special caution ought to be exercised before a Plan purchases a
Senior Certificate in such circumstances. See "ERISA Considerations" in the
Prospectus.
Each prospective purchaser of a Certificate and each
prospective owner of a beneficial interest in a Certificate which is not a DTC
registered Security shall be either provide an opinion of counsel or a
certification as described in the Prospectus under "ERISA CONSIDERATIONS". An
opinion of counsel or certification will not be required with respect to the
purchase of DTC registered Certificates. 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
<PAGE>
-69-
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.
<PAGE>
-70-
================================================================================
No dealer, salesman or other person has been authorized to
give any information or to make any representations not contained in this
Prospectus Supplement and the Prospectus and, if given or made, such information
or representations must not be relied upon as having been authorized by the
Company or by the Underwriter. This Prospectus Supplement and the Prospectus do
not constitute an offer to sell, or a solicitation of an offer to buy, the
securities offered hereby to anyone in any jurisdiction in which the person
making such offer or solicitation is not qualified to do so or to anyone to whom
it is unlawful to make any such offer or solicitation. Neither the delivery of
this Prospectus Supplement and the Prospectus nor any sale made hereunder shall,
under any circumstances, create an implication that information herein or
therein is correct as of any time since the date of this Prospectus Supplement
or the Prospectus.
__________
TABLE OF CONTENTS
Page
----
Prospectus Supplement
Summary..................................... S-
Description of the Mortgage Pool............ S-
Description of the Certificates............. S-
Certain Yield and Prepayment
Considerations............................. S-
Pooling and Servicing Agreement............. S-
Federal Income Tax Consequences............. S-
Method of Distribution...................... S-
Legal Opinions.............................. S-
Ratings..................................... S-
Legal Investment............................ S-
................Prospectus.................
Summary of Prospectus.......................
Risk Factors................................
The Mortgage Pools..........................
Servicing of Mortgage Loans.................
Description of the Certificates.............
Subordination...............................
Description of Credit Enhancement...........
Purchase Obligations........................
Primary Mortgage Insurance, Hazard
Insurance; Claims Thereunder...............
The Company.................................
Imperial Credit Industries, Inc.............
The Pooling Agreement.......................
Yield Considerations........................
Maturity and Prepayment Considerations......
Certain Legal Aspects of Mortgage
Loans .....................................
Federal Income Tax Consequences.............
State and Other Tax Consequences............
ERISA Considerations........................
Legal Investment Matters....................
Use of Proceeds.............................
Methods of Distribution.....................
Legal Matters...............................
Financial Information.......................
Rating......................................
Index of Principal Definitions..............
<PAGE>
-71-
WMC SECURED
ASSETS CORP.
$---------------
Mortgage Pass-Through
Certificates
Series 199_-__
Class A-1 Certificates $ ----%
Class A-2 Certificates $ ----%
Class A-3 Certificates $ ----%
Class A-4 Certificates $ ----%
Class A-5 Certificates $ ----%
Class A-6 Certificates $ ----%
Class A-7 Certificates $ Variable Rate
--------------------
PROSPECTUS SUPPLEMENT
--------------------
__________________________________
_______, 19__
================================================================================
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This preliminary prospectus supplement shall not constitute an offer
to sell or the solicitation of an offer to buy nor shall there be any sale of
these securities in any State in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws of any
such State.
VERSION 2
=========
SUBJECT TO COMPLETION SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS SUPPLEMENT DATED JULY 23, 1998
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED ______________, 19__)
$---------------
WMC SECURED ASSETS CORP.
COMPANY
[NAME OF MASTER SERVICER]
MASTER SERVICER
MORTGAGE PASS-THROUGH CERTIFICATES, SERIES 19__-__
WEIGHTED AVERAGE ADJUSTABLE PASS-THROUGH RATE
The Series 19__-__ Mortgage Pass-Through Certificates (the
"Certificates") will evidence the entire beneficial ownership interest in a
trust fund (the "Trust Fund") consisting primarily of a pool of conventional
adjustable-rate one- to four-family first lien mortgage loans (the "Mortgage
Loans"), exclusive of the Spread (as defined herein), to be deposited by WMC
Secured Assets Corp. (the "Company") into the Trust Fund for the benefit of the
Certificateholders. Certain characteristics of the Mortgage Loans are described
herein under "Description of the Mortgage Pool."
PROSPECTIVE INVESTORS SHOULD REVIEW THE INFORMATION SET FORTH UNDER
"RISK FACTORS" ON PAGE S-__ OF THE PROSPECTUS SUPPLEMENT AND THE INFORMATION SET
FORTH UNDER "RISK FACTORS" ON PAGE __ OF THE PROSPECTUS FOR A DISCUSSION OF
MATERIAL RISKS AFFECTING INVESTMENT IN THE SECURITIES BEFORE PURCHASING ANY OF
THE CLASS A CERTIFICATES.
A limited amount of losses on the Mortgage Loans will initially be
covered by an irrevocable letter of credit (the "Letter of Credit") to be issued
by ________________ (the "Letter of Credit Bank"). The maximum amount available
to be drawn under the Letter of Credit will initially be equal to approximately
_____% of the aggregate principal balance of the Mortgage Loans as of
_______________, 19__ (the "Cut-off Date").
The interest rates on the Mortgage Loans (each, a "Mortgage Rate") will
change semi-annually based on the Index (as defined herein) and the respective
Note Margins described herein, subject to certain periodic and lifetime
limitations as described more fully herein.
[Approximately ___% (by principal balance as of the Cut-off Date) of
the Mortgage Loans will be "sub-prime" mortgage loans as described herein. Such
Mortgage Loans will be
<PAGE>
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 the Letter of Credit,
may affect the yield to maturity of the Certificates.]
Distributions on the Certificates will be made on the 25th day of each
month or, if such day is not a business day, then on the next succeeding
business day commencing on ____________, 19__ (each, a "Distribution Date"). As
more fully described herein, interest distributions on the Certificates will be
based on the principal balance of the Mortgage Loans and the then applicable
Weighted Average Adjustable Pass-Through Rate, which will equal the weighted
average of the Net Mortgage Rates on the Mortgage Loans for the month preceding
such Distribution Date, as described more fully herein. The "Net Mortgage Rate"
for each Mortgage Loan is generally equal the Mortgage Rate thereon from time to
time, net of the per annum rates applicable to the calculation of the related
servicing fee and Spread. The initial Weighted Average Adjustable Pass- Through
Rate for the Certificates will be _______% per annum. The Weighted Average
Adjustable Pass-Through Rate on the Certificates may increase or decrease from
month to month. Distributions in respect of principal of the Certificates will
be made as described herein under "Description of the
Certificates--Distributions."
Certain Mortgage Loans provide that, at the option of the related
Mortgagors, the adjustable rate on such Mortgage Loans may be converted to a
fixed rate (the "Convertible Mortgage Loans"), provided that certain conditions
have been satisfied. Upon notification from a Mortgagor of such Mortgagor's
intent to convert from an adjustable rate to a fixed rate and prior to the
conversion of any such Mortgage Loan (a "Converting Mortgage Loan"), the Master
Servicer [or the related Subservicer] will be obligated to purchase the
Converting Mortgage Loan at a net price of par plus accrued interest thereon
(the "Conversion Price"). [In the event of a failure by a Subservicer to
purchase a Converting Mortgage Loan, the Master Servicer shall use its best
efforts to purchase any Converted Mortgage Loan (as defined herein) from the
Mortgage Pool at the Conversion Price during the one month period following the
date of conversion to a Converted Mortgage Loan.] In the event that neither the
Master Servicer [nor the related Subservicer] purchases a Converting or
Converted Mortgage Loan, the Mortgage Pool will thereafter include both fixed
rate and adjustable rate Mortgage Loans. See "Certain Yield and Prepayment
Considerations" herein. Except as set forth herein, the Master Servicer's only
obligations with respect to the Certificates are its contractual obligations as
Master Servicer under the terms of the Pooling and Servicing Agreement (as
defined herein).
As described herein, the Trust Fund will be treated as a grantor trust
for federal income tax purposes.
THE YIELD TO MATURITY ON THE CERTIFICATES WILL DEPEND ON THE RATE OF
PAYMENT OF PRINCIPAL (INCLUDING AS A RESULT OF PREPAYMENTS, DEFAULTS,
LIQUIDATIONS AND PURCHASES OF
-2-
<PAGE>
CONVERTING MORTGAGE LOANS AND CONVERTED MORTGAGE LOANS) ON THE MORTGAGE LOANS.
THE MORTGAGE LOANS MAY BE PREPAID IN FULL OR IN PART AT ANY TIME WITHOUT
PENALTY. THE YIELD TO INVESTORS ON THE CERTIFICATES WILL BE ADVERSELY AFFECTED
BY ANY SHORTFALLS IN INTEREST COLLECTED ON THE MORTGAGE LOANS DUE TO
PREPAYMENTS, LIQUIDATIONS OR OTHERWISE. SEE "CERTAIN YIELD AND PREPAYMENT
CONSIDERATIONS" HEREIN AND "YIELD CONSIDERATIONS" IN THE PROSPECTUS.
PROCEEDS OF THE ASSETS IN THE TRUST FUND ARE THE SOLE SOURCE OF
PAYMENTS ON THE CERTIFICATES. THE CERTIFICATES DO NOT REPRESENT AN INTEREST IN
OR OBLIGATION OF THE COMPANY, THE MASTER SERVICER OR ANY OF THEIR AFFILIATES.
NEITHER THE CERTIFICATES NOR THE UNDERLYING MORTGAGE LOANS ARE INSURED OR
GUARANTEED BY ANY GOVERNMENTAL AGENCY OR INSTRUMENTALITY OR BY THE COMPANY, THE
MASTER SERVICER OFFERED OR ANY OF THEIR AFFILIATES.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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.
The Certificates will be purchased from the Company by the Underwriter
and will be offered by the Underwriter from time to time to the public in
negotiated transactions or otherwise at varying prices to be determined at the
time of sale. The proceeds to the Company from the sale of the Certificates will
be equal to _________% of the initial aggregate principal balance of the
Certificates, plus accrued interest thereon from ___________ 1, 19__ (the
"Cut-off Date"), net of any expenses payable by the Company.
The Certificates are offered by the Underwriter subject to prior sale,
when, as and if delivered to and accepted by the Underwriter and subject to
certain other conditions. The Underwriter reserves the right to withdraw, cancel
or modify such offer and to reject any order in whole or in part. It is expected
that delivery of the Certificates will be made on or about ____________, 19__ at
the office of __________________________________, _______________,
_____________________ against payment therefor in immediately available funds.
[Name of Underwriter]
[Date of Prospectus Supplement]
-3-
<PAGE>
THE CERTIFICATES OFFERED BY THIS PROSPECTUS SUPPLEMENT CONSTITUTE A
SEPARATE SERIES OF CERTIFICATES BEING OFFERED BY THE COMPANY PURSUANT TO ITS
PROSPECTUS DATED _____________, 19__, OF WHICH THIS PROSPECTUS SUPPLEMENT IS A
PART AND WHICH ACCOMPANIES THIS PROSPECTUS SUPPLEMENT. THE PROSPECTUS CONTAINS
IMPORTANT INFORMATION REGARDING THIS OFFERING WHICH IS NOT CONTAINED HEREIN, AND
PROSPECTIVE INVESTORS ARE URGED TO READ THE PROSPECTUS AND THIS PROSPECTUS
SUPPLEMENT IN FULL. SALES OF THE CERTIFICATES MAY NOT BE CONSUMMATED UNLESS THE
PURCHASER HAS RECEIVED BOTH THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS.
UNTIL _____________, 19__, ALL DEALERS EFFECTING TRANSACTIONS IN THE
CERTIFICATES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED
TO DELIVER A PROSPECTUS SUPPLEMENT AND THE PROSPECTUS TO WHICH IT RELATES. THIS
DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A
PROSPECTUS SUPPLEMENT AND PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH
RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
-4-
<PAGE>
SUMMARY
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere herein and in the Prospectus.
Capitalized terms used herein and not otherwise defined herein have the meanings
assigned in the Prospectus.
Title of Securities........Mortgage Pass-Through Certificates, Weighted Average
Adjustable Pass-Through Rate, Series 19__-__.
Company....................WMC Secured Assets Corp. (the "Company"), an
affiliate of WMC Mortgage Corp. ("WMC Mortgage"). See
"The Company" in the Prospectus.
Master Servicer............[Name of Master Servicer] (the "Master Servicer"),[
an affiliate of the Company]. See "Pooling and
Servicing Agreement--The Master Servicer" herein.
Trustee....................________________, ______________ (the "Trustee").
Cut-off Date...............___________, 19__ (the "Cut-off Date").
Delivery Date..............On or about __________, 19__ (the "Delivery Date").
Denominations..............The Certificates will be issued in registered,
certificated form, in minimum denominations of
$______ and integral multiples of $_____ in excess
thereof.
The Mortgage Pool..........The Mortgage Pool will consist of a pool of
adjustable rate, fully-amortizing mortgage loans (the
"Mortgage Loans"), exclusive of the Spread (as
defined herein). The aggregate principal balance of
the Mortgage Loans as of the Cut-off Date will be
approximately $______________.
The Mortgage Loans are secured by first liens on one-
to four-family residential real properties (each, a
"Mortgaged Property"). The Mortgage Loans have
individual principal balances at origination of at
least $______ but not more than $_________ with an
average principal balance at origination of
approximately $_________. The Mortgage Loans have
terms to maturity of __ years from the date of
origination and a weighted average remaining term to
stated maturity of approximately ____ years and __
months as of the Cut-off Date. The Mortgage Rate on
each Mortgage Loan will adjust semi-annually on its
Adjustment Date (as defined herein),
-5-
<PAGE>
with corresponding adjustments in the amount of
monthly payments, to equal the sum (rounded as
described herein) of the Index described below and a
fixed percentage set forth in the related Mortgage
Note (the "Note Margin"). However, (i) on any
Adjustment Date such Mortgage Rate may not increase
or decrease by more than 1% (the "Periodic Rate
Cap"), (ii) over the life of such Mortgage Loan, such
Mortgage Rate may not exceed the related maximum
Mortgage Rate (such maximum Mortgage Rate is equal to
the Mortgage Rate at origination plus a lifetime rate
cap (the "Lifetime Rate Cap")), which maximum
Mortgage Rates will range from ______% to ______% and
(iii) with respect to approximately ____% of the
Mortgage Loans, by aggregate principal balance as of
the Cut-off Date, over the life of such Mortgage
Loan, such Mortgage Rate may not be lower than the
minimum Mortgage Rate. The difference between the
Mortgage Rate on each Mortgage Loan at origination
and the minimum Mortgage Rate on such Mortgage Loan
will equal the lifetime rate floor (the "Lifetime
Rate Floor"). The minimum Mortgage Rates will range
from _____% to ______% per annum.
Accordingly, changes in the Weighted Average
Adjustable Pass-Through Rate will not necessarily
correspond to changes in the Index or other
prevailing interest rates. Additionally, the initial
Mortgage Rates in effect on the Mortgage Loans will
likely be lower than the sum of the Index and related
Note Margin that would have been applicable at
origination. Because the maximum Mortgage Rate on any
Mortgage Loan is determined by adding the Lifetime
Rate Cap to the Mortgage Rate at origination, the
maximum rate on a Mortgage Loan will likely be less
than the sum of the Index and the Note Margin that
would have been applicable at origination plus the
Lifetime Rate Cap. No Mortgage Loan provides for
payment caps on any Adjustment Date which would
result in deferred interest or negative amortization.
The Mortgage Loans will bear interest at Mortgage
Rates of at least _____% per annum but not more than
______% per annum, as of the Cut-off Date. For a
further description of the Mortgage Loans, see
"Description of the Mortgage Pool" herein.
The Index..................As of any Adjustment Date with respect to any
Mortgage Loan, the Index applicable to the
determination of the related
-6-
<PAGE>
Mortgage Rate will be a rate equal to the monthly
weighted average cost of funds for members of the
Federal Home Loan Bank of San Francisco as most
recently available 45 days prior to the Adjustment
Date (the "Cost of Funds Index" or "Index").
Conversion of Mortgage
Loans....................Approximately _____% of the Mortgage Loans, by
aggregate principal balance as of the Cut-off Date,
are Convertible Mortgage Loans. Upon notification
from a Mortgagor of such Mortgagor's intent to
convert from an adjustable rate to a fixed rate and
prior to the conversion thereof, the Master Servicer
[or the related Subservicer] will be obligated to
purchase the Converting Mortgage Loan at a net price
of par plus accrued interest thereon (the "Conversion
Price"). [In the event of a failure by a Subservicer
to purchase a Converting Mortgage Loan, the Master
Servicer shall use its best efforts to purchase any
Converted Mortgage Loan (as defined herein) from the
Mortgage Pool at the Conversion Price during the
one-month period following the date of conversion to
a Converted Mortgage Loan.] In the event that neither
the Master Servicer [nor the related Subservicer]
purchases a Converting or Converted Mortgage Loan,
the Mortgage Pool will thereafter include both
fixed-rate and adjustable-rate Mortgage Loans. See
"Certain Yield and Prepayment Considerations" herein.
The Certificates...........The Certificates evidence the entire beneficial
ownership interest in a trust fund (the "Trust Fund")
consisting primarily of the Mortgage Pool, exclusive
of the Spread. The Certificates will be issued
pursuant to a Pooling and Servicing Agreement, to be
dated as of the Cut-off Date, among the Company, the
Master Servicer, and the Trustee (the "Pooling and
Servicing Agreement").
Interest Distributions.....The Weighted Average Adjustable Pass-Through Rate
applicable to the Certificates in respect of each
Distribution Date will equal the weighted average of
the Net Mortgage Rates on the Mortgage Loans for the
month preceding such Distribution Date. The initial
Weighted Average Adjustable Pass-Through Rate will be
______% per annum. The Net Mortgage Rate on each
Mortgage Loan is generally equal to the Mortgage Rate
thereon minus the rate per annum at which the related
servicing fee accrues (the "Servicing Fee Rate") and
the per annum rate at which the Spread referred to
below
-7-
<PAGE>
under "Pooling and Servicing Agreement--Servicing and
Other Compensation and Payment of Expenses; Spread"
accrues.
Holders of the Certificates will be entitled to
receive distributions allocable to interest in
proportion to their respective Percentage Interests
(as defined herein) on each Distribution Date, to the
extent of available funds, in an aggregate amount
equal to one month's interest, at the then applicable
Weighted Average Adjustable Pass-Through Rate, on the
principal balance of the Certificates outstanding as
of the close of business on the immediately preceding
Distribution Date, subject to reduction in the event
of any full and partial prepayments or any interest
shortfalls not covered by the Letter of Credit (as
defined herein) as well as certain losses and
delinquencies on the Mortgage Loans as described
herein. See "Description of the
Certificates--Distributions" herein and in the
Prospectus.
Principal Distributions....Principal payments (including prepayments) received
on the Mortgage Loans will be passed through on each
Distribution Date to holders of the Certificates in
proportion to their respective Percentage Interests.
See "Description of the Certificates--Distributions"
herein and in the Prospectus.
Advances...................The Master Servicer is required to make advances
("Advances") to holders of the Certificates in
respect of delinquent payments of principal and
interest on the Mortgage Loans, subject to the
limitations described herein. See "Description of the
Certificates--Advances" herein and in the Prospectus.
Credit Enhancement.........Neither the Certificates nor the Mortgage Loans are
insured or guaranteed by any governmental agency or
instrumentality or by the Company, the Master
Servicer or any affiliate thereof. However, a limited
amount of losses on the Mortgage Loans will be
covered initially by an irrevocable letter of credit
(the "Letter of Credit") to be issued by
________________ (the "Letter of Credit Bank") in
favor of the Trustee for the benefit of the holders
of the Certificates. The maximum amount available
under the Letter of Credit to cover losses with
respect to the Mortgage Loans will initially equal
$_________ (the initial "Available Amount") which is
equal to approximately _____% of the aggregate
principal balance of the Mortgage Loans as of the
Cut-off Date. The
-8-
<PAGE>
Available Amount is subject to periodic reduction as
described herein.
The Letter of Credit will cover losses on the
Mortgage Loans that constitute Defaulted Mortgage
Losses, Special Hazard Losses, Fraud Losses and
Bankruptcy Losses (each as defined in the
Prospectus), to the extent described herein. Amounts
that may be drawn under the Letter of Credit to cover
Special Hazard Losses, Fraud Losses and Bankruptcy
Losses are initially limited to $___________,
$___________ and $______________, respectively. All
of the foregoing amounts are subject to periodic
reduction as described herein. Any draws under the
Letter of Credit, including draws for Special Hazard
Losses, Fraud Losses and Bankruptcy Losses, will
reduce the Available Amount. The Letter of Credit
will expire on ______________, 19__, unless earlier
terminated or extended in accordance with its terms
or replaced in a manner as herein described.
In the event losses on Mortgage Loans occur which are
not covered by the Letter of Credit or any
replacement credit enhancement, such losses will be
borne by the Certificateholders. See "Description of
Credit Enhancement" herein.
Optional Termination.......At its option, on any Distribution Date when the
principal balance of the Mortgage Loans is less than
[___]% of the aggregate principal balance of the
Mortgage Loans as of the Cut-off Date, the Master
Servicer or the Company may (i) purchase from the
Trust Fund all remaining Mortgage Loans and other
assets thereof and thereby effect early retirement of
the Certificates or (ii) purchase in whole, but not
in part, the Certificates. See "Pooling and Servicing
Agreement--Termination" herein and "The Pooling
Agreement--Termination; Retirement of Certificates"
in the Prospectus.
Special Prepayment
Considerations...........The rate of principal payments on the Certificates
collectively will depend on the rate and timing of
principal payments (including by reason of
prepayments, defaults and liquidations) on the
Mortgage Loans. As is the case with mortgage-backed
securities generally, the Certificates are subject to
substantial inherent cash-flow uncertainties because
-9-
<PAGE>
the Mortgage Loans may be prepaid at any time.
Generally, when prevailing interest rates are
increasing, prepayment rates on mortgage loans tend
to decrease, resulting in a reduced return of
principal to investors at a time when reinvestment at
such higher prevailing rates would be desirable.
Conversely, when prevailing interest rates are
declining, prepayment rates on mortgage loans tend to
increase, resulting in a greater return of principal
to investors at a time when reinvestment at
comparable yields may not be possible.
See "Description of the Certificates--Distributions"
and "Certain Yield and Prepayment Considerations"
herein, and "Maturity and Prepayment Considerations"
in the Prospectus.
Special Yield
Considerations...........The yield to maturity on the Certificates will depend
on the rate and timing of principal payments
(including by reason of prepayments, defaults,
liquidations [and purchases of Mortgage Loans
converting to a fixed rate]) on the Mortgage Loans,
as well as other factors such as changes in the
Index, provisions of the Mortgage Loans limiting
changes in the Mortgage Rates and the purchase price
for such Certificates, as described herein. The
Weighted Average Adjustable Pass- Through Rate will
be reduced to the extent that prepayments,
liquidations and purchases occur at a faster rate for
Mortgage Loans having higher Net Mortgage Rates than
for Mortgage Loans having lower Net Mortgage Rates.
The yield to investors on the Certificates will be
adversely affected by any allocation thereto of
prepayment interest shortfalls on the Mortgage Loans,
which are expected to result from the distribution of
interest only to the date of prepayment (rather than
a full month's interest) in connection with
prepayments in full, and the lack of any distribution
of interest on the amount of any partial prepayments.
See "Certain Yield and Prepayment Considerations"
herein, and "Yield Considerations" in the Prospectus.
Federal Income Tax
Consequences.............No election will be made to treat the Trust Fund as a
real estate mortgage investment conduit for federal
income tax purposes. Upon issuance of the
Certificates, _______________________, counsel to the
Depositor, will
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deliver its opinion generally to the effect that,
assuming compliance with all provisions of the
Pooling and Servicing Agreement, for federal income
tax purposes the Trust Fund will be classified as a
grantor trust under the Internal Revenue Code of 1986
(the "Code"), and not as a partnership or an
association taxable as a corporation.
For further information regarding the federal income
tax consequences of investing in the Certificates see
"Federal Income Tax Consequences" herein.
Rating.....................It is a condition of the issuance of the Certificates
that they be rated at least "___" by
__________________. _________ RATING OF THE
CERTIFICATES WILL NOT REPRESENT ANY ASSESSMENT OF THE
MASTER SERVICER'S [NOR THE RELATED SUBSERVICER'S]
ABILITY TO PURCHASE CONVERTING MORTGAGE LOANS, OR THE
REMARKETING AGENT'S ABILITY TO ARRANGE FOR THE
PURCHASE OF CONVERTED MORTGAGE LOANS. In the event
that neither the Master Servicer [nor the related
Subservicer] purchases a Converting or Converted
Mortgage Loan, investors in the Certificates might
suffer a lower than anticipated yield. 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. See
"Certain Yield and Prepayment Considerations" and
"Rating" herein and "Yield Considerations" in the
Prospectus.
Legal Investment...........The Certificates will constitute "mortgage related
securities" for purposes of the Secondary Mortgage
Market Enhancement Act of 1984 ("SMMEA") for so long
as they are rated in at least the second highest
rating category by one or more nationally recognized
statistical rating agencies. Institutions whose
investment activities are subject to legal investment
laws and regulations, regulatory capital requirements
or review by regulatory authorities may be subject to
restrictions on investment in the Certificates and
should consult with their legal advisors. See "Legal
Investment" herein and "Legal Investment Matters" in
the Prospectus.
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<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 Certificates:]
[Appropriate Risk Factors as necessary.]
DESCRIPTION OF THE MORTGAGE POOL
GENERAL
The Mortgage Pool will consist of Mortgage Loans with an aggregate
principal balance outstanding as of the Cut-off Date of approximately
$___________. The Mortgage Pool will consist of conventional, adjustable-rate,
fully-amortizing Mortgage Loans with terms to maturity of not more than 30 years
from the due date of the first monthly payment. On or before the Delivery Date,
the Company will acquire the Mortgage Loans to be included in Mortgage Pool from
WMC Mortgage Corp. ("WMC Mortgage"), an affiliate of the Company [, which in
turn acquired them pursuant to various mortgage loan purchase agreements from
[_________] (the "Sellers")]. The Seller[s] will make certain representations
and warranties with respect to the Mortgage Loans and, as more particularly
described in the Prospectus, will have certain repurchase or substitution
obligations in connection with a breach of any such representation and warranty,
as well as in connection with an omission or defect in respect of certain
constituent documents required to be delivered with respect to the Mortgage
Loans, in any event if such breach, omission or defect cannot be cured and it
materially and adversely affects the interests of Certificateholders. Neither
the Company nor any other entity or person will have any responsibility to
purchase or replace any Mortgage Loan if a Seller is obligated but fails to do
so. See "Description of the Mortgage Pool--Representations by Sellers" and
"Description of the Certificates--Assignment of Trust Fund Assets" in the
Prospectus and "--The Seller" below. The Mortgage Loans will have been
originated or acquired by the [Sellers] in accordance with the underwriting
criteria described herein. See "--Underwriting" below. All percentages of the
Mortgage Loans described herein are approximate percentages (except as otherwise
indicated) by aggregate principal balance as of the Cut-off Date.
The Mortgage Rate on each Mortgage Loan will adjust semi-annually on a
date specified in the related Mortgage Note (the "Adjustment Date"). For
approximately ____% of the Mortgage Loans, by aggregate principal balance as of
the Cut-off Date, the first Adjustment Date occurred prior to the Cut-off Date.
On each Adjustment Date, the Mortgage Rate on a Mortgage Loan will be
adjusted to equal the sum (rounded to either the nearest or next highest
multiple of _____%) of (a) a rate per annum equal to the monthly weighted
average cost of funds for members of the Federal Home Loan Bank
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<PAGE>
of San Francisco (the "FHLB of San Francisco") as published by the FHLB of San
Francisco (the "Cost of Funds Index" or "Index") and as most recently available
as of the day 45 days prior to such Adjustment Date or, in the event that such
Index is no longer available, an index selected by the Master Servicer and
reasonably acceptable to the Trustee that is based on comparable information,
and (b) the related Note Margin, subject to the following limitations. The
Mortgage Rate on the Mortgage Loan on any Adjustment Date may not increase or
decrease by more than the Periodic Rate Cap applicable to such Mortgage Loan
and, over the life of such Mortgage Loan, generally may not exceed the Mortgage
Rate at origination plus the Lifetime Rate Cap, or be less than the Mortgage
Rate at origination minus any Lifetime Rate Floor, applicable to such Mortgage
Loan. No Mortgage Loan provides for payment caps on any Adjustment Date which
would result in deferred interest or negative amortization. Effective with the
first payment due date on a Mortgage Loan after an Adjustment Date therefor, the
monthly principal and interest payment will be adjusted to an amount that will
fully amortize the then outstanding principal balance of such Mortgage Loan at
its stated maturity and pay interest at the adjusted Mortgage Rate. Because the
amortization schedule of each Mortgage Loan will be recalculated semi-annually,
any partial prepayments thereof will not reduce the term to maturity of such
Mortgage Loan. An increase in the Mortgage Rate on a Mortgage Loan will result
in a larger monthly payment and in a larger percentage of such monthly payment
being allocated to interest and a smaller percentage being allocated to
principal, and conversely, a decrease in the Mortgage Rate on the Mortgage Loan
will result in a lower monthly payment and in a larger percentage of each
monthly payment being allocated to principal and a smaller percentage being
allocated to interest.
The Cost of Funds Index reflects the monthly weighted average cost of
funds of savings and loan associations and savings banks, the home offices of
which are located in Arizona, California and Nevada, that are member
institutions of the FHLB of San Francisco, as computed from statistics tabulated
and published by the FHLB of San Francisco. The FHLB of San Francisco normally
announces the Cost of Funds Index on or near the last working day of the month
following the month in which the cost of funds was incurred. The Index is
available through a variety of sources, including, without limitation, Telerate,
The Wall Street Journal and USA Today.
Listed below are the historical values of the Cost of Funds Index since
1988. Such values may fluctuate significantly over time and may not increase or
decrease in a constant pattern from period to period. The following does not
purport to be representative of future values of the Index. No assurance can be
given as to the Index value to be applied on any future Adjustment Date.
COST OF FUNDS INDEX
Month 1992 1993 1994 1995 1996 1997
- ----- ---- ---- ---- ---- ---- ----
January.................
February................
March...................
April...................
May.....................
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June....................
July....................
August..................
September...............
October.................
November................
December................
The initial Mortgage Rate in effect on a Mortgage Loan generally will
be lower than the sum of the Index that would have been applicable at
origination and the Note Margin. Absent a decline in the Index subsequent to
origination of a Mortgage Loan, the related Mortgage Rate will generally
increase on the first Adjustment Date following origination of such Mortgage
Loan. The repayment of such Mortgage Loans will be dependent on the ability of
the Mortgagor to make larger Monthly Payments following adjustments of the
Mortgage Rate. Moreover, because the maximum Mortgage Rate on any Mortgage Loan
is determined by adding the Lifetime Rate Cap to the Mortgage Rate at
origination, irrespective of the Index that would have been applicable at
origination, the maximum Mortgage Rate on a Mortgage Loan will generally be less
than the sum of the Index and the Note Margin that would have been applicable at
origination plus the Lifetime Rate Cap. Mortgage Loans that have the same
initial Mortgage Rate may not always bear interest at the same Mortgage Rate
because the Mortgage Loans may have different Adjustment Dates (and the Mortgage
Rate therefore may reflect different Index values), different Note Margins,
different Lifetime Rate Caps and different Lifetime Rate Floors, if any.
