PROSPECTUS SUPPLEMENT
(To Prospectus Dated December 16, 1997) $1,660,000,000
ContiMortgage Home Equity Loan Pass-Through Certificates Series 1997-5
[ContiMortgage Logo] ContiMortgage Corporation
Seller and Servicer
ContiWest Corporation
Seller
ContiSecurities Asset Funding Corp.
Depositor
----------------------------------------
The ContiMortgage Home Equity Loan Pass-Through Certificates, Series
1997-5 will consist of (i) the Class A-1 Certificates, the Class A-2 Fixed
Certificates, the Class A-3 Certificates, the Class A-4 Certificates, the Class
A-5 Certificates, the Class A-6 Certificates, the Class A-7 Certificates, the
Class A- 8 Certificates, the Class A-9 Certificates, the Class A-10
Certificates, Class A-11 IO Certificates (collectively, the "Class A Trust
Certificates"), (ii) the Class B Certificates (the "Subordinate Certificates"),
(iii) a residual class with respect to each REMIC held by the Trust ( the "Class
R Certificates") and (iv) the Class A-2 Floating Certificates (the "Grantor
Trust Certificates"). Only the Class A Trust Certificates (other than the Class
A-2 Fixed Certificates), the Class A-2 Floating Certificates and Class B
Certificates (the "Offered Certificates") are offered hereby.
On or before the issuance of the Offered Certificates, MBIA Insurance
Corporation (the "Certificate Insurer") will issue two financial guaranty
insurance policies, one relating to the Class A Trust Certificates and one
relating to the Class A-2 Floating Certificates (each, a "Certificate Insurance
Policy" and collectively, the "Certificate Insurance Policies"). The Certificate
Insurance Policies will guarantee the timely payment of interest on the Class A
Trust Certificates and the Class A-2 Floating Certificates and the related
Certificate Insurance policy will guarantee the ultimate payment of principal of
the Class A Trust Certificates. The Class B Certificates will not be covered by
either Certificate Insurance Policy. See "Summary of Terms - Credit
Enhancement." [MBIA Logo]
For a discussion of significant matters affecting investment in the
Offered Certificates, see "Risk Factors" beginning on Page S-26 herein,
"Prepayment and Yield Considerations" beginning on page S-48 herein and "Risk
Factors" beginning on page 6 in the Prospectus.
----------------------------------------
(Cover continued on next page)
THE OFFERED CERTIFICATES REPRESENT BENEFICIAL INTERESTS IN THE TRUST OR THE
GRANTOR TRUST ONLY AND DO NOT REPRESENT INTERESTS IN OR OBLIGATIONS OF THE
DEPOSITOR, THE SELLERS, THE SERVICER, THE CERTIFICATE INSURER OR ANY OF THEIR
AFFILIATES. NEITHER THE OFFERED CERTIFICATES NOR THE HOME EQUITY LOANS ARE
INSURED OR GUARANTEED BY ANY GOVERNMENTAL AGENCY.
THESE SECURITIES HAVE NOT BEEN
APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS SUPPLEMENT OR THE PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
===================================================================================================================================
Initial Certificate Underwriting Proceeds to
Class Principal Balance Pass-Through Rate Price to Public(1) Discount Depositor(1)(2)
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per Class A-1 $103,340,000 5.90625% 100% 0.08% 99.92%
Certificate
- ----------------------------------------------------------------------------------------------------------------------------------
Per Class A-2 $675,000,000 (3) 100% 0.175% 99.825%
Floating
Certificate
- ------------------------------------------------------------------------------------------------------------------------------------
Per Class A-3 $63,000,000 6.40% 99.99942% 0.250% 99.74942%
Certificate
- ------------------------------------------------------------------------------------------------------------------------------------
Per Class A-4 $140,000,000 6.58% 99.98729% 0.325% 99.66229%
Certificate
- ------------------------------------------------------------------------------------------------------------------------------------
Per Class A-5 $40,000,000 6.63% 99.95831% 0.350% 99.60831%
Certificate
- ------------------------------------------------------------------------------------------------------------------------------------
Per Class A-6 $115,540,000 6.87% 99.99988% 0.400% 99.59988%
Certificate
- -----------------------------------------------------------------------------------------------------------------------------------
Per Class A-7 $130,000,000 (4) 100% 0.175% 99.825%
Certificate
- -----------------------------------------------------------------------------------------------------------------------------------
Per Class A-8 $109,520,000 (4) 100% 0.250% 99.75%
Certificate
- -----------------------------------------------------------------------------------------------------------------------------------
Per Class A-9 $35,605,000 (4) 100% 0.200% 99.8%
Certificate
- -----------------------------------------------------------------------------------------------------------------------------------
Per Class A-10 $194,875,000 (5) 100% 0.230% 99.77%
Certificate
- -----------------------------------------------------------------------------------------------------------------------------------
Per Class A-11 (6) (6) 16.85156% 0.50% 16.35156%
IO Certificate
- -----------------------------------------------------------------------------------------------------------------------------------
Per Class B $53,120,000 7.62% 99.98764% 0.600% 99.38764%
Certificate
- -----------------------------------------------------------------------------------------------------------------------------------
Total $1,660,000,000 $1,686,169,376.74 $3,949,039.69 $1,682,220,337.06
===================================================================================================================================
(1) Plus accrued interest, if any, from December 16, 1997 with respect to
the Fixed Rate Certificates (excluding the Class A-1 Fixed
Certificates).
(2) Before deducting expenses estimated to be $1,200,000.
(3) The Pass-Through Rate on the Class A-2 Floating Certificates will be
based on one-month LIBOR, subject to a maximum rate of 10% per annum.
(4) The Pass-Through Rate on the Class A-7, Class A-8 and Class A-9
Certificates will be based on one-month LIBOR and subject to an
Available Funds Cap as described herein.
(5) The Pass-Through Rate on the Class A-10 Certificates will be
determined pursuant to the Auction Rate Procedures described in Annex
I hereto and subject to an Available Funds Cap as described herein.
(6) Interest will be calculated on the basis of a Notional Principal
Amount equal to the aggregate outstanding Certificate Principal
Balance of the Class A-5 and Class A-6 Certificates and will only be
payable until the 18th Payment Date at a Pass-Through Rate for the 1st
through the 6th Payment Dates, which will be equal to 25% per annum,
and for the 7th through the 18th Payments Dates, which will be equal
to 6.5% per annum.
</TABLE>
The Offered Certificates are offered by the Underwriters when, as and
if issued, delivered to and accepted by the Underwriters and subject to certain
other conditions. It is expected that delivery of the Offered Certificates will
be made against payment therefor in book-entry form through the book-entry
facilities of The Depository Trust Company, Cedel Bank, S.A. and the Euroclear
System on or about December 23, 1997.
----------------------------------------
Greenwich Capital Markets, Inc.
Bear, Stearns & Co. Inc.
ContiFinancial Services Corporation
Credit Suisse First Boston
Merrill Lynch & Co.
Morgan Stanley Dean Witter
Nomura Securities International, Inc.
Underwriter of the Class A-10 Certificates
Merrill Lynch & Co.
Underwriters of the Class A-11 IO Certificates
Greenwich Capital Markets, Inc.
The date of this Prospectus Supplement is December 16, 1997
<PAGE>
(Cover continued from previous page)
The Class A Trust Certificates, Class B Certificates and Class R
Certificates (the "Trust Certificates") represent undivided ownership interests
in a pool of fixed and adjustable rate home equity loans (the "Home Equity
Loans") held by ContiMortgage Home Equity Loan Trust 1997-5 (the "Trust"). The
Home Equity Loans are secured by first and second lien mortgages or deeds of
trust.
The Trust Certificates also will represent undivided ownership
interests in all monies due under the Home Equity Loans after December 15, 1997
(the "Cut-Off Date"), security interests in the properties which secure the Home
Equity Loans, funds on deposit in certain trust accounts and certain other
property. The Home Equity Loans were originated or purchased by the Sellers. The
Trust will be created pursuant to a Pooling and Servicing Agreement (the
"Pooling and Servicing Agreement") to be dated as of December 1, 1997, among
ContiSecurities Asset Funding Corp., as the Depositor, ContiMortgage
Corporation, as a Seller and the Servicer, ContiWest Corporation, as a Seller
and Manufacturers and Traders Trust Company, as the Trustee (the "Trustee").