Approximately ____% of the Mortgage Loans, by aggregate principal
balance as of the Cut-off Date, are Convertible Mortgage Loans. The first month
in which any of the Mortgage Loans could convert is _______, 19__ and the last
month in which any of the Mortgage Loans may convert is ________ 1, 19__. Upon
conversion, the monthly payments of principal and interest will be adjusted to
provide for full amortization at scheduled maturity. Upon notification from a
Mortgagor of such Mortgagor's intent to convert from an adjustable rate to a
fixed rate and prior to the conversion thereof, the Master Servicer [or the
related Subservicer] will be obligated to purchase the Converting Mortgage Loan
at the Conversion Price. [In the event of a failure by a Subservicer to purchase
a Converting Mortgage Loan, the Master Servicer shall use its best efforts to
purchase such Mortgage Loan following its conversion (a "Converted Mortgage
Loan") at the Conversion Price during the one-month period following the date of
conversion to a Converted Mortgage Loan.]
In the event that the Master Servicer [nor the related Subservicer]
fails to purchase a Converting Mortgage Loan and the Master Servicer does not
purchase a Converted Mortgage Loan, neither the Company nor any of its
affiliates nor any other entity is obligated to purchase or arrange for the
purchase of any Converted Mortgage Loan. Any such Converted Mortgage Loan will
remain in the Mortgage Pool as a fixed-rate Mortgage Loan and will result in the
Mortgage Pool having both fixed rate and adjustable rate Mortgage Loans. See
"Certain Yield and Prepayment Considerations" herein.
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<PAGE>
Following the purchase of any Converted Mortgage Loan as described
above, the purchaser will be entitled to receive an assignment from the Trustee
of such Mortgage Loan and the purchaser will thereafter own such Mortgage Loan
free of any further obligation to the Trustee or the Certificateholders with
respect thereto.
The Principal Balance of any Mortgage Loan as of any time of
determination is the principal balance of such Mortgage Loan remaining to be
paid by the Mortgagor at the close of business on the Cut-off Date, after
deduction of all payments due on or before the Cut-off Date whether or not paid,
reduced by all amounts distributed to Certificateholders with respect to such
Mortgage Loan and reported to them as allocable to principal, including the
principal components of any Advances (as described below under "Description of
the Certificates--Advances").
The Mortgage Loans will have approximately the following
characteristics as of the Cut-off Date:
Number of Mortgage Loans.........................
Weighted Average Adjustable Pass-Through Rate(1).
Mortgage Rates:
Weighted Average.............................
Range........................................
Range of Net Mortgage Rates.......................
Note Margins:
Weighted Average.............................
Range........................................
Net Note Margin(2)................................
Maximum Mortgage Rates:
Weighted Average.............................
Range........................................
Maximum Net Mortgage Rates (3):
Weighted Average.............................
Range........................................
Weighted Average Months to Next Adjustment Date after ____________, 19__(4)...
(1) The Weighted Average Adjustable Pass-Through Rate is equal to the
weighted average of the Net Mortgage Rates on the Mortgage Loans.
(2) The Net Note Margin is the Note Margin on each Mortgage Loan minus the
Servicing Fee Rate and the rate at which the Spread accrues.
(3) The difference between the maximum Net Mortgage Rate and the Net
Mortgage Rate as of the Cut-off Date may be less than the Lifetime Rate
Cap.
(4) The Weighted Average Months to the next Adjustment Date is equal to the
weighted average of the number of months until the Adjustment Date next
following _____________, 19__.
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<PAGE>
The Mortgage Loans in the Mortgage Pool will have the following
characteristics as of the Cut-off Date (expressed as a percentage of the
aggregate principal balance of the Mortgage Loans having such characteristics
relative to the aggregate principal balance of all Mortgage Loans in the
Mortgage Pool):
The Mortgage Loans will have had individual principal balances
at origination of at least $__________ but not more than $__________.
None of the Mortgage Loans in the Mortgage Pool will have been
originated prior to _____________, 19__ or will have a scheduled
maturity later than ____________, ____. No Mortgage Loan in the
Mortgage Pool will have an unexpired term to stated maturity as of the
Cut-off Date of less than __ years and __ months. The weighted average
remaining term to stated maturity of the Mortgage Loans in the Mortgage
Pool as of the Cut-off Date will be approximately ____ years and __
months. The weighted average Adjustment Date of the Mortgage Loans in
the Mortgage Pool next following the Cut-off Date is ____________,
19__.
Approximately _____% of the Mortgage Loans will have
Loan-to-Value Ratios at origination exceeding 80% but less than or
equal to 90%, and approximately ____% of the Mortgage Loans will have
Loan-to-Value Ratios exceeding 90%. The weighted average Loan-to-Value
Ratio at origination, as of the Cut-off Date, is approximately _____%.
At least _____% of such Mortgage Loans will be secured by fee
simple interests in detached one- to four-family dwelling units with
the remaining units being secured by fee simple interests in attached
planned unit developments, condominiums or townhouses.
Approximately _____% of the Mortgage Loans in the Mortgage
Pool will be secured by Mortgaged Properties located in California.
No more than _____% of the Mortgage Loans in the Mortgage Pool
will be secured by Mortgaged Properties located in any one zip code
area in California, and no more than ____% will be secured by Mortgaged
Properties located in any one zip code area outside California.
No more than _____% of the Mortgage Loans were equity
refinance mortgage loans made to mortgagors who used less than the
entire amount of the proceeds to refinance an existing mortgage loan.
The weighted average Loan-to-Value Ratio at origination of such
Mortgage Loans, as of the Cut-off Date, is approximately ______%.
Approximately ____% of the Mortgage Loans were made to Mortgagors who
used the entire proceeds to refinance an existing Mortgage Loan.
No Mortgage Loan provides for deferred interest or negative
amortization.
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<PAGE>
Approximately ____% of the Mortgage Loans in the Mortgage Pool
will have been underwritten under a reduced loan documentation program.
The weighted average Loan-to-Value Ratio at origination of the Mortgage
Loans in the Mortgage Pool which were underwritten under such reduced
loan documentation program will be approximately ____% and no more than
approximately ____% of such Mortgage Loans will be secured by Mortgaged
Properties located in California. See "Pooling and Servicing
Agreement--The Master Servicer" herein.
No more than ____% of the Mortgage Loans will be secured by
vacation or second homes. No more than ____% of the Mortgage Loans will
be secured by one- to four-story condominium units. No Mortgage Loans
will be secured by condominium units in buildings of five or more
stories.
None of the Mortgage Loans in the Mortgage Pool will be
Buydown Mortgage Loans.
The following table sets forth the number and aggregate principal
balance as of the Cut-off Date of Mortgage Loans having their next Adjustment
Dates in the month described therein. The table also indicates the approximate
percentage of Mortgage Loans in the Mortgage Pool with an Adjustment Date in
each such month.
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<PAGE>
<TABLE>
<CAPTION>
MONTH OF NUMBER OF AGGREGATE PERCENTAGE OF
ADJUSTMENT DATE MORTGAGE LOANS PRINCIPAL BALANCE MORTGAGE POOL
--------------- -------------- ----------------- -------------
<S> <C> <C> <C>
Total..................
The following table sets forth the number and aggregate principal
balance of Mortgage Loans having unpaid principal balances in the ranges
described therein as of the Cut-off Date. The table also indicates the
approximate weighted average Mortgage Rate and the approximate weighted average
Loan-to-Value Ratio at origination of the Mortgage Loans in each given range, as
of the Cut-off Date.
</TABLE>
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER WEIGHTED ORIGINAL
OF AGGREGATE AVERAGE LOAN-TO-
MORTGAGE PRINCIPAL MORTGAGE VALUE
PRINCIPAL BALANCE LOANS BALANCE RATE RATIO
- ----------------- ----- ------- ---- -----
<S> <C> <C> <C> <C>
Total, Average or Weighted Average................. _______ $____________ ________% _______%
</TABLE>
UNDERWRITING STANDARDS
[Additional disclosure as necessary. See Version 1 for
underwriting disclosure for WMC Mortgage.]
DELINQUENCY AND FORECLOSURE EXPERIENCE
[Additional disclosure as necessary. See Version 1 for sample
disclosure for this section.]
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<PAGE>
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 Cut-off Date, as adjusted for the scheduled
principal payments due before such date. Prior to the issuance of the
Certificates, 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
included in the Mortgage Pool prior to the issuance of the Certificates. The
Company believes that the information set forth herein will be substantially
representative of the characteristics of the Mortgage Pool as they will be
constituted at the time the 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.
A Current Report on Form 8-K containing a detailed description of
the Mortgage Loans will be available to purchasers of the Certificates and will
be filed, together with the Pooling and Servicing Agreement, with the Securities
and Exchange Commission within fifteen days after initial issuance. The Current
Report on Form 8-K will specify the aggregate principal balance of the Mortgage
Loans in the Mortgage Pool outstanding as of the Cut-off Date and will set forth
the other approximate information presented in this Prospectus Supplement.
See also "The Mortgage Pools" and "Certain Legal Aspects of
Mortgage Loans" in the Prospectus.
DESCRIPTION OF THE CERTIFICATES
GENERAL
The Certificates evidence in the aggregate the entire beneficial
ownership of the Trust Fund. The Trust Fund will consist of (i) the Mortgage
Loans, exclusive of the Company's rights in and to the Spread with respect to
each Mortgage Loan; (ii) such assets as from time to time are identified as
deposited in respect of the Mortgage Loans in the Certificate Account (as
described in the Prospectus) 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 all proceeds thereof; and (v) the
Letter of Credit (or any alternate form of credit support substituted therefor)
and all proceeds thereof, other than any amount drawn thereunder and deposited
in a reserve fund.
DISTRIBUTIONS
Distributions to holders of Certificates will be made on each
Distribution Date based on their respective Percentage Interests. The undivided
Percentage Interest of a Certificate will be equal to the percentage obtained by
dividing the initial principal balance of such Certificate by
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<PAGE>
the aggregate initial principal balance of all Certificates, which will equal
the aggregate principal balance of the Mortgage Loans as of the Cut-off Date.
The "Available Distribution Amount" for any Distribution Date will
generally consist of (i) the aggregate amount of scheduled payments on the
Mortgage Loans due on the related Due Date and received on or prior to the
related Determination Date, after deduction of the related master servicing fees
(the "Servicing Fees"), (ii) certain unscheduled payments, including Mortgagor
prepayments on the Mortgage Loans, Insurance Proceeds, Liquidation Proceeds and
proceeds from repurchases of and substitutions for the Mortgage Loans occurring
during the preceding calendar month and (iii) all Advances made for such
Distribution Date, in each case net of amounts reimbursable therefrom to the
Master Servicer. In addition to the foregoing amounts, with respect to
unscheduled collections, not including Mortgagor prepayments, the Master
Servicer may elect to treat such amounts as included in the Available
Distribution Amount for the Distribution Date in the month of receipt, but is
not obligated to do so. With respect to any Distribution Date, (i) the "Due
Date" is the first day of the month in which such Distribution Date occurs and
(ii) the "Determination Date" is the [__th] day of the month in which such
Distribution Date occurs or, if such day is not a business day, the immediately
succeeding business day. See "Description of the Certificates--Distributions" in
the Prospectus.
Holders of Certificates will be entitled to receive distributions
of interest on each Distribution Date, to the extent of the Available
Distribution Amount for such Distribution Date, in an aggregate amount equal to
one month's interest, at the then applicable Weighted Average Adjustable
Pass-Through Rate on the principal balance of the Mortgage Loans outstanding as
of the close of business on the immediately preceding Distribution Date (or, in
the case of the first Distribution Date, outstanding as of the Delivery Date),
subject to reduction in the event of any interest shortfalls not covered by the
Letter of Credit, including any Prepayment Interest Shortfalls (as defined
below) resulting from full and partial prepayments, as well as certain losses
and delinquencies on the Mortgage Loans as described below. The Weighted Average
Adjustable Pass-Through Rate for any Distribution Date will equal the average of
the Net Mortgage Rates on the Mortgage Loans (weighted by the principal balances
of such Mortgage Loans as of the Due Date occurring in the preceding month).
Subject to the following limitations, for each period beginning on the related
Adjustment Date therefor, the Net Mortgage Rate on a Mortgage Loan will equal
the sum of the Cost of Funds Index (rounded to the nearest multiple of ______%)
and the Net Note Margin. The Net Note Margin for each Mortgage Loan will be
______%. The Net Mortgage Rate on any Mortgage Loan on any Adjustment Date may
not increase or decrease by more than the Periodic Rate Cap, and the Net
Mortgage Rate on any Mortgage Loan will not exceed the maximum Net Mortgage Rate
(the "Maximum Net Mortgage Rate") applicable to such Mortgage Loan as specified
in the Pooling and Servicing Agreement. The difference between the Net Mortgage
Rate as of the Cut-off Date and the Maximum Net Mortgage Rate will not exceed,
and may be less than, the Lifetime Rate Cap. With respect to each Mortgage Loan,
the Net Mortgage Rate is the rate per annum equal to the Mortgage Rate for such
Mortgage Loan, net of the Servicing Fee Rate and the per annum rate at which the
Spread accrues. See "Description of
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the Mortgage Pool" and "Pooling and Servicing Agreement--Servicing and Other
Compensation and Payment of Expenses; Spread" herein.
Holders of the Certificates will be entitled to receive on each
Distribution Date, to the extent of the Available Distribution Amount for such
Distribution Date after distributions of interest as set forth above, an amount
equal to the "Principal Distribution Amount" for such Distribution Date, which
will equal the sum of: (a) the principal portion of any Advances for such
Distribution Date; (b) any amount required to be paid by the Master Servicer due
to the operation of a deductible clause in any blanket policy maintained by it
to cover hazard losses on the Mortgage Loans as described in the Prospectus
under "Primary Mortgage Insurance, Hazard Insurance; Claims Thereunder"; (c) all
payments in respect of the Mortgage Loans on account of principal (including,
without limitation, principal prepayments, the principal portion of any
Liquidation Proceeds and Insurance Proceeds, the principal portion of proceeds
from repurchased Mortgage Loans and the principal portion of proceeds from the
purchase of Converting Mortgage Loans and the sale of Converted Mortgage Loans)
on deposit in the Certificate Account on the Determination Date immediately
preceding such Distribution Date, exclusive or net of (i) Liquidation Proceeds,
Insurance Proceeds and principal prepayments received during the month in which
such Distribution Date occurs (unless such amounts are deemed to have been
received in the prior month pursuant to the Pooling and Servicing Agreement as
described below), (ii) scheduled payments of principal due on a date or dates
subsequent to the first day of the month in which such Distribution Date occurs,
(iii) late payments of principal which have been the subject of a previous
Advance or Advances that have not been reimbursed to the Master Servicer and
(iv) an amount equal to liquidation expenses incurred by the Master Servicer to
the extent not reimbursed from related Liquidation Proceeds; and (d) all amounts
required to be deposited in the Certificate Account on the Business Day
immediately preceding such Distribution Date, with respect to draws or payments
under the Letter of Credit which are allocable to payments on account of
principal of the Mortgage Loans, except for payments of principal which have
been the subject of a previous Advance or Advances and which are eligible for
withdrawal in reimbursement to the Master Servicer.
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 preceding calendar month. Such shortfalls will result
because interest on prepayments in full is collected only to the date of
prepayment, and no interest is collected on prepayments in part, as such
prepayments are applied to reduce the outstanding principal balance of the
related Mortgage Loan as of the Due Date in the month of prepayment. The
Prepayment Interest Shortfall and other interest shortfalls (such as those
resulting from the application of the Relief Act (as defined herein)) not
covered by the Letter of Credit on any Distribution Date will be allocated to
the holders of the Certificates pro rata based on distributions of interest to
be made on such Distribution Date, before taking into account any such
reduction. Prepayment Interest Shortfalls and other interest shortfalls will not
be offset by a reduction of the servicing compensation of the Master Servicer or
otherwise.
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Distributions for any Distribution Date will also be reduced if
net Liquidation Proceeds or net Insurance Proceeds (together with any net
amounts payable as described below under "Description of Credit Enhancement")
received on a defaulted Mortgage Loan liquidated during the month preceding the
month in which such Distribution Date occurs are less than the outstanding
principal balance of such Mortgage Loan, plus interest thereon at the related
Net Mortgage Rate. If an Advance by the Master Servicer was previously made in
respect thereof, late payments of principal and interest, if any, remitted to
the Master Servicer for deposit into the Certificate Account will not be passed
through to Certificateholders but rather will be subject to withdrawal by the
Master Servicer from the Certificate Account in reimbursement to itself for such
Advance. To the extent that an Advance is not made, the distributions for such
Distribution Date will be reduced accordingly. Reimbursement of the Master
Servicer or the Company for any other advances or expenses reimbursable to
either as described in the Prospectus, out of amounts otherwise distributable to
the Certificateholders, will also reduce the distributions for the related
Distribution Date. Distributions for any Distribution Date will be reduced to
the extent that losses on any Mortgage Loans in the Mortgage Pool are not
covered by the Letter of Credit or any substitute form of credit enhancement.
With respect to Insurance Proceeds, Liquidation Proceeds and other
unscheduled collections (not including prepayments by the mortgagors) received
in any calendar month, the Master Servicer may elect to treat such amounts as
part of the distribution to be made on the Distribution Date in the month of
receipt, but is not obligated to do so. If the Master Servicer so elects, such
amounts will be deemed to have been received (and any related loss which
requires a draw on the Letter of Credit shall be deemed to have occurred) on the
last day of the month prior to the receipt thereof.
ADVANCES
Prior to each Distribution Date, the Master Servicer is required
to make Advances for the benefit of the Certificateholders (out of its own funds
or funds held in the Custodial Account (as described in the Prospectus) for
future distribution or withdrawal) with respect to any payments of principal and
interest (net of the related Servicing Fees and the Spread) which were due on
the Mortgage Loans on the immediately preceding Due Date and delinquent on the
business day next preceding the related Determination Date.
Such Advances are required to be made only to the extent they are
deemed by the Master Servicer to be recoverable from related late collections,
Insurance Proceeds, Liquidation Proceeds or draws on the Letter of Credit. The
purpose of making such Advances is to maintain a regular cash flow to the
Certificateholders, rather than to guarantee or insure against losses. The
Master Servicer will not be required to make any Advances with respect to
reductions in the amount of the monthly payments on the Mortgage Loans due to
bankruptcy proceedings or the application of the Relief Act or similar
legislation or regulations.
All Advances will be reimbursable to the Master Servicer on a
first priority basis from late collections, Insurance Proceeds, Liquidation
Proceeds and draws on the Letter of Credit on
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or in respect of the Mortgage Loan as to which such unreimbursed Advance was
made. In addition, any Advances previously made which are deemed by the Master
Servicer to be nonrecoverable from related late collections, Insurance Proceeds,
Liquidation Proceeds or draws on the Letter of Credit may be reimbursed to the
Master Servicer out of any funds in the Custodial Account or Certificate Account
prior to distributions on the Certificates.
CERTAIN YIELD AND PREPAYMENT CONSIDERATIONS
The effective yield to the holders of Certificates will be lower
than the yield otherwise produced by the applicable Weighted Average Adjustable
Pass-Through Rate and purchase price because monthly distributions will not be
made to such holders until the 25th day (or if such day is not a business day,
then on the next succeeding business day) of the month following the month in
which interest accrues on the Mortgage Loans (without any additional
distributions of interest or earnings thereon in respect of such delay). See
"Yield Considerations" in the Prospectus.
The yield to maturity and the aggregate amount of distributions on
the Certificates will be directly related to the rate of payment of principal on
the Mortgage Loans. Such yield may be adversely affected by a higher or lower
than anticipated rate of payment of principal on the Mortgage Loans in the Trust
Fund. The rate of payment of principal on such Mortgage Loans will in turn be
affected by the amortization schedules of the Mortgage Loans (which will change
periodically as described above), the rate of principal prepayments thereon by
the Mortgagors, liquidations of defaulted Mortgage Loans and purchases of
Mortgage Loans due to certain breaches of representations or the conversion of
Convertible Mortgage Loans. The principal component of the monthly payments on
the Mortgage Loans may change on each related Adjustment Date. In addition, the
amortization schedule of a Mortgage Loan may be changed in connection with the
receipt of a partial prepayment thereon, provided however that such changes will
not include a change in the maturity date of the related Mortgage Loan. See
"Description of the Mortgage Pool--General" herein.
Other factors affecting prepayment of mortgage loans include
changes in mortgagors' housing needs, job transfers, mortgage market interest
rates, unemployment, mortgagors' net equity in the mortgaged properties, changes
in the value of the mortgaged properties and servicing decisions. If prevailing
mortgage rates fell significantly below the Mortgage Rates on the Mortgage
Loans, the rate of prepayment (and refinancing) would be expected to increase.
Conversely, if prevailing mortgage rates rose significantly above the Mortgage
Rates on the Mortgage Loans, the rate of prepayment on the Mortgage Loans would
be expected to decrease. There can be no certainty as to the rate of prepayments
on, or conversions of, the Mortgage Loans during any period or over the life of
the Certificates. However, in the event that substantial numbers of Mortgagors
exercise their conversion rights, and [the related Subservicers and] the Master
Servicer purchase the Converting and Converted Mortgage Loans, the Mortgage Pool
will experience substantial prepayment of principal.
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The Mortgage Loans may be prepaid by the Mortgagors at any time
without payment of any prepayment fee or penalty. In addition, certain of the
Mortgage Loans provide that the Mortgagors may, during a specified period of
time, convert the adjustable rate of such Mortgage Loans to a fixed rate. The
Company is not aware of any publicly available statistics that set forth
principal prepayment or conversion experience or prepayment or conversion
forecasts of comparable adjustable rate mortgage loans over an extended period
of time, and its experience with respect to comparable adjustable rate mortgages
is insufficient to draw any conclusions with respect to the expected prepayment
or conversion rates on the Mortgage Loans included in the Mortgage Pool. The
rate of payments (including prepayments) on pools of mortgage loans is
influenced by a variety of economic, geographic, social and other factors. As is
the case with conventional fixed rate mortgage loans, adjustable rate mortgage
loans may be subject to a greater rate of principal prepayments or purchases due
to their conversion to fixed interest rate loans in a low interest rate
environment. For example, if prevailing interest rates fall significantly,
adjustable rate 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 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. In the event that [the Subservicers or] the Master
Servicer purchases Converting or Converted Mortgage Loans, a Mortgagor's
exercise of the conversion option will result in a pro rata distribution of the
principal portion thereof to the Certificateholders, as described herein.
Alternatively, to the extent Subservicers fail in their obligation to purchase
Converting Mortgage Loans and the Master Servicer does not purchase Converted
Mortgage Loans, as described herein, the Mortgage Pool will include fixed rate
Mortgage Loans, which will have the effect of limiting the extent to which the
Weighted Average Adjustable Pass-Through Rate can increase or decrease in
accordance with changes in the Index and accordingly may affect the yield to
Certificateholders.
The existence of Periodic Rate Caps, Lifetime Rate Caps and any
Lifetime Rate Floors also will affect the likelihood of prepayments resulting
from refinancing and the exercise of the conversion option. Although the
Mortgage Rates on the Mortgage Loans will adjust periodically, such increases
and decreases will be limited by the Periodic Rate Caps, Lifetime Rate Caps and
any Lifetime Rate Floors on each Mortgage Loan and will be based on the Index
(which may not rise and fall consistently with mortgage interest rates) plus the
related Note Margins (which may be different from the prevailing margins on
other mortgage loans). As a result, the Mortgage Rates on the Mortgage Loans at
any time may not equal the prevailing rates for other adjustable rate loans and
accordingly, the rate of prepayment may be lower or higher than would otherwise
be anticipated.
With respect to those Mortgage Loans having Lifetime Rate Floors,
if prevailing mortgage rates were to fall below the minimum Mortgage Rates, the
rate of prepayment on such
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Mortgage Loans may be expected to increase and such Mortgage Loans may prepay at
a rate higher than would otherwise be anticipated for adjustable rate mortgage
loans.
All of the Mortgage Loans are assumable under certain
circumstances if, in the sole judgment of the Master Servicer, the prospective
purchaser of a Mortgaged Property is creditworthy and the security for such
Mortgage Loan is not impaired by the assumption. The extent to which the
Mortgage Loans are assumed by purchasers of the Mortgaged Properties rather than
prepaid by the related mortgagors in connection with the sales of the Mortgaged
Properties will affect the weighted average life of the Certificates and may
result in a prepayment experience on the Mortgage Loans that differs from that
on other conventional mortgage loans.
The yield to maturity of the Certificates will depend on the rate
of payment of principal (including by reason of principal prepayments, purchases
of Mortgage Loans in the Mortgage Pool which are Converting Mortgage Loans or
Converted Mortgage Loans or in respect of which a breach of a representation or
warranty has occurred, and liquidation of defaulted Mortgage Loans) on the
Mortgage Loans, the price paid by the holders of Certificates and the Weighted
Average Adjustable Pass-Through Rate in effect from time to time. Such yield may
be adversely affected by a higher or lower than anticipated rate of prepayments
on the Mortgage Loans. Because the Weighted Average Adjustable Pass-Through Rate
at any time is the weighted average of the Net Mortgage Rates on the Mortgage
Loans, the Weighted Average Adjustable Pass Through Rate (and the yield on the
Certificates) will be reduced as a result of prepayments, liquidations and
purchases at a faster rate for Mortgage Loans having higher Net Mortgage Rates
as opposed to Mortgage Loans having lower Net Mortgage Rates. Because Mortgage
Loans having higher Net Mortgage Rates generally have higher Mortgage Rates,
such Mortgage Loans are generally more likely to be prepaid at a faster rate
under most circumstances than are Mortgage Loans having lower Net Mortgage
Rates.
The rate of default on the Mortgage Loans will also affect the
rate of payment of principal on the Mortgage Loans. In general, defaults on
mortgage loans are expected to occur with greater frequency in their early
years, although little data is available with respect to the rate of default on
adjustable rate mortgage loans. Increases in the monthly payments to an amount
in excess of the preceding monthly payment required at the time of origination
may result in a default rate higher than that on level payment mortgage loans.
Furthermore, the Mortgagor under each Mortgage Loan was qualified on the basis
of the Mortgage Rate in effect at origination. The repayment of such Mortgage
Loans will be dependent on the ability of the Mortgagor to make larger monthly
payments following adjustments of the Mortgage Rate. The rate of default on
Mortgage Loans which are equity refinance or limited documentation mortgage
loans may be higher than for other types of Mortgage Loans.
Prepayments, liquidations and purchases of the Mortgage Loans will
result in distributions to Certificateholders of principal amounts which would
otherwise be distributed over the remaining terms of the Mortgage Loans.
Furthermore, the rate of prepayments, defaults and liquidations on, or
conversions of, the Mortgage Loans will be affected by the general economic
condition of the region of the country where the related Mortgaged Properties
are located. The
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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
increasing unemployment or falling property values. See "Maturity and Prepayment
Considerations" in the Prospectus. Since the rates of payment of principal on
the Mortgage Loans will depend on future events and 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 rate of principal prepayments on the Certificates.
The amount of interest passed through to holders of the
Certificates will be reduced by shortfalls in collections of interest resulting
from full or partial principal prepayments or otherwise, which will not be
offset by a reduction in the Servicing Fees payable to the Master Servicer or
otherwise. See "Yield Considerations" in the Prospectus and "Description of the
Certificates--Distributions" herein for a discussion of the effect of principal
prepayments on the Mortgage Loans on the yield to maturity of the Certificates.
The timing of changes in the rate of prepayments, liquidations and
purchases 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 addition, the yield to maturity of the Certificates will depend
on the price paid by holders of the Certificates. If any Certificate is
purchased at initial issuance at a discount and the rate of prepayments on the
Mortgage Loans is lower than that originally anticipated, the purchaser's yield
to maturity will be lower than that assumed at the time of purchase. Conversely,
if any Certificate is purchased at initial issuance at a premium and the rate of
prepayments on the Mortgage Loans is higher than that originally anticipated,
the purchaser's yield to maturity will be lower than that assumed at the time of
purchase.
The first distribution on the Certificates reflecting an
adjustment to the scheduled monthly payments on a related Mortgage Loan will be
passed through to holders of Certificates on the second Distribution Date
following the date on which the adjustment to such Mortgage Rate was made.
Furthermore, adjustments in the Net Mortgage Rates are based on the Index as
reported 45 days prior to the Adjustment Date. Accordingly, the yield to
Certificateholders will be adjusted on a delayed basis relative to movements in
the Index. Although the Net Mortgage Rate of each Mortgage Loan will be adjusted
pursuant to the Index, such rate is subject to the Periodic Rate Cap and is also
limited by the Lifetime Rate Cap and any Lifetime Rate Floor applicable to such
Mortgage Loan. With respect to certain Mortgage Loans the difference between the
Net Mortgage Rate as of the Cut-off Date and the maximum Net Mortgage Rate will
be less than the Lifetime Rate Cap. Therefore, if the Index changes
substantially between Adjustment Dates, the Net Mortgage Rate may be lower than
if the Net Mortgage Rate could be adjusted based on the Index without such caps.
A number of factors affect the performance of the Index and may
cause the Index to move in a manner different from other indices. To the extent
that the Index may reflect changes in the general level of interest rates less
quickly than other indices, in a period of rising interest
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rates, increases in the yield to Certificateholders due to such rising interest
rates may occur later than that which would be produced by other indices, and in
a period of declining rates, the Index may remain higher than other market
interest rates which may result in a higher level of prepayments of Mortgage
Loans which adjust in accordance with the Index than mortgage loans which adjust
in accordance with other indices.
For additional considerations relating to the yield on the
Certificates, see "Yield Considerations" and "Maturity and Prepayment
Considerations" in the Prospectus.
POOLING AND SERVICING AGREEMENT
GENERAL
The Certificates will be issued, and the Mortgage Loans serviced
and administered, pursuant to a Pooling and Servicing Agreement (the "Pooling
and Servicing Agreement") dated as of __________ 1, 19__, among the Company, the
Master Servicer, and _____________________, as trustee (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 and
Servicing Agreement and the Certificates. The Trustee will appoint
____________________ to serve as Custodian in connection with the Certificates.
The Certificates will be transferable and exchangeable at the corporate trust
office of the Trustee, which will serve as Certificate Registrar and will be
responsible for making distributions on the Certificates and forwarding monthly
reports with respect thereto to the holders thereof. In addition to the
circumstances described in the Prospectus, the Company may terminate the Trustee
for cause under certain circumstances. The Company will provide a prospective or
actual Certificateholder without charge, on written request, a copy (without
exhibits) of the Pooling and Servicing Agreement. Requests should be addressed
to the President, WMC Secured Assets Corp., 6320 Canoga Avenue, Woodland Hills,
California 91367. See "Description of the Certificates," "Servicing of Mortgage
Loans" and "The Pooling Agreement" in the Prospectus.
THE MASTER SERVICER
[Name of Master Servicer] will act as master servicer (in such
capacity, the "Master Servicer") for the Certificates pursuant to the Pooling
and Servicing Agreement.
[Further disclosure as appropriate. See Version 1 for disclosure
for WMC Mortgage Corp.]
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES; SPREAD
The Servicing Fees for each Mortgage Loan are payable out of the
interest payments on such Mortgage Loan. The Servicing Fees in respect of each
Mortgage Loan will accrue at
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____% per annum (the "Servicing Fee Rate") on the outstanding principal balance
of each Mortgage Loan. The Master Servicer is obligated to pay certain ongoing
expenses associated with the Trust Fund and incurred by the Master Servicer in
connection with its responsibilities under the Pooling and Servicing Agreement,
including the expenses of the Letter of Credit and any substitute credit support
and the fees of the Trustee. 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 for
information regarding expenses payable by the Master Servicer.
Pursuant to the terms of the Pooling and Servicing Agreement, the
Master Servicer will be obligated to remit to the Company or its designee, a
portion of the interest collected on each Mortgage Loan (the "Spread"). The rate
at which the Spread on each Mortgage Loan accrues
will be equal to ____% per annum.
TERMINATION
The circumstances under which the obligations created by the
Pooling and Servicing Agreement will terminate in respect of the Certificates
are described in "Description of the Certificates--Termination; Retirement of
Certificates" in the Prospectus. The Master Servicer or the Company will have
the option (i) to purchase all remaining Mortgage Loans and other assets in the
Trust Fund, thereby effecting early retirement of the Certificates or (ii) to
purchase in whole, but not in part, the Certificates, but either such option
will not be exercisable until such time as the aggregate principal balance of
the Mortgage Loans as of the Distribution Date on which the purchase proceeds
are to be distributed to the Certificateholders is less than __% of the
aggregate principal balance of the Mortgage Loans as of the Cut-off Date. Any
such purchase of Mortgage Loans and other assets of the Trust Fund shall be made
at a price equal to the aggregate principal balance of all the Mortgage Loans
(or the fair market value of the related underlying Mortgaged Properties with
respect to defaulted Mortgage Loans as to which title to such Mortgaged
Properties has been acquired if such fair market value is less than such unpaid
principal balance) (net of any unreimbursed Advance attributable to principal),
together with one month's interest on such aggregate amount at the then
applicable Weighted Average Adjustable Pass-Through Rate.
Upon presentation and surrender of the Certificates in connection
with the termination of the Trust Fund or a purchase of Certificates under the
circumstances described above, the holders of the Certificates will receive, in
proportion to their respective Percentage Interests, an amount equal to the sum
of the principal balances of the Mortgage Loans plus one month's accrued
interest thereon at the then applicable Weighted Average Adjustable Pass-Through
Rate.
DESCRIPTION OF CREDIT ENHANCEMENT
GENERAL
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All of the Mortgage Loans are the subject of credit support
coverage provided by the Letter of Credit. In addition, each Mortgage Loan is
covered by a Primary Hazard Insurance Policy as described under "Primary
Mortgage Insurance, Hazard Insurance; Claims Thereunder" in the Prospectus. See
also "Description of the Mortgage Pool--Primary Mortgage Insurance" herein.
LETTER OF CREDIT
The Letter of Credit Bank will issue the Letter of Credit to the
Trustee for the benefit of the holders of the Certificates. Subject to the
limitations described below, the Letter of Credit will be available to cover
Defaulted Mortgage Losses, Special Hazard Losses, Fraud Losses and Bankruptcy
Losses. The maximum amount available to be drawn under the Letter of Credit with
respect to all losses will initially be equal to $_________ (the initial
"Available Amount") which is equal to approximately ____% of the aggregate
principal balance of the Mortgage Loans as of the Cut-off Date. The Available
Amount at any time will be reduced by any amounts previously drawn under the
Letter of Credit (net of any amounts received or collected by the Master
Servicer following each respective draw as subsequent recoveries on the Mortgage
Loans with respect to which such draws were made and, if appropriate, such draws
were reimbursed to the Letter of Credit Bank). The Available Amount will be
reinstated with respect to the subsequent recoveries described in the preceding
sentence, however in no event will the Available Amount be reinstated to an
amount in excess of the initial Available Amount. The Available Amount under the
Letter of Credit (if the Letter of Credit is extended in accordance with its
terms) is also subject to reduction pursuant to the terms of the Pooling and
Servicing Agreement annually beginning on the tenth anniversary of the Cut-off
Date and each anniversary thereafter, such that, beginning with the fourteenth
anniversary of the Cut-off Date and on each anniversary thereafter, the
Available Amount will not exceed ____% of the aggregate outstanding principal
balance of the Mortgage Loans, provided that such scheduled reductions will not
reduce the Available Amount below three times the principal balance of the
largest single Mortgage Loan outstanding on such anniversary, and further
provided that the Available Amount will not be reduced in accordance with the
preceding sentence if delinquency rates and losses on the Mortgage Loans exceed
certain levels as specified by the Rating Agency as set forth in the Pooling and
Servicing Agreement. The Amount Available may be further reduced from time to
time by such amounts as the Master Servicer may determine and direct the
Trustee, provided the then current rating of the Certificates is not adversely
affected.
Notwithstanding the foregoing, the maximum amount available under
the Letter of Credit in connection with Fraud Losses (the "Fraud Loss Amount")
shall initially be equal to $___________. As of any date of determination after
the Cut-off Date the Fraud Loss Amount shall equal (X) prior to the first
anniversary of the Cut-off Date an amount equal to ____% of the aggregate
principal balance of all of the Mortgage Loans as of the Cut-off Date minus the
aggregate amount of draws made under the Letter of Credit with respect to Fraud
Losses up to such date of determination, and (Y) from the first through fifth
anniversary of the Cut-off Date, an amount equal to (1) the lesser of (a) the
Fraud Loss Amount as of the most recent anniversary of the Cut-off Date and (b)
____% of the aggregate principal balance of all of the Mortgage Loans
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as of the most recent anniversary of the Cut-off Date minus (2) the aggregate
amount of draws made under the Letter of Credit with respect to Fraud Losses
since the most recent anniversary of the Cut-off Date up to such date of
determination. After the fifth anniversary of the Cut-off Date the Fraud Loss
Amount shall be zero and no draws shall be made under the Letter of Credit
with respect to Fraud Losses.
The maximum amount available under the Letter of Credit in respect
of Special Hazard Losses (the "Special Hazard Amount") will equal $__________
less the sum of (A) any amounts drawn under the Letter of Credit in respect of
Special Hazard Losses (to the extent that such amounts do not exceed the lesser
of the cost of repair or replacement of the related Mortgaged Properties) and
(B) the Adjustment Amount. The Adjustment Amount on each anniversary of the
Cut-off Date will be equal to the amount, if any, by which the Special Hazard
Amount, without giving effect to the deduction of the Adjustment Amount for such
anniversary, exceeds the greater of (i) 1% (or, if greater than 1%, the highest
percentage of Mortgage Loans by principal balance in any California zip code
area) times the aggregate principal balance of all of the Mortgage Loans in the
Mortgage Pool on such anniversary and (ii) twice the principal balance of the
single Mortgage Loan in the Mortgage Pool having the largest principal balance.
As used in this Prospectus Supplement, "Special Hazard Losses" has the same
meaning set forth in the Prospectus except that Special Hazard Losses will not
include and the Letter of Credit will not cover losses occasioned by war, civil
insurrection, certain governmental actions, nuclear reaction and certain other
risks.
As of any date of determination prior to the first anniversary of
the Cut-off Date, the maximum amount available under the Letter of Credit in
respect of Bankruptcy Losses (the "Bankruptcy Amount") will equal $__________
less the sum of any amounts drawn under the Letter of Credit for such losses up
to such date of determination. As of any day of determination on or after the
first anniversary of the Cut-off Date, the Bankruptcy Amount will equal the
excess, if any, of (1) the lesser of (a) the Bankruptcy Amount as of the
business day next preceding the most recent anniversary of the Cut-off Date (the
"Relevant Anniversary") and (b) an amount calculated pursuant to the terms of
the Pooling and Servicing Agreement, which amount as calculated will provide for
a reduction in the Bankruptcy Amount, provided that delinquency rates and losses
on all of the Mortgage Loans do not exceed certain levels as set forth in the
Pooling and Servicing Agreement, over (2) the aggregate amount of draws made
under the Letter of Credit since the Relevant Anniversary in connection with
Bankruptcy Losses. The Bankruptcy Amount and the related automatic reductions
described above may be reduced or modified upon written confirmation from the
Rating Agency that such reduction or modification will not adversely affect the
then current rating assigned to the Certificates by such Rating Agency. Such a
reduction or modification may adversely affect the coverage provided by the
Letter of Credit with respect to Bankruptcy Losses.
[Described manner in which payments will be made under the Letter
of Credit.] See "Description of Credit Enhancement--Letter of Credit" in the
Prospectus. However, the Trustee shall not make such draws under the Letter of
Credit in connection with a Bankruptcy Loss so long as the Master Servicer has
notified the Trustee in writing that the Master Servicer is diligently
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pursuing any remedies that may exist in connection with the representations and
warranties made regarding the related Mortgage Loan and either (A) the related
Mortgage Loan is not in default with regard to payments due thereunder or (B)
delinquent payments of principal and interest under the related Mortgage Loan
and any premiums on any applicable Primary Hazard Insurance Policy and any
related escrow payments in respect of such Mortgage Loan are being advanced on a
current basis by the Master Servicer [or a Subservicer].
Any Mortgage Loan the unpaid principal balance of which is paid
pursuant to a draw under the Letter of Credit will be assigned to the Company
and will no longer be subject to the Pooling and Servicing Agreement. Any
subsequent recoveries with respect to such Mortgage Loans will be paid to the
Company and, following notice and, if appropriate, reimbursement of such draw to
the Letter of Credit Bank, the Available Amount under the Letter of Credit (and
the Special Hazard Amount, Fraud Loss Amount or Bankruptcy Amount, if
applicable) will be reinstated to the extent of such recovery.
The Master Servicer, in lieu of maintaining the Letter of Credit,
may reduce the coverage thereunder (including accelerating the manner in which
such coverage is reduced pursuant to the related automatic reductions),
terminate such coverage or obtain and maintain alternate forms of credit support
(including, but not limited to, other letters of credit, insurance policies,
surety bonds, reserve funds, and secured or unsecured corporate guaranties),
with respect to Defaulted Mortgage Losses, Special Hazard Losses, Fraud Losses
and Bankruptcy Losses, provided that prior to any such reduction, termination or
substitution the Master Servicer shall have obtained written confirmation from
the Rating Agency that such reduction, termination or substitution will not
adversely affect the then current rating assigned to the Certificates by such
Rating Agency and shall provide a copy of each confirmation to the Trustee. In
the event that the long-term debt obligations of the Letter of Credit Bank are
at any time downgraded by the Rating Agency, the Company may request the Master
Servicer to obtain alternate forms of credit support, in accordance with the
preceding sentence, but the Master Servicer is under no obligation to do so. In
lieu of making a draw under the Letter of Credit for Defaulted Mortgage Losses,
Special Hazard Losses, Fraud Losses or Bankruptcy Losses as provided above, the
Master Servicer, at its sole option, may pay the amount otherwise required to be
drawn, in which case the amount so paid will reduce the related coverage under
the Letter of Credit.
As to any Mortgage Loan which is delinquent in payment by 90 days
or more, the Master Servicer may, at its sole option, purchase such Mortgage
Loan at a price equal to 100% of the unpaid principal balance thereof plus all
accrued and unpaid interest thereon through the last day of the month in which
such purchase occurs. To the extent that the Master Servicer subsequently
experiences losses with respect to such purchased Mortgage Loans which would
have been covered by the Letter of Credit had such Mortgage Loans remained in
the Trust Fund, the Available Amount (and the Special Hazard Amount, Fraud Loss
Amount or Bankruptcy Amount, to the extent that such losses constitute Special
Hazard Losses, Fraud Losses or Bankruptcy Losses) will be reduced by an amount
equal to the entire amount of such losses.
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The Letter of Credit will expire on ___________, 19__ unless
earlier terminated or extended in accordance with its terms. The Letter of
Credit contains provisions to the effect that on or before the first day of the
sixth month immediately preceding the expiration date a request may be made to
extend the expiration date. It is within the Letter of Credit Bank's sole
discretion whether to agree to such an extension. If, as of the date 30 days
prior to the expiration date, or the expiration date thereof as so extended, a
replacement Letter of Credit or alternate form of credit support has not been
delivered to the Trustee, then, pursuant to the terms of the Pooling and
Servicing Agreement, the entire remaining amount of the Letter of Credit will be
drawn by the Trustee prior to such expiration date. In that event, the amount so
paid will be held by the Trustee in the form of a reserve fund held outside of
the Trust Fund (but pledged to the Trustee and held by it in trust for the
benefit of the Certificateholders), pending the substitution of any other form
of credit support therefor, and will be applied in the same manner as described
herein regarding draws under the Letter of Credit.
LETTER OF CREDIT BANK
The Letter of Credit will be issued by the Letter of Credit Bank,
which will be the ___________________, a ___________________. _______________
principal executive offices are located at ________________________________.
____________________ is engaged in a broad range of banking and
financial services activities, including deposit-taking, lending and leasing,
securities brokerage services, investment management, investment banking,
capital markets activities and foreign exchange
transactions.
[Additional disclosure as appropriate.]
The information set forth in the preceding paragraphs concerning
the Letter of Credit Bank has been provided by the Letter of Credit Bank as of
the date hereof.
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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 Certificates. This discussion is directed solely to a holder of a
Certificate as a capital asset within the meaning of Section 1221 of the
Internal Revenue Code of 1986 (the "Code") and does not purport to discuss all
federal income tax consequences that may be applicable to particular categories
of investors, some of which (such as banks, insurance companies and foreign
investors) may be subject to special rules. Further, the authorities on which
this discussion, and the opinion referred to below, are based are subject to
change or differing interpretations, which could apply retroactively. Taxpayers
and preparers of tax returns should be aware that under applicable Treasury
regulations a provider of advice on 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. A holder of a Certificate
is advised to consult its own tax advisors concerning the federal, state, local
or other tax consequences to it of the purchase, ownership and disposition of a
Certificate.
GRANTOR TRUST
CLASSIFICATION OF THE TRUST FUND
Upon issuance of the Certificates, Thacher Proffitt &
Wood, counsel to the Depositor, will deliver its opinion to the effect that,
assuming compliance with all provisions of the Pooling and Servicing Agreement,
the Trust Fund will be classified as a grantor trust under subpart E, part I of
subchapter J of the Code and not as an association taxable as a corporation or
as a partnership. Accordingly, a holder of a Certificate generally will be
treated as the owner of an undivided interest in the Mortgage Loans and other
assets held as part of the trust fund in which the Certificates evidence an
undivided interest.
CHARACTERIZATION OF THE INVESTMENT IN THE CERTIFICATES
The Certificates will represent interests in (i)
"qualifying real property loans" within the meaning of Section 593(d) of the
Code; (ii) "loans secured by an interest in real
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property" within the meaning of Section 7701(a)(19)(C) of the Code; (iii)
"obligations (including any participation or certificate of beneficial ownership
therein) which . . . are principally secured by an interest in real property"
within the meaning of Section 860G(a)(3)(A) of the Code; and (iv) "real estate
assets" within the meaning of Section 856(c)(5)(A) of the Code generally in the
same proportion that the assets of the Trust Fund would be so treated. In
addition, interest on the 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.
TAXATION OF OWNERS OF THE CERTIFICATES
A holder of a Certificate generally will be required to
report on its federal income tax returns its share of the entire income from the
Mortgage Loans (including amounts used to pay reasonable servicing fees and
other expenses) in accordance with the holder's normal method of accounting and
will be entitled to deduct its share of any such reasonable servicing fees and
other expenses. Because of market discount or premium, the amount includible in
income on account of the 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 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 a
holder of a Certificate that is subject to the limitations of either Section 67
or Section 68 of the Code may be substantial. Further, a holder of a Certificate
(other than corporations) subject to the alternative minimum tax may not deduct
miscellaneous itemized deductions in determining such holder's alternative
minimum taxable income.
MARKET DISCOUNT. A holder of a Certificate may be subject
to the market discount rules of Sections 1276 through 1278 of the Code to the
extent an interest in the Mortgage Loans is considered to have been purchased at
a "market discount", that is, at a purchase price less than its adjusted issue
price. 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 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 the Mortgage Loans that is received by (or, in the case of
an accrual basis holder of a Certificate, due to) the Trust Fund in that month.
A holder of a Certificate 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. If made, such election will apply to all market
discount bonds acquired by such holder during or after the first taxable year
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to which such election applies. In the absence of such an election, it may be
necessary to accrue such discount under a proportionate method. In addition,
Sections 1271 to 1275 of the Code addressing the treatment of debt instruments
issued with original issue discount (the "OID Regulations") would permit a
holder of a Certificate to elect to accrue all interest, discount (including DE
MINIMIS market or original issue discount) and premium in income as interest,
based on a constant yield method. If such an election were made with respect to
the Mortgage Loans with market discount, such holder 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 holder acquires
during the taxable year of the election or thereafter, and possibly previously
acquired instruments. Similarly, a holder that made this election for a
Certificate 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 holder owns or acquires. Each of these elections to
accrue interest, discount and premium with respect to a Certificate on a
constant yield method or as interest is irrevocable.
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 Conference Committee Report (the
"Committee Report") accompanying the Tax Reform Act of 1986 will apply. Under
those rules, in each accrual period market discount on the Mortgage Loans should
accrue, at the holder's option: (i) on the basis of a constant yield method, or
(ii) 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. 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 the Mortgage Loans purchased at a discount in the secondary
market.
Market discount with respect to the Mortgage Loans
generally will be considered to exceed a DE MINIMIS amount if it is greater than
0.25% of the stated redemption price of the Mortgage Loans multiplied by the
number of complete years to maturity remaining after the date of their 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 used, if any. If market discount is treated as DE MINIMIS
under the foregoing rule, it appears that such market discount 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 market 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 Mortgage Loans.
Further, 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
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<PAGE>
market discount not yet includible in income, unless an election has been made
to report market discount currently as it accrues.
PREMIUM. If a holder of a Certificate is treated as
acquiring the Mortgage Loans at a premium, that is, at a price in excess of
their principal amount, such holder may elect under Section 171 of the Code to
amortize using a constant yield method the portion of such premium allocable to
the Mortgage Loans that were 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 the
Mortgage Loans if an amortization election is not made should be allowed as a
deduction when a principal payment is made (or, for a holder using the accrual
method of accounting, when such payments of stated redemption price are due). A
significant portion of the Mortgage Loans were originated prior to September 28,
1985. Accordingly, such an election shall not be available for premium
attributable to such Mortgage Loans.
SALES OF CERTIFICATES
Except as described below, any gain or loss, recognized
on the sale or exchange of a Certificate, generally will be capital gain or
loss, and will be equal to the difference between the amount realized on the
sale of a Certificate and its adjusted basis. The adjusted basis of a
Certificate generally will equal its cost, increased by any income (including
original issue discount and market discount income) recognized by the seller and
reduced (but not below zero) by any previously reported losses, amortized
premium and distributions with respect to the Certificate. The Code as of the
date of this Private Placement Memorandum provides for a top marginal tax rate
applicable to ordinary income of individuals of 39.6% while maintaining a
maximum marginal rate for the long-term gains of individuals of 28%. There is no
such rate differential for corporations. In addition, the distinction between a
capital gain or loss and ordinary income or loss may be relevant for other
purposes.
Gain or loss from the sale of a 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 any 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 any
Certificate 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 Internal Revenue Service
(the "IRS"), at the time the taxpayer enters into the conversion transaction,
subject to appropriate reduction for prior inclusion
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<PAGE>
of interest and other 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 limitation on 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 Trustee will furnish to the holders of the
Certificates with each distribution a statement setting forth the amount of such
distribution allocable to principal on the Mortgage Loans and to interest
thereon at the Pass-Through Rate. In addition, the Trustee will furnish, within
a reasonable time after the end of each calendar year, to each person who was a
holder of a Certificate at any time during such year, information regarding the
amount of servicing compensation received by the Master Servicer and Trustee and
such other customary factual information as it deems necessary or desirable to
enable each such person to prepare its tax returns and will furnish comparable
information to the IRS as and when required by law to do so. There is no
assurance the IRS will agree with the Trustee's information reports of such
items of income and expense. Neither the Depositor nor its affiliates will have
any responsibility with respect to the foregoing.
BACKUP WITHHOLDING
Payments of interest and principal, as well as payments
of proceeds from the sale of a Certificate, 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 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
A holder of a Certificate 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 Certificate will not be subject to United States federal income
or withholding tax in respect of a distribution on the Certificate attributable
to Mortgage Loans originated after July 18, 1984, provided that such holder
complies to the extent necessary with certain identification requirements
(including delivery of a statement, signed by such holder under penalties of
perjury, certifying that such holder is not a United States person and providing
the name and address of such holder). However, such a holder of a Certificate
will be subject to United States federal income or withholding tax in respect of
distributions of interest on the Certificate attributable to Mortgage Loans were
originated prior to July 18, 1984. A significant portion of the Mortgage Loans
were originated prior to that date and will be subject
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generally to United States withholding tax in the absence of an applicable tax
treaty exemption. Accordingly, an investment in Certificates may not be suitable
for certain foreign investors.
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, or an estate or trust whose income from sources
without the United States is includible in gross income for United States
federal income tax purposes regardless of its connection with the conduct of a
trade or business within the United States. To the extent such 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.
To the extent that interest on the Certificates would be
exempt under Section 871(h)(1) of the Code from U.S. withholding tax, and a
Certificate is not held in connection with a holder's trade or business in the
United States, a Certificate will not be subject to U.S. estate taxes in the
estate of non-resident alien individual.
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in the Underwriting
Agreement dated ______________, 19__ the Underwriter has agreed to purchase and
the Company has agreed to
sell to the Underwriter the Certificates.
The Underwriting Agreement provides that the obligation of the
Underwriter to pay for and accept delivery of the Certificates is subject to,
among other things, the receipt of certain legal opinions and to the conditions,
among others, that no stop order suspending the effectiveness of the Company's
Registration Statement shall be in effect, and that no proceedings for such
purpose shall be pending before or threatened by the Securities and Exchange
Commission.
The distribution of the Certificates by the Underwriter may be
effected from time to time in one or more negotiated transactions, or otherwise,
at varying prices to be determined at the time of sale. Proceeds to the Company
from the sale of the Certificates, before deducting expenses payable by the
Company, will be _____% of the aggregate principal balance of the Certificates
plus accrued interest thereon from the Cut-off Date. The Underwriter may effect
such transactions by selling the Certificates to or through dealers, and such
dealers may receive compensation in the form of underwriting discounts,
concessions or commissions from the Underwriter for whom they act as agent. In
connection with the sale of the Certificates, the Underwriter may be deemed to
have received compensation from the Company in the form of underwriting
compensation. The Underwriter and any dealers that participate with the
Underwriter in the distribution of the Certificates may be deemed to be
underwriters and any profit
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on the resale of the Certificates positioned by them may be deemed to be
underwriting discounts and commissions under the Securities Act of 1933.
The Underwriting Agreement provides that the Company will
indemnify the Underwriter, and under limited circumstances the Underwriter will
indemnify the Company, against certain civil liabilities under the Securities
Act of 1933, or contribute to payments required
to be made in respect thereof.
There can be no assurance that a secondary market for the
Certificates will develop or, if it does develop, that it will continue. The
primary source of information available to investors concerning the Certificates
will be the monthly statements discussed in the Prospectus under "Description of
the Certificates--Reports to Certificateholders," which will include information
as to the outstanding principal balance of the Certificates and the status of
the applicable form of credit enhancement. There can be no assurance that any
additional information regarding the Certificates will be available through any
other source. In addition, the Company is not aware of any source through which
price information about the Certificates will be generally available on an
ongoing basis. The limited nature of such information regarding the Certificates
may adversely affect the liquidity of the Certificates, even if a secondary
market for the Certificates becomes available.
LEGAL OPINIONS
Certain legal matters relating to the Certificates will be passed
upon for the Company by _____________________ and for the Underwriter by
_________________________.
RATING
It is a condition to the issuance of the Certificates that they be
rated not lower than "___" by _________________________ ___________.
The ratings of _______ on mortgage pass-through certificates
address the likelihood of the receipt by certificateholders of all distributions
on the underlying mortgage loans to which they are entitled. _______ 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. _______ ratings on
pass-through certificates do not represent any assessment of the Master
Servicer's [or the related Subservicer's] ability to purchase Converting
Mortgage Loans, or the Master Servicer's ability to purchase Converted Mortgage
Loans. In the event that neither the related Subservicer nor the Master Servicer
purchases a Converting or Converted Mortgage Loan, investors might suffer a
lower than anticipated yield. The rating does not address the possibility that
Certificateholders might suffer a lower than anticipated yield.
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<PAGE>
The Company has not requested a rating on the Certificates by any
rating agency other than _______. However, there can be no assurance as to
whether any other rating agency will rate the 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
rating assigned to the Certificates by _______.
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 rating
initially assigned to the Certificates is subsequently lowered for any reason,
no person or entity is obligated to provide any additional support or credit
enhancement with respect to the Certificates.
LEGAL INVESTMENT
The Certificates will constitute "mortgage related
securities" for purposes of the Secondary Mortgage Market Enhancement Act of
1984 ("SMMEA") so long as they are rated in at least the second highest rating
category by one of the Rating Agencies, and, as such, are legal investments for
certain entities to the extent provided in SMMEA. SMMEA provides, however, that
states could override its provisions on legal investment and restrict or
condition investment in mortgage related securities by taking statutory action
on or prior to October 3, 1991. Certain states have enacted legislation which
overrides the preemption provisions of SMMEA.
The Company makes no representations as to the proper
characterization of the Certificates for legal investment or other purposes, or
as to the ability of particular investors to purchase the Certificates under
applicable legal investment restrictions. These uncertainties may adversely
affect the liquidity of the Certificates. Accordingly, all institutions whose
investment activities are subject to legal investment laws and regulations,
regulatory capital requirements or review by regulatory authorities should
consult with their legal advisors in determining whether and to what extent the
Certificates constitutes a legal investment or is subject to investment, capital
or other restrictions.
See "Legal Investment Matters" in the Prospectus.
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<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 Underwriter. This Prospectus Supplement and the Prospectus do not
constitute an offer to sell, or a solicitation of an offer to buy, the
securities offered hereby to anyone in any jurisdiction in which the person
making such offer or solicitation is not qualified to do so or to anyone to whom
it is unlawful to make any such offer or solicitation. Neither the delivery of
this Prospectus Supplement and the Prospectus nor any sale made hereunder shall,
under any circumstances, create an implication that information herein or
therein is correct as of any time since the date of this Prospectus Supplement
or the Prospectus.
-----------------
TABLE OF CONTENTS
PAGE
Prospectus Supplement
Summary.............................................. S-
Description of the Mortgage Pool..................... S-
Description of the Certificates...................... S-
Certain Yield and Prepayment
Considerations.................................. S-
Pooling and Servicing Agreement...................... S-
Federal Income Tax
Consequences.................................... S-
Method of Distribution............................... S-
Legal Opinions....................................... S-
Rating............................................... S-
Legal Investment..................................... S-
Prospectus
Summary of Prospectus................................
Risk Factors.........................................
The Mortgage Pools...................................
Servicing of Mortgage Loans..........................
Description of the Certificates......................
Subordination........................................
Description of Credit Enhancement....................
Purchase Obligations.................................
Primary Mortgage Insurance, Hazard
Insurance; Claims Thereunder....................
The Company..........................................
WMC Mortgage Corp....................................
The Pooling Agreement................................
Yield Considerations.................................
Maturity and Prepayment
Considerations..................................
Certain Legal Aspects of Mortgage
Loans ..........................................
Federal Income Tax
Consequences....................................
State and Other Tax Consequences.....................
ERISA Considerations.................................
Legal Investment Matters.............................
Use of Proceeds......................................
Methods of Distribution..............................
Legal Matters........................................
Financial Information................................
Rating...............................................
Index of Principal Definitions.......................
================================================================================
WMC SECURED
ASSETS CORP.
$_________________
MORTGAGE PASS-THROUGH
CERTIFICATES
SERIES 199_-____
-----------
PROSPECTUS SUPPLEMENT
-----------
------------------------------
__________, 19__
================================================================================
<PAGE>
SUBJECT TO COMPLETION DATED JULY 23, 1998
PROSPECTUS SUPPLEMENT [VERSION 3]
(TO PROSPECTUS DATED ______________ 199_)
$------------
---------------------
---------------------
MASTER SERVICER AND SELLER
---------------------
COMPANY
_________________ TRUST SERIES 199_-_
MORTGAGE-BACKED NOTES, SERIES 199_-_
The ________________ Trust Series 199_-_ (the "Issuer") will be formed
pursuant to a Trust Agreement to be dated as of ___, 199_ between _____________
(the "Company") and __________________, the Owner Trustee. The Issuer will issue
$___________ aggregate principal amount of Mortgage-Backed Notes, Series 199_-_
(the "Notes"). The Notes will be issued pursuant to an Indenture to be dated as
of ____, 199_, between the Issuer and ________________________, the Indenture
Trustee.
PROSPECTIVE INVESTORS SHOULD REVIEW THE INFORMATION SET FORTH UNDER
"RISK FACTORS" ON PAGE S-__ OF THIS PROSPECTUS SUPPLEMENT AND THE INFORMATION
SET FORTH UNDER "RISK FACTORS" ON PAGE __ OF THE PROSPECTUS FOR A DISCUSSION OF
MATERIAL RISKS AFFECTING INVESTMENT IN THE SECURITIES BEFORE PURCHASING ANY OF
THE NOTES.
The Notes will represent indebtedness of the trust fund (the "Trust
Fund") created by the Trust Agreement. The Trust Fund will consist of
adjustable-rate, conventional, one- to four-family, first lien mortgage loans
(the "Mortgage Loans"). In addition, the Notes will have the benefit of an
irrevocable and unconditional financial guaranty insurance policy (the "Note
Insurance Policy") issued by __________________ (the "Note Insurer") as
described under "Description of the Notes--Note Insurance Policy" herein.
(CONTINUED ON FOLLOWING PAGE)
--------------------------
THE ASSETS PLEDGED TO SECURE THE NOTES AND PROCEEDS FROM THE NOTE
INSURANCE POLICY ARE THE SOLE SOURCE OF PAYMENTS ON THE NOTES. THE
NOTES WILL REPRESENT OBLIGATIONS SOLELY OF THE ISSUER AND WILL NOT
REPRESENT AN INTEREST IN OR OBLIGATION OF THE COMPANY, THE MASTER
SERVICER, THE OWNER TRUSTEE, THE INDENTURE TRUSTEE OR ANY OF THEIR
AFFILIATES, OTHER THAN THE ISSUER. NEITHER THE NOTES NOR THE
UNDERLYING MORTGAGE LOANS ARE INSURED OR GUARANTEED BY ANY
GOVERNMENTAL AGENCY OR INSTRUMENTALITY.
THESE NOTES 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.
--------------------------
There is currently no secondary market for the Notes.
______________________ (together, the "Underwriters") intend to make a secondary
market in the Notes, but are not obligated to do so. There can be no assurance
that a secondary market for the Notes will develop or, if it does develop, that
it will continue or provide Noteholders with sufficient liquidity of investment.
The Notes will not be listed on any securities exchange.