The Class A-2 Floating Certificates, represent undivided ownership
interests in the assets held by ContiMortgage Grantor Trust 1997-A (the "Grantor
Trust"). The assets of the Grantor Trust will consist of (1) the Class A-2 Fixed
Certificates issued by the Trust, (2) a swap agreement between the Grantor Trust
and National Westminster Bank, Plc (the "Swap Agreement") pursuant to which
National Westminster Bank, Plc (the "Swap Counterparty") will be entitled to
receive the fixed rate of interest paid to the Grantor Trust in respect of the
Class A-2 Fixed Certificates and will be obligated to pay to the Grantor Trust a
floating rate based on one-month LIBOR which is sufficient to pay interest due
on the Class A-2 Floating Certificates and (3) the rights of the Grantor Trustee
under the related Certificate Insurance Policy. The Grantor Trust will be
created pursuant to a Trust Agreement (the "Grantor Trust Agreement") to be
dated as of December 1, 1997, among ContiSecurities Asset Funding Corp., as the
Depositor, ContiMortgage Corporation, as servicer, and Manufacturers and Traders
Trust Company, as the trustee (the "Grantor Trustee").
The Class B Certificates are subordinate in right of distribution to
the Class A Trust Certificates to the extent described herein. The initial
aggregate Certificate Principal Balance of the Subordinate Certificates will
equal 3.2% of the initial aggregate Certificate Principal Balance of the Trust
Certificates.
As described under "ERISA Considerations" herein, the Class A Trust
Certificates (other than the Class A-2 Fixed Certificates) and the Class A-2
Floating Certificates may be purchased by employee benefit plans that are
subject to ERISA. The Subordinate Certificates may not be purchased by employee
benefit plans that are subject to ERISA except as provided herein. See "ERISA
Considerations" herein and in the Prospectus.
The Class A-11 IO Certificates are "interest only" certificates and
are not entitled to distributions in respect of principal. The yield to maturity
of the Class A-11 IO Certificates will be sensitive to very high rates of
prepayments on the Home Equity Loans. Investors in the Class A-11 IO
Certificates should consider the associated risks, including the risk that if
the rate of prepayments is very high, such investors may fail to recover their
initial investments.
Distributions of interest will be made to the Owners of the Offered
Certificates on the 15th day of each month (or, if such day is not a business
day, the next business day) beginning in January, 1998. To the extent available,
interest will be passed through on each Payment Date to the Owners of the
Offered Certificates based on the related Certificate Principal Balance (as
defined herein) or Notional Amount, as the case may be, and at the rate
applicable to each Class of the Offered Certificates (each, a "Pass- Through
Rate"). The Pass-Through Rate for the Class A-2 Floating, Class A-7, Class A-8
and Class A-9 Certificates adjusts monthly based on one-month LIBOR (as defined
herein) or as otherwise described herein. The Pass-Through Rate for the Class
A-10 Certificates will be determined monthly based on the auction rate
procedures set forth in Annex I hereto. Distributions of principal in reduction
of the Certificate Principal Balances will be made on each Payment Date in the
manner and the amounts described herein.
By purchasing a Class A-10 Certificate (the "Auction Rate
Certificates"), whether in an Auction or otherwise, each prospective purchaser
will be deemed to have agreed (i) to participate in Auctions on the terms
described herein and (ii) so long as the beneficial ownership of the Auction
Rate Certificates is maintained in book-entry form, to sell, transfer or
otherwise dispose of the Auction Rate Certificates only pursuant to a Bid or a
Sell Order in an Auction, or to or through a Broker-Dealer, provided that in the
case of all transfers other than those pursuant to an Auction, the owner of the
Auction Rate Certificates so transferred, its Participant or Broker-Dealer
advises the Auction Agent of such transfer.
The Trust Estate will make one or more elections to treat certain
assets thereof as a "real estate mortgage investment conduit" (a "REMIC") for
federal income tax purposes. As described more fully herein, all Classes of the
Trust Certificates (other than the Class R Certificates) will constitute
"regular interests" in a REMIC. The Class A-2 Floating Certificates will
constitute interests in a Grantor Trust. See "Certain Federal Income Tax
Consequences" herein and in the Prospectus.
Prior to their issuance there has been no market for the Offered
Certificates, and there can be no assurance that one will develop or if it does
develop, that it will provide the Owners of the Offered Certificates with
liquidity or will continue for the life of the Offered Certificates. The
Underwriters intend, but are not obligated, to make a market in the Offered
Certificates.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN
TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE
OFFERED CERTIFICATES, INCLUDING OVER-ALLOTMENT, STABILIZING TRANSACTIONS,
SYNDICATE SHORT COVERING TRANSACTIONS AND PENALTY BIDS. FOR A DESCRIPTION OF
THESE ACTIVITIES SEE "UNDERWRITING" IN THIS PROSPECTUS SUPPLEMENT.
UNTIL 90 DAYS AFTER THE DATE OF THIS PROSPECTUS SUPPLEMENT, ALL
DEALERS EFFECTING TRANSACTIONS IN THE OFFERED CERTIFICATES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS
SUPPLEMENT AND THE PROSPECTUS TO WHICH IT RELATES. THIS 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.
The Certificates offered by this Prospectus Supplement will be part of
a separate series of Certificates being offered by the Depositor pursuant to its
Prospectus dated December 16, 1997, 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.
AVAILABLE INFORMATION
The Depositor has filed with the Securities and Exchange Commission
(the "Commission") a Registration Statement under the Securities Act of 1933
with respect to the Offered Certificates. This Prospectus Supplement and the
related Prospectus, which form a part of the Registration Statement, omit
certain information contained in such Registration Statement pursuant to the
Rules and Regulations of the Commission. The Registration Statement can be
inspected and copied at the Public Reference Room of the Commission at 450 Fifth
Street, N.W., Washington, D.C., and the Commission's regional offices at Seven
World Trade Center, 13th Floor, New York, New York 10048, and Citicorp Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such
materials can be obtained at prescribed rates from the Public Reference Section
of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 and
electronically through the Commission's Electronic Data Gathering, Analysis and
Retrieval system at the Commission's web site (http://www.sec.gov).
REPORTS TO OWNERS
Monthly and annual reports concerning the Certificates, the Trust and
the Grantor Trust will be sent by the Trustee to the Owners of Offered
Certificates and the Certificate Insurer. So long as any Offered Certificate is
in book-entry form, such reports will be sent to Cede & Co., as the nominee of
DTC and as Owner of such Offered Certificates pursuant to the Pooling and
Servicing Agreement. DTC will supply such reports to Owners of any such Offered
Certificates in accordance with its procedures. The Depositor will file or cause
to be filed with the Commission such periodic reports with respect to the Trust
and the Grantor Trust as are required under the Securities Exchange Act of 1934
and the rules and regulations of the Commission thereunder. It is the
Depositor's intent to suspend the filing of such reports as soon as such reports
are no longer statutorily required.
<PAGE>
SUMMARY OF TERMS
This summary is qualified in its entirety by reference to the detailed
information appearing elsewhere in this Prospectus Supplement and the
accompanying Prospectus. Reference is made to the Index of Principal Defined
Terms for the location of certain capitalized terms.
Issuers: ContiMortgage Home Equity Loan Trust
1997-5 (the "Trust"). ContiMortgage Grantor Trust
1997-A (the "Grantor Trust").
Certificates Offered: $1,660,000,000 ContiMortgage Home Equity
Loan Pass-Through Certificates, Series 1997-5, to
be issued in the following Classes (each, a
"Class") and original Certificate Principal
Balances (each, a "Certificate Principal
Balance"), set forth below:
Initial Pass-Through
Certificate Rate Class
Principal Balance
$103,340,000 5.90625% Class A-1 Certificates
$675,000,000 (1) Class A-2 Floating Certificates
$ 63,000,000 6.40%(2) Class A-3 Certificates
$140,000,000 6.58%(2) Class A-4 Certificates
$ 40,000,000 6.63%(2) Class A-5 Certificates
$115,540,000 6.87%(2) Class A-6 Certificates
$130,000,000 (3) Class A-7 Certificates
$109,520,000 (4) Class A-6 Certificates
$ 35,605,000 (5) Class A-9 Certificates
$194,875,000 (6) Class A-10 Certificates
($)(7) (8) Class A-11 IO Certificates
$ 53,120,000 7.62%(2) Class B Certificates
(1) On each Payment Date, the
Pass-Through Rate with respect to the Class A-2
Floating Certificates will be equal to the lesser
of (x) LIBOR plus 0.17% per annum and (y) 10% per
annum (such rate, the "Class A-2 Floating
Pass-Through Rate"). The Class A-2 Fixed
Certificates, which will be deposited to the
Grantor Trust and are not offered hereby, will
have an initial Certificate Principal Balance of
$675,000,000 and a Pass-Through Rate of 6.37% per
annum.