The Notes will be purchased from the Company by the Underwriters and
will be offered by the Underwriters from time to time to the public in
negotiated transactions or otherwise at varying prices to be determined at the
time of sale. The proceeds to the Company from the sale of the Notes are
expected to be approximately $____________________ before the deduction of
expenses payable by the Company estimated to be approximately
$-----------------.
The Notes 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 Notes will be made on or about __________ 199_ in
book-entry form through the Same Day Funds Settlement System of The Depository
Trust Company as discussed herein, against payment therefor in immediately
available funds.
-------------------------------------
THE UNDERWRITERS ARE ACTING AS CO-LEAD MANAGERS IN CONNECTION WITH
ALL ACTIVITIES RELATING TO THIS OFFERING.
The date of this Prospectus Supplement is ___ __, 199_
<PAGE>
(CONTINUED FROM PREVIOUS PAGE)
The interest rates on the Mortgage Loans will be subject to monthly,
semi-annual or annual adjustment commencing after the related Initial Period (as
defined herein) based on the related Index (as defined herein) and the
respective Gross Margins described herein, subject to certain periodic and
lifetime limitations as described more fully herein.
The Mortgage Loans were generally underwritten in accordance with the
underwriting standards described in "Description of the Mortgage
Pool--Underwriting" and Appendix A to this Prospectus Supplement. See also "Risk
Factors--Underwriting Standards" in this Prospectus Supplement. Approximately
____% of the Mortgage Loans, by aggregate principal balance as of the Cut-off
Date, are secured by Mortgaged Properties in California. See "Risk
Factors--Delinquencies and Potential Delinquencies" in this Prospectus
Supplement.
[Approximately ___% (by principal balance as of the Cut-off Date) of
the Mortgage Loans will be "sub-prime" mortgage loans as described herein. 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
Note Insurance Policy or Overcollateralization, may affect the yield to maturity
of the Notes.]
[The Mortgage Loans will be "sub-prime" mortgage loans. The 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
the Subordinate Certificates, may affect the yield to maturity of the Senior
Certificates.]
Payments on the Notes will be made on the __th day of each month or, if
such day is not a business day, then on the next business day, commencing in
_____ 199_ (each, a "Payment Date"). As described herein, interest will accrue
on the Notes at a floating rate (the "Note Interest Rate") equal, on the first
Payment Date, to ____%, and thereafter, equal to the lesser of (i) One-Month
LIBOR (as defined herein) plus ____% per annum, except as described herein, and
(ii) the Available Funds Interest Rate (as defined herein). See "Description of
the Notes--Interest Payments on the Notes" herein. As described herein, interest
payable with respect to each Payment Date will accrue on the basis of a 360-day
year and the actual number of days elapsed during the period commencing on the
Payment Date immediately preceding the month in which such Payment Date occurs
and ending on the calendar day immediately preceding such Payment Date, except
with respect to the first Payment Date, which has an accrual period from ___ __,
199_ to ----- ___, 199_, and will be based on the Note Principal Balance thereof
and the then-applicable Note Interest Rate thereof, as reduced by certain
interest shortfalls. Payments in respect of principal of the Notes will be made
as described herein under "Description of the Notes--Priority of Payment."
The Notes may be redeemed in whole, but not in part, by the Issuer on
any Payment Date on or after the earlier of (i) the Payment Date on which the
aggregate Principal Balance (as defined herein) of the Mortgage Loans is less
than or equal to 25% of the aggregate Principal Balance of the Mortgage Loans as
of the Cut-off Date or (ii) the Payment Date occurring in ____ 20__. See
"Description of the Notes--Optional Redemption" herein.
The Notes initially will be registered in the name of Cede & Co., as
nominee of The Depository Trust Company ("DTC"), as further described herein.
The interests of beneficial owners of the Notes will be represented by book
entries on the records of DTC and the participating members of DTC. Definitive
certificates will be available for the Notes only under the limited
circumstances described herein. See "Description of the Notes--Book-Entry Notes"
herein.
It is a condition of the issuance of the Notes that they be rated "AAA"
by Standard & Poor's Ratings Services ("S&P") and "Aaa" by Moody's Investors
Service, Inc. ("Moody's").
THE YIELD TO MATURITY ON THE NOTES WILL DEPEND ON, AMONG OTHER THINGS,
THE RATE AND TIMING OF PRINCIPAL PAYMENTS (INCLUDING PREPAYMENTS, REPURCHASES,
DEFAULTS, LIQUIDATIONS AND NEGATIVE AMORTIZATION) ON THE MORTGAGE LOANS. THE
MORTGAGE LOANS GENERALLY MAY BE PREPAID IN FULL OR IN PART AT ANY TIME; HOWEVER,
PREPAYMENT MAY SUBJECT THE MORTGAGOR TO A PREPAYMENT CHARGE WITH RESPECT TO
APPROXIMATELY HALF OF THE MORTGAGE LOANS. IN ADDITION, THE YIELD ON THE NOTES
WILL BE SENSITIVE TO FLUCTUATIONS IN THE LEVEL OF ONE-MONTH LIBOR, WHICH MAY
VARY SIGNIFICANTLY OVER TIME. SEE "CERTAIN YIELD AND PREPAYMENT CONSIDERATIONS"
HEREIN AND "YIELD AND PREPAYMENT CONSIDERATIONS" IN THE PROSPECTUS.
THE NOTES OFFERED BY THIS PROSPECTUS SUPPLEMENT CONSTITUTE PART OF A
SEPARATE SERIES OF NOTES BEING OFFERED PURSUANT TO THE COMPANY'S PROSPECTUS
DATED ______, 199_, OF WHICH THIS PROSPECTUS SUPPLEMENT IS A PART AND WHICH
ACCOMPANIES THIS PROSPECTUS SUPPLEMENT. THE PROSPECTUS CONTAINS IMPORTANT
INFORMATION REGARDING THIS OFFERING WHICH IS NOT CONTAINED HEREIN, AND
PROSPECTIVE INVESTORS ARE URGED TO READ THE PROSPECTUS AND THIS PROSPECTUS
SUPPLEMENT IN FULL. SALES OF THE NOTES MAY NOT BE CONSUMMATED UNLESS THE
PURCHASER HAS RECEIVED BOTH THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS.
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<PAGE>
UNTIL NINETY DAYS AFTER THE DATE OF THIS PROSPECTUS SUPPLEMENT, ALL
DEALERS EFFECTING TRANSACTIONS IN THE NOTES, WHETHER OR NOT PARTICIPATING IN
THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS SUPPLEMENT AND THE
PROSPECTUS TO WHICH IT RELATES. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE
OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS SUPPLEMENT AND PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
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<PAGE>
SUMMARY
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere herein and in the Prospectus.
Capitalized terms used herein and not otherwise defined herein have the meanings
assigned in the Prospectus.
The Notes..............................$_____________ Mortgage-Backed Notes,
Series 199_-_. Only the Notes are offered
hereby. The Notes will be issued pursuant
to an Indenture, dated as of ___ __, 199_
between the Issuer and the Indenture
Trustee.
Issuer.................................The Notes will be issued by
__________________ Trust Series 199_-_
(the "Issuer"), a Delaware business trust
established pursuant to the Trust
Agreement, dated as of _______ __, 199_
(the "Trust Agreement"), between the
Company and the Owner Trustee. The Notes
will represent obligations solely of the
Issuer, and the proceeds of the assets of
the Issuer (such assets, the "Trust
Fund") and the Note Insurance Policy will
be the sole source of payments on the
Notes.
Company................................WMC Secured Assets Corp. (the "Company").
See "The Company" in the Prospectus.
Master Servicer........................______________________ ( the "Master
Servicer"). See "Description of the
Servicing Agreement--The Master Servicer;
the Subservicer" herein.
Subservicer............................The Mortgage Loans will be subserviced by
_______ ("_____________"). See
"Description of the Servicing
Agreement--The Master Servicer; the
Subservicer" herein.
Owner Trustee..........................___________________ a _______ trust
company.
Indenture Trustee......................___________________________, a
___________.
Cut-off Date..........................._____ ___, 199_.
Delivery Date..........................On or about ______ ___, 199_.
Payment Date...........................The __th day of each month (or, if such
day is not a business day, the next
business day), beginning on ______ __,
199_ (each, a "Payment Date").
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<PAGE>
Denominations and
Registration...........................The Notes will be issued, maintained and
transferred on the book-entry records of
DTC and its Participants (as defined in
the Prospectus). The Notes will be
offered in registered form, in minimum
denominations of $25,000 and integral
multiples of $1 in excess thereof. The
Notes will be represented by one or more
Notes registered in the name of Cede &
Co., as nominee of DTC. No Beneficial
Owner will be entitled to receive a Note
in fully registered, certificated form (a
"Definitive Note"), except under the
limited circumstances described herein.
See "Description of the Notes--Book-Entry
Notes" herein.
The Mortgage Pool......................The Mortgage Loans are secured by first
liens on one- to four-family real
properties (each, a "Mortgaged
Property"). The Mortgage Loans have
individual principal balances at
origination of at least $________ but not
more than $_______ with an average
principal balance at origination of
approximately $__________ The Mortgage
Loans have terms to maturity of up to 30
years from the date of origination and a
weighted average remaining term to stated
maturity of approximately ____ months as
of the Cut-off Date.
The Mortgage Rate on each Mortgage Loan
will be subject to monthly, semi-annual
or annual adjustment, commencing after an
initial period from origination of three
months, six months, one year, two years
or three years (such period, the "Initial
Period"), on its Adjustment Date (as
defined herein), to equal the sum
(rounded as described herein) of the
related Index described below and a fixed
percentage set forth in the related
Mortgage Note (the "Gross Margin").
However, (i) on any Adjustment Date such
Mortgage Rate may not increase or
decrease by more than the Periodic Rate
Cap (as defined herein), except as
described herein, (ii) over the life of
such Mortgage Loan, such Mortgage Rate
may not exceed the related maximum
Mortgage Rate (the "Maximum Mortgage
Rate"), which Maximum Mortgage Rates will
range from _______% to ________% and
(iii) over the life of such Mortgage
Loan, such Mortgage Rate may not be lower
than the minimum Mortgage Rate (the
"Minimum Mortgage Rate"), which Minimum
Mortgage Rates will range from _______%
to ________% per annum. As of the Cut-off
Date, the Mortgage Loans will have
Mortgage Rates of at least _______% per
annum but not more than _______% per
annum, with a weighted average of -----%.
The Mortgage Loans will have Gross
Margins ranging from ______% to _______%
with a weighted average of ------% as of
the Cut-off Date.
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<PAGE>
Approximately ______% of the Mortgage
Loans (by aggregate principal balance as
of the Cut-off Date) (the "Convertible
Mortgage Loans") provide that, at the
option of the related Mortgagors, the
adjustable interest rate on such Mortgage
Loan may be converted to a fixed interest
rate, provided that certain conditions
have been satisfied. Such Convertible
Mortgage Loans will be repurchased upon
conversion by the Master Servicer as
described herein. See "Description of the
Mortgage Pool-Convertible Mortgage Loans"
herein.
Approximately _____% of the Mortgage
Loans (by aggregate principal balance as
of the Cut-off Date) (the "Negative
Amortization Loans") provide for negative
amortization. To the extent that accrued
interest on any Negative Amortization
Loan exceeds the related monthly payment,
such excess ("Deferred Interest") is
added to the principal balance of such
Mortgage Loan on the Due Date and
thereafter accrues interest at the
related Mortgage Rate. Investors should
consider the potential effect of the
negative amortization feature on the rate
of default and loss on the Negative
Amortization Loans. See "Certain Yield
and Prepayment Considerations" and
"Description of the Mortgage
Pool-Negative Amortization Loans" herein.
For a further description of the Mortgage
Loans, see "Description of the Mortgage
Pool" herein.
The Indices............................As of any Adjustment Date with respect to
any Mortgage Loan, the Index applicable
to the determination of the related
Mortgage Rate will be one of the
following: (i) the average of the
interbank offered rates for one month
U.S. dollar deposits in the London market
based on quotations of major banks as
most recently available generally 45 days
prior to the Adjustment Date ("Negative
Amortization Loan One- Month LIBOR");
(ii) the average of the interbank offered
rates for six month U.S. dollar deposits
in the London market based on quotations
of major banks as most recently available
generally 45 days prior to the Adjustment
Date ("Six-Month LIBOR"); (iii) the
weekly average yield on U.S. Treasury
securities adjusted to a constant
maturity of six months ("Six- Month CMT")
as published by the Federal Reserve Board
in Statistical Release H.15(519) and most
recently available as of the first
business day generally 45 days prior to
the Adjustment Date; or (iv) the weekly
average yield on U.S. Treasury securities
adjusted to a constant maturity of one
year ("One-Year CMT") as published by the
Federal Reserve Board in Statistical
Release H.15(519) and most recently
S-6
<PAGE>
available as of the first business day
generally 45 days prior to the
Adjustment Date. The Negative
Amortization Loans will have an Index
of Negative Amortization Loan One-
Month LIBOR, the other Mortgage Loans
will have an Index of Six-Month LIBOR,
Six-Month CMT or One-Year CMT.
Interest Payments .....................Interest on the Notes will be paid
monthly on each Payment Date, commencing
in _____ 199_, in an amount (the
"Interest Payment Amount") equal to
interest accrued on the Note Principal
Balance thereof immediately prior to such
Payment Date at the Note Interest Rate
for the related Interest Period (as
defined below), minus (i) any Prepayment
Interest Shortfalls and Relief Act
Shortfalls (each as defined herein) to
the extent not covered by the Master
Servicer by Compensating Interest (as
defined herein) for such Payment Date and
(ii) any Deferred Interest (as defined
herein) allocated thereto on such Payment
Date as described herein. The Note
Interest Rate on each Payment Date after
the first Payment Date will be a floating
rate equal to the lesser of (i)(a) with
respect to each Payment Date up to and
including the earlier of (x) the Payment
Date in _____ 20__ and (y) the Payment
Date which occurs on or prior to the date
on which the aggregate Principal Balance
of the Mortgage Loans is less than 25% of
the aggregate Principal Balance of the
Mortgage Loans as of the Cut-off Date,
One-Month LIBOR (as defined herein) plus
_____%, and (b) with respect to each
Payment Date thereafter, One-Month LIBOR
plus _____% and (ii) the Available Funds
Interest Rate with respect to such
Payment Date. The Note Interest Rate for
the first Payment Date will equal
_______% per annum. Interest on the Notes
in respect of any Payment Date will
accrue from the preceding Payment Date
(or in the case of the first Payment
Date, from the Delivery Date through the
day preceding such Payment Date (each
such period, an "Interest Period")) on
the basis of the actual number of days in
the Interest Period and a 360-day year.
The "Available Funds Interest Rate" for
any Payment Date is a rate per annum
equal to the lesser of (x) the fraction,
expressed as a percentage, the numerator
of which is (i) an amount equal to (A)
1/12 of the aggregate Principal Balance
of the then outstanding Mortgage Loans
times the weighted average of the Expense
Adjusted Mortgage Rates on the then
outstanding Mortgage Loans minus (B) the
amount of the fee payable to the Owner
Trustee with respect to the Trust
Agreement and the premium with respect to
the Notes payable to the Note Insurer
with respect to the Note Insurance Policy
for such Payment Date, and the
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<PAGE>
denominator of which is (ii) an amount
equal to (A) the then outstanding
aggregate Note Principal Balance of the
Notes multiplied by (B) the actual number
of days elapsed in the related Interest
Period divided by 360 and (y) _________%
per annum (the "Maximum Note Interest
Rate"). The amount of the fee payable to
the Owner Trustee together with the
amount of the premium payable to the Note
Insurer (together, the "Administrative
Fee") will accrue at ------% per annum
based on the Note Principal Balance of
the Notes.
The "Expense Adjusted Mortgage Rate" on
any Mortgage Loan is equal to the then
applicable Mortgage Rate thereon minus
the sum of (i) the Minimum Spread, (ii)
the Servicing Fee Rate and (iii) the
Indenture Trustee Fee Rate. For any
Payment Date, the Minimum Spread is equal
to ____% per annum, the Servicing Fee
Rate is equal to _____% per annum and the
Indenture Trustee Fee Rate is equal to
_____% per annum.
As further described herein, with respect
to the Notes and any Payment Date, to the
extent that (a) the lesser of (x) the
amount payable if clause (i) of the
definition of Note Interest Rate above is
used to calculate interest and (y) the
amount payable if the Maximum Note
Interest Rate is used to calculate
interest exceeds (b) the amount payable
if clause (ii) of the definition of Note
Interest Rate above is used to calculate
interest (such excess, the "Available
Funds Cap Carry-Forward Amount"), the
holders of the Notes will be paid the
amount of such Available Funds Cap
Carry-Forward Amount with interest
thereon at the Note Interest Rate for the
Notes applicable from time to time after
certain payments to the holders of the
Notes and the Note Insurer to the extent
of available funds. The Note Insurance
Policy does not cover the Available Funds
Cap Carry-Forward Amount, nor do the
ratings assigned to the Notes address the
payment of the Available Funds Cap
Carry-Forward Amount.
To the extent that Deferred Interest
causes a shortfall in interest
collections on the Mortgage Loans that
would otherwise cause a shortfall in the
amount of interest payable to the
Noteholders, such amount will be paid
using principal collections on the
Mortgage Loans through the priority of
payment provisions described herein. To
the extent that the Interest Payment
Amount for any Payment Date exceeds
Available Funds for such Payment Date,
the lesser of such excess and the
aggregate amount of Deferred Interest, if
any, that is added to the principal
balance of the Negative Amortization
Loans on the Due Date occurring in the
month
S-8
<PAGE>
in which such Payment Date occurs will be
added to the Note Principal Balance of
the Notes and subtracted from the
Interest Payment Amount for such Payment
Date.
Principal Payments ....................Principal payments will be payable on the
Notes on each Payment Date in an
aggregate amount equal to the Principal
Payment Amount for such Payment Date. The
Principal Payment Amount will include, to
the extent of available funds and except
as otherwise described herein, the
principal portion of all scheduled
monthly payments (whether received or
advanced) due from Mortgagors on the
related Due Date, and all unscheduled
amounts received during the preceding
calendar month that are allocable to
principal (including proceeds of
repurchases, prepayments, liquidations
and insurance (excluding proceeds paid in
respect of the Note Insurance Policy))
and may be reduced as a result of
overcollateralization in excess of the
required level, as described herein. In
addition, on any Payment Date, to the
extent of funds available therefor,
Noteholders will also be entitled to
receive payments generally equal to the
amount, if any, necessary to bring the
Subordination Amount up to the Required
Subordination Amount (such amount, the
"Subordination Increase Amount"). On the
Payment Date in _____ ____, principal
will be payable on the Notes in an amount
equal to the Note Principal Balance on
such Payment Date.
The "Note Principal Balance" of the Notes
on any date of determination is the
initial principal balance thereof as of
the Delivery Date, increased by any
Deferred Interest allocated thereto, and
reduced by all payments of principal
thereon prior to such date of
determination.
Note Insurer...........................___________________ (the "Note Insurer").
See _______________ herein.
Note Insurance Policy..................On the Delivery Date, the Note Insurer
will issue a Note Insurance Policy in
favor of the Indenture Trustee on behalf
of the holders of the Notes. On each
Payment Date, a draw will be made on the
Note Insurance Policy to cover (a) any
shortfall in amounts available to make
payments of the Interest Payment Amount
and (b) the Subordination Deficit (as
defined herein). The Note Insurance
Policy will also cover any unpaid
Preference Amount. In addition, the Note
Insurance Policy will guarantee the
payment of the outstanding Note Principal
Balance of each Note on the Payment Date
in _____ _________(after giving effect to
all other amounts distributable and
allocable to principal on such
S-9
<PAGE>
Payment Date). The Note Insurance Policy
does not insure the payment of the
Available Funds Cap Carry-Forward Amount
(as defined herein). See "Description of
the Notes--Note Insurance Policy" herein
and "Description of Credit Enhancement"
in the Prospectus.
The Certificates.......................Trust Certificates, Series 199_-_. The
Certificates will be issued pursuant to
the Trust Agreement and will represent
the beneficial ownership interest in the
Issuer. The Certificates are not offered
hereby.
Credit Enhancement.....................The credit enhancement provided for the
benefit of the Noteholders consists
solely of (a) the overcollateralization
provisions which utilize the internal
cash flows of the Mortgage Loans and (b)
the Note Insurance Policy.
OVERCOLLATERALIZATION. Initially, the
aggregate Principal Balance of the
Mortgage Loans as of the Cut-off Date
will exceed the aggregate Note Principal
Balance of the Notes as of the Delivery
Date by approximately $_____________ or
_____% of the aggregate Principal Balance
of the Mortgage Loans as of the Cut-off
Date. This amount is the required level
of overcollateralization (the "Required
Subordination Amount") as of the Delivery
Date and may increase or decrease,
subject to certain trigger tests, in
accordance with the provisions of the
Indenture. An increase would result in a
temporary period of accelerated
amortization of the Notes to increase the
actual level of overcollateralization to
its required level; a decrease would
result in a temporary period of
decelerated amortization to reduce the
actual level of overcollateralization to
its required level. See "Description of
the Notes--Overcollateralization
Provisions."
THE NOTE INSURANCE POLICY. The Notes will
have the benefit of the Note Insurance
Policy, as discussed more fully herein.
See "Description of the Notes--Note
Insurance Policy" herein.
Advances...............................The Master Servicer is required to make
advances ("Advances") in respect of
delinquent payments of principal and
interest on the Mortgage Loans, subject
to the limitations described herein. See
"Description of the Notes--Advances"
herein and in the Prospectus.
Optional Redemption of
the Notes.............................The Notes may be redeemed in whole, but
not in part, by the Issuer on any Payment
Date on or after the earlier of (i) the
Payment Date on which the aggregate
Principal Balance (as
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<PAGE>
defined herein) of the Mortgage Loans is
less than or equal to 25% of the
aggregate Principal Balance of the
Mortgage Loans as of the Cut-off Date or
(ii) the Payment Date occurring in ______
______. See "Description of the
Notes--Optional Redemption" herein and
"The Agreements--Termination; Redemption
of Notes" in the Prospectus.
Special Prepayment
Considerations.......................The rate and timing of principal payments
on the Notes will depend, among other
things, on the rate and timing of
principal payments (including
prepayments, defaults, liquidations,
negative amortization and purchases of
the Mortgage Loans due to a breach of a
representation or warranty) on the
related Mortgage Loans. As is the case
with mortgage-backed securities
generally, the Notes are subject to
substantial inherent cash-flow
uncertainties because the Mortgage Loans
may be prepaid at any time; however, a
prepayment may subject the related
Mortgagor to a prepayment charge with
respect to approximately half of the
Mortgage Loans. Generally, when
prevailing interest rates increase,
prepayment rates on mortgage loans tend
to decrease, resulting in a slower return
of principal to investors at a time when
reinvestment at such higher prevailing
rates would be desirable. Conversely,
when prevailing interest rates decline,
prepayment rates on mortgage loans tend
to increase, resulting in a faster return
of principal to investors at a time when
reinvestment at comparable yields may not
be possible.
See "Certain Yield and Prepayment
Considerations" herein, and "Maturity and
Prepayment Considerations" in the
Prospectus.
Special Yield
Considerations......................The yield to maturity on the Notes will
depend on, among other things, the rate
and timing of principal payments
(including prepayments, defaults,
liquidations, negative amortization and
purchases of the Mortgage Loans due to a
breach of a representation or warranty)
on the Mortgage Loans and the allocation
thereof to reduce the Note Principal
Balance thereof. The yield to maturity on
the Notes will also depend on the Note
Interest Rate and the purchase price for
such Notes.
If the Notes are purchased at a premium
and principal payments thereon occur at a
rate faster than anticipated at the time
of purchase, the investor's actual yield
to maturity will
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<PAGE>
be lower than that assumed at the time of
purchase. Conversely, if the Notes are
purchased at a discount and principal
payments thereon occur at a rate slower
than that assumed at the time of
purchase, the investor's actual yield to
maturity will be lower than that assumed
at the time of purchase.
The Notes were structured assuming, among
other things, a constant prepayment rate
("CPR") of 20% and corresponding weighted
average lives as described herein. The
prepayment, yield and other assumptions
to be used for pricing purposes for the
Notes may vary as determined at the time
of sale.
See "Certain Yield and Prepayment
Considerations" herein and "Yield
Considerations" in the Prospectus.
Federal Income Tax
Consequences..........................Upon the issuance of Notes, Thacher
Proffitt & Wood, counsel to the Company,
will deliver its opinion to the effect
that, assuming compliance with all
provisions of the Indenture, Owner Trust
Agreement and certain related documents,
for federal income tax purposes, the
Notes will be characterized as
indebtedness and not as representing an
ownership interest in the Trust Fund or
an equity interest in the Issuer or the
Company and the Issuer will not be (i)
classified as an association taxable as a
corporation for federal income tax
purposes (other than as a "qualified REIT
subsidiary" as defined in Section 856(i)
of the Code), (ii) a taxable mortgage
pool as defined in Section 7701(i) of the
Code, or (iii) a "publicly traded
partnership" as defined in Treasury
Regulation Section 1.7704-1.
For further information regarding federal
income tax consequences of an investment
in the Notes see "Federal Income Tax
Consequences" herein and "Federal Income
Tax Consequences" and "State and Other
Tax Consequences" in the Prospectus.
Legal Investment.......................The Notes will constitute "mortgage
related securities" for purposes of SMMEA
for so long as they are rated in at least
the second highest rating category by one
or more nationally recognized statistical
rating agencies. Institutions whose
investment activities are subject to
legal investment laws and regulations or
to review by certain regulatory
authorities may be subject to
restrictions on investment in the Notes.
See "Legal Investment" herein.
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<PAGE>
Rating.................................It is a condition to the issuance of the
Notes that they be rated "AAA" by
Standard & Poor's Ratings Services
("S&P") and "Aaa" by Moody's Investors
Service, Inc. ("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 represent any
assessment of the Master Servicer's
ability to repurchase any Converting
Mortgage Loan following the conversion of
the related Mortgage Rate to a fixed
rate, or the effect on the yield to
Noteholders resulting from any such
conversion and the failure of the Master
Servicer to repurchase such Converting
Mortgage Loan. Also, the ratings issued
by S&P and Moody's on payment of
principal and interest on the Notes do
not cover the payment of the Available
Funds Cap Carry-Forward Amount. See
"Certain Yield and Prepayment
Considerations" and "Ratings" herein.
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<PAGE>
RISK FACTORS
Prospective Noteholders 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 Notes:
UNDERWRITING STANDARDS; SUB-PRIME LOANS
The Mortgage Loans were underwritten generally in accordance with
underwriting standards described in "Description of the Mortgage
Pool--Underwriting" below and Appendix A attached hereto. 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
Note Insurance Policy or Overcollateralization, may affect the yield to maturity
of the Notes.
In addition, the principal balances of certain of the Mortgage Loans
may 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.
RISKS DUE TO GEOGRAPHICAL CONCENTRATION OF THE MORTGAGE POOL IN CALIFORNIA
Approximately ______% of the Mortgage Loans (by aggregate outstanding
principal balance as of the Cut-off Date) are secured by Mortgaged Properties
located in the State of California. In the event California experiences a
decline in real estate values, losses on the Mortgage Loans may be greater than
otherwise would be the case.
POTENTIAL DELINQUENCIES
Approximately _____% of the Mortgage Loans (by aggregate outstanding
principal balance as of the Cut-off Date) will have Loan-to-Value Ratios in
excess of 80% but will not be covered by a primary mortgage insurance policy.
Such Mortgage Loans will be affected to a greater extent than Mortgage Loans
with primary mortgage insurance or a Loan-to-Value Ratio equal to or less than
80% by any decline in the value of the related Mortgaged Property. No assurance
can be given that values of the Mortgaged Properties have remained or will
remain at their levels on the dates of origination of the related Mortgage
Loans. If the residential real estate market should experience an overall
decline in property values such that the outstanding balances of the Mortgage
Loans, and any secondary financing on the Mortgaged Properties, become equal to
or greater than the value of the Mortgaged Properties, the actual rates of
delinquencies, foreclosures and losses could be higher than those now generally
experienced in the mortgage lending industry. Any decrease in the value of such
Mortgage Loans may result in the allocation of losses to the Notes which are not
covered by overcollateralization or the Note Insurance Policy. See "Primary
Mortgage Insurance, Hazard Insurance; Claims Thereunder" in the Prospectus.
__________ has limited historical delinquency and default experience
that may be referred to for purposes of estimating the future delinquency and
loss experience of the Mortgage Loans underwritten pursuant to the underwriting
standards described herein, [which include those of non-related bulk
purchasers.] There can be no assurance that the delinquency experience of the
servicing portfolios described herein with respect to mortgage loans serviced by
__________ will correspond to the
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<PAGE>
delinquency experience of the Mortgage Loans underwritten pursuant to such
underwriting standards. See "Description of the Servicing Agreement--The Master
Servicer; the Subservicer" herein.
RISK OF MORTGAGE LOAN YIELD REDUCING NOTE INTEREST RATE ON THE NOTES
The Note Interest Rate is based upon, among other factors as described
herein under "Description of the Notes--Interest Payments on the Notes," the
value of an index (One-Month LIBOR (as defined herein)) which is different from
the value of the indices applicable to the Mortgage Loans (Negative Amortization
Loan One-Month LIBOR, Six-Month LIBOR, Six-Month CMT and One-Year CMT (each as
defined herein)), as described under "Description of the Mortgage Pool" herein.
Investors should note that the value of One-Month LIBOR on the Notes may differ
from Negative Amortization Loan One- Month LIBOR, due to the different reference
date. The Mortgage Rate of each Mortgage Loan adjusts monthly, semi-annually or
annually, commencing after the Initial Period, based upon the related Index,
whereas the Note Interest Rate on the Notes adjusts monthly based upon One-Month
LIBOR plus
- ----%
(or after the earlier of (x) the Payment Date in ____ 20__ and (y) the Payment
Date which occurs on or prior to the date on which the aggregate Principal
Balance of the Mortgage Loans is less than 25% of the aggregate Principal
Balance of the Mortgage Loans as of the Cut-off Date, One-Month LIBOR plus
_____%), limited by the Available Funds Interest Rate (as defined herein). In
addition, One-Month
LIBOR
and the Indices on the Mortgage Loans may respond differently to economic and
market factors, and there is not necessarily any correlation between them.
Moreover, the Mortgage Loans are subject to Periodic Rate Caps, Maximum Mortgage
Rates and Minimum Mortgage Rates (each, as defined herein). Thus, it is
possible, for example, that One-Month LIBOR may rise during periods in which the
Indices are stable or falling or that, even if both One-Month LIBOR and the
Indices rise during the same period, One-Month LIBOR may rise much more rapidly
than the Indices. See "Description of the Notes--Interest Payments on the
Notes."