(2) The Pass-Through Rate with respect
to the Class A-3, the Class A-4, the Class A-5,
Class A-6, and Class B Certificates (i) for the
1st through the 6th Payment Dates will equal the
Pass-Through Rate for such Class set out above and
(ii) thereafter will equal the lesser of (x) the
Pass-Through Rate for such Class set out above and
(y) the Available Funds Cap.
(3) On each Payment Date, the
Pass-Through Rate for the Class A-7 Certificates
will be equal to the lesser of (x) LIBOR plus
0.20% per annum, and (y) the Available Funds Cap.
(4) On each Payment Date, the
Pass-Through Rate for the Class A-8 Certificates
will be equal to the lesser of (x) LIBOR plus
0.30% per annum and (y) the Available Funds Cap.
(5) On each Payment Date, the
Pass-Through Rate for the Class A-9 Certificates
will be equal to the lesser of (x) LIBOR plus
0.25% per annum and (y) the Available Funds Cap.
(6) The Pass-Through Rate for the Class
A-10 Certificates for the first Payment Date will
equal LIBOR plus 0.10% per annum. For each Payment
Date thereafter, the Pass-Through Rate for the
Class A-10 Certificates will equal the lesser of
(x) the rate determined in accordance with the
Auction Procedures described in Annex I hereto and
(y) the Available Funds Cap.
(7) The Class A-11 IO Certificates do
not have a Certificate Principal Balance but will
accrue interest on their Notional Amount. The
"Notional Amount" of the Class A-11 IO
Certificates will equal (a) on any Payment Date
prior to the 19th Payment Date, the aggregate
Certificate Principal Balance of the Class A-5 and
Class A-6 Certificates and (b) on or after the
19th Payment Date, zero.
(8) On each of the 1st through the 6th
Payment Dates, the Pass-Through Rate for the Class
A-11 IO Certificates will be equal to 25% per
annum and on the 7th through the 18th Payment
Dates, the Pass- Through Rate for the Class A-11
IO Certificates will be equal to 6.5% per annum.
The "Available Funds Cap" means with
respect to any Payment Date, the product of (I)
the weighted average Coupon Rate of the Home
Equity Loans as of the opening of business on the
first day of the related Remittance Period, less
the sum of (i) an amount, expressed as an annual
percentage rate of the outstanding aggregate Loan
Balance of the Home Equity Loans as of the opening
of business on the first day of the related
Remittance Period, equal to the sum of the
Servicing Fee, the Trustee Fee, the Certificate
Insurer Premium, the Auction Agent Fee and the
Broker-Dealer Fee, in each case due with respect
to such Payment Date, (ii) after the 6th Payment
Date, 0.50% per annum and (iii) for the 1st
through the 6th Payment Dates, the sum of (A) the
product of (a) the weighted average Pass-Through
Rate of the Fixed Rate Certificates (other than
the Class A-11 IO Certificates) and (b) the
outstanding aggregate Certificate Principal
Balance of the Fixed Rate Certificates (other than
the Class A-11 IO Certificates) divided by the
outstanding aggregate Loan Balances of the Home
Equity Loans as of the opening of business on the
first day of the related Remittance Period and (B)
the product of (a) 25% per annum and (b) the
Notional Amount of the Class A-11 IO Certificates
divided by the outstanding aggregate Loan Balances
of the Home Equity Loans as of the opening of
business on the first day of the related
Remittance Period; and (iv) for the 7th through
the 18th Payment Dates, the product of (a) 6.5%
per annum and (b) the Notional Amount of the Class
A-11 IO Certificates divided by the outstanding
aggregate Loan Balances as of the opening of
business on the first day of the related
Remittance Period and (II) (i) for the 1st through
the 6th Payment Dates, a fraction, the numerator
of which is equal to the outstanding aggregate
Loan Balance of the Home Equity Loans as of the
opening of business on the first day of the
related Remittance Period and the denominator of
which is the outstanding aggregate Certificate
Principal Balance of the Adjustable Rate
Certificates and (ii) for each Payment Date
thereafter, 1.0.
The initial aggregate Certificate
Principal Balance of the Subordinate Certificates
will equal 3.2% of the initial aggregate
Certificate Principal Balance of the Trust
Certificates. The Subordinate Certificates are
subordinate in right of distribution to the
related Class A Trust Certificates to the extent
described herein.
On any date after the Closing Date, the
"Aggregate Trust Certificate Principal Balance" is
the sum of the Certificate Principal Balance of
Class A Trust Certificates and Class B
Certificates.
Certain Designation: For purposes of this Prospectus
Supplement, the following designations will refer
to the Classes of Certificates indicated.
Trust Certificates Class A-1, Class A-2 Fixed, Class A-3,
Class A-4, Class A-5, Class A-6, Class A- 7, Class
A-8, Class A-9, Class A-10, Class A-11 IO, Class B
and Class R Certificates.
Class A Trust Certificates Class A-1, Class A-2 Fixed, Class A-3,
Class A-4, Class A-5, Class A-6, Class A-7, Class
A-8, Class A-9, Class A-10 and Class A-11 IO
Certificates.
Floating Rate Certificates Class A-7, Class A-8 and Class A-9
Certificates.
Auction Rate Certificates Class A-10 Certificates.
Adjustable Rate
Certificates Class A-7, Class A-8,
Class A-9 and Class A-10 Certificates.
Fixed Rate Certificates Class A-1, Class A-2 Fixed, Class A-3,
Class A-4, Class A-5, Class A-6, Class A- 11 IO
and Class B Certificates.
Interest-Only Certificates Class A-11 IO Certificates.
Offered Certificates The Class A Trust Certificates (other
than the Class A-2 Fixed Certificates), the Class
A-2 Floating Certificates and the Class B
Certificates.
Class A Offered Certificates The Class A Trust Certificates (other
than the Class A-2 Fixed Certificates) and the
Class A-2 Floating Certificates.
Trust Offered Certificates The Class A Trust Certificates (other
than the Class A-2 Fixed Certificates) and the
Class B Certificates.
Planned Amortization Class
("PAC") Certificates Class A-2 Fixed, Class A-3, Class A-4,
Class A-5, Class A-6, Class A-7 and Class A-8
Certificates.
Fixed Rate PAC Group Class A-2 Fixed, Class A-3, Class A-4,
Class A-5 and Class A-6 Certificates.
Floating Rate PAC Group Class A-7 and Class A-8
Certificates.
Companion Certificates Class A-9
Certificates and Class A-10 Certificates.
Subordinate Certificates Class B Certificates.
Grantor Trust Certificates Class A-2 Floating Certificates.
Depositor: ContiSecurities Asset Funding Corp. (the
"Depositor"), a Delaware corporation.
Servicer: ContiMortgage Corporation
(the "Servicer"), a Delaware corporation.
Sellers: ContiMortgage Corporation, a Delaware corporation
and ContiWest Corporation, a Nevada corporation
(each a "Seller" and collectively, the "Sellers").
Originator: ContiMortgage Corporation (the
"Originator"), a Delaware corporation.
Trustee: Manufacturers and Traders Trust Company (the
"Trustee"), a New York banking corporation.
Grantor Trustee: Manufacturers and Traders Trust
Company (the "Grantor Trustee"), a New York
banking corporation.
Auction Agent: Bankers Trust Company (the "Auction
Agent"), a New York banking corporation.
Cut-Off Date: As of the close of business on December
15, 1997.
Statistical Calculation As of the close of business on
Date: November 13, 1997.
Closing Date: On or about December 23, 1997.
Description of the
Certificates: The ContiMortgage Home Equity Loan
Trust 1997-5 Certificates (the "Trust
Certificates") will consist of the Class A Trust
Certificates, Class B Certificates and a residual
class for each REMIC held by the Trust (the "Class
R Certificates" or the "Retained Certificates").
The Trust Certificates will be issued pursuant to
a Pooling and Servicing Agreement (the "Pooling
and Servicing Agreement") to be dated as of
December 1, 1997, among the Depositor, the
Sellers, the Servicer and the Trustee.
The Class A-2 Floating Certificates will
be issued pursuant to a Grantor Trust Agreement
(the "Grantor Trust Agreement") to be dated as of
December 1, 1997, among the Depositor, the
Servicer and the Grantor Trustee. At all times the
outstanding Certificate Principal Balance of the
Class A-2 Floating Certificates will equal the
outstanding Certificate Principal Balance of the
Class A-2 Fixed Certificates. The Trust Offered
Certificates and the Class A-2 Floating
Certificates are referred to collectively herein
as the "Offered Certificates." Only the Offered
Certificates are offered hereby.