DESCRIPTION OF THE MORTGAGE POOL
GENERAL
The Mortgage Pool will consist of conventional, adjustable-rate,
monthly payment, first lien mortgage loans with terms to maturity of not more
than 30 years from the date of origination or modification. As of the Cut-off
Date, the principal balance of the Mortgage Loans was equal to $__________. The
Company will acquire the Mortgage Loans to be included in the Mortgage Pool from
__________________ (_______), the parent of the Company, which in turn acquired
them from ------ (in such capacity, the "Seller"), which in turn acquired them
pursuant to various agreements from affiliates of ____________ and various
mortgage loan conduit sellers (collectively, the "Originators"). All of the
Mortgage Loans will be subserviced by ______________. The Company will convey
the Mortgage Loans to the Issuer on the Delivery Date pursuant to the Trust
Agreement. ________________ will make certain representations and warranties
with respect to the Mortgage Loans and, as more particularly described in the
Prospectus, will have certain repurchase or substitution obligations in
connection with a breach of any such representation or warranty, as well as in
connection with an omission or defect in respect of certain constituent
documents required to be delivered with respect to the Mortgage Loans, in any
event if such breach, omission or defect cannot be cured and it materially and
adversely affects the interests of holders of the Securities or the Note
Insurer. See "Description of the Mortgage Pool--Representations by Sellers" and
"Description of the Notes--Assignment of Trust Fund Assets" in the Prospectus.
The Mortgage Loans will have been originated or acquired by the Originators in
accordance with the underwriting criteria described herein. See "--Underwriting"
below and Appendix A.
S-15
<PAGE>
The representations and warranties made by ______________ will be
pledged to the Indenture Trustee for the benefit of the Noteholders and the Note
Insurer.
Approximately ________% of the Mortgage Loans, by aggregate principal
balance as of the Cutoff Date, will have Loan-to-Value Ratios in excess of 80%
but will not be covered by a primary mortgage insurance policy. Each other
Mortgage Loan with a Loan-to-Value Ratio in excess of 80% will be covered by a
primary mortgage insurance policy. See "Primary Mortgage Insurance, Hazard
Insurance; Claims Thereunder" in the Prospectus.
MORTGAGE LOANS
MORTGAGE RATE ADJUSTMENT
The Mortgage Rate on each Mortgage Loan will adjust monthly (with
respect to _____% of the Mortgage Loans), semi-annually (with respect to _____%
of the Mortgage Loans) or annually (with respect to _____% of the Mortgage
Loans) commencing after an initial period after origination (the "Initial
Period") of three months, six months, one year, two years or three years, in
each case on each applicable Adjustment Date to a rate equal to the sum,
generally rounded to the nearest one-eighth of one percentage point (12.5 basis
points), of (i) the related Index plus (ii) a fixed percentage (the "Gross
Margin"). In addition, the Mortgage Rate on each Mortgage Loan (other than the
Negative Amortization Loans) is subject on its first Adjustment Date following
its origination to a cap (the "Initial Periodic Rate Cap") and on each
Adjustment Date thereafter to a periodic rate cap (the "Periodic Rate Cap"). All
of the Mortgage Loans are also subject to specified maximum and minimum lifetime
Mortgage Rates ("Maximum Mortgage Rates" and "Minimum Mortgage Rates,"
respectively). The Mortgage Loans were generally originated with an initial
Mortgage Rate below the sum of the current Index and the Gross Margin. Due to
the application of the Periodic Rate Caps, Maximum Mortgage Rates and Minimum
Mortgage Rates, the Mortgage Rate on any Mortgage Loan, as adjusted on any
related Adjustment Date, may not equal the sum of the related Index and the
Gross Margin. The Due Date for each Mortgage Loan is the first day of the month.
Approximately _____% of the Mortgage Loans will not have reached their
first Adjustment Date as of the Delivery Date. All of the Mortgage Loans with an
Initial Period of three months have already reached their first Adjustment Date.
The initial Mortgage Rate is generally lower than the rate that would have been
produced if the applicable Gross Margin had been added to the related Index in
effect at origination. Mortgage Loans that have not reached their first
Adjustment Date are, therefore, more likely to be subject to the Periodic Rate
Cap on their first Adjustment Date.
SIX-MONTH LIBOR INDEX
The Index applicable to the determination of the Mortgage Rate on
approximately ______% of the Mortgage Loans (by principal balance as of the
Cut-off Date) will be the average of the interbank offered rates for six-month
United States dollar deposits in the London market as published by FNMA and as
most recently available as of the first business day generally 45 days prior to
such Adjustment Date.
The table below sets forth historical average rates of Six-Month LIBOR
for the months indicated as made available from FNMA. Such average rates may
fluctuate significantly from month to month as well as over longer periods and
may not increase or decrease in a constant pattern from period to period. There
can be no assurance that levels of Six-Month LIBOR published by FNMA, or
published on a different Reference Date would have been at the same levels as
those set forth below. The following does not purport to be representative of
future levels of Six-Month LIBOR (as published by FNMA). No
S-16
<PAGE>
assurance can be given as to the level of Six-Month LIBOR on any Adjustment Date
or during the life of any Mortgage Loan based on Six-Month LIBOR.
<TABLE>
<CAPTION>
SIX-MONTH LIBOR
MONTH 1993 1994 1995 1996 1997
- ----- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
January........................................... 3.44% 3.39% 6.69% 5.34% 5.71%
February.......................................... 3.33 4.00 6.44 5.29 5.68
March............................................. 3.38 4.25 6.44 5.52 5.96
April............................................. 3.31 4.63 6.31 5.42 6.08
May............................................... 3.44 5.00 6.06 5.64
June.............................................. 3.56 5.25 5.88 5.84
July.............................................. 3.56 5.33 5.88 5.92
August............................................ 3.44 5.33 5.94 5.74
September......................................... 3.38 5.69 5.99 5.75
October........................................... 3.50 6.00 5.95 5.58
November.......................................... 3.52 6.44 5.74 5.55
December.......................................... 3.50 7.00 5.56 5.62
</TABLE>
ONE-YEAR CMT INDEX
The Index applicable to the determination of the Mortgage Rate on
approximately _____% of the Mortgage Loans (by principal balance as of the
Cut-off Date) will be the weekly average yield on U.S. Treasury securities
adjusted to a constant maturity of one year as published by the Federal Reserve
Board in Statistical Release H.15(519) and most recently available as of the
first business day generally 45 days prior to the Adjustment Date.
The table below sets forth historical average rates of One-Year CMT
for the months indicated as made available from Telerate Page 7052. Such average
rates may fluctuate significantly from month to month as well as over longer
periods and may not increase or decrease in a constant pattern from period to
period. There can be no assurance that levels of One-Year CMT published by
Telerate Page 7052, or published on a different Reference Date would have been
at the same levels as those set forth below. The following does not purport to
be representative of future levels of One-Year CMT (as published by Telerate
Page 7052). No assurance can be given as to the level of One-Year CMT on any
Adjustment Date or during the life of any Mortgage Loan based on One-Year CMT.
S-17
<PAGE>
<TABLE>
<CAPTION>
ONE-YEAR CMT
MONTH 1993 1994 1995 1996 1997
- ----- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
January........................................... 3.50% 3.54% 7.08% 5.11% 5.60%
February.......................................... 3.38 3.85 6.73 4.94 5.52
March............................................. 3.33 4.28 6.43 5.31 5.79
April............................................. 3.25 4.74 6.27 5.53 5.99
May............................................... 3.36 5.31 6.02 5.64
June.............................................. 3.55 5.24 5.66 5.81
July.............................................. 3.45 5.47 5.59 5.84
August............................................ 3.47 5.56 5.72 5.69
September......................................... 3.36 5.74 5.64 5.84
October........................................... 3.38 6.11 5.60 5.57
November.......................................... 3.58 6.48 5.45 5.43
December.......................................... 3.61 7.10 5.32 5.47
</TABLE>
NEGATIVE AMORTIZATION LOANS
Approximately _____% of the Mortgage Loans ("Negative Amortization
Loans") have a negative amortization feature whereby interest payments on such
Mortgage Loans may be deferred and may be added to the Principal Balance
thereof. The amount of the monthly payment on each Negative Amortization Loan
adjusts annually on each "Payment Adjustment Date" to an amount which would
amortize fully the outstanding principal balance of the Negative Amortization
Loan over its remaining term, and pay interest at the Mortgage Rate as adjusted
on the immediately preceding Rate Adjustment Date, subject to a payment cap (the
"Payment Cap") that limits any increase or decrease in the amount of the monthly
payment on any Payment Adjustment Date to an amount not greater than 7.5% of the
amount of the monthly payment due on the preceding Due Date, to the extent that
the related Mortgagor has elected to have the monthly payment limited by the
Payment Cap. The Payment Cap shall not be in effect on the fifth anniversary of
the first Due Date and on each fifth anniversary thereafter (each such
anniversary, a "Recast Date"). The weighted average first Recast Date of the
Negative Amortization Loans, rounded to the nearest Due Date, is _________ __,
____. If on any Rate Adjustment Date, due to the addition of Deferred Interest,
the principal balance of any Negative Amortization Loan would exceed 110% of the
original principal balance thereof (such limitation, a "Negative Amortization
Cap"), the related monthly payment will be recalculated, without regard to the
Payment Cap, to equal an amount sufficient to amortize such Negative
Amortization Loan over its remaining term at the Mortgage Rate as adjusted on
the immediately preceding Rate Adjustment Date. Any monthly payment so
recalculated will remain in effect until the earliest of the next Payment
Adjustment Date, the next Recast Date or the next Due Date on which the
principal balance of the related Negative Amortization Loan would exceed the
Negative Amortization Cap.
The Mortgage Notes provide that at least 30 days prior to any Payment
Adjustment Date the related Mortgagor must be notified of (i) the monthly
payment that would be sufficient to amortize fully the then outstanding
principal balance of the related Negative Amortization Loan over its remaining
term (the "Full Payment") and (ii) the monthly payment that would be equal to
the above amount subject to the Payment Cap (the "Limited Payment"). Upon timely
notice, a Mortgagor may elect to pay the Limited Payment, subject only to the
related Negative Amortization Cap and the applicable provisions on the related
Recast Date.
On any Rate Adjustment Date an increase in the Mortgage Rate on a
Negative Amortization Loan will result in a larger portion of each subsequent
monthly payment being allocated to interest and a smaller
S-18
<PAGE>
portion being allocated to principal, and conversely, a decrease in the Mortgage
Rate on a Negative Amortization Loan will result in a larger portion of each
subsequent monthly payment being allocated to principal and a smaller portion
being allocated to interest. However, because Mortgage Rates on the Negative
Amortization Loans adjust on a monthly basis but monthly payments due on the
Negative Amortization Loans adjust only annually, and because the application of
Payment Caps may limit the amount by which the monthly payments may adjust, the
amount of a monthly payment may be more or less than the amount necessary to
fully amortize the principal balance of the Negative Amortization Loan over its
then remaining term at the applicable Mortgage Rate. Accordingly, Negative
Amortization Loans may be subject to reduced amortization (if the monthly
payment due on a Due Date is sufficient to pay interest accrued during the
related accrual period at the applicable Mortgage Rate but is not sufficient to
reduce principal in accordance with a fully amortizing schedule); negative
amortization (if interest accrued during the related accrual period at the
applicable Mortgage Rate is greater than the entire monthly payment due on the
related Due Date (such excess accrued interest, "Deferred Interest")); or
accelerated amortization (if the monthly payment due on a Due Date is greater
than the amount necessary to pay interest accrued during the related accrual
period at the applicable Mortgage Rate and to reduce principal in accordance
with a fully amortizing schedule). In addition, subsequent to the final Recast
Date and the final Payment Adjustment Date, the addition of any Deferred
Interest to the principal balance of any Negative Amortization Loan that is not
offset by subsequent accelerated amortization will result in a final lump sum
payment at maturity greater than, and potentially substantially greater than,
the monthly payment due on the immediately preceding Due Date.
The maximum increase in the principal balance of a Negative
Amortization Loan due to the addition of Deferred Interest to the principal
balance of such Negative Amortization Loan and the resulting Loan-to-Value Ratio
on such Negative Amortization Loan will depend on the relationships between the
Payment Cap, the Maximum Mortgage Rate, the Negative Amortization Cap and the
related Index. If the outstanding principal balance of a Negative Amortization
Loan having a Loan-to-Value Ratio of 80% was to increase to an amount equal to
the Negative Amortization Cap, the Loan-to-Value Ratio (as based on the then
outstanding principal balance) thereof would in no event exceed approximately
88%.
CONVERTIBLE LOANS
Approximately ____% of the Mortgage Loans ("Convertible Mortgage
Loans") provide that, at the option of the related Mortgagors, the adjustable
interest rate on such Mortgage Loans may be converted to a fixed interest rate.
Upon conversion, the Mortgage Rate will be converted to a fixed interest rate
determined in accordance with the formula set forth in the related Mortgage Note
which formula is intended to result in a Mortgage Rate which is not less than
the then current market interest rate (subject to applicable usury laws). After
such conversion, the monthly payments of principal and interest will be adjusted
to provide for full amortization over the remaining term to scheduled maturity.
Upon notification from a Mortgagor of such Mortgagor's intent to convert from an
adjustable interest rate to a fixed interest rate and prior to the conversion of
any such Mortgage Loan (a "Converting Mortgage Loan"), the Master Servicer will
be obligated to purchase the Converting Mortgage Loan at a price equal to the
outstanding principal balance thereof plus accrued interest thereon at the
related Mortgage Rate plus any unreimbursed Advances with respect to such
Mortgage Loan net of any subservicing fees (the "Conversion Price").
In the event that the Master Servicer fails to purchase a Converting
Mortgage Loan (such Mortgage Loan, following its conversion, a "Converted
Mortgage Loan"), neither the Company nor any of its affiliates nor any other
entity is obligated to purchase or arrange for the purchase of any Converted
Mortgage Loan. Any such Converted Mortgage Loan will remain in the Mortgage Pool
as a fixed-rate Mortgage Loan and will result in the Mortgage Pool's having
fixed-rate Mortgage Loans and as a result the Note Interest Rate may be reduced.
See "Certain Yield and Prepayment Considerations" herein.
S-19
<PAGE>
Following the purchase of any Converted Mortgage Loan as described
above, the purchaser will be entitled to receive an assignment from the
Indenture Trustee of such Mortgage Loan and the purchaser will thereafter own
such Mortgage Loan free of any further obligation to the Indenture Trustee or
the
Noteholders with respect thereto.
MORTGAGE LOAN CHARACTERISTICS
All percentages of the Mortgage Loans described herein are approximate
percentages (except as otherwise indicated) by aggregate principal balance as of
the Cut-off Date.
The Mortgage Loans generally have original terms to stated maturity of
approximately 30 years.
Effective with the first payment due on a Mortgage Loan after each
related Adjustment Date, the Monthly Payment will be adjusted to an amount that
will fully amortize the outstanding principal balance of the Mortgage Loan over
its remaining term. The weighted average number of months from the Cut-off Date
to the next Adjustment Date is __ months.
As of the Cut-off Date, each Mortgage Loan will have an unpaid
principal balance of not less than $_______ or more than $________ and the
average unpaid principal balance of the Mortgage Loans will be approximately
$________. The latest stated maturity date of any of the Mortgage Loans will be
__________, ______; however, the actual date on which any Mortgage Loan is paid
in full may be earlier than the stated maturity date due to unscheduled payments
of principal.
As of the Cut-off Date, the weighted average remaining term to stated
maturity of the Mortgage Loans will be approximately ____ months.
The earliest year of origination of any Mortgage Loan is _____ and the
latest month and year of origination will be _________ ___.
None of the Mortgage Loans are Buydown Mortgage Loans.
Set forth below is a description of certain additional characteristics
of the Mortgage Loans as of the Cut-off Date (except as otherwise indicated).
Dollar amounts and percentages may not add up to totals due to rounding.
S-20
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL BALANCES OF THE MORTGAGE LOANS AT ORIGINATION
ORIGINAL PERCENTAGE OF CUT-OFF
MORTGAGE LOAN NUMBER OF AGGREGATE UNPAID DATE AGGREGATE
PRINCIPAL BALANCE($) MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
----------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
0.01 - 50,000.00...................... $ %
50,000.01 - 100,000.00......................
100,000.01 - 150,000.00......................
150,000.01 - 200,000.00......................
200,000.01 - 250,000.00......................
250,000.01 - 300,000.00......................
300,000.01 - 350,000.00......................
350,000.01 - 400,000.00......................
400,000.01 - 450,000.00......................
450,000.01 - 500,000.00......................
500,000.01 - 550,000.00......................
550,000.01 - 600,000.00......................
650,000.01 - 700,000.00......................
Total........................................
</TABLE>
The average original principal balance of the Mortgage Loans will be
approximately $______.
S-21
<PAGE>
<TABLE>
<CAPTION>
CURRENT BALANCES OF THE MORTGAGE LOANS AT THE CUT-OFF DATE
PERCENTAGE OF
CURRENT CUT-OFF DATE
MORTGAGE LOAN NUMBER OF AGGREGATE UNPAID AGGREGATE
PRINCIPAL BALANCE($) MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
----------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
0.01 - 50,000.00................... $ %
50,000.00 - 100,000.00...................
100,000.01 - 150,000.00...................
150,000.01 - 200,000.00...................
200,000.01 - 250,000.00...................
250,000.01 - 300,000.00...................
300,000.01 - 350,000.00...................
350,000.01 - 400,000.00...................
400,000.01 - 450,000.00...................
450,000.01 - 500,000.00...................
500,000.01 - 550,000.00...................
550,000.01 - 600,000.00...................
650,000.01 - 700,000.00...................
Total.....................................
</TABLE>
The average current principal balance of the Mortgage Loans will be
approximately $____________.
S-22
<PAGE>
<TABLE>
<CAPTION>
MORTGAGE RATES AT ORIGINATION
PERCENTAGE OF
CUT-OFF DATE
NUMBER OF AGGREGATE UNPAID AGGREGATE
MORTGAGE RATES(%) MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
-------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
3.000 - 3.499....................... $ %
4.000 - 4.999.......................
5.000 - 5.499.......................
5.500 - 5.999.......................
6.000 - 6.499.......................
6.500 - 6.999.......................
7.000 - 7.499.......................
7.500 - 7.999.......................
8.000 - 8.499.......................
8.500 - 8.999.......................
9.000 - 9.499.......................
9.500 - 9.999.......................
10.000 - 10.499.......................
10.500 - 10.999.......................
11.000 - 11.499.......................
11.500 - 11.999.......................
12.000 - 12.499.......................
12.500 - 12.999.......................
13.000 - 13.499.......................
13.500 - 13.999.......................
14.000 - 14.499.......................
14.500 - 14.999.......................
15.500 - 15.999.......................
16.000 - 16.499.......................
Total............................
</TABLE>
The weighted average Mortgage Rate of the Mortgage Loans at
origination will be approximately ______% per annum.
S-23
<PAGE>
<TABLE>
<CAPTION>
MORTGAGE RATES AT CUT-OFF DATE
PERCENTAGE OF
CUT-OFF DATE
NUMBER OF AGGREGATE UNPAID AGGREGATE
MORTGAGE RATES(%) MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
-------------- -------------- ----------------- -----------------
<S> <C> <C <C>
5.500 - 5.999................................. $ %
6.000 - 6.499.................................
6.500 - 6.999.................................
7.000 - 7.499.................................
7.500 - 7.999.................................
8.000 - 8.499.................................
8.500 - 8.999.................................
9.000 - 9.499.................................
9.500 - 9.999.................................
10.000 - 10.499.................................
10.500 - 10.999.................................
11.000 - 11.499.................................
11.500 - 11.999.................................
12.000 - 12.499.................................
12.500 - 12.999.................................
13.000 - 13.499.................................
13.500 - 13.999.................................
14.000 - 14.499.................................
14.500 - 14.999.................................
15.500 - 15.999.................................
16.500 - 16.999.................................
Total......................................
</TABLE>
The weighted average Mortgage Rate of the Mortgage Loans as of the
Cut-off Date will be approximately _____% per annum.
S-24
<PAGE>
<TABLE>
<CAPTION>
NEXT ADJUSTMENT DATE
<S> <C> <C> <C>
PERCENTAGE OF
CUT-OFF DATE
NUMBER OF AGGREGATE UNPAID AGGREGATE
NEXT ADJUSTMENT DATE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
</TABLE>
The weighted average remaining months to the next Adjustment Date of the
Mortgage Loans will be approximately __ months.
S-25
<PAGE>
<TABLE>
<CAPTION>
GROSS MARGIN
PERCENTAGE OF
CUT-OFF DATE
NUMBER OF AGGREGATE UNPAID AGGREGATE
GROSS MARGINS (%) MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
----------------- -------------- ----------------- -----------------
<S> <C> <C>
2.000-2.249............................ $ %
2.500-2.749............................
2.750-2.999............................
3.000-3.249............................
3.250-3.499............................
3.500-3.749............................
3.750-3.999............................
4.000-4.249............................
4.250-4.499............................
4.500-4.749............................
4.750-4.999............................
5.000-5.249
5.250-5.499............................
5.500-5.749............................
5.750-5.999............................
6.000-6.249............................
6.250-6.499
6.500-6.749............................
6.750-6.999............................
7.000-7.249............................
7.250-7.499............................
7.500-7.749............................
7.750-7.999............................
8.000-8.249............................
8.250-8.499............................
8.500-8.749............................
8.750-8.999............................
9.000-9.249
9.250-9.499............................
10.000-10.249..........................
10.750-10.999..........................
11.000-11.249..........................
Total..............................
</TABLE>
The weighted average Gross Margin of the Mortgage Loans will be
approximately _______% per annum.
S-26
<PAGE>
<TABLE>
<CAPTION>
MAXIMUM MORTGAGE RATE
PERCENTAGE OF
CUT-OFF DATE
NUMBER OF AGGREGATE UNPAID AGGREGATE
MAXIMUM MORTGAGE RATE (%) MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
------------------------- -------------- ----------------- -----------------
<S> <C>
10.000 - 10.499
10.500 - 10.999..............................
11.000 - 11.499..............................
11.500 - 11.999..............................
12.000 - 12.499..............................
12.500 - 12.999..............................
13.000 - 13.499..............................
13.500 - 13.999..............................
14.000 - 14.499..............................
14.500 - 14.999..............................
15.000 - 15.499..............................
15.500 - 15.999..............................
16.000 - 16.499..............................
16.500 - 16.999..............................
17.000 - 17.499..............................
17.500 - 17.999..............................
18.000 - 18.499..............................
18.500 - 18.999..............................
19.000 - 19.499..............................
19.500 - 19.999..............................
20.000 - 20.499..............................
20.500 - 20.999..............................
21.000 - 21.499..............................
21.500 - 21.999..............................
22.000 - 22.499..............................
22.500 - 22.999..............................
23.000 - 23.499..............................
Total....................................
</TABLE>
The weighted average Maximum Mortgage Rate of the Mortgage Loans will be
approximately _____% per annum.
S-27
<PAGE>
<TABLE>
<CAPTION>
INDEX
PERCENTAGE OF
CUT-OFF DATE
NUMBER OF AGGREGATE UNPAID AGGREGATE
INDEX MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
Negative Amortization Loan
<S> <C> <C>
One-Month LIBOR...................... $ %
Six-Month LIBOR...........................
Six-Month CMT.............................
One-Year CMT..............................
Total.................................
</TABLE>
For a description of the Indices, see "Summary-The Indices" herein.
<TABLE>
<CAPTION>
INITIAL PERIODIC RATE CAP
PERCENTAGE OF
CUT-OFF DATE
NUMBER OF AGGREGATE UNPAID AGGREGATE
INITIAL PERIODIC RATE CAP (%) MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
----------------------------- -------------- ----------------- -----------------
<S> <C> <C>
1.000........................................ $ %
1.500........................................
2.000........................................
3.000........................................
6.500........................................
Unlimited(1).................................
Total....................................
</TABLE>
(1) Subject to the Maximum Rate Cap and the Minimum Rate Cap.
<TABLE>
<CAPTION>
PERIODIC RATE CAP
PERCENTAGE OF
CUT-OFF DATE
NUMBER OF AGGREGATE UNPAID AGGREGATE
PERIODIC RATE CAP (%) MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
--------------------- -------------- ----------------- -----------------
<S> <C> <C>
1.000..................................... $ %
1.500.....................................
2.000.....................................
Unlimited(1)..............................
Total.................................
- -----------------
</TABLE>
(1) Subject to the Maximum Rate Cap and the Minimum Rate Cap.
S-28
<PAGE>
<TABLE>
<CAPTION>
ORIGINAL LOAN-TO-VALUE RATIOS
PERCENTAGE OF
CUT-OFF DATE
NUMBER OF AGGREGATE UNPAID AGGREGATE
ORIGINAL LOAN-TO-VALUE RATIOS MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
----------------------------- -------------- ----------------- -----------------
<S> <C> <C>
Less than or equal to 25.00%............... $ %
25.01% - 30.00%............................
30.01% - 35.00%............................
35.01% - 40.00%............................
40.01% - 45.00%............................
45.01% - 50.00%............................
50.01% - 55.00%............................
55.01% - 60.00%............................
60.01% - 65.00%............................
65.01% - 70.00%............................
70.01% - 75.00%............................
75.01% - 80.00%............................
80.01% - 85.00%............................
85.01% - 90.00%............................
90.01% - 95.00%............................
95.01% - 100.00%...........................
Total..................................
</TABLE>
The minimum and maximum Loan-to-Value Ratios at origination of the
Mortgage Loans were approximately ______% and 100.00%, respectively, and the
weighted average Loan-to-Value Ratio at origination of the Mortgage Loans was
approximately _______%.
<TABLE>
<CAPTION>
MORTGAGE LOAN AMORTIZATION
PERCENTAGE OF
CUT-OFF DATE
NUMBER OF AGGREGATE UNPAID AGGREGATE
MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
<S> <C> <C>
Level Amortization........................ $ %
Negative Amortization (110% Cap)..........
Total.................................
<CAPTION>
OCCUPANCY TYPES
PERCENTAGE OF
CUT-OFF DATE
NUMBER OF AGGREGATE UNPAID AGGREGATE
OCCUPANCY (AS INDICATED BY BORROWER) MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------------------------ -------------- ----------------------- ---------------------
<S> <C> <C>
Owner-Occupied Primary Residence......... $ %
Second Homes.............................
Non-Owner Occupied.......................
Total................................
</TABLE>
S-29
<PAGE>
<TABLE>
<CAPTION>
MORTGAGE LOAN PROGRAM
Percentage of
Cut-off Date
NUMBER OF AGGREGATE UNPAID Aggregate
LOAN PROGRAM MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------ -------------- ----------------------- --------------------
<S> <C> <C>
Full Documentation....................... $ %
Limited Documentation....................
No Ratio.................................
Alternate Documentation..................
No Income No Asset.......................
Lite (Self Employed B/C).................
Express..................................
Total................................
</TABLE>
See "--Underwriting" below and Appendix A attached hereto for a description
of each Originator's documentation programs.
<TABLE>
<CAPTION>
RISK CATEGORIES OF MORTGAGE LOANS
<S> <C> <C> <C>
PERCENTAGE OF
CUT-OFF DATE
NUMBER OF AGGREGATE UNPAID AGGREGATE
CREDIT GRADE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
</TABLE>
Total...................................
- -----------------
S-30
<PAGE>
<TABLE>
<CAPTION>
PROPERTY TYPES
PERCENTAGE OF CUT-OFF
NUMBER OF AGGREGATE UNPAID DATE AGGREGATE
PROPERTY TYPE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
------------- -------------- ----------------- -----------------
<S> <C> <C>
Single-family............................... $ %
Planned Unit Development....................
Two- to Four-Family.........................
Condominium.................................
CondoSelect ................................
Manufactured Housing........................
Total....................................
<CAPTION>
GEOGRAPHIC DISTRIBUTION OF MORTGAGED PROPERTIES
PERCENTAGE OF
CUT-OFF DATE
NUMBER OF AGGREGATE UNPAID AGGREGATE
STATE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
----- -------------- ----------------- -----------------
<S> <C> <C>
California................................. $ %
Colorado...................................
Florida....................................
Georgia....................................
Hawaii.....................................
Illinois...................................
Maryland...................................
New Jersey.................................
Utah.......................................
Washington.................................
Other (no more than 3% in
any one state)....................
Total...................................
</TABLE>
No more than approximately ______% of the Mortgage Loans will be
secured by Mortgaged Properties located in any one zip code.
S-31
<PAGE>
<TABLE>
<CAPTION>
PURPOSES OF MORTGAGE LOANS
PERCENTAGE OF
CUT-OFF DATE
NUMBER OF AGGREGATE UNPAID AGGREGATE
LOAN PURPOSE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
------------ -------------- ----------------- -----------------
<S> <C> <C>
Purchase................................. $ %
Refinance/No Equity Take-Out.............
Refinance/Equity Take-Out................
Construction.............................
Total.................................
</TABLE>
In general, in the case of a Mortgage Loan made for "no equity take-out"
refinance purposes, substantially all of the proceeds are used to pay in full
the principal balance of a previous mortgage loan of the mortgagor with respect
to a Mortgaged Property and to pay origination and closing costs associated with
such refinancing. Mortgage Loans made for "equity take-out" refinance purposes
may involve the use of the proceeds to pay in full the principal balance of a
previous mortgage loan and related costs except that a portion of the proceeds
are generally retained by the mortgagor for uses unrelated to the Mortgaged
Property. The amount of such proceeds retained by the mortgagor may be
substantial.
See "--Underwriting" below and Appendix A attached hereto for a description
of each Originator's risk categories.
Specific information with respect to the Mortgage Loans will be available
to purchasers of the Notes on or before the time of issuance of such Notes. If
not included in the Prospectus Supplement, such information will be included in
the Form 8-K.
UNDERWRITING
[See Prospectus Version 1 for sample disclosure and Appendix A.] See "The
Mortgage Pools-Underwriting Standards" in the Prospectus.
DELINQUENCY AND FORECLOSURE EXPERIENCE OF THE SELLER
Based solely upon information provided by the Seller, the following tables
summarize, for the respective dates indicated, the delinquency, foreclosure,
bankruptcy and REO property status with respect to all mortgage loans originated
or acquired by the Seller. The indicated periods of delinquency are based on the
number of days past due on a contractual basis. The monthly payments under all
of such mortgage loans are due on the first day of each calendar month.
<TABLE>
<CAPTION>
At December 31, 1996 March 31, 1997
----------------------------------------- --------------------------------------
NUMBER PRINCIPAL NUMBER PRINCIPAL
OF LOANS AMOUNT OF LOANS AMOUNT
(DOLLARS IN THOUSANDS) (DOLLARS IN THOUSANDS)
<S> <C> <C>
Total Loans Outstanding............... $ $
</TABLE>
S-32
<PAGE>
DELINQUENCY1
Period of Delinquency:
30-59 Days.....................
60-89 Days.....................
90 Days or More................
Total Delinquencies...............
Delinquencies as a Percentage
of Total Loans Outstanding............
- --------
1 The delinquency balances, percentages and numbers set forth under this
heading exclude (a) delinquent mortgage loans that were in foreclosure at
the respective dates indicated ("Foreclosure Loans"), (b) delinquent
mortgage loans as to which the related mortgagor was in bankruptcy
proceedings at the respective dates indicated ("Bankruptcy Loans") and (c)
REO properties that have been purchased upon foreclosure of the related
mortgage loans. All Foreclosure Loans, Bankruptcy Loans and REO properties
have been segregated into the sections of the table entitled "Foreclosures
Pending," "Bankruptcies Pending" and "REO Properties," respectively, and
are not included in the "30-59 Days," "60-89 Days," "90 Days or More" and
"Total Delinquencies" sections of the table. See the section of the table
entitled "Total Delinquencies plus Foreclosures Pending and Bankruptcies
Pending" for total delinquency balances, percentages and numbers which
include Foreclosure Loans and Bankruptcy Loans, and see the section of the
table entitled "REO Properties" for delinquency balances, percentages and
numbers related to REO properties that have been purchased upon foreclosure
of the related mortgage loans.