Denominations: The Offered Certificates are issuable in
book entry form in minimum original principal
amounts (or a Notional Amount in the case of the
Class A-11 IO Certificates) of (a) $1,000 and
integral multiples in excess thereof in the case
of the Offered Certificates, other than the
Auction Rate Certificates, and (b) $25,000 and
integral multiples thereof, in the case of the
Auction Rate Certificates.
The Home Equity Loans: Unless otherwise noted, all statistical
percentages in this Prospectus Supplement are
approximate and measured by the aggregate
principal balance (the "Loan Balance") of the home
equity loans in the Trust (the "Home Equity
Loans"), in relation to the Home Equity Loans that
bear fixed interest rates (the "Fixed Rate Loans")
or adjustable interest rates (the "Adjustable Rate
Loans") or of all of the Home Equity Loans in the
Trust (the "Original Aggregate Loan Balance"), in
each case as of the Statistical Calculation Date.
See "Additional Information" in this Prospectus
Supplement. The Home Equity Loans will consist of
fixed and adjustable rate conventional home equity
loans evidenced by promissory notes (the "Notes")
secured by first and second lien deeds of trust,
security deeds or mortgages (the "Mortgages"). The
properties securing the Home Equity Loans (the
"Properties") are located in 48 states and the
District of Columbia and consist primarily of
single-family residences (which may be attached,
detached, part of a two-to-four family dwelling, a
condominium unit or a unit in a planned unit
development) and also include mixed use properties
and manufactured housing. The Properties may be
owner-occupied or non-owner occupied investment
properties. No Combined Loan-to-Value Ratio (based
upon appraisals made at the time of origination)
exceeded 100% as of the Statistical Calculation
Date (except for one Home Equity Loan). The Home
Equity Loans are not insured by either primary or
pool mortgage insurance policies. The Home Equity
Loans are not guaranteed by the Sellers or any
affiliate thereof. The Home Equity Loans will be
serviced by the Servicer generally in accordance
with the standards and procedures required by
FannieMae for FannieMae mortgage-backed
securities.
Fixed Rate Loans. As of the Statistical
Calculation Date, the average Loan Balance of the
Fixed Rate Loans was $61,890.72; the interest
rates (the "Coupon Rates") of such Home Equity
Loans ranged from 7.19% to 19.99%; the weighted
average Loan-to-Value Ratio of such Home Equity
Loans was 73.56%; the weighted average Combined
Loan-to-Value Ratio of such Home Equity Loans was
76.70%; the weighted average Coupon Rate of such
Home Equity Loans was 11.094%; and the weighted
average remaining term to maturity of such Home
Equity Loans was 225.03 months. The remaining
terms to maturity as of the Statistical
Calculation Date of the Fixed Rate Loans ranged
from 52 months to 360 months. The maximum Loan
Balance of the Fixed Rate Loans as of the
Statistical Calculation Date was $414,000. The
Fixed Rate Loans containing "balloon" payments
represent 48.74% of the Loan Balance of the Fixed
Rate Loans. No Fixed Rate Loan will mature later
than December 1, 2027. 11,619 of the Fixed Rate
Loans are secured by first mortgages representing
in the aggregate 93.57% of the Loan Balance of the
Fixed Rate Loans and 1,600 of the Fixed Rate Loans
are secured by second lien mortgages representing
in the aggregate 6.43% of the Loan Balance of the
Fixed Rate Loans. As a percentage of the Loan
Balance of the Fixed Rate Loans, 87.00% were
secured by mortgages on single-family detached
dwellings, 2.11% by mortgages on single-family
attached dwellings, 6.58% by mortgages on
two-to-four family dwellings, 0.62% by
condominiums, 2.01% by manufactured housing and
1.68% by other types of dwellings. See "The Home
Equity Loan Pool-Home Equity Loans-Fixed Rate
Loans" herein.
Adjustable Rate Loans. As of the
Statistical Calculation Date, the average Loan
Balance of the Adjustable Rate Loans was
$95,476.81; the Coupon Rates of such Home Equity
Loans ranged from 6.50% to 16.5%; the weighted
average Loan-to-Value Ratio of such Home Equity
Loans was 79.15%; the weighted average Coupon Rate
of such Home Equity Loans was 10.33%; and the
weighted average remaining term to maturity of
such Home Equity Loans was 358.40 months. The
remaining terms to maturity as of the Statistical
Calculation Date of the Adjustable Rate Loans
ranged from 178 months to 360 months. The maximum
Loan Balance of the Adjustable Rate Loans as of
the Statistical Calculation Date was $435,000. No
Adjustable Rate Loan will mature later than
December 1, 2027. All of the Adjustable Rate Loans
are secured by first mortgages. As a percentage of
the Loan Balance of the Adjustable Rate Loans,
87.82% were secured by mortgages on single-family
detached dwellings, 0.94% by mortgages on
single-family attached dwellings, 5.44% by
mortgages on two-to-four family dwellings, 1.34%
by condominiums, 0.98% by manufactured housing and
3.48% by other types of dwellings. See "The Home
Equity Loan Pool- Home Equity Loans-Adjustable
Rate Loans" herein.
All of the Adjustable Rate Loans have
maximum Coupon Rates. The weighted average maximum
Coupon Rate of the Adjustable Rate Loans is
16.56%, with maximum Coupon Rates that range from
approximately 12.5% to 23.5%. The Adjustable Rate
Loans have a weighted average gross margin as of
the Statistical Calculation Date of 6.22%. The
gross margin for the Adjustable Rate Loans ranges
from 2.5% to 11.10%.
Approximately $58,803,067 or 18.38% of the
Adjustable Rate Loans by aggregate Loan Balance as
of the Statistical Calculation Date bear interest
at rates that adjust, along with the related
monthly payments, semiannually based on Six-Month
LIBOR (the "Six-Month LIBOR Loans"). The Six-Month
LIBOR Loans have periodic reset caps ranging from
1% to 1.5%.
Approximately $221,131,863 or 69.12% of
the Adjustable Rate Loans by aggregate Loan
Balance as of the Statistical Calculation Date
bear interest at a fixed rate for two years after
origination and thereafter have periodic
adjustments at frequencies in the same manner as
the Six-Month LIBOR Loans (as described above)
(the "2/28 Loans"). After the first adjustment,
the 2/28 Loans have periodic reset caps ranging
from 1% to 6%.
Approximately $39,893,940 or 12.47% of
the Adjustable Rate Loans by aggregate Loan
Balance as of the Statistical Calculation Date
bear interest at a fixed rate for three years
after origination and thereafter have periodic
adjustments at frequencies in the same manner as
the Six-Month LIBOR Loans (as described above)
(the "3/27 Loans"). After the first adjustment,
the 3/27 Loans have periodic reset caps ranging
from 1% to 3%.
Swap Agreement: Pursuant to the Swap Agreement, on each
Payment Date, the Swap Counterparty will be
entitled to receive from the Grantor Trust the
distributions of interest on the outstanding
Certificate Principal Balance of the Class A-2
Fixed Certificates immediately prior to such
Payment Date, which are calculated at a fixed rate
of 6.37% per annum, and will be obligated to pay
to the Grantor Trust an amount equal to one
months' interest at the Class A-2 Floating
Pass-Through Rate on the outstanding Certificate
Principal Balance of the Class A-2 Floating
Certificates immediately prior to such Payment
Date. At all times the outstanding Certificate
Principal Balance of the Class A-2 Floating
Certificates will equal the outstanding
Certificate Principal Balance of the Class A-2
Fixed Certificates.
Swap Counterparty: National Westminster Bank, Plc
Final Scheduled
Payment Dates: The Final Scheduled Payment Dates for
each of the respective Classes of Offered
Certificates are as follows, although it is
anticipated that the actual final Payment Date for
each Class (other than Class A-11 IO) will occur
earlier than the Final Scheduled Payment Date. See
"Prepayment and Yield Considerations" herein. The
payment of the outstanding Certificate Principal
Balance, if any remains then outstanding, of the
Class A-1 Certificates on the Final Scheduled
Payment Date for the Class A-1 Certificates is
guaranteed by the Certificate Insurer.
Final Scheduled
Class Payment Date
Class A-1 Certificates: December 15, 1998
Class A-2 Floating October 15, 2012
Certificates:
Class A-3 Certificates: June 15, 2014
Class A-4 Certificates: June 15, 2019
Class A-5 Certificates: December 15, 2020
Class A-6 Certificates: March 15, 2024
Class A-7 Certificates: October 15, 2012
Class A-8 Certificates: March 15, 2024
Class A-9 Certificates: January 15, 2029
Class A-10 Certificates: June 15, 1999
Class A-11 IO Certificates: January 15, 2029
Class B Certificates:
Distributions-General:
On the 15th day of each month, or, if
such day is not a Business Day, then the next
succeeding Business Day, commencing in January,
1998 (each such day being a "Payment Date"), the
Trustee will be required, subject to the
availability of amounts therefor, pursuant to the
cashflow priorities hereinafter described, to
distribute to the Owners of record (or, in the
case of the Class A-2 Fixed Certificates, to
distribute to the Grantor Trustee) of the Fixed
Rate Certificates (other than the Class A-1
Certificates) as of the last day of the calendar
month immediately preceding the calendar month in
which such Payment Date occurs and to the Owners
of the Adjustable Rate Certificates and the Class
A-1 Certificates of record as of the day
immediately preceding such Payment Date (each such
date, the "Record Date") the applicable "Class
Distribution Amount" which shall be the sum of (x)
the related Current Interest, (y) the related
Interest Carry Forward Amount and (z) the related
Principal Distribution Amount (each as defined
below).
For each Payment Date, interest due with
respect to the Fixed Rate Certificates (except the
Class A-1 Certificates) will be interest which has
accrued on the related Certificate Principal
Balance (the Notional Amount in the case of the
Class A-11 IO Certificates) during the calendar
month immediately preceding the month in which
such Payment Date occurs (or the period from the
Cut-Off Date to the end of the calendar month in
the case of the first Payment Date). The interest
due with respect to the Adjustable Rate
Certificates, the Class A-2 Floating Certificates
and the Class A-1 Certificates will be the
interest which has accrued thereon at the
applicable Pass-Through Rate from the preceding
Payment Date to and including the day prior to the
current Payment Date. Each period referred to
above relating to the accrual of interest is the
"Accrual Period" for the related Class of Offered
Certificates. All calculations of interest on the
Fixed Rate Certificates will be made on the basis
of a 360-day year assumed to consist of twelve
30-day months. Calculations of interest on the
Adjustable Rate Certificates, the Class A-2
Floating Certificates and the Class A-1
Certificates will be made on the basis of the
actual number of days elapsed in the related
Accrual Period and a year of 360 days.
A "Business Day" is any day other than a
Saturday, Sunday or a day on which the Certificate
Insurer or banking institutions in New York City
or in the city in which the corporate trust office
of the Trustee is located are authorized or
obligated by law or executive order to close.
Interest: On each Payment Date the Interest
Remittance Amount (plus, in the case of the Class
A Trust Certificates, the interest component of
any Insured Payment which is available only for
the payment of the amount described in SECOND,
below) will be distributed in the following order
of priority:
FIRST, concurrently, to the Trustee, the
Trustee Fee, to the Certificate Insurer, the
Premium Amount, to the Auction Agent, the Auction
Agent Fee, and to the Broker-Dealer, the
Broker-Dealer Fee;
SECOND, to the Owners of the Class A
Trust Certificates, the related Current Interest
plus the Interest Carry Forward Amount with
respect to each Class of Class A Trust
Certificates without any priority among such Class
A Trust Certificates; PROVIDED, that if the
Interest Remittance Amount less the amount paid to
the Trustee as the Trustee Fee, the Premium Amount
paid to the Certificate Insurer, the amount paid
to the Auction Agent as the Auction Agent Fee and
the amount paid to the Broker-Dealer as the
Broker- Dealer Fee (such amount, the "Interest
Amount Available") plus the interest component of
any Insured Payment is not sufficient to make a
full distribution of interest with respect to all
Classes of the Class A Trust Certificates, then
such amount will be distributed among the
outstanding Classes of Class A Trust Certificates
pro rata based on the aggregate amount of interest
due on each such Class, and any shortfall will be
carried forward with accrued interest;
THIRD, to the extent of the Interest
Amount Available then remaining, to the Owners of
the Class B Certificates, the related Current
Interest; and
FOURTH, the amount, if any, of the
Interest Amount Available remaining after
application with respect to the priorities set
forth above is defined as the "Monthly Excess
Interest Amount" for such Payment Date and shall
be applied as described below under "Credit
Enhancement-Application of Monthly Excess Cashflow
Amounts" in this Summary of Terms.
On each Payment Date, the interest
received by the Grantor Trust as Owner of the
Class A-2 Fixed Certificates will be paid to the
Swap Counterparty under the Swap Agreement in
exchange for interest due on the Class A-2
Floating Certificates at the Class A-2 Floating
Pass-Through Rate. The interest due to be received
by the Grantor Trust from the Swap Counterparty
under the Swap Agreement will be distributed to
the Owners of the Class A-2 Floating Certificates.
To the extent an insufficient amount is received
from the Swap Counterparty, the Grantor Trustee
will make a claim under the related Certificate
Insurance Policy.
"Current Interest" with respect to each
Class of Class A Trust Certificates, Class B
Certificates and the Class A-2 Floating
Certificates means, with respect to any Payment
Date (i) the aggregate amount of interest accrued
during the related Accrual Period on the
Certificate Principal Balance or Notional Amount
of such Class plus (ii) the Preference Amount as
it relates to interest previously paid on such
Class of the Class A Trust Certificates, Class B
Certificates and the Class A-2 Floating
Certificates prior to such Payment Date.
"Interest Remittance Amount" means, as
of any Monthly Remittance Date, the sum, without
duplication, of (i) all interest due during the
related Remittance Period on the Home Equity Loans
(less the Servicing Fee), (ii) all Compensating
Interest paid by the Servicer on such Monthly
Remittance Date and (iii) the portion of any
Substitution Amount, Loan Purchase Price or Net
Liquidation Proceeds relating to interest.
The "Interest Carry Forward Amount" with
respect to any Class of Class A Trust Certificates
and Class B Certificates for any Payment Date is
the sum of (x) the amount, if any, by which (i)
the sum of the Current Interest and all prior
unpaid Interest Carry Forward Amounts for such
Class as of the immediately preceding Payment Date
exceeds (ii) the amount of the actual distribution
with respect to interest made to the Owners of
such Class of Class A Trust Certificates or Class
B Certificates on such immediately preceding
Payment Date plus (y) interest on such amount
calculated for the related Accrual Period at the
related Pass-Through Rate in effect with respect
to such Class of Class A Trust Certificates or
Class B Certificates. Assuming that the related
Certificate Insurance Policy is timely and
properly drawn upon in the event of an anticipated
shortfall, an Interest Carry Forward Amount would
only arise with respect to the Class A Trust
Certificates or the Class A-2 Floating
Certificates, as the case may be, in the event of
an Insurer Default.
Principal: Prior to the Stepdown Date. On each
Payment Date before the Stepdown Date, the Owners
of the Class A Trust Certificates (other than the
Class A-11 IO Certificates) will be entitled to
receive payment of 100% of the Principal
Distribution Amount together with the principal
component of any Insured Payment for such Payment
Date as follows: (i) to the Class A-1 Certificates
until the Certificate Principal Balances thereof
have been reduced to zero, (ii) PRO RATA between
the Fixed Rate PAC Group and the Floating Rate PAC
Group based on the aggregate Certificate Principal
Balances of each Group, sequentially in the order
of their numerical Class designations within each
Group (beginning with the Class A-2 Fixed and
Class A-7 Certificates, respectively), in an
amount up to the amount necessary to reduce the
respective Certificate Principal Balances thereof
to their respective Planned Principal Balances for
such Payment Date; (iii) sequentially, to the
Class A-9 and Class A-10 Certificates, in that
order, until the respective Certificate Principal
Balances thereof are reduced to zero; and (iv) to
the PAC Certificates as provided in clause (ii),
but without regard to the Planned Principal
Balances and until the respective Certificate
Principal Balances thereof are reduced to zero.
The final Payment Date for the Class A-1
Certificates will be December 15, 1998, at which
time the remaining Certificate Principal Balance,
if any, of the Class A-1 Certificates will be paid
in full. If the Principal Remittance Amount for
such Payment Date is not sufficient to pay in full
the remaining Certificate Principal Balance, if
any remain then outstanding, of the Class A-1
Certificates on such date, a draw will be made on
the Certificate Insurance Policy in the amount of
such shortfall.
Prior to the Stepdown Date, the Class B
Certificates will not be entitled to any
distribution of principal (unless the Class A
Trust Certificate Principal Balance has been
reduced to zero).