S-33
<PAGE>
<TABLE>
<CAPTION>
At December 31, 1996 March 31, 1997
----------------------------------------- --------------------------------------
NUMBER PRINCIPAL NUMBER PRINCIPAL
OF LOANS AMOUNT OF LOANS AMOUNT
(DOLLARS IN THOUSANDS) (DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
FORECLOSURES PENDING2.................
Foreclosures Pending as a
Percentage of Total Loans
Outstanding...........................
BANKRUPTCIES PENDING3.................
Bankruptcies Pending as a
Percentage of Total Loans
Outstanding...........................
Total Delinquencies plus
Foreclosures Pending and
Bankruptcies Pending..................
Total Delinquencies plus
Foreclosures Pending and
Bankruptcies Pending as a
Percentage of Total Loans
Outstanding...........................
REO PROPERTIES4.......................
REO Properties as a Percentage
of Total Loans Outstanding............
</TABLE>
The above data on delinquency, foreclosure, bankruptcy and REO property
status are calculated on the basis of the total mortgage loans originated or
acquired by the Seller. However, the total amount of mortgage loans on which the
above data are 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 or to foreclosure or bankruptcy proceedings or
REO property status. In the absence of such mortgage loans, the delinquency,
foreclosure, bankruptcy and REO property percentages indicated above would be
higher and could be substantially higher. Because the Mortgage Pool will consist
of a fixed group of Mortgage Loans, the actual delinquency, 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 above.
- --------
2 Mortgage loans that are in foreclosure but as to which the mortgaged
property has not been liquidated at the respective dates indicated. It is
generally the Master Servicer's policy, with respect to mortgage loans
originated by the Seller, to commence foreclosure proceedings when a
mortgage loan is between 31 and 60 days delinquent.
3 Mortgage loans as to which the related mortgagor is in bankruptcy
proceedings at the respective dates indicated.
4 REO properties that have been purchased upon foreclosure of the related
mortgage loans, including mortgaged properties that were purchased by the
Seller after the respective dates indicated.
S-34
<PAGE>
Based solely on information provided by the Seller, the following table
presents the changes in the Seller's charge-off and recoveries for the period
indicated.
THREE MONTHS ENDED
MARCH 31, 1997
-------------------------
(DOLLARS IN THOUSANDS)
Charge-offs:
Mortgage Loan Properties........................
REO Properties..................................
Recoveries:
Mortgage Loan Properties........................
REO Properties..................................
Net charge-offs.................................
Ratio of net charge-offs to average loans
outstanding during the three months ended March
31, 1997.............................................
- ---------------
The above data on charge-offs and recoveries are calculated on the basis of
the total mortgage loans originated or acquired by the Seller. However, the
total amount of mortgage loans on which the above data are 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 charge-offs. In the absence of
such mortgage loans, the charge-off percentages indicated above would be higher
and could be substantially higher. Because the Mortgage Pool will consist of a
fixed group of Mortgage Loans, the actual charge-off percentages with respect to
the Mortgage Pool may therefore be expected to be higher, and may be
substantially higher, than the percentages indicated above.
The information set forth in the preceding paragraphs concerning
_____________ has been provided by ________________.
For loss and delinquency information with respect to mortgage loans serviced
by ______________, see "Description of the Servicing Agreement--The Master
Servicer; the Subservicer" 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 Cut-off Date, as adjusted for the scheduled principal
payments due on or before such date. 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 Notes are issued
although the range of Mortgage Rates and maturities and certain other
characteristics of the Mortgage Loans in the Mortgage Pool may vary.
A Current Report on Form 8-K will be available to purchasers of the Notes
and will be filed, together with the Servicing Agreement, the Trust Agreement
and the Indenture, with the Securities and Exchange Commission within fifteen
days after the initial issuance of the Notes. 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.
S-35
<PAGE>
See "The Mortgage Pools" and "Certain Legal Aspects of Mortgage Loans" in
the Prospectus.
THE ISSUER
The _______________ Trust Series 199_-_, is a business trust formed under
the laws of the State of Delaware pursuant to the Trust Agreement dated as of
__________, 199_ between the Company and ____________________ as the Owner
Trustee for the transactions described in this Prospectus Supplement. The Trust
Agreement constitutes the "governing instrument" under the laws of the State of
Delaware relating to business trusts. After its formation, the Issuer will not
engage in any activity other than (i) acquiring and holding the Mortgage Loans
and the other assets of the Issuer and proceeds therefrom, (ii) issuing the
Notes and the Certificates, (iii) making payments on the Notes and the
Certificates and (iv) engaging in other activities that are necessary, suitable
or convenient to accomplish the foregoing or are incidental thereto or connected
therewith.
The assets of the Issuer will consist of the Mortgage Loans and certain
related assets.
The Issuer's principal offices are in
____________________________________________, in care of
___________________________, as Owner Trustee, at the address listed below.
THE OWNER TRUSTEE
Wilmington Trust Company is the Owner Trustee under the Trust Agreement. The
Owner Trustee is a ________________ banking corporation and its principal
offices are located in _______________.
Neither the Owner Trustee nor any director, officer or employee of the Owner
Trustee will be under any liability to the Issuer or the Noteholders under the
Trust Agreement under any circumstances, except for the Owner Trustee's own
misconduct, gross negligence, bad faith or grossly negligent failure to act or
in the case of the inaccuracy of certain representations made by the Owner
Trustee in the Trust Agreement. All persons into which the Owner Trustee may be
merged or with which it may be consolidated or any person resulting from such
merger or consolidation shall be the successor of the Owner Trustee under the
Trust Agreement.
THE INDENTURE TRUSTEE
_______________________________ will act as Indenture Trustee with respect
to the Indenture. The Indenture Trustee will provide to a prospective or actual
Noteholder without charge, upon written request, a copy of the Indenture.
Requests should be addressed to the Indenture Trustee at ______
- -----------------------------------------------------------------.
[NOTE INSURER]
S-36
<PAGE>
DESCRIPTION OF THE NOTES
GENERAL
The Notes will be issued pursuant to the Indenture dated as of _____, 199_,
between the Issuer and ____________________________, as Indenture Trustee. The
Certificates (together with the Notes, the "Securities") will be issued pursuant
to the Trust Agreement dated as of ________________, 199_, between the Company
and _______________________, as Owner Trustee. The following summaries describe
certain provisions of the Securities, the Indenture, the Trust Agreement and the
Servicing Agreement. The summaries do not purport to be complete and are subject
to, and qualified in their entirety by reference to, the provisions of the
applicable agreement. Only the Notes are offered hereby.
The Notes will be secured by the pledge by the Issuer of its assets to the
Indenture Trustee pursuant to the Indenture which will consist of the following
(such assets, collectively, the "Trust Fund"): (i) the Mortgage Loans; (ii)
collections in respect of principal and interest of the Mortgage Loans received
after the Cut-Off Date (other than payments due on or before the Cut-off Date);
(iii) the amounts on deposit in any Collection Account (as defined in the
Prospectus), including the account in which amounts are deposited prior to
payment to the Noteholders (the "Payment Account"), including net earnings
thereon; (iv) certain insurance policies maintained by the Mortgagors or by or
on behalf of the Master Servicer or related subservicer in respect of the
Mortgage Loans; (v) an assignment of the Company's rights under the Purchase
Agreement and the Servicing Agreement; and (vi) proceeds of the foregoing.
The Notes will be issued in denominations of $25,000 and integral multiples
of $1 in excess thereof. See "--Book-Entry Notes" below.
BOOK-ENTRY NOTES
GENERAL. Beneficial Owners that are not Participants or Intermediaries (as
defined in the Prospectus) but desire to purchase, sell or otherwise transfer
ownership of, or other interests in, the related Book-Entry Notes may do so only
through Participants and Intermediaries. In addition, Beneficial Owners will
receive all payments of principal of and interest on the related Book-Entry
Notes from the Paying Agent (as defined in the Prospectus) through DTC and
Participants. Accordingly, Beneficial Owners may experience delays in their
receipt of payments. Unless and until Definitive Notes are issued for the
related Book-Entry Notes, it is anticipated that the only registered Noteholder
of such Book-Entry Notes will be Cede, as nominee of DTC. Beneficial Owners will
not be recognized by the Indenture Trustee or the Master Servicer as
Noteholders, as such term is used in the Indenture, and Beneficial Owners will
be permitted to receive information furnished to Noteholders and to exercise the
rights of Noteholders only indirectly through DTC, its Participants and
Intermediaries.
Under the rules, regulations and procedures creating and affecting DTC and
its operations (the "Rules"), DTC is required to make book-entry transfers of
Book-Entry Notes among Participants and to receive and transmit payments of
principal of, and interest on, such Book-Entry Notes. Participants and
Intermediaries with which Beneficial Owners have accounts with respect to such
Book-Entry Notes similarly are required to make book-entry transfers and receive
and transmit such payments on behalf of their respective Beneficial Owners.
Accordingly, although Beneficial Owners will not possess physical certificates
evidencing their interests in the Book-Entry Notes, the Rules provide a
mechanism by which Beneficial Owners, through their Participants and
Intermediaries, will receive payments and will be able to transfer their
interests in the Book-Entry Notes.
None of the Company, the Master Servicer, the Note Insurer, the Owner
Trustee or the Indenture Trustee will have any liability for any actions taken
by DTC or its nominee, including, without limitation,
S-37
<PAGE>
actions for any aspect of the records relating to or payments made on account of
beneficial ownership interests in the Book-Entry Notes held by Cede, as nominee
for DTC, or for maintaining, supervising or
reviewing any records relating to such beneficial ownership interests.
DEFINITIVE NOTES. Definitive Notes will be issued to Beneficial Owners or
their nominees, respectively, rather than to DTC or its nominee, only under the
limited conditions set forth in the Prospectus under "Description of the
Notes--Form of Notes."
Upon the occurrence of an event described in the Prospectus in the third
paragraph under "Description of the Notes--Form of Notes," the Indenture Trustee
is required to notify, through DTC, Participants who have ownership of
Book-Entry Notes as indicated on the records of DTC of the availability of
Definitive Notes for their Book-Entry Notes. Upon surrender by DTC of the
definitive certificates representing the Book-Entry Notes and upon receipt of
instructions from DTC for re-registration, the Indenture Trustee will reissue
the Book-Entry Notes as Definitive Notes issued in the respective principal
amounts owned by individual Beneficial Owners, and thereafter the Indenture
Trustee will recognize the holders of such Definitive Notes as Noteholders under
the Indenture.
For additional information regarding DTC and the Book-Entry Notes, see
"Description of the Notes--Form of Notes" in the Prospectus.
PAYMENTS
Payments on the Notes will be made by the Indenture Trustee or the Paying
Agent on the __th day of each month or, if such day is not a Business Day, then
the next succeeding Business Day, commencing in ________ 199_. Payments on the
Notes will be made to the persons in whose names such Notes are registered at
the close of business on the day prior to each Payment Date or, if the Notes are
no longer Book-Entry Notes, on the Record Date. See "Description of the
Notes--Payments" in the Prospectus. Payments will be made by check or money
order mailed (or upon the request, at least five Business Days prior to the
related Record Date, of a Holder owning Notes having denominations aggregating
at least $5,000,000, by wire transfer or otherwise) to the address of the person
entitled thereto (which, in the case of Book-Entry Notes, will be DTC or its
nominee) as it appears on the Security Register in amounts calculated as
described herein as of the Determination Date. However, the final payment in
respect of the Notes will be made only upon presentation and surrender thereof
at the office or the agency of the Indenture Trustee specified in the notice to
Holders of such final payment. A "Business Day" is any day other than (i) a
Saturday or Sunday or (ii) a day on which banking institutions in New York City,
Delaware, California or in the city in which the corporate trust offices of the
Indenture Trustee or the principal office of the Note Insurer are located, are
required or authorized by law to be closed.
AVAILABLE FUNDS
The "Available Funds" for any Payment Date will equal the amount received by
the Indenture Trustee and available in the Payment Account on each Payment Date.
The Available Funds will generally be equal to the sum of (i) the aggregate
amount of scheduled payments on the related Mortgage Loans due on the related
Due Date and received on or prior to the related Determination Date, (ii) any
amounts representing interest on amounts in the Payment Account and
miscellaneous fees and collections, including assumption fees, to the extent not
paid to any Subservicer, (iii) any unscheduled payments and receipts, including
Mortgagor prepayments on such Mortgage Loans, received during the related
Prepayment Period, and (iv) all Advances made for such Payment Date in respect
of such Mortgage Loans, in each case net of amounts reimbursable therefrom to
the Master Servicer and any Subservicer and reduced by Servicing Fees,
Administrative Fees and fees of the Indenture Trustee paid by the Master
Servicer. With respect to any Payment Date, (i) the Due Date is the first day of
the month in which such Payment Date occurs, and (ii)
S-38
<PAGE>
the Determination Date is the fourth Business Day prior to such Payment Date, or
if such day is not a business day, the immediately preceding business day.
INTEREST PAYMENTS ON THE NOTES
On each Payment Date, holders of the Notes will be entitled to receive an
amount (the "Interest Payment Amount") equal to interest accrued during the
related Interest Period (as defined herein) on the Note Principal Balance
thereof at the then-applicable Note Interest Rate (as defined below), minus (i)
any Prepayment Interest Shortfalls and Relief Act Shortfalls (each as defined
below) to the extent not covered by the Master Servicer by Compensating Interest
(as defined below) for such Payment Date and (ii) any Deferred Interest for such
Payment Date allocated thereto as described below. With respect to each Payment
Date, interest payable on the Notes will accrue during the Interest Period.
Interest will be calculated on the basis of the actual number of days in the
Interest Period and an a 360-day year. Notwithstanding the foregoing, if
payments are not made as required under the Note Insurance Policy, additional
interest shortfalls may be allocated to the Notes as described below. See
"Description of the Notes--Note Insurance Policy."
To the extent that Deferred Interest causes a shortfall in interest
collections on the Mortgage Loans that would otherwise cause a shortfall in the
amount of interest payable to the Noteholders, such amount will be paid using
principal collections on the Mortgage Loans through the priority of payment
provisions described under "-Priority of Payment" below. To the extent that the
Interest Payment Amount for any Payment Date exceeds Available Funds for such
Payment Date, the lesser of such excess and the aggregate amount of Deferred
Interest, if any, that is added to the principal balance of the Negative
Amortization Loans on the Due Date occurring in the month in which such Payment
Date occurs will be added to the Note Principal Balance of the Notes and
subtracted from the Interest Payment Amount for such Payment Date.
The "Prepayment Interest Shortfall" for any Payment Date is equal to the
aggregate shortfall, if any, in collections of interest resulting from Mortgagor
prepayments on the Mortgage Loans during the preceding calendar month. Such
shortfalls will result because interest on prepayments in full is distributed
only to the date of prepayment, and because no interest is distributed on
prepayments in part, as such prepayments in part are applied to reduce the
outstanding principal balance of the related Mortgage Loans as of the Due Date
in the month of prepayment. However, with respect to any Payment Date, any
Prepayment Interest Shortfalls during the preceding calendar month will be
offset by the Master Servicer, but only to the extent such Prepayment Interest
Shortfalls do not exceed an amount equal to the total servicing fee payable to
the Master Servicer and any Subservicer with respect to such Payment Date. No
assurance can be given that the servicing compensation available to cover
Prepayment Interest Shortfalls will be sufficient therefor. See "The Servicing
Agreement--Servicing and Other Compensation and Payment of Expenses." The
"Relief Act Shortfalls" for any Payment Date are any shortfalls relating to the
Relief Act (as defined in the Prospectus) or similar legislation or regulations.
On each Payment Date after the first Payment Date, the Note Interest Rate
will be a floating rate equal to the lesser of (i)(a) with respect to each
Payment Date up to and including the earlier of (x) the Payment Date in ________
_______ and (y) the Payment Date which occurs on or prior to the date on which
the aggregate Principal Balance of the Mortgage Loans is less than 25% of the
aggregate Principal Balance of the Mortgage Loans as of the Cut-off Date,
One-Month LIBOR (as defined herein) plus 0.22%, and (b) with respect to each
Payment Date thereafter, One-Month LIBOR plus 0.44% and (ii) the Available Funds
Interest Rate with respect to such Payment Date. On the first Payment Date, the
Note Interest Rate will be equal to _______% per annum.
S-39
<PAGE>
The "Available Funds Interest Rate" for any Payment Date is a rate per annum
equal to the lesser of (x) the fraction, expressed as a percentage, the
numerator of which is (i) an amount equal to (A) 1/12 of the aggregate Principal
Balance of the then outstanding Mortgage Loans times the weighted average of the
Expense Adjusted Mortgage Rates on the then outstanding Mortgage Loans minus (B)
the amount of the fee payable to the Owner Trustee with respect to the Trust
Agreement and the premium with respect to the Notes payable to the Note Insurer
with respect to the Note Insurance Policy for such Payment Date, and the
denominator of which is (ii) an amount equal to (A) the then outstanding
aggregate Note Principal Balance of the Notes multiplied by (B) the actual
number of days elapsed in the related Interest Period (as defined herein)
divided by 360 and (y) ________% per annum (the "Maximum Note Interest Rate").
The amount of the fee payable to the Owner Trustee together with the amount of
the premium payable to the Note Insurer (together, the "Administrative Fee")
will accrue at ________% per annum based on the Note Principal Balance of the
Notes.
The "Expense Adjusted Mortgage Rate" on any Mortgage Loan is equal to the
then applicable Mortgage Rate thereon minus the sum of (i) the Minimum Spread
and (ii) the Servicing Fee Rate and (iii) the Indenture Trustee Fee Rate. For
any Payment Date, the Minimum Spread is equal to ____% per annum, the Servicing
Fee Rate is equal to _____% per annum and the Indenture Trustee Fee Rate is
equal to ____% per annum.
As further described herein, with respect to the Notes and any Payment Date,
to the extent that (a) the lesser of (x) the amount payable if clause (i) of the
definition of Note Interest Rate above is used to calculate interest and (y) the
amount payable if the Maximum Note Interest Rate is used to calculate interest
exceeds (b) the amount payable if clause (ii) of the definition of Note Interest
Rate above is used to calculate interest (such excess, the "Available Funds Cap
Carry-Forward Amount"), the holders of the Notes will be paid the amount of such
Available Funds Cap Carry-Forward Amount with interest thereon at the Note
Interest Rate for the Notes applicable from time to time after certain payments
to the holders of the Notes and the Note Insurer to the extent of available
funds. The Note Insurance Policy does not cover the Available Funds Cap
Carry-Forward Amount, nor do the ratings assigned to the Notes address the
payment of the Available Funds Cap Carry-Forward Amount.
As described herein, the Interest Payment Amount allocable to the Notes is
based on their Note Principal Balance. The "Note Principal Balance" of any Note
as of any date of determination is equal to the initial Note Principal Balance
thereof, increased by any Deferred Interest allocated thereto, and reduced by
all amounts allocable to the Principal Payment Amount and the Subordination
Increase Amount previously distributed with respect to such Note.
The "Principal Balance" of any Mortgage Loan is, at any given time, the
Principal Balance as of the Cut-off Date of such Mortgage Loan, increased by all
Deferred Interest thereon, minus (a) the sum of all amounts paid or advanced
with respect to such Mortgage Loan with respect to principal and (b) the
principal portion of any losses with respect thereto for any previous Payment
Date.
CALCULATION OF ONE-MONTH LIBOR
On the second business day preceding each Payment Date, commencing with the
Payment Date occurring in ________ 199_ (each such date, an "Interest
Determination Date"), the Indenture Trustee will determine the London interbank
offered rate for one-month United States dollar deposits ("One-Month LIBOR") for
the next Interest Period for the Notes on the basis of the offered rates of the
Reference Banks for one-month United States dollar deposits, as such rates
appear on the Reuter Screen LIBO Page, as of 11:00 a.m. (London time) on such
Interest Determination Date. As used in this section, "business day" means a day
on which banks are open for dealing in foreign currency and exchange in London
and New York City; "Reuter Screen LIBO Page" means the display designated as
page "LIBO" on the Reuter
S-40
<PAGE>
Monitor Money Rates Service (or such other page as may replace the LIBO page on
that service for the purpose of displaying London interbank offered rates of
major banks); and "Reference Banks" means leading banks selected by the
Indenture Trustee and engaged in transactions in Eurodollar deposits in the
international Eurocurrency market (i) with an established place of business in
London, (ii) whose quotations appear on the Reuter Screen LIBO Page on the
Interest Determination Date in question, (iii) which have been designated as
such by the Indenture Trustee and (iv) not controlling, controlled by, or under
common control with, the Company or the Seller.
On each Interest Determination Date, One-Month LIBOR for the related
Interest Period for the Notes will be established by the Indenture Trustee as
follows:
(a) If on such Interest Determination Date two or more Reference
Banks provide such offered quotations, One-Month LIBOR for the related
Interest Period shall be the arithmetic mean of such offered quotations
(rounded upwards if necessary to the nearest whole multiple of 0.0625%).
(b) If on such Interest Determination Date fewer than two Reference
Banks provide such offered quotations, One-Month LIBOR for the related
Interest Period shall be the higher of (x) One-Month LIBOR as determined on
the previous Interest Determination Date and (y) the Reserve Interest
Rate.
The "Reserve Interest Rate" shall be the rate per annum that the Indenture
Trustee determines to be either (i) the arithmetic mean (rounded upwards if
necessary to the nearest whole multiple of 0.0625%) of the one-month United
States dollar lending rates which New York City banks selected by the
Indenture Trustee are quoting on the relevant Interest Determination Date
to the principal London offices of leading banks in the London interbank
market or (ii) in the event that the Indenture Trustee can determine no
such arithmetic mean, the lowest one-month United States dollar lending
rate which New York City banks selected by the Indenture Trustee are
quoting on such Interest Determination Date to leading European banks.
The establishment of One-Month LIBOR on each Interest Determination Date by
the Indenture Trustee and the Indenture Trustee's calculation of the rate of
interest applicable to the Notes for the related Interest Period shall (in the
absence of manifest error) be final and binding.
PRINCIPAL PAYMENTS ON THE NOTES
The "Principal Payment Amount" for any Payment Date will be equal to the
lesser of (a) the sum of the Available Funds remaining after distributions
pursuant to clause (i) of "--Priority of Payment" below and any portion of any
Insured Amount for such Payment Date representing a Subordination Deficit and
(b) the sum of:
(i) the principal portion of all scheduled monthly payments on the
Mortgage Loans received or Advanced (as defined herein) on the Mortgage
Loans with respect to the related Due Date;
(ii) the principal portion of all proceeds of the repurchase of a
Mortgage Loan (or, in the case of a substitution, certain amounts
representing a principal adjustment) pursuant to the Servicing
Agreement during the preceding calendar month;
(iii) the principal portion of all other unscheduled collections
received during the related Prepayment Period (or deemed to be received
during the related Prepayment Period) (including, without limitation, full
and partial Principal Prepayments made by the respective Mortgagors,
Liquidation Proceeds and Insurance Proceeds (excluding proceeds paid in
respect of the Note Insurance Policy)), to the extent not distributed in
the preceding month; and
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(iv) any Insured Payment made with respect to any Subordination
Deficit;
MINUS
(v) the amount of any Subordination Reduction Amount for such
Payment Date.
In no event will the Principal Payment Amount with respect to any Payment
Date be (x) less than zero or (y) greater than the then outstanding Note
Principal Balance of the Notes.
PRIORITY OF PAYMENT
On each Payment Date, Available Funds and any Insured Amount with respect
to such Payment Date will be allocated to the Securities in the following order
of priority, in each case to the extent of Available
Funds remaining:
(i) to the Noteholders, the Interest Payment Amount with respect to
such Payment Date;
(ii) to the Noteholders, the Principal Payment Amount with respect to
such Payment Date;
(iii) to the Note Insurer, the aggregate of all payments, if any, made
by the Note Insurer under the Note Insurance Policy and any other amounts
due to the Note Insurer pursuant to the Insurance Agreement, to the extent
not previously paid or reimbursed (the "Reimbursement Amount");
(iv) to the Noteholders, the Subordination Increase Amount (as defined
in "--Overcollateralization Provisions" below), in reduction of the Note
Principal Balance thereof, until the Note Principal Balance has been
reduced to zero;
(v) to the Noteholders, any Available Funds Cap Carry-Forward Amount
for such Payment Date;
(vi) to the Indenture Trustee, for any amounts owing to the Indenture
Trustee; and
(vii) any remaining amounts to the holders of the Certificates.
OVERCOLLATERALIZATION PROVISIONS
OVERCOLLATERALIZATION RESULTING FROM CASH FLOW STRUCTURE.
With respect to any Payment Date, the excess, if any, of (x) the sum of the
aggregate Principal Balances of the Mortgage Loans as of the close of business
on the last day of the period commencing on the second day of the month
preceding the month of such Payment Date (or, with respect to the first Payment
Date, the day following the Cut-Off Date) and ending on the related Due Date
(such period, the "Due Period") over (y) the Note Principal Balance of the Notes
as of such Payment Date (and following the making of all payments made on such
Payment Date) is the "Subordination Amount" as of such Payment Date. The
Indenture requires that, on each Payment Date, the Net Monthly Excess Cashflow,
if any, be applied on such Payment Date as an accelerated payment of principal
on the Notes, but only to the limited extent hereafter described. The "Net
Monthly Excess Cashflow" for any Payment Date is equal to the amount of
Available Funds remaining after application to items (i) through (iii) under
"--Priority of Payment" herein. This application has the effect of accelerating
the amortization of the Notes relative to the amortization of the Mortgage
Loans. The Indenture requires that the Net Monthly Excess Cashflow
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will be applied as an accelerated payment of principal on the Notes until the
Subordination Amount has increased to the level equal to the Required
Subordination Amount for such Payment Date.
Any amount of Net Monthly Excess Cashflow actually applied as an
accelerated payment of principal is a "Subordination Increase Amount." The
required level of the Subordination Amount with respect to a Payment Date is the
"Required Subordination Amount" with respect to such Payment Date. Initially,
the aggregate Principal Balance of the Mortgage Loans as of the Cut-off Date
will exceed the aggregate Note Principal Balance of the Notes as of the Delivery
Date by approximately $_____________ or _____% of the aggregate Principal
Balance of the Mortgage Loans as of the Cut-off Date. This amount is the initial
Required Subordination Amount. The Indenture generally provides that the
Required Subordination Amount may, over time, decrease, or increase, subject to
certain floors, caps and triggers.
In the event that the Required Subordination Amount is permitted to
decrease or "step down" on a Payment Date in the future, the Indenture provides
that a portion of the principal which would otherwise be distributed to the
Holders of the Notes on such Payment Date shall be distributed to the Holders of
the Certificates on such Payment Date. This has the effect of decelerating the
amortization of the Notes relative to the amortization of the Mortgage Loans,
and of reducing the Subordination Amount. With respect to any Payment Date, the
difference, if any, between (a) the Subordination Amount that would result on
such Payment Date after taking into account all payments to be made on such
Payment Date (exclusive of any reductions thereto attributable to Subordination
Reduction Amounts (as described below) on such Payment Date) and (b) the
Required Subordination Amount for such Payment Date is the "Excess Subordination
Amount" with respect to such Payment Date. With respect to any Payment Date, an
amount equal to the lesser of (a) the Excess Subordination Amount and (b) the
principal collections received by the Master Servicer with respect to the prior
Due Period is the "Subordination Reduction Amount." In addition, a Subordination
Reduction Amount may result even prior to the occurrence of any decrease or
"step down" in the Required Subordination Amount. This is because the Holders of
the Notes will generally be entitled to receive 100% of collected principal,
even though the Note Principal Balance of the Notes will represent less than
100% of the Mortgage Loans' principal balance. In the absence of the provisions
relating to the Subordination Reduction Amount, the foregoing may otherwise
increase the Subordination Amount above the Required Subordination Amount even
without the application of any Net Monthly Excess Cashflow.
The Indenture provides that, on any Payment Date, all unscheduled
collections on account of principal (other than any such amount applied to the
payment of a Subordination Reduction Amount) with respect to Mortgage Loans
during the calendar month preceding the calendar month in which such Payment
Date occurs (the "Prepayment Period") will be distributed to the Holders of the
Notes on such Payment Date. If any Mortgage Loan became a Liquidated Mortgage
Loan (as defined below) during such Prepayment Period, the net Liquidation
Proceeds (as defined in the Prospectus) related thereto and allocated to
principal may be less than the Principal Balance of the related Mortgage Loan;
the amount of any such insufficiency is generally defined as a "Realized Loss."
A "Liquidated Mortgage Loan" is, in general, a defaulted Mortgage Loan as to
which the Master Servicer has determined that all amounts that it expects to
recover on such Mortgage Loan have been recovered (exclusive of any possibility
of a deficiency judgment). The principal balance of any Mortgage Loan after it
becomes a Liquidated Mortgage Loan shall equal zero. The Indenture does not
contain any provision which requires that the amount of any Realized Loss should
be distributed to the Holders of the Notes on the Payment Date which immediately
follows the event of loss; I.E., the Indenture does not require the current
recovery of losses. However, the occurrence of a Realized Loss will reduce the
Subordination Amount, which, to the extent that such reduction causes the
Subordination Amount to be less than the Required Subordination Amount
applicable to the related Payment Date, will require the payment of a
Subordination Increase Amount on such Payment Date (or, if insufficient funds
are available on such Payment Date, on subsequent Payment Dates, until the
Subordination Amount equals the Required Subordination Amount). The effect of
the foregoing is to
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allocate losses to overcollateralization by reducing, or eliminating entirely,
payments of Net Monthly Excess Cashflow and of Subordination Reduction Amounts
which the holders of the Certificates would otherwise receive.
OVERCOLLATERALIZATION AND THE NOTE INSURANCE POLICY. The Indenture defines
a "Subordination Deficit" with respect to a Payment Date to be the amount, if
any, by which (x) the aggregate Note Principal Balance of the Notes as of such
Payment Date, and following the making of all payments to be made on such
Payment Date (except for any payment to be made as to principal from proceeds of
the Note Insurance Policy), exceeds (y) the aggregate Principal Balances of the
Mortgage Loans as of the close of business on the Due Date preceding such
Payment Date. The Indenture requires the Indenture Trustee to make a claim for
an Insured Amount under the Note Insurance Policy not later than the third
Business Day prior to any Payment Date as to which the Indenture Trustee has
determined that a Subordination Deficit will occur for the purpose of applying
the proceeds of such Insured Amount as a payment of principal to the Holders of
the Notes on such Payment Date. Investors in the Notes should realize that,
under extreme loss or delinquency scenarios, they may temporarily receive no
payments of principal.
NOTE INSURANCE POLICY
The following summary describes certain terms of the Note Insurance Policy,
to be dated as of the Delivery Date. The summary does not purport to be complete
and is subject to, and qualified in its entirety
by reference to, the provisions of the Note Insurance Policy.