On and After the Stepdown Date. On each
Payment Date on or after the Stepdown Date, the
Owners of all Class A Trust Certificates (other
than the Class of A-11 IO Certificates) and Class
B Certificates will be entitled to receive
payments of principal, in the order of priority,
in the amounts set forth below and to the extent
of the Principal Distribution Amount (plus, in the
case of the Class A Trust Certificates (other than
the Class A-11 IO Certificates), the principal
component of any Insured Payment) as follows:
FIRST, the lesser of (x) the Principal
Distribution Amount together with the principal
component of any Insured Payment and (y) the Class
A Principal Distribution Amount shall be
distributed as follows: (i) PRO RATA between the
Fixed Rate PAC Group and the Floating Rate PAC
Group based on the outstanding aggregate
Certificate Principal Balances of each Group,
sequentially in the order of their numerical Class
designations within each Group (beginning with the
Class A-2 Fixed and Class A-7 Certificates,
respectively), in an amount up to the amount
necessary to reduce the respective Certificate
Principal Balances thereof to their respective
Planned Principal Balances for such Payment Date;
(ii) sequentially, to the Class A-9 and Class A-10
Certificates, in that order, until the respective
Certificate Principal Balances thereof are reduced
to zero; and (iii) to the PAC Certificates as
provided in clause (i), but without regard to the
Planned Principal Balances and until the
respective Certificate Principal Balances thereof
are reduced to zero;
SECOND, the lesser of (x) the excess of
(i) the Principal Distribution Amount over (ii)
the amount distributed to the Owners of the Class
A Trust Certificates in clause FIRST above and (y)
the Class B Principal Distribution Amount shall be
distributed to the Owners of the Class B
Certificates, until the Certificate Principal
Balance thereof has been reduced to zero; and
THIRD, any amount of the Principal Remittance
Amount remaining after making all of the
distributions in clauses FIRST and SECOND above
shall be included as part of the Monthly Excess
Cashflow Amount and shall be applied as described
below under "Credit Enhancement-Application of
Monthly Excess Cashflow Amounts" in this Summary
of Terms.
On each Payment Date, all principal
payments received by the Grantor Trust as Owner of
the Class A-2 Fixed Certificates will be
distributed to the Owner of the Class A-2 Floating
Certificates as payments of principal of the Class
A-2 Floating Certificates.
After the Certificate Principal Balance
of the Class A Trust Certificates (other than the
Class A-11 IO Certificates) has been reduced to
zero, the Owners of the Class B Certificates will
be entitled to receive 100% of the Principal
Distribution Amount for such Payment Date until
the Certificate Principal Balance thereof has been
reduced to zero.
The PAC Certificates are entitled to
receive distributions in reduction of their
Certificate Principal Balances in accordance with
the respective Planned Principal Balances set
forth in the Planned Principal Balance Schedule
set forth in Annex II hereof. If the amount
available for distributions of principal of the
Class A Trust Certificates (other than the Class
A-11 IO Certificates) exceeds the amount necessary
to reduce the Certificate Principal Balance of the
applicable Class of PAC Certificates to its
Planned Principal Balance on a Payment Date, such
excess will be distributed sequentially to the
Companion Certificates. However, if the amount
available for distributions of principal of the
Class A Trust Certificates (other than the Class
A-11 IO Certificates) is less than the amount
necessary to reduce the Certificate Principal
Balance of the applicable Class of PAC
Certificates to its Planned Principal Balance on a
Payment Date, the Companion Certificates will not
receive any distributions of principal on such
Payment Date and on any future Payment Date until
the Certificate Principal Balance of the
applicable Class of PAC Certificates is reduced to
its Planned Principal Balance for the applicable
Payment Date.
Notwithstanding the foregoing, on any
Payment Date on which the Certificate Principal
Balance of the Subordinate Certificates has been
reduced to zero and on or after which a
Certificate Insurer Default (as defined herein)
has occurred and is continuing, distributions of
principal of the Class A Trust Certificates (other
than the Class A-11 IO Certificates) will be made
on a pro rata basis without regard to any Planned
Principal Balances or the order of priority
described above.
In addition to the following
definitions, the above discussion makes use of a
number of defined terms which are defined under
"Description of the Certificates-Distributions"
herein.
"Principal Distribution Amount" means,
as of any Payment Date, the sum of (i) the
Principal Remittance Amount (MINUS, for Payment
Dates occurring on and after the Stepdown Date,
the Overcollateralization Release Amount if any)
and (ii) the Extra Principal Distribution Amount,
if any.
The "Remittance Period" with respect to
any Monthly Remittance Date is the calendar month
immediately preceding the calendar month (or, with
respect to the first Remittance Period, the period
from the Cut-Off Date to the end of the calendar
month) in which the Monthly Remittance Date
occurs. A "Monthly Remittance Date" is any date on
which funds on deposit in the Principal and
Interest Account are remitted to the Certificate
Account, which is the 10th day of each month or,
if such day is not a Business Day, the next
succeeding Business Day, commencing in the month
following the month in which the Closing Date
occurs.
A "Liquidated Home Equity Loan" is, in
general, a defaulted Home Equity Loan as to which
the Servicer has determined that all amounts that
it expects to recover on such Home Equity Loan
have been recovered (exclusive of any possibility
of a deficiency judgment).
"Principal Remittance Amount" means, as
of any Monthly Remittance Date, the sum, without
duplication, of (i) the principal actually
collected by the Servicer on the Home Equity Loans
during the related Remittance Period, (ii) the
Loan Balance of each Home Equity Loan that was
repurchased from the Trust during the related
Remittance Period, (iii) any Substitution Amount
relating to principal delivered by the Seller in
connection with a substitution of a Home Equity
Loan during the related Remittance Period, (iv)
any Insurance Proceeds and (v) all Net Liquidation
Proceeds actually collected by the Servicer during
the related Remittance Period (to the extent such
Net Liquidation Proceeds related to principal).
A "Delinquency Trigger Event" will be
deemed to have occurred with respect to any
Payment Date on or after the Stepdown Date if 55%
of the Three Month Rolling Average 60+ Day
Delinquency Rate equals or exceeds the Senior
Specified Enhancement Percentage.
"Stepdown Date" means the later to occur
of (x) the Payment Date in January 2001 and (y)
the first Payment Date on which the Senior
Enhancement Percentage (after taking into account
distributions of principal on such Payment Date)
is greater than or equal to the Senior Specified
Enhancement Percentage.
"Overcollateralization Floor" means
$8,300,000 (0.50% of the original aggregate Loan
Balance).
"Class A Principal Distribution Amount"
means as of any Payment Date (a) prior to the
Stepdown Date, the lesser of (i) 100% of the
Principal Distribution Amount plus the principal
component of any Insured Payment and (ii) the
aggregate Certificate Principal Balance of the
Class A Trust Certificates and (b) on or after the
Stepdown Date the lesser of (i) 100% of the
Principal Distribution Amount plus the principal
component of any Insured Payment and (ii) the
excess, if any, of (x) the aggregate Certificate
Principal Balance of the Class A Trust
Certificates immediately prior to such Payment
Date over (y) the Senior Optimal Balance
applicable to such Payment Date.
"Class B Principal Distribution Amount"
means as of any Payment Date on or after the
Stepdown Date, the excess, if any, of (x) the
aggregate Certificate Principal Balance of the
Class A Trust Certificates and Class B
Certificates (after taking into account the
payment of the related Class A Principal
Distribution Amount on such Payment Date) over (y)
the Class B Optimal Balance applicable to such
Payment Date provided that if the Class A Trust
Certificate Principal Balance has been reduced to
zero, the Class B Certificates will receive 100%
of the Principal Distribution Amount.
"Class B Optimal Balance" means as of
any Payment Date on and after the Stepdown Date:
(a) if neither a Delinquency Trigger Event
nor a Cumulative Realized Loss Trigger
Event is then in effect, the lesser of:
(i) the product of (x) 97.42% and
(y) the outstanding aggregate
Loan Balance of the Home
Equity Loans as of the last
day of the related Remittance
Period, and
(ii) the outstanding aggregate Loan
Balance of the Home Equity
Loans as of the last day of
the related Remittance Period
MINUS $8,300,000; or
(b) if a Delinquency Trigger Event is then
in effect, but as to which a Cumulative
Loss Trigger Event is not in effect, the
lesser of:
(i) the product of (x) 100% MINUS
45% of the Three-Month Rolling
Average 60+ Delinquency Rate
and (y) the outstanding
aggregate Loan Balance of the
Home Equity Loans as of the
last day of the related
Remittance Period and
(ii) the outstanding aggregate Loan
Balance of the Home Equity
Loans as of the last day of
the related Remittance Period,
minus $8,300,000; or
(c) if a Cumulative Realized Loss Trigger
Event is in effect but as to which a
Delinquency Trigger Event is not in
effect, the lesser of:
(i) the product of (x) 100% MINUS
the percentage equivalent of a
fraction, the numerator of
which is $35,524,000 and the
denominator of which is the
outstanding aggregate Loan
Balance of the Home Equity
Loans as of the last day of
the related Remittance Period
and (y) the outstanding
aggregate Loan Balance of the
Home Equity Loans as of the
last day of the related
Remittance Period and
(ii) the outstanding aggregate Loan
Balance of the Home Equity
Loans of the last day of the
related Remittance Period,
minus $8,300,000; or
(d) if both a Delinquency Trigger Event and
a Cumulative Realized Loss Trigger Event
are then in effect, the least of:
(i) the product (x) 100% MINUS 45%
of the Three-Month Rolling
Average 60+ Delinquency Rate
and (y) the outstanding
aggregate Loan Balance of the
Home Equity Loans as of the
last day of the related
Remittance Period,
(ii) the product of (x) 100% minus
the percentage equivalent of a
fraction, the numerator of
which is $35,524,000 and the
denominator of which is the
outstanding aggregate Loan
Balance of the Home Equity
Loans as of the last day of
the related Remittance Period,
and (y) the outstanding
aggregate Loan Balance of the
Home Equity Loans as of the
last day of the related
Remittance Period, and
(iii) the outstanding aggregate Loan
Balance of the Home Equity
Loans as of the last day of
the related Remittance Period,
MINUS $8,300,000.
"Senior Optimal Balance" means, as of
any Payment Date on and after the Stepdown Date:
(a) if neither a Delinquency Trigger Event
nor a Cumulative Realized Loss Trigger
Event is then in effect, the lesser of
(i) the product of (x) 90.54% and
(y) the outstanding aggregate
Loan Balance of the Home
Equity Loans as of the last
day of the related Remittance
Period, and
(ii) the outstanding aggregate Loan
Balance of the Home Equity
Loans as of the last day of
the related Remittance Period
MINUS $8,300,000; or
(b) a Delinquency Trigger Event is then in
effect, but as to which a Cumulative
Realized Loss Trigger Event is not in
effect, the lesser of:
(i) the product of (x) 100% MINUS
45% of the Three-Month Rolling
Average 60+ Delinquency Rate
and (y) the outstanding
aggregate Loan Balance of the
Home Equity Loans as of the
last day of the related
Remittance Period, and
(ii) the outstanding aggregate Loan
Balance of the Home Equity
Loans as of the last day of
the related Remittance Period
MINUS $8,300,000; or
(c) if a Cumulative Realized Loss Trigger
Event is in effect but as to which a
Delinquency Trigger Event is not in
effect, the lesser of:
(i) the product of (x) 93.12%
MINUS the percentage
equivalent of a fraction, the
numerator of which is
$35,524,000 and the
denominator of which is the
outstanding aggregate Loan
Balance of the Home Equity
Loans as of the last day of
the related Remittance Period
and (y) the outstanding
aggregate Loan Balance of the
Home Equity Loans as of the
last day of the related
Remittance Period, and
(ii) the outstanding aggregate Loan
Balance of the Home Equity
Loans of the last day of the
related Remittance Period,
MINUS $8,300,000; or
(d) if both a Delinquency Trigger Event and
a Cumulative Realized Loss Trigger Event
are then in effect, the least of:
(i) the product (x) 100% MINUS 45%
of the Three-Month Rolling
Average 60+ Delinquency Rate
and (y) the outstanding
aggregate Loan Balance of the
Home Equity Loans as of the
last day of the related
Remittance Period,
(ii) the product of (x) 93.12%
MINUS the percentage
equivalent of a fraction, the
numerator of which is
$35,524,000 and the
denominator of which is the
outstanding aggregate Loan
Balance of the Home Equity
Loans as of the last day of
the related Remittance Period,
and (y) the outstanding
aggregate Loan Balance of the
Home Equity Loans as of the
last day of the related
Remittance Period and
(ii) the outstanding aggregate Loan
Balance of the Home Equity
Loans as of the last day of
the related Remittance Period,
MINUS $8,300,000.
"Overcollateralization Amount" means as
of any Payment Date the positive difference, if
any, between (x) the Loan Balance of the Home
Equity Loans as of the last day of the immediately
preceding Remittance Period and (y) the
Certificate Principal Balance of the Class A Trust
Certificates and Class B Certificates (after
taking into account all distributions of principal
on such Payment Date).
"Senior Enhancement Percentage" for any
Payment Date is the percentage obtained by
dividing (x) the sum of (i) the aggregate
Certificate Principal Balance of the Subordinate
Certificates and (ii) the Overcollateralization
Amount, in each case after taking into account the
distribution of the Principal Distribution Amount
on such Payment Date by (y) the aggregate Loan
Balance of the Home Equity Loans as of the last
day of the related Remittance Period.
"Senior Specified Enhancement
Percentage" on any date of determination thereof
means 9.46%.
"Extra Principal Distribution Amount"
means as of any Payment Date, the lesser of (x)
the Monthly Excess Interest Amount for such
Payment Date and (y) the Overcollateralization
Deficiency for such Payment Date.
"Overcollateralization Deficiency" means as of any
Payment Date, the excess, if any, of (x) the
Targeted Overcollateralization Amount for such
Payment Date over (y) the Overcollateralization
Amount for such Payment Date, calculated for this
purpose after taking into account the reduction on
such Payment Date of the Certificate Principal
Balance of the Class A Trust Certificates and
Class B Certificates resulting from the
distribution of the related Principal Remittance
Amount (but not the related Extra Principal
Distribution Amount or the principal component of
any Insured Payment) on such Payment Date, but
prior to taking into account any related Applied
Realized Loss Amount on such Payment Date.
"Overcollateralization Release Amount" means as of
any Payment Date, the lesser of (x) the Principal
Remittance Amount for such Payment Date and (y)
the excess of (i) the Overcollateralization Amount
for such Payment Date, assuming that 100% of the
Principal Remittance Amount is applied on such
Payment Date to the payment of principal on Class
A Trust Certificates and Class B Certificates and
(ii) the Targeted Overcollateralization Amount for
such Payment Date.
"Targeted Overcollateralization Amount"
means as of any Payment Date, (x) after the sixth
Payment Date, but prior to the Stepdown Date, 1.2%
of the Original Aggregate Loan Balance and (y) on
and after the Stepdown Date (A) if neither a
Delinquency Trigger Event nor a Cumulative
Realized Loss Trigger Event is in effect, the
greater of (i) 2.58% of the aggregate outstanding
Loan Balance of the Home Equity Loans as of the
last day of the related Remittance Period and (ii)
the Overcollateralization Floor or (B) if a
Delinquency Trigger Event is in effect but a
Cumulative Realized Loss Trigger Event is not in
effect, the Targeted Overcollateralization Amount
shall be equal to the Targeted
Overcollateralization Amount for the immediately
preceding Payment Date or (C) if a Cumulative
Realized Loss Trigger Event is in effect (whether
or not a Delinquency Trigger Event is in effect),
the product of (i) 2.14% and (ii) the Original
Aggregate Loan Balance.
A "Cumulative Realized Loss Trigger
Event" has occurred on any date of determination
if the amount of Cumulative Realized Losses
expressed as a percentage of the Original
Aggregate Loan Balance on any date of
determination equals or exceeds the percentage for
such date set below:
DATE PERCENTAGE
January 1998-December 1999 1.05%
January 2000-December 2000 1.80%
January 2001-December 2001 2.40%
January 2002-December 2002 2.85%
January 2003 and thereafter 3.00%
"Preference Amount" means any amount
previously distributed to an Owner of an Offered
Certificate that is recoverable and sought to be
recovered as a voidable preference by a trustee in
bankruptcy under 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.
Distributions on the
Auction Rate Certificates:
Distributions of interest on the Auction
Rate Certificates will be made among all Owners of
such Certificates pro rata based on the
Certificate Principal Balances of such
Certificates. However, distributions of principal
of the Auction Rate Certificates will be made on
specific Auction Rate Certificates selected no
later than five Business Days prior to the related
Payment Date by lot or such other manner as may be
determined in accordance with the Auction Rate
Procedures in Annex I, and will be made only in
amounts equal to $25,000 and integral multiples in
excess thereof.
Monthly Servicing
Fee:
The Servicer is entitled to a fee (the
"Servicing Fee") equal to 0.50% per annum (subject
to certain limitations described in the Pooling
and Servicing Agreement), payable monthly at one-
twelfth the annual rate, of the then outstanding
principal amount of each Home Equity Loan as of
the first day of each calendar month.