On the Delivery Date, the Note Insurer will issue the Note Insurance Policy
in favor of the Indenture Trustee on behalf of the Noteholders. The Note
Insurance Policy will unconditionally and irrevocably guarantee certain payments
on the Notes. Draws will be made on the Note Insurance Policy (any such draw, an
"Insured Amount") to cover Deficiency Amounts and Preference Amounts. A
"Deficiency Amount" means (A) with respect to each Payment Date prior to the
Final Scheduled Payment Date, an amount equal to the sum of (i) the excess, if
any, of the Interest Payment Amount over the Available Funds for such Payment
Date and (ii) any Subordination Deficit; (B) with respect to the Final Scheduled
Payment Date, an amount equal to the sum of (i) the excess, if any, of the
Interest Payment Amount over the Available Funds for such Payment Date and (ii)
the excess, if any, of the Note Principal Balance of all Outstanding Notes due
on such Final Scheduled Payment Date over Available Funds not used to pay the
Interest Payment Amount for such Final Scheduled Payment Date; and (C) for any
date on which the acceleration of the Notes has been directed or consented to by
the Note Insurer pursuant to Section 5.02 of the Indenture, an amount equal to
the excess, if any, of the sum of the Note Principal Balance of the Notes,
together with accrued and unpaid interest thereon through the date of payment of
such accelerated Notes, over the Available Funds for such date of payment. For
purposes of the foregoing, amounts in the Payment Account available for interest
distributions on any Payment Date shall be deemed to include all amounts in the
Payment Account for such Payment Date available for distribution on such Payment
Date. A "Preference Amount" means any amount previously distributed to a
Noteholder that is recoverable and sought to be recovered as a voidable
preference by a trustee in bankruptcy pursuant to the United States Bankruptcy
Code (11 U.S.C.), as amended from time to time, in accordance with a final
nonappealable order of a court having competent jurisdiction. Prepayment
Interest Shortfalls, Relief Act Shortfalls and any Available Funds Cap
Carry-Forward Amount will not be covered by the Note Insurance Policy. Deferred
Interest will not be covered by the Note Insurance Policy except with respect to
Deferred Interest which is added to the Note Principal Balance of the Notes.
Pursuant to the terms of the Indenture, draws under the Note Insurance Policy in
respect of any Subordination Deficit will be paid to the Noteholders by the
Paying Agent as principal. In the absence of payments under the Note Insurance
Policy, Noteholders will directly bear the credit risks associated with their
investment to the extent such risks are not covered by the Subordination Amount
or otherwise.
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ADVANCES
Prior to each Payment Date, the Master Servicer is required under the
Servicing Agreement to make Advances (out of its own funds, advances made by a
Subservicer, or funds held in the Collection Account (as described in the
Prospectus) for future payment or withdrawal) with respect to any payments of
principal and interest (net of the Servicing Fee Rate) which were due on the
Mortgage Loans on the immediately preceding Due Date and which are delinquent on
the business day next preceding the related Determination Date.
Such Advances are required to be made only to the extent they are deemed by
the Master Servicer to be recoverable from related late collections, Insurance
Proceeds, or Liquidation Proceeds. The purpose of making such Advances is to
maintain a regular cash flow to the Noteholders, rather than to guarantee or
insure against losses. Any failure by the Master Servicer to make an Advance as
required under the Servicing Agreement will constitute an Event of Default
thereunder, in which case the Indenture Trustee, as successor Master Servicer,
will be obligated to make any such Advance, in accordance with the terms of the
Servicing Agreement.
All Advances will be reimbursable to the Master Servicer on a first
priority basis from late collections, Insurance Proceeds or Liquidation Proceeds
from the Mortgage Loan as to which such unreimbursed Advance was made. In
addition, any Advances previously made which are deemed by the Master Servicer
to be nonrecoverable from related late collections, Insurance Proceeds and
Liquidation Proceeds may be reimbursed to the Master Servicer out of any funds
in the Collection Account prior to payments on the Notes.
THE PAYING AGENT
The Paying Agent shall initially be the Indenture Trustee. The Paying Agent
shall have the revocable power to withdraw funds from the Payment Account for
the purpose of making payments to the
Noteholders.
OPTIONAL REDEMPTION
The Notes may be redeemed in whole, but not in part, by the Issuer on any
Payment Date on or after the earlier of (i) the Payment Date on which the
aggregate Principal Balance of the Mortgage Loans is less than or equal to 25%
of the aggregate Principal Balance of the Mortgage Loans as of the Cut-off Date
or (ii) the Payment Date occurring in _______ ______. The purchase price will be
equal to 100% of the aggregate outstanding Note Principal Balance and accrued
and unpaid interest thereon (including any Available Funds Cap Carry-Forward
Amount) at the Note Interest Rate through the date on which the Notes are
redeemed in full together with all amounts due and owing to the Note Insurer and
the Indenture Trustee. The "Final Scheduled Payment Date" is the Payment Date
occurring in __________.
CERTAIN YIELD AND PREPAYMENT CONSIDERATIONS
The yield to maturity of the Notes will depend on the price paid by the
holder for such Note, the Note Interest Rate and the rate and timing of
principal payments (including payments in excess of required installments,
prepayments or terminations, liquidations, repurchases and negative
amortization) on the Mortgage Loans and the allocation thereof. Such yield 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 and liquidations of
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defaulted Mortgage Loans, the negative amortization feature of the Negative
Amortization Loans and purchases of Mortgage Loans due to certain breaches of
representations and warranties or the conversion of Convertible Mortgage Loans.
The timing of changes in the rate of prepayments, liquidations, repurchases and
negative amortization of the Mortgage Loans may, and the timing of 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. 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 Notes. In the event that
substantial numbers of Mortgagors exercise their conversion rights with respect
to Convertible Mortgage Loans, and the related Subservicers or the Master
Servicer purchase the Converting and Converted Mortgage Loans, the Mortgage Pool
will experience some prepayment of principal.
Certain of the Mortgage Loans may be prepaid in full or in part at any time
without penalty. The Mortgage Loans (except for the Convertible Mortgage Loans)
generally are assumable under certain circumstances if, in the sole judgment of
the Master Servicer or Subservicer, the prospective purchaser of a Mortgaged
Property is creditworthy and the security for such Mortgage Loan is not impaired
by the assumption. The Convertible Mortgage Loans are not assumable if the
related Mortgagor has exercised its option to convert such Mortgage Loan into a
fixed rate mortgage loan, in which case the Mortgage Note with respect to such
mortgage loan would generally contain a customary "due on sale" provision. The
Master Servicer shall enforce any due-on-sale clause contained in any Mortgage
Note or Mortgage, to the extent permitted under applicable law and governmental
regulations; provided, however, if the Master Servicer determines that it is
reasonably likely that any Mortgagor will bring, or if any Mortgagor does bring,
legal action to declare invalid or otherwise avoid enforcement of a due-on-sale
clause contained in any Mortgage Note or Mortgage, the Master Servicer shall not
be required to enforce the due-on-sale clause or to contest such action. The
extent to which the Mortgage Loans are assumed by purchasers of the Mortgaged
Properties rather than prepaid by the related Mortgagors in connection with the
sales of the Mortgaged Properties will affect the weighted average life of the
Notes and may result in a prepayment experience on the Mortgage Loans that
differs from that on other conventional mortgage loans. See "Maturity and
Prepayment Considerations" in the Prospectus. Prepayments, liquidations and
purchases of the Mortgage Loans will result in payments to holders of the Notes
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 (other than mortgage loans similar to the
CondoSelect Loans, as described below) 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 and servicing decisions.
To accommodate changes in the interest portion of the monthly payment due
on each Negative Amortization Loan resulting from monthly changes in the
Mortgage Rate, the monthly payment will be adjusted annually on each Payment
Adjustment Date, subject to an increase or decrease of not more than 7.5% in the
monthly payment from that in effect immediately prior to such Payment Adjustment
Date, except as otherwise provided under "Description of the Mortgage
Pool-Negative Amortization Loans" herein. However, due to the Payment Cap and
the fact that the Mortgage Rates on the Negative Amortization Loans are subject
to change monthly while the monthly payments due thereon are only subject to
change annually, the portion of each monthly payment allocated to interest and
that allocated to principal could vary significantly. If an adjustment of the
Mortgage Rate on any Negative Amortization Loan results in Deferred Interest,
such Deferred Interest will be added to the principal balance of the Negative
Amortization Loan, resulting in negative amortization. If an adjustment to the
Mortgage Rate on any Negative Amortization Loan causes the amount of the accrued
interest to exceed the scheduled interest component of the monthly payment and
to be less than the entire monthly payment, the principal balance will not be
reduced in accordance with a fully amortizing schedule, and therefore reduced
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amortization will result. If an adjustment to the Mortgage Rate on any Negative
Amortization Loan causes the amount of interest accrued in any month to be less
than the scheduled interest component of the then current monthly payment, such
excess will be applied to reduce the outstanding principal balance on the
related Negative Amortization Loan, thereby resulting in accelerated
amortization of such Negative Amortization Loan.
Several factors contribute to the increased risk of default in connection
with negatively amortizing mortgage loans. The outstanding principal balance of
a mortgage loan which is subject to negative amortization increases by the
amount of interest which is deferred as herein described. During periods in
which the outstanding principal balance of a Negative Amortization Loan is
increasing due to the addition of Deferred Interest thereto, such increasing
principal balance of the Negative Amortization Loan may approach or exceed the
value of the related Mortgaged Property, thus increasing the likelihood of
defaults as well as the amount of any loss experienced with respect to any such
Negative Amortization Loan that is required to be liquidated. Additionally,
although increases in the amount of the related monthly payments are subject to
Payment Caps, such Payment Caps are not in effect on any of the Recast Dates, as
described herein, or when the outstanding principal balance exceeds the Negative
Amortization Cap, in which cases the monthly payment for each such Negative
Amortization Loan will be recalculated to equal an amount which would be
sufficient to fully amortize such Negative Amortization Loan over its remaining
term at the Mortgage Rate as adjusted on the immediately preceding Rate
Adjustment Date. The amount of such increased monthly payment may be
substantially higher than the monthly payment in effect prior to such
recalculation and the repayment of the Negative Amortization Loans will be
dependent on the ability of the Mortgagor to make such larger monthly payments.
Furthermore, each Negative Amortization Loan provides for the payment of any
remaining unamortized principal balance of such Negative Amortization Loan (due
to the addition of Deferred Interest, if any, to the principal balance of such
Negative Amortization Loan) in a single payment at the maturity of the Negative
Amortization Loan. Because the Mortgagors may be so required to make a larger
single payment upon maturity, it is possible that the default risk associated
with the Negative Amortization Loans is greater then that associated with fully
amortizing mortgage loans.
The Convertible Mortgage Loans provide that the Mortgagors may, during a
specified period of time, convert the adjustable interest rate of such Mortgage
Loans to a fixed interest rate. The Company is not aware of any publicly
available statistics that set forth principal prepayment, conversion experience
or conversion forecasts of adjustable-rate mortgage loans over an extended
period of time, and its experience with respect to adjustable-rate mortgages is
insufficient to draw any conclusions with respect to the expected prepayment or
conversion rates on the 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, adjustable-rate 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, adjustable-rate 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 Converting or Converted Mortgage
Loans, a Mortgagor's exercise of the conversion option will result in a payment
of the principal portion thereof to the Noteholders, as described herein.
Alternatively, to the extent Subservicers fail to purchase Converting Mortgage
Loans and the Master
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Servicer does not purchase Converted Mortgage Loans, the Mortgage Pool will
include additional 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. In general, defaults on
mortgage loans are expected to occur with greater frequency in their early
years. Increases in the monthly payments of the Mortgage Loans to an amount in
excess of the monthly payment required at the time of origination may result in
a default rate higher than that on level payment mortgage loans, particularly
since the Mortgagor under each Mortgage Loan was qualified on the basis of the
Mortgage Rate in effect at origination. The repayment of such Mortgage Loans
will be dependent on the ability of the Mortgagor to make larger monthly
payments as the Mortgage Rate increases. In addition, the rate of default on
Mortgage Loans which are refinance or limited documentation mortgage loans, and
on Mortgage Loans with high Loan-to-Value Ratios, may be higher than for other
types of Mortgage Loans. Furthermore, the rate and timing of prepayments,
defaults and liquidations on the Mortgage Loans will be affected by the general
economic condition of the region of the country in which the related Mortgaged
Properties are located. The risk of delinquencies and loss is greater and
prepayments are less likely in regions where a weak or deteriorating economy
exists, as may be evidenced by, among other factors, increasing unemployment or
falling property values. See "Maturity and Prepayment Considerations" in the
Prospectus.
The amount of interest otherwise payable to holders of the Notes will be
reduced by any interest shortfalls to the extent not covered by the Note
Insurance Policy or by the Master Servicer as described herein. If payments were
not made as required under the Note Insurance Policy, interest shortfalls not
allocable to Overcollateralization and not covered by the Master Servicer will
be allocated to the Notes as described herein. See "Yield Considerations" in the
Prospectus and "Description of the Notes-Interest Payments on the Notes" herein
for a discussion of the effect of principal prepayments on the Mortgage Loans on
the yield to maturity of the Notes and certain possible shortfalls in the
collection of interest.
In addition, the yield to maturity of the Notes will depend on, among other
things, the price paid by the holders of the Notes and the then applicable Note
Interest Rate. The extent to which the yield to maturity of a Note 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 Note is purchased at a premium and
principal payments thereon occur at a rate faster than anticipated at the time
of purchase, the investor's actual yield to maturity will be lower than that
assumed at the time of purchase. Conversely, if a Note is purchased at a
discount and principal payments thereon occur at a rate slower than that assumed
at the time of purchase, the investor's actual yield to maturity will be lower
than that assumed at the time of purchase. For additional considerations
relating to the yield on the Notes, see "Yield Considerations" and "Maturity and
Prepayment Considerations" in the Prospectus.
In addition, the yield to maturity on the Notes may be affected by
shortfalls with respect to interest in the event that the interest accrued on
the Notes at the Note Interest Rate is greater than the amount of interest
accrued on the Mortgage Loans at the related Mortgage Rates less the sum of the
Servicing Fee Rate, the Indenture Trustee Fee Rate and the Administrative Fee
Rate. In such event, the resulting shortfall will only be payable to the extent
that on any future Payment Date interest accrued on the Mortgage Loans at the
related Mortgage Rates less such rates is greater than the interest accrued on
the Notes, and only to the extent of Available Funds following distributions to
the Noteholders pursuant to clauses (i) through (iv) under "Description of the
Securities-Priority of Payment."
The Note Interest Rate is based upon, among other factors as described
herein under "Description of the Notes--Interest Payments on the Notes," the
value of an index (One-Month LIBOR (as defined herein)) which is different from
the value of the indices applicable to the Mortgage Loans (Negative Amortization
Loan One-Month LIBOR, Six-Month LIBOR, Six-Month CMT and One-Year CMT).
Investors should note
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that the value of One-Month LIBOR on the Notes may differ from Negative
Amortization Loan One- Month LIBOR, due to the different reference date. The
Mortgage Rate of each Mortgage Loan adjusts monthly, semi-annually or annually,
commencing after the Initial Period, based upon the related Index, whereas the
Note Interest Rate on the Notes adjusts monthly based upon One-Month LIBOR plus
0.22% (or after the earlier of (x) the Payment Date in _____ _______ and (y) the
Payment Date which occurs on or prior to the date on which the aggregate
Principal Balance of the Mortgage Loans is less than 25% of the aggregate
Principal Balance of the Mortgage Loans as of the Cut-off Date, One-Month LIBOR
plus 0.44%), limited by the Available Funds Interest Rate (as defined herein).
In addition, One-Month LIBOR and the Indices on the Mortgage Loans may respond
differently to economic and market factors, and there is not necessarily any
correlation between them. Moreover, the Mortgage Loans are subject to Periodic
Rate Caps, Maximum Mortgage Rates and Minimum Mortgage Rates (each, as defined
herein). Thus, it is possible, for example, that One-Month LIBOR may rise during
periods in which the Indices are stable or falling or that, even if both
One-Month LIBOR and the Indices rise during the same period, One-Month LIBOR may
rise much more rapidly than the Indices.
Although the Mortgage Rates on the Mortgage Loans will adjust monthly,
semi-annually or annually, such increases and decreases may be limited by the
Periodic Rate Cap, the Maximum Mortgage Rate and the Minimum Mortgage Rate, if
applicable, on each such Mortgage Loan, and will be based on the applicable
Index (which may not rise and fall consistently with prevailing mortgage rates)
plus the related Gross Margin (which may be different from the prevailing
margins on other mortgage loans). As a result, the Mortgage Rates on the
Mortgage Loans at any time may not equal the prevailing rates for other
adjustable-rate loans and accordingly, the rate of prepayment may be lower or
higher than would otherwise be anticipated. In addition, because all of the
Mortgage Loans have Maximum Mortgage Rates, if prevailing mortgage rates were to
increase above the Maximum Mortgage Rates, the rate of prepayment on the
Mortgage Loans may be slower than would otherwise be the case. In general, if
prevailing mortgage rates fall significantly below the Mortgage Rates on the
Mortgage Loans, the rate of prepayments (including refinancings) will be
expected to increase. Conversely, if prevailing mortgage rates rise
significantly above the Mortgage Rates on the Mortgage Loans, the rate of
prepayment on the Mortgage Loans will be expected to decrease.
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 payment to the investor
of each dollar distributed in reduction of principal of such security (assuming
no losses). The weighted average life of the Notes 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.
Because the amortization schedule of each Mortgage Loan will be recalculated
monthly, semi-annually or annually after the initial Adjustment Date for such
Mortgage Loan, any partial prepayments thereof will not reduce the term to
maturity of such Mortgage Loan. In addition, an increase in the Mortgage Rate on
a Mortgage Loan will result in a larger monthly payment and in a larger
percentage of such monthly payment being allocated to interest and a smaller
percentage being allocated to principal, and conversely, a decrease in the
Mortgage Rate on the Mortgage Loan will result in a lower monthly payment and in
a larger percentage of each monthly payment being allocated to principal and a
smaller percentage being allocated to interest.
Prepayments on mortgage loans are commonly measured relative to a
prepayment standard or model. The model used in this Prospectus Supplement, the
Constant Prepayment Rate model ("CPR"), assumes that the outstanding principal
balance of a pool of mortgage loans prepays at a specified constant annual rate
or CPR. In generating monthly cash flows, this rate is converted to an
equivalent constant monthly rate. To assume a 20% CPR or any other CPR
percentage is to assume that the stated percentage of the outstanding principal
balance of the pool is prepaid over the course of a year. No representation is
made that the Mortgage Loans will prepay at that or any other rate.
S-49
<PAGE>
The table set forth below has been prepared on the basis of certain
assumptions as described below regarding the weighted average characteristics of
the Mortgage Loans that are expected to be included in the Trust Fund as
described under "Description of the Mortgage Pool" herein and the performance
thereof. The table assumes, among other things, that: (i) the Mortgage Pool
consists of five Mortgage Loans with the following characteristics:
S-50
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Original Months to Remaining
Term to Next Rate Term to MAXIMUM Minimum Initial
Principal Mortgage Maturity Adjustment Maturity Gross MORTGAGE Mortgage Periodic Periodic
BALANCE RATE (IN MONTHS) DATE (IN MONTHS) MARGIN RATE RATE CAP CAP
------- ---- ----------- ---- ----------- ------ ---- ---- --- ---
$
</TABLE>
(ii) the first and second mortgage loans listed above have an Index of Six-Month
LIBOR, (iii) the third mortgage loan listed above is a negative amortization
loan with the same characteristics as the Negative Amortization Loans and an
Index of Negative Amortization Loan One-Month LIBOR; (iv) the fourth and fifth
mortgage loans listed above have an Index of One-Year CMT; (v) Negative
Amortization Loan One- Month LIBOR, Six-Month LIBOR and One-Year CMT remain
constant at _____%, ____% and ------%, respectively; (vi) payments on the Notes
are based upon the actual number of days in the month and a 360- day year and
are received, in cash, on the __th day of each month, commencing in ____ 199_;
(vii) there are no delinquencies or losses on the Mortgage Loans, there are no
conversions of Mortgage Loans from adjustable to fixed rates and principal
payments on the Mortgage Loans are timely received together with prepayments, if
any, at the respective constant percentages of CPR set forth in the following
table; (viii) there are no repurchases of the Mortgage Loans; (ix) there is no
Prepayment Interest Shortfall or any other interest shortfall in any month; (x)
the scheduled monthly payment for the Mortgage Loan is calculated based on its
principal balance, Mortgage Rate and remaining term to maturity such that such
Mortgage Loan will amortize in amounts sufficient to repay the remaining
principal balance of such Mortgage Loan by its remaining term to maturity, (xi)
the Indices remain constant at the rates listed above and the Mortgage Rate on
the Mortgage Loan is adjusted on the next Adjustment Date (and on subsequent
Adjustment Dates, as necessary) to equal the related Index plus the applicable
Gross Margin, subject to the Maximum Mortgage Rate listed below and the related
Periodic Rate Cap; (xii) with respect to each Mortgage Loan (other than the
Negative Amortization Loans), the monthly payment on the Mortgage Loan is
adjusted on the Due Date immediately following the next related Adjustment Date
(and on subsequent Adjustment Dates, as necessary) to equal a fully amortizing
payment as described in clause (x) above; (xiii) payments on the Mortgage Loans
earn no reinvestment return; (xiv) the Administrative Fee Rate is ________% per
annum, the Indenture Trustee Fee Rate is ______% per annum and the Servicing Fee
Rate is 0.50% per annum; (xv) there are no additional ongoing Trust Fund
expenses payable out of the Trust Fund; (xvi) there are no investment earnings
on amounts in any Collection Account, including the Payment Account, and no
other miscellaneous servicing fees are passed through to the Noteholders; and
(xvii) the Notes will be purchased on ____ ___, 199_.
The actual characteristics and performance of the Mortgage Loans will
differ from the assumptions used in constructing the table set forth below,
which is hypothetical in nature and is provided only to give a general sense of
how the principal cash flows might behave under varying prepayment scenarios.
For example, it is very unlikely that the Mortgage Loans will prepay at a
constant level of CPR until maturity or that all of the Mortgage Loans will
prepay at the same level of CPR. Moreover, the diverse remaining terms to stated
maturity of the Mortgage Loans could produce slower or faster principal payments
than indicated in the table at the various constant percentages of CPR
specified, even if the weighted average remaining term to stated maturity of the
Mortgage Loans is as assumed. Any difference between such assumptions and the
actual characteristics and performance of the Mortgage Loans, or actual
prepayment experience, will affect the percentages of initial Note Principal
Balance outstanding over time and the weighted average life of the Notes.
Subject to the foregoing discussion and assumptions, the following table
indicates the weighted average life of the Notes, and sets forth the percentages
of the initial Note Principal
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<PAGE>
Balance of the Notes that would be outstanding after each of the dates shown at
various percentages of CPR.
<TABLE>
<CAPTION>
PERCENT OF INITIAL NOTE PRINCIPAL BALANCE OUTSTANDING AT THE FOLLOWING PERCENTAGES OF CPR
NOTES
<S> <C> <C> <C> <C> <C> <C> <C>
PAYMENT DATE 0% 10% 15% 20% 25% 30% 40%
- ------------ -- --- --- --- --- --- ---
Initial Percentage.........................................
</TABLE>
Weighted Average Life in Years**...........................
Weighted Average Life in Years***..........................
- ----------------
(*) Indicates a number that is greater than zero but less than 0.5%.
(**) The weighted average life of a Note is determined by (i) multiplying
the net reduction, if any, of Note Principal Balance by the number of
years from the date of issuance of the Note to the related Payment
Date, (ii) adding the results, and (iii) dividing the sum by the
aggregate of the net reductions of the Note Principal Balance
described in (i) above.
(***) Calculated pursuant to footnote **, but assumes the Issuer exercises
its option to redeem the Notes on the first Payment Date on which it
would be permitted to do so. See "Description of the Notes--Optional
Redemption" herein.
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<PAGE>
THIS TABLE HAS BEEN PREPARED BASED ON THE ASSUMPTIONS DESCRIBED IN THE SECOND
PARAGRAPH PRECEDING THIS TABLE (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.
DESCRIPTION OF THE SERVICING AGREEMENT
The following summary describes certain terms of the Servicing
Agreement, dated as of ____, 199_ between the Company and the Master Servicer
(the "Servicing Agreement"). The summary does not purport to be complete and is
subject to, and qualified in its entirety by reference to, the provisions of the
Servicing Agreement. Whenever particular sections or defined terms of the
Servicing Agreement are referred to, such sections or defined terms are thereby
incorporated herein by reference.
THE MASTER SERVICER; THE SUBSERVICER
_________ _____ (in its capacity as master servicer, the "Master
Servicer") will act as master servicer for the Mortgage Loans pursuant to the
Servicing Agreement. See ____________ in the Prospectus. _________________ has
entered into subservicing arrangements with ________. Notwithstanding these
agreements, ____________ _______ will remain primarily liable for servicing the
Mortgage Loans. All of the Mortgage Loans will initially be subserviced by
_______________.
[DESCRIPTION OF SUBJECT]
The following table sets forth certain information concerning
delinquency experience including bankruptcies and foreclosures in progress on
one- to four-family residential mortgage, consumer, and commercial loans
included in Wendover's servicing portfolio at the dates indicated. Consumer and
commercial loans represented less than ___% of the overall portfolio volume at
__________ ____, 1997. As at December 31, _____, ______, ________ and _______
and March 31, 1997, the total principal balance of loans being serviced by
__________ was (in millions) $________, $___________, $___________ $___________
and $____________ respectively. The indicated periods of delinquency are based
on the number of days past due on a contractual basis. No mortgage, consumer, or
commercial loan is considered delinquent for these purposes until it is one
month past due on a contractual basis.
S-53
<PAGE>
<TABLE>
<CAPTION>
AT DECEMBER 31, AT MARCH 31, 1997
---------------------------------------------------------------------------------------------------------
1993 1994 1995 1996 1997
------------------- ------------------- --------------------- ------------------- -----------------
Percent of Percent of Percent of Percent of PERCENT OF
Number Servicing Number Servicing Number Servicing Number Servicing Number of SERVICING
OF LOANS PORTFOLIO OF LOANS PORTFOLIO OF LOANS PORTFOLIO OF LOANS PORTFOLIO LOANS PORTFOLIO
<S> <C> <C> <C> <C> <C>
Total Portfolio(1)
Period of Delinquency:
30-59 days.............
60-89 days.............
90 days or more........
Total Delinquencies
(excluding
Foreclosures)
Foreclosures Pending
</TABLE>
1 Includes purchased mortgage servicing rights owned by Wendover totaling
_____ loans for $____ million unpaid principal balance and ______ loans
for $_____ million unpaid principal balance as of December 31, ____ and
_____, respectively, and _____ loans for $____ million unpaid principal
balance as of _________ ______.
S-54
<PAGE>
GENERAL. There can be no assurance that the delinquency and foreclosure
experience of the Mortgage Loans will correspond to the delinquency and
foreclosure experience of the servicing portfolio of ___________ set forth in
the foregoing tables. The statistics shown above represent the respective
delinquency and foreclosure experiences only at the dates presented, whereas the
aggregate delinquency and foreclosure experience on the Mortgage Loans will
depend on the results obtained over the life of the Trust Fund. Each servicing
portfolio includes mortgage loans with a variety of payment and other
characteristics (including geographic location) which are not necessarily
representative of the payment and other characteristics of the Mortgage Loans.
In addition, _________ servicing portfolio includes consumer and commercial
loans. Each servicing portfolio includes mortgage loans underwritten pursuant to
guidelines not necessarily representative of those applicable to the Mortgage
Loans. It should be noted that if the residential real estate market should
experience an overall decline in property values, the actual rates of
delinquencies and foreclosures could be higher than those previously experienced
by _____. In addition, adverse economic conditions may affect the timely payment
by mortgagors of scheduled payments of principal and interest on the Mortgage
Loans and, accordingly, the actual rates of delinquencies and foreclosures with
respect to the Mortgage Loans.
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 Fee Rate in respect of each
Mortgage Loan will be equal to 0.50% per annum of the outstanding principal
balance of such Mortgage Loan. The Servicing Fee consists of (a) servicing
compensation payable to the Master Servicer in respect of its master servicing
responsibilities 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). The
Subservicer will be entitled to retain in the form of additional servicing
compensation half of any late payment charges. The Master Servicer will not be
entitled to any such additional servicing compensation and any such amounts,
including prepayment penalties, to the extent received by the Master Servicer,
will be included in Available Funds.
THE INDENTURE
The following summary describes certain terms of the Indenture. The
summary does not purport to be complete and is subject to, and qualified in its
entirety by reference to, the provisions of the Trust Agreement and Indenture.
Whenever particular defined terms of the Indenture are referred to, such defined
terms are thereby incorporated herein by reference. See "The Agreements" in the
Prospectus.
CONTROL BY NOTE INSURER
Pursuant to the Indenture, unless a Note Insurer Default exists (i) the
Note Insurer shall be deemed to be the holder of the Notes for certain purposes
(other than with respect to payment on the Notes), and will be entitled to
exercise all rights of the Noteholders thereunder, including the rights of
Noteholders referred to under "--Events of Default" and "--Rights Upon Event of
Default," without the consent of such Noteholders, and the Noteholders may
exercise such rights only with the prior written consent of the Note Insurer and
(ii) the Indenture Trustee may take actions which would otherwise be at its
option or within its discretion, including the actions referred to under
"--Events of Default" and "--Rights Upon Event of Default," only at the
direction of the Note Insurer. A "Note Insurer Default" means the existence and
continuation of (i) a failure of the Note Insurer to make a payment under the
Note Insurance Policy in accordance with its terms or (ii) certain bankruptcy or
insolvency actions by or against the Note Insurer.
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<PAGE>
EVENTS OF DEFAULT
An "Event of Default" with respect to the Notes is defined in the
Indenture as follows: (a) the failure to pay (i) the Interest Payment Amount or
the Principal Payment Amount with respect to a Payment Date on such Payment
Date, or (ii) any Subordination Increase Amount or Available Funds Carry-Forward
Amount with respect to a Payment Date, but only to the extent funds are
available to make such payment as described under "Description of the
Notes--Priority of Payment"; (b) a default in the observance of certain negative
covenants in the Indenture; (c) a default in the observance of any other
covenant of the Indenture, and the continuation of any such default for a period
of thirty days after notice to the Issuer by the Indenture Trustee or the Note
Insurer, or if a Note Insurer Default exists, by the Holders of at least 25% of
the Note Principal Balance of the Notes; (d) any representation or warranty made
by the Issuer in the Indenture or in any certificate or other writing delivered
pursuant thereto having been incorrect in a material respect as of the time
made, and the circumstance in respect of which such representation or warranty
is incorrect not having been cured within thirty days after notice thereof is
given to the Issuer by the Indenture Trustee or the Note Insurer, or, if a Note
Insurer Default exists, by Noteholders representing at least 25% of the Note
Principal Balance of the Notes; (e) certain events of bankruptcy, insolvency,
receivership or reorganization of the Issuer; or (f) the failure by the Issuer
on the Final Scheduled Payment Date to reduce the Note Principal Balance of the
Notes to zero.
RIGHTS UPON EVENT OF DEFAULT
In case an Event of Default should occur and be continuing with respect
to the Notes, the Indenture Trustee may, and on request of the Note Insurer or
Noteholders representing more than 50% of the Note Principal Balance of the
Notes of such Series then outstanding shall, declare the principal of such
Series of Notes to be due and payable. Such declaration may under certain
circumstances be rescinded by Noteholders representing more than 50% of the Note
Principal Balance of the Notes.
If, following an Event of Default, the Notes have been declared to be
due and payable, the Indenture Trustee may, in its discretion (provided that the
Note Insurer or Noteholders representing more than 50% of the Note Principal
Balance of the Notes have not directed the Indenture Trustee to sell the assets
included in the Trust Estate), refrain from selling such assets and continue to
apply all amounts received on such assets to payments due on the Notes in
accordance with their terms, notwithstanding the acceleration of the maturity of
such Notes. The Indenture Trustee, however, unless otherwise directed by the
Note Insurer, must sell the assets included in the Trust Estate if collections
in respect of such assets are determined to be insufficient to pay certain
expenses payable under the Indenture and to make all scheduled payments on the
Notes, in which case payments will be made on the Notes in the same manner as
described in the next sentence with regard to instances in which such assets are
sold. In addition, upon an Event of Default the Indenture Trustee may, with the
consent of the Note Insurer, sell the assets included in the Trust Estate, in
which event the collections on, or the proceeds from the sale of, such assets
will be applied as provided below; provided, however, that any proceeds of a
claim under the Note Insurance Policy shall be used only to pay interest and
principal on the Notes as provided in clauses (iii) and (iv): (i) to the payment
of the fees of the Indenture Trustee and Owner Trustee which have not been
previously paid; (ii) to the Note Insurer, any premium then due, provided no
Note Insurer Default exists; (iii) to the Noteholders, the amount of interest
then due and unpaid on the Notes (but not including any Available Funds Cap
Carry-Forward Amount), without preference or priority of any kind; (iv) to the
Noteholders, the amount of principal then due and unpaid on the Notes, without
preference or priority of any kind; (v) to the Note Insurer, any Reimbursement
Amount, to the extent not previously reimbursed; (vi) to the Noteholders, the
amount of any Available Funds Cap Carry-Forward Amount not previously paid; and
(vii) to the Issuer.
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<PAGE>
Subject to the provisions of the Indenture relating to the duties of
the Indenture Trustee, in case an Event of Default shall occur and be
continuing, the Indenture Trustee shall be under no obligation to exercise any
of the rights and powers under the Indenture at the request or direction of any
of the Noteholders, unless such Noteholders shall have offered to the Indenture
Trustee reasonable security or indemnity satisfactory to it against the costs,
expenses and liabilities which might be incurred by it in compliance with such
request or direction. Subject to such provisions for indemnification and certain
limitations contained in the Indenture, Noteholders representing more than 50%
of the Note Principal Balance of the Notes shall have the right to direct the
time, method, and place of conducting any proceeding or any remedy available to
the Indenture Trustee or exercising any trust or power conferred on the
Indenture Trustee with respect to the Notes; and Noteholders representing more
than 50% of the Note Principal Balance of the Notes may, in certain cases, waive
any default with respect thereto, except a default in the payment of principal
or interest or a default in respect of a covenant or provision of the Indenture
that cannot be modified without the waiver or consent of the holder of each
outstanding Note affected thereby.
LIMITATION ON SUITS
No Noteholder will have any right to institute any proceedings with
respect to the Indenture unless (1) such Noteholder has previously given written
notice to the Indenture Trustee of a continuing Event of Default; (2)
Noteholders representing not less than 25% of the Note Principal Balance of the
Notes have made written request to the Indenture Trustee to institute
proceedings in respect of such Event of Default in its own name as Indenture
Trustee; (3) such Noteholders have offered to the Indenture Trustee reasonable
indemnity satisfactory to it against the costs, expenses and liabilities to be
incurred in compliance with such request; (4) for 60 days after its receipt of
such notice, request and offer of indemnity the Indenture Trustee has failed to
institute any such proceedings; (5) no direction inconsistent with such written
request has been given to the Indenture Trustee during such 60-day period by the
Noteholders representing more than 50% of the Note Principal Balance of the
Notes; and (6) such Noteholders have the consent of the Note Insurer, unless a
Note Insurer Default exists.
THE INDENTURE TRUSTEE
The Indenture Trustee may resign at any time, in which event the Issuer
will be obligated to appoint, at the direction of the Note Insurer, a successor
Indenture Trustee. The Indenture Trustee also may be removed at any time by the
Note Insurer, or if a Note Insurer Default exists, then by Noteholders
representing more than 50% of the Note Principal Balance of the Notes, if the
Indenture Trustee ceases to be eligible to continue as such under the Indenture
or if the Indenture Trustee becomes incapable of acting, bankrupt, insolvent or
if a receiver or public officer takes charge of the Indenture Trustee or its
property. Any resignation or removal of the Indenture Trustee and appointment of
a successor Indenture Trustee will not become effective until acceptance of the
appointment by the successor Indenture Trustee.
FEDERAL INCOME TAX CONSEQUENCES
Upon the issuance of Notes, Thacher Proffitt & Wood, counsel to the
Company, will deliver its opinion to the effect that, assuming compliance with
all provisions of the Indenture, Owner Trust Agreement and certain related
documents, for federal income tax purposes, the Notes will be characterized as
indebtedness and not as representing an ownership interest in the Trust Fund or
an equity interest in the Issuer or the Company and the Issuer will not be (i)
classified as an association taxable as a corporation for federal income tax
purposes (other than as a "qualified REIT subsidiary" as defined in Section
856(i) of the Code), (ii) a taxable mortgage pool as defined in Section 7701(i)
of the Code, or (iii) a "publicly traded partnership" as defined in Treasury
Regulation Section 1.7704-1. The Notes will not be treated as
S-57
<PAGE>
having been issued with "original issue discount" (as defined in the
Prospectus). The prepayment assumption that will be used in determining the rate
of amortization of 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 20% CPR. No
representation is made that the Mortgage Loans will prepay at that rate or at
any other rate. See "Federal Income Tax Consequences" in the Prospectus.
The Notes will not be treated as assets described in Section
7701(a)(19)(C) of the Code or "real estate assets" under Section 856(c)(4)(A) of
the Code. In addition, interest on the Notes will not be treated as "interest on
obligations secured by mortgages on real property" under Section 856(c)(3)(B) of
the Code. The Notes will also not be treated as "qualified mortgages" under
Section 860G(a)(3)(C) of the Code.
Prospective investors in the Notes should see "Federal Income Tax
Consequences" and "State and Other Tax Consequences" in the Prospectus for a
discussion of the application of federal income and state and local tax laws to
the Issuer and purchasers of the Notes.
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in an Underwriting
Agreement, dated ______ ___, 199_ (the "Underwriting Agreement"), among
______________ ( _____________ ), ______________ ( __________ together with
______________ "Underwriters"), the Company and ___________ the Underwriters
have agreed to purchase and the Company has agreed to sell to the Underwriters
the Notes. It is expected that delivery of the Notes will be made only in
book-entry form through the Same Day Funds Settlement System of DTC, on or about
_____ ____, 199_, against payment therefor in immediately available funds.
The Notes will be purchased from the Company by the Underwriters and
will be offered by the Underwriters from time to time to the public in
negotiated transactions or otherwise at varying prices to be determined at the
time of sale. The proceeds to the Company from the sale of the Notes are
expected to be approximately $__________________ before the deduction of
expenses payable by the Company estimated to be approximately $____________. The
Underwriters may effect such transactions by selling the Notes to or through
dealers, and such dealers may receive compensation in the form of underwriting
discounts, concessions or commissions from the Underwriters. In connection with
the sale of the Notes, the Underwriters may be deemed to have received
compensation from the Company in the form of underwriting compensation. The
Underwriters and any dealers that participate with the Underwriters in the
distribution of the Notes may be deemed to be underwriters and any profit on the
resale of the Notes positioned by them may be deemed to be underwriting
discounts and commissions under the Securities Act of 1933.
The Underwriting Agreement provides that the Company and _____ will
jointly and severally indemnify the Underwriters, and that under limited
circumstances the Underwriters will indemnify the Company, against certain civil
liabilities under the Securities Act of 1933, or contribute to payments required
to be made in respect thereof.
There can be no assurance that a secondary market for the Notes will
develop or, if it does develop, that it will continue or provide the Noteholders
with sufficient liquidity of investment. The primary source of information
available to investors concerning the Notes will be the monthly statements
discussed in the Prospectus under "Description of the Notes--Reports to
Noteholders," which will include information as to the outstanding principal
balance of the Notes. There can be no assurance that any additional information
regarding the Notes will be available through any other source. In addition, the
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<PAGE>
Company is not aware of any source through which price information about the
Notes will be generally available on an ongoing basis. The limited nature of
such information regarding the Notes may adversely affect the liquidity of the
Notes, even if a secondary market for the Notes becomes available.
LEGAL OPINIONS
Certain legal matters relating to the Notes will be passed upon for the
Company by Thacher Proffitt & Wood, New York, New York and for the Underwriters
by ______________, New York, New
York.
RATINGS
It is a condition of the issuance of the Notes that they be rated "AAA"
by Standard & Poor's Ratings Services ("S&P") and "Aaa" by Moody's Investors
Service, Inc. ("Moody's").
S&P's ratings on mortgage pass-through certificates address the
likelihood of the receipt by Noteholders of payments required under the
Indenture. S&P's ratings take into consideration the credit quality of the
mortgage pool, structural and legal aspects associated with the Notes, and the
extent to which the payment stream in the mortgage pool is adequate to make
payments required under the Notes. S&P's rating on the Notes does not, however,
constitute a statement regarding frequency of prepayments on the mortgages. See
"Certain Yield and Prepayment Considerations" herein. The ratings issued by S&P
on payment of principal and interest do not cover the payment of the Available
Funds Cap Carry-Forward Amount.
The rating process of Moody's addresses the structural and legal
aspects associated with the Notes, including the nature of the underlying
mortgage loans. The ratings assigned to the Notes do not represent any
assessment of the likelihood or rate of principal prepayments. The ratings do
not address the possibility that Noteholders might suffer a lower than
anticipated yield. The ratings do not address the likelihood that Noteholders
will be paid any Prepayment Interest Shortfalls, Relief Act Shortfalls or the
Available Funds Cap Carry-Forward Amount. The ratings do not address the
likelihood that Noteholders will be paid any Deferred Interest except to the
extent Deferred Interest is added to the Note Principal Balance.
The Company has not requested a rating on the Notes by any rating
agency other than S&P and Moody's. However, there can be no assurance as to
whether any other rating agency will rate the Notes, or, if it does, what rating
would be assigned by any such other rating agency. A rating on the Notes by
another rating agency, if assigned at all, may be lower than the ratings
assigned to the Notes by S&P 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 Notes are subsequently lowered for any reason, no
person or entity is obligated to provide any additional support or credit
enhancement with respect to the Notes.
The ratings do not address the likelihood that the Master Servicer will
repurchase any Converting Mortgage Loan following the conversion of the related
Mortgage Rate to a fixed rate, and do not address the effect on the yield to
Noteholders resulting from any such conversion and the failure of the Master
Servicer to repurchase such Converting Mortgage Loan.
S-59
<PAGE>
LEGAL INVESTMENT
The Notes will constitute "mortgage related securities" for purposes of
the Secondary Mortgage Market Enhancement Act of 1984 ("SMMEA") for so long as
they are rated in at least the second highest rating category by one or more
nationally recognized statistical rating agencies, and, as such, are legal
investments for certain entities to the extent provided in SMMEA. SMMEA
provides, however, that states could override its provision on legal investment
and restrict or condition investment in mortgage related securities by taking
statutory action on or prior to October 3, 1991.
The Company makes no representations as to the proper characterization
of the Notes for legal investment or other purposes, or as to the ability of
particular investors to purchase the Notes under applicable legal investment
restrictions. These uncertainties may adversely affect the liquidity of the
Notes. Accordingly, all institutions whose investment activities are subject to
legal investment laws and regulations, regulatory capital requirements or review
by regulatory authorities should consult with their legal advisors in
determining whether and to what extent the Notes constitute a legal investment
or are subject to investment, capital or other restrictions.
See "Legal Investment Matters" in the Prospectus.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as
amended ("ERISA") and the Code impose certain requirements on employee benefit
plans and certain other retirement plans and arrangements (including, but not
limited to, individual retirement accounts and annuities), as well as on
collective investment funds and certain separate and general accounts in which
such plans or arrangements are invested (all of which are hereinafter referred
to as a "Plan") and on persons who are fiduciaries with respect to such Plans.
Any Plan fiduciary which proposes to cause a Plan to acquire any of the Notes
would be required to determine whether such an investment is permitted under the
governing Plan instruments and is prudent and appropriate for the Plan in view
of its overall investment policy and the composition and diversification of its
portfolio. In addition, ERISA and the Code prohibit certain transactions
involving the assets of a Plan and "disqualified persons" (within the meaning of
the Code) and "parties in interest" (within the meaning of ERISA) who have
certain specified relationships to the Plan. Therefore, a Plan fiduciary
considering an investment in the Notes should also consider whether such an
investment might constitute or give rise to a prohibited transaction under ERISA
or the Code. Any Plan fiduciary which proposes to cause a Plan to acquire any of
the Notes should consult with its counsel with respect to the potential
consequences under ERISA and the Code of the Plan's acquisition and ownership of
such Notes.
EXPERTS
The consolidated financial statements of the Note Insurer,
______________________________, as of December 31, 1996 and 1995 and for each of
the years in the three-year period ended December 31, 1996 are incorporated by
reference herein and in the registration statement in reliance upon the report
of __________________________, independent certified public accountants,
incorporated by reference herein, and upon the authority of said firm as experts
in accounting and auditing.
S-60
<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 notes
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
PAGE
Prospectus Supplement
Summary..............................................
Risk Factors.........................................
Description of the Mortgage Pool.....................
The Issuer...........................................
The Owner Trustee....................................
The Indenture Trustee................................
______________________ ..............................
Description of the Notes.............................
Certain Yield and Prepayment Considerations..........
Description of the Servicing Agreement...............
The Indenture........................................
Federal Income Tax Consequences......................
Method of Distribution............................... S-58
Legal Opinions....................................... S-59
Ratings..............................................
Legal Investment.....................................
ERISA Considerations.................................
Experts..............................................
Appendix A--Underwriting Guidelines Applicable
to the Mortgage Loans..................
Prospectus
WMC SECURED
ASSETS CORP.
Series 199_-_
$
Mortgage-Backed Notes
Series 199_-_
--------------
PROSPECTUS SUPPLEMENT
--------------
--------------------------------------------
------------- 199_
-------------------------
-----------------------------
================================================================================
S-61
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PRELIMINARY PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY
SUCH STATE.
PROSPECTUS
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 17 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 March 13, 1998.
<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.
<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>
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TABLE OF CONTENTS
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
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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 Certificates115
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
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FINANCIAL INFORMATION..........................................................................................119
RATING ......................................................................................................119
INDEX OF PRINCIPAL DEFINITIONS.................................................................................120
</TABLE>
5
<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>
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>
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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>
<TABLE>
<CAPTION>
<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>
<TABLE>
<CAPTION>
<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>
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<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
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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
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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
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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
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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
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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
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<CAPTION>
<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
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corresponding effect on yield to investors. See
"Rating" herein.
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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
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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
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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
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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
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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
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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."
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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:
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(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.
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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
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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
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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.
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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)
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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
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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
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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
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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
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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).
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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
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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.
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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
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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.
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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
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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
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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.
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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"
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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
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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;
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(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.
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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
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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
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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);
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(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
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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
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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,
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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
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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"),
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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
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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.
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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
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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.
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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.
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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
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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.
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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.
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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
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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
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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.
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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
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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
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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.
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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
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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
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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
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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."
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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.
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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.
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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
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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
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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
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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
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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
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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.
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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.
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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
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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.
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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.
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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.
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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
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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
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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."
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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
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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
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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
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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).
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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.
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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
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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
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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
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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.
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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
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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,
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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.
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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
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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
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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
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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;
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(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
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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
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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.
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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>
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>
INDEX OF PRINCIPAL DEFINITIONS
PAGE
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
120
<PAGE>
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
121
<PAGE>
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
122
<PAGE>
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
123
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION (ITEM 14 OF FORM S-3).
The expenses expected to be incurred in connection with the issuance
and distribution of the Securities being registered, other than underwriting
compensation, are as set forth below. All such expenses, except for the filing
fee, are estimated.
Filing Fee for Registration Statement.............. $ 529,820
Legal Fees and Expenses............................ 750,000
Accounting Fees and Expenses....................... 320,000
Trustee's Fees and Expenses
(including counsel fees).................... 150,000
Printing and Engraving Fees........................ 250,000
Rating Agency Fees................................. 500,000
Miscellaneous...................................... 25,000
--------------
Total ............................................ $ 2,524,820
===============
- --------
INDEMNIFICATION OF DIRECTORS AND OFFICERS (ITEM 15 OF FORM S-3).
Subsection (a) of Section 145 of the General Corporation Law of
Delaware empowers a corporation to indemnify any person who was or is a party or
is threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of the corporation) by reason of the
fact that he is or was a director, employee or agent of the corporation, or is
or was serving at the request of the corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise, against expenses (including attorneys' fees), judgments, fines
and amounts paid in settlement actually and reasonably incurred by him in
connection with such action, suit or proceeding if he acted in good faith and in
a manner he reasonably believed to be in or not opposed to the best interests of
the corporation, and, with respect to any criminal action or proceeding, had no
cause to believe his conduct was unlawful.
Subsection (b) of Section 145 empowers a corporation to indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that such
person acted in any of the capacities set forth above, against expenses
(including attorneys' fees) actually and reasonably incurred by him in
connection with the defense or settlement of such action or suit if he acted in
good faith and in a manner he reasonably believed to be in or not opposed to the
best interests of the corporation and except that no indemnification may be made
in respect to any claim, issue or matter as to which such person shall have been
<PAGE>
adjudged to be liable to the corporation unless and only to the extent that the
Court of Chancery or the court in which such action or suit was brought shall
determine upon application that, despite the adjudication of liability but in
view of all circumstances of the case, such person is fairly and reasonably
entitled to indemnity for such expenses which the Court of Chancery or such
other court shall deem proper.
Section 145 further provides that to the extent a director, officer,
employee or agent of a corporation has been successful on the merits or
otherwise in the defense of any action, suit or proceeding referred to in
subsections (a) and (b), or in the defense of any claim, issue or matter
therein, he shall be indemnified against expenses (including attorneys' fees)
actually and reasonably incurred by him in connection therewith; that
indemnification and advancement of expenses provided by, or granted pursuant to,
Section 145 shall not be deemed exclusive of any other rights to which the
indemnified party may be entitled; and empowers the corporation to purchase and
maintain insurance on behalf of a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against any liability asserted against him
and incurred by him in any such capacity, or arising out of his status as such,
whether or not the corporation would have the power to indemnify him against
such liabilities under Section 145.
The By-laws of WMC Secured Assets Corp. (the "Company") provide, in
effect, that to the full extent permitted by law, the Company shall indemnify
and hold harmless each person who was or is a party or is threatened to be made
a party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative and whether or not by
or in the right of the Company, by reason of the fact that he is or was a
director or officer, or his testator or intestate is or was a director or
officer of the Company, or by reason of the fact that such person is or was
serving at the request of the Company as a director, officer, employee or agent
of another corporation, partnership, joint venture, trust or other enterprise of
any type or kind, domestic or foreign, against expenses, including attorneys'
fees, judgments, fines and amounts paid in settlement, actually and reasonably
incurred as a result of such action, suit or proceeding.
The Company presently does not have liability insurance maintained
covering directors and principal officers of the Company.
Section 8(b) of the proposed form of Underwriting Agreement provides
that each Underwriter severally will indemnify and hold harmless the Company,
each of its directors, each of its officers who signs the Registration
Statement, and each person, if any, who controls the Company within the meaning
of the Securities Act of 1933, as amended, and the Securities Exchange of 1934,
as amended, against any losses, claims, damages or liabilities to which any of
them may become subject under the Securities Act of 1933, the Securities
Exchange Act of 1934 or other federal or state law or regulation, at common law
or otherwise, insofar as such losses,
<PAGE>
claims, damages or liabilities (or actions in respect thereof) arise out of or
are based upon an untrue statement or an alleged untrue statement of a material
fact contained in the registration statement when it became effective, or in the
Registration Statement, any related preliminary prospectus or the Prospectus, or
any amendment or supplement thereto, or any related preliminary prospectus
supplement, or arise out of or are based upon the omission or alleged omission
to state therein a material fact required to be stated therein or necessary to
make the statements therein not misleading, in each case to the extent, but only
to the extent, that such untrue statement or alleged untrue statement or
omission or alleged omission was made therein in reliance upon and in conformity
with written information furnished to the Company by such Underwriter,
specifically for use in the preparation thereof, and will reimburse the Company
for any legal or other expenses reasonably incurred by the Company in connection
with investigating or defending against such loss, claim, damage, liability or
action.
The Pooling and Servicing Agreements with respect to each series of
Certificates and the Servicing Agreements, Indentures and Owner Trust Agreements
with respect to each series of Notes will provide that no director, officer,
employee or agent of the Registrant is liable to the Trust Fund or the
Securityholders, except for such person's own willful misfeasance, bad faith or
gross negligence in the performance of duties or reckless disregard of
obligations and duties. The Pooling and Servicing Agreements with respect to
each series of Certificates and the Servicing Agreements, Indentures and Owner
Trust Agreements with respect to each series of Notes will further provide that,
with the exceptions stated above, a director, officer, employee or agent of the
Registrant is entitled to be indemnified against any loss, liability or expense
incurred in connection with legal action relating to such Agreements and related
Securities other than such expenses related to particular Mortgage Loans.
EXHIBITS (ITEM 16 OF FORM S-3).
Exhibits--
1.1* -- Form of Underwriting Agreement.
3.1* -- Amended and Restated Articles of Incorporation.
3.2* -- Restated By-Laws.
4.1* -- Form of Pooling and Servicing Agreement for an offering of
Mortgage Pass-Through Certificates consisting of senior and
subordinate certificate classes.
4.2* -- Form of Pooling and Servicing Agreement for alternate forms
of credit support (single class).
4.3* -- Form of Servicing Agreement for an offering of Mortgage-
Backed Notes.
4.4* -- Form of Trust Agreement for an offering of Mortgage-Backed
Notes.
4.5* -- Form of Indenture for an offering of Mortgage-Backed Notes.
5.1 -- Opinion of Thacher Proffitt & Wood with respect to legality.
<PAGE>
8.1 -- Opinion of Thacher Proffitt & Wood with respect to certain
tax matters (included with Exhibit 5.1).
23.1 -- Consent of Thacher Proffitt & Wood (included as part of
Exhibit 5.1 and Exhibit 8.1).
24.1 -- Power of Attorney (included on page 6 of this Part II).
* Previously filed.
UNDERTAKINGS (ITEM 17 OF FORM S-3).
A. UNDERTAKINGS PURSUANT TO RULE 415.
The Registrant hereby undertakes:
(a)(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement (i) to include
any prospectus required by Section 10(a)(3) of the Securities Act of 1933, (ii)
to reflect in the prospectus any facts or events arising after the effective
date of the registration statement (or the most recent post-effective amendment
thereof) which, individually or in the aggregate, represent a fundamental change
in the information set forth in the registration statement, and (iii) to include
any material information with respect to the plan of distribution not previously
disclosed in this Registration Statement or any material change to such
information in this Registration Statement; PROVIDED, HOWEVER, that subparts (i)
and (ii) do not apply if the information required to be included in the
post-effective amendment by those subparts is contained in periodic reports
filed by the Registrant pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 that are incorporated by reference in the Registration
Statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
(b) That, for the purposes of determining any liability under the
Securities Act of 1933, each filing of the Registrant's annual report pursuant
to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (and, where
applicable, each filing of an employee benefit plan's annual report pursuant to
Section 15(d) of the Securities Exchange Act of 1934) that is incorporated by
reference in the registration statement shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial BONA FIDE offering
thereof.
<PAGE>
(f) To provide to the underwriter at the closing specified in the
underwriting agreements, certificates in such denominations and registered in
such names as required by the underwriter to permit prompt delivery to each
purchaser.
B. UNDERTAKING IN RESPECT OF INDEMNIFICATION.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, WMC
Secured Assets Corp. certifies that it has reasonable grounds to believe that it
meets all of the requirements for filing on Form S-3, and has duly caused this
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Woodland Hills, State of California, on the 23rd
of July, 1998.
WMC SECURED ASSETS CORP.
By: /s/ Todd Wallace
------------------------------
Name: Todd Wallace
Title: Vice President & Treasurer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Todd Wallace, as his true and lawful
attorney-in-fact and agent, with full power of substitution and resubstitution,
for and in his or her name, place and stead, in any and all capacities, to sign
any or all amendments or supplements (including post-effective amendments) to
this Registration Statement, and to file the same, with all exhibits thereto,
and other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorney-in-fact and agent full power and
authority to do and perform each and every act and thing requisite and necessary
to be done in and about the premises, as fully to all intents and purposes as
might or could be done in person, hereby ratifying and confirming all that said
attorney-in-fact and agent, or his substitute or substitutes, may lawfully do or
cause to be done by virtue thereof.
<PAGE>
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated:
SIGNATURE TITLE DATE
/s/ Scott McAfee President July 23, 1998
- -------------------
Scott A. McAfee
/s/ Todd Wallace Vice-President & Treasurer July 23, 1998
- -------------------
Todd R. Wallace
/s/ Stephen Wright Vice President July 23, 1998
- -------------------
Stephen M. Wright
/s/ Jules Vogel Vice President, General Counsel July 23, 1998
- ------------------- & Secretary
Jules B. Vogel
/s/ Susan Whiteside Assistant Secretary July 23, 1998
- -------------------
Susan Whiteside
Exhibits 5.1, 8.1, 23.1
-----------------------
July 23, 1998
WMC Secured Assets Corp.
6320 Canoga Avenue
Woodland Hills, California 91367
Re: WMC Secured Assets Corp.
Mortgage Pass-Through Certificates and Notes
Registration Statement on Form S-3
--------------------------------------------
Dear Sirs:
We are counsel to WMC Secured Assets Corp., a Delaware
corporation (the "Registrant"), in connection with the registration under the
Securities Act of 1933, as amended (the "Act"), of Mortgage Pass- Through
Certificates ("Certificates") and Mortgage-Backed Notes ("Notes"; and together
with Certificates, "Securities"), and the related preparation and filing of a
Registration Statement on Form S-3 (the "Registration Statement"). The
Certificates are issuable in series under separate pooling and servicing
agreements (each such agreement, a "Pooling and Servicing Agreement"), among the
Registrant, a master servicer to be identified in the prospectus supplement for
such series of Certificates and a trustee to be identified in the prospectus
supplement for such series of Certificates. Each Pooling and Servicing Agreement
will be substantially in the form filed as an Exhibit to the Registration
Statement. The Notes are issuable in series pursuant to separate indentures
(each such indenture, an "Indenture"), between an issuer and an indenture
trustee, each to be identified in the prospectus supplement for such series of
Notes. Each Indenture will be substantially in the form filed as an Exhibit to
the Registration Statement.
In connection with rendering this opinion letter, we have
examined the forms of the Pooling and Servicing Agreement and Indenture
contained as Exhibits in the Registration Statement, the Registration Statement
and such other documents as we have deemed necessary. As to matters of fact, we
have examined and relied upon representations or certifications of officers of
the Registrant or public officials. In rendering this opinion letter, except for
the matters that are specifically addressed in the opinions expressed below, we
have assumed (i) the authenticity of all documents submitted to us as originals
and the conformity to the originals of all documents submitted to us as copies,
(ii) the necessary entity formation and continuing existence in the jurisdiction
of formation, and the necessary licensing and
<PAGE>
WMC Secured Assets Corp.
July 23, 1998 Page 2.
qualification in all jursidictions, of all parties to all documents, (iii) the
necessary authorization, execution, delivery and enforceability of all
documents, and the necessary entity power with respect thereto, and (iv) that
there is not and will not be any other agreement that modifies or supplements
the agreements expressed in the documents to which this opinion letter relates
that renders any of the opinions expressed herein inconsistent with such
documents as so modified or supplemented.
Our opinions set forth below are subject to the qualification
that enforceability of each of the respective obligations of the parties under
any agreement is subject to (i) general principles of equity, regardless of
whether such enforceability is considered in a proceeding in equity or at law,
(ii) the effect of certain laws, regulations and judicial or other decisions
upon the availability and enforceability of certain covenants, remedies and
other provisions, including the remedies of specific performance and self-help
and provisions imposing penalties and forfeitures, (iii) bankruptcy, insolvency,
liquidation, receivership, moratorium, reorganization or other similar laws
affecting the rights of creditors and (iv) public policy considerations
underlying the securities laws, to the extent that such public policy
considerations limit the enforceability of the provisions of any agreement,
which purport or are construed to provide indemnification with respect to
securities law violations. However, the non-enforceability of any such
provisions will not, taken as a whole, materially interfere with the practical
realization of the benefits of the rights and remedies included in any such
agreement, except for the consequences of any judicial, administrative,
procedural or other delay which may be imposed by, relate to or arise from
applicable laws, equitable principles and interpretations thereof.
In rendering this opinion letter, we do not express any opinion
concerning any law other than the law of the State of New York and the corporate
law of the State of Delaware. We do not express any opinion with respect to the
securities laws of any jurisdiction or any other matter not specifically
addressed in the opinions expressed below.
Based upon and subject to the foregoing, it is our opinion that:
1. Upon the authorization, execution and delivery thereof by the
parties thereto, each Pooling and Servicing Agreement will be a legal and valid
obligation of the Registrant, enforceable against the Registrant in accordance
with its terms.
2. Upon the authorization, execution and delivery thereof by the
parties thereto, each Indenture will be a legal and valid obligation of the
applicable issuer, enforceable against such issuer in accordance with its terms.
3. Upon the authorization, execution and delivery of a Pooling
and Servicing Agreement for a series of Certificates by the parties thereto, the
execution and authentication of the Certificates of such series in accordance
with that Pooling and Servicing Agreement and the sale and delivery of such
Certificates as contemplated in the Registration Statement and the prospectus
and prospectus supplement delivered in connection therewith, such Certificates
will be legally and validly issued and outstanding, fully paid and
non-assessable and entitled to the benefits of that Pooling and Servicing
Agreement.
<PAGE>
WMC Secured Assets Corp.
July 23, 1998 Page 3.
4. Upon the authorization, execution and delivery of an Indenture
for a series of Notes by the parties thereto, the execution and authentication
of the Notes in accordance with that Indenture and the sale and delivery of such
Notes as contemplated in the Registration Statement and the prospectus and
prospectus supplement delivered in connection therewith, such Notes will be
legally and validly issued and outstanding, fully paid and non-assessable and
entitled to the benefits of that Indenture.
5. The description of federal income tax consequences appearing
under the heading "Federal Income Tax Consequences" in the prospectus contained
in the Registration Statement, while not purporting to discuss all possible
federal income tax consequences of an investment in Securities, is accurate with
respect to those tax consequences which are discussed.
We hereby consent to the filing of this opinion letter as an
Exhibit to the Registration Statement, and to the use of our name in the
prospectus and prospectus supplement included in the Registration Statement
under the heading "Legal Matters", and in the prospectus included in the
Registration Statement under the heading "Federal Income Tax Consequences",
without admitting that we are "experts" within the meaning of the Act, and the
rules and regulations thereunder, with respect to any part of the Registration
Statement, including this Exhibit.
Very truly yours,
THACHER PROFFITT & WOOD
By /s/Thacher Proffitt & Wood