Credit Enhancement: The Credit Enhancement provided for the
benefit of the Owners of the Class A Trust
Certificates consists of the subordination of the
Subordinate Certificates to the Class A Trust
Certificates, the priority of application of
Realized Losses and the application of Monthly
Excess Cashflow Amounts. Additional Credit
Enhancement for the benefit of the Owners of the
Class A Trust Certificates and the Class A-2
Floating Certificates will be provided separately
by each of the related Certificate Insurance
Policies.
Subordination of Subordinate
Certificates. The rights of the Owners of the
Subordinate Certificates and the Retained
Certificates to receive distributions with respect
to the Home Equity Loans will be subordinated, to
the extent described herein, to such rights of the
Owners of the Class A Trust Certificates. This
subordination is intended to enhance the
likelihood of regular receipt by the Owners of the
Class A Trust Certificates of the full amount of
their scheduled monthly payment of interest and
principal and to afford such Owners protection
against Realized Losses.
The protection afforded to the Owners of
the Class A Trust Certificates by means of the
subordination of the Subordinate Certificates and
the Retained Certificates will be accomplished by
the preferential right of the Owners of the Class
A Trust Certificates to receive, prior to any
distribution being made on a Payment Date in
respect of the Subordinate Certificates and the
Retained Certificates, the amounts of interest due
them and principal available for distribution on
such Payment Date, and, if necessary, by the right
of the Owners of the Class A Trust Certificates to
receive future distributions of amounts that would
otherwise be payable to the Owners of the
Subordinate Certificates and the Retained
Certificates.
In addition, the rights of the Owners of
the Retained Certificates to receive distributions
will be subordinated, to the extent described
herein, to such rights of the Owners of the Class
A Trust Certificates and the Class B Certificates.
This subordination is intended to enhance the
likelihood of regular receipt by the Owners of the
Class A Trust Certificates and the Class B
Certificates of the amount of interest due them
and principal available for distribution and to
afford such Owners with protection against
Realized Losses.
Application of Realized Losses. If a
Home Equity Loan becomes a Liquidated Loan during
a Remittance Period, the Net Liquidation Proceeds
relating thereto and allocated to principal may be
less than the Loan Balance of such Home Equity
Loan. The amount of such insufficiency is a
"Realized Loss." Realized Losses will, in effect,
be absorbed first, by the Retained Certificates
(both through the application of the Monthly
Excess Cashflow Amount to fund such insufficiency
and through a potential reduction in the
Overcollateralization Amount), second, by the
Owners of the Class B Certificates and third, with
respect to the Class A Trust Certificates, to the
extent that an Overcollateralization Deficit would
occur, by a payment under the Certificate
Insurance Policy.
To the extent that Realized Losses
occur, such Realized Losses will reduce the
aggregate outstanding Loan Balance of the Home
Equity Loans (I.E., a reduction in the collateral
balance will occur). Since the
Overcollateralization Amount is the excess, if
any, of the outstanding aggregate Loan Balance of
the Home Equity Loans as of the last day of the
related Remittance Period over the Aggregate Trust
Certificate Principal Balance (after taking into
effect distributions of principal on such Payment
Date), Realized Losses, to the extent experienced
and not accounted for by application of the
Monthly Excess Interest Amount, will in the first
instance reduce the Overcollateralization Amount.
The Pooling and Servicing Agreement
requires that, beginning with the seventh Payment
Date, the Overcollateralization Amount be
initially increased to, and thereafter maintained
at, the Targeted Overcollateralization Amount.
This increase and subsequent maintenance is
intended to be accomplished by the application of
Monthly Excess Interest Amounts to the funding of
the Extra Principal Distribution Amounts. Such
Extra Principal Distribution Amounts, since they
are funded from interest collections on the Home
Equity Loans but are distributed as principal on
the Class A Trust Certificates or Class B
Certificates, will increase the
Overcollateralization Amount.
If, on any Payment Date after taking
into account all Realized Losses experienced
during the prior Remittance Period and after
taking into account the distribution of principal
(including the Extra Principal Distribution
Amount) with respect to the Class A Trust
Certificates or Class B Certificates on such
Payment Date, the Aggregate Trust Certificate
Principal Balance exceeds the aggregate Loan
Balance of the Home Equity Loans as of the end of
the related Remittance Period (I.E., if the level
of overcollateralization is negative), then the
Certificate Principal Balance of the Subordinate
Certificates will be reduced (in effect, "written
down") such that the level of
overcollateralization is zero, rather than
negative. Such a negative level of
overcollateralization is an "Applied Realized Loss
Amount," which will be applied as a reduction in
the Certificate Principal Balance of the
Subordinate Certificates. The Pooling and
Servicing Agreement does not permit the "write
down" of the Certificate Principal Balance of any
Class A Certificate.
"Overcollateralization Deficit" means,
for any Payment Date, the excess of the aggregate
Class A Trust Certificate Principal Balance over
the outstanding aggregate Loan Balance of the Home
Equity Loans as of the last day of the related
Remittance Period, calculated after taking into
account the reduction on such Payment Date of the
Class A Trust Certificate Principal Balance
resulting from the distribution of the related
Principal Remittance Amount on such Payment Date.
Once the Certificate Principal Balance of the
Subordinate Certificates has been "written down,"
the amount of such write down will no longer bear
interest, nor will such amount thereafter be
"reinstated" or "written up," although the amount
of such write down may, on future Payment Dates be
paid to Owners of the Subordinate Certificates.
The source of funding of such payments will be the
amount, if any, of the Monthly Excess Cashflow
Amount remaining on such future Payment Dates
after the funding of the Extra Principal
Distribution Amount, the payment of any
Reimbursement Amount to the Certificate Insurer
and after the payment of the Interest Carry
Forward Amount with respect to the Subordinate
Certificates on such Payment Date.
Application of Monthly Excess Cashflow Amounts.
The weighted average net Coupon Rate for the Home
Equity Loans is generally expected to be higher
than the weighted average of the Pass-Through
Rates on the Class A Trust Certificates and Class
B Certificates, thus generating certain excess
interest collections which, in the absence of
losses will not be necessary to fund interest
distributions on the Class A Trust and Class B
Certificates. The Pooling and Servicing Agreement
provides that this excess interest be applied to
the extent available, to make accelerated payments
of principal (I.E., the Extra Principal
Distribution Amount) to the Class or Classes then
entitled to receive distributions of principal;
such application will cause the Aggregate Trust
Certificate Principal Balance to amortize more
rapidly than the Home Equity Loans, resulting in
overcollateralization.
The required level of
overcollateralization for any Payment Date after
the sixth Payment Date is the Targeted
Overcollateralization Amount for such Payment
Date. The Targeted Overcollateralization Amount is
initially (I.E., prior to the Stepdown Date)
$19,920,000. Since the actual level of the
Overcollateralization Amount is essentially zero
as of the Closing Date, and through the sixth
Payment Date, subject to the availability of
Monthly Excess Interest Amounts, Extra Principal
Distribution Amounts will be paid commencing on
the seventh Payment Date, with the result that the
Overcollateralization Amount will increase to the
level of the Targeted Overcollateralization
Amount.
If, once the Targeted
Overcollateralization Amount has been reached,
Realized Losses not accounted for by the
application of the Monthly Excess Interest Amount
occur, such Realized Losses will result in an
Overcollateralization Deficiency (since it will
reduce the Loan Balance of the Home Equity Loans
without giving rise to a corresponding reduction
of the Aggregate Trust Certificate Principal
Balance). The cashflow priorities of the Trust
require that, in this situation, an Extra
Principal Distribution Amount be paid (subject to
the availability of any Monthly Excess Interest
Amount in subsequent months) for the purpose of
re-establishing the Overcollateralization Amount
at the then-required Targeted
Overcollateralization Amount.
On and after the Stepdown Date and
assuming that neither a Cumulative Realized Loss
Trigger Event or a Delinquency Trigger Event is in
effect, the Targeted Overcollateralization Amount
is permitted to decrease or "step-down" below the
initial level to a level equal to 2.58 % of the
then current aggregate outstanding Loan Balance of
the Home Equity Loans (subject to the
Overcollateralization Floor). If the Targeted
Overcollateralization Amount is permitted to
"step-down" on a Payment Date, the Pooling and
Servicing Agreement permits a portion of the
Principal Remittance Amount for such Payment Date
not to be passed through as a distribution of
principal on such Payment Date. This has the
effect of decelerating the amortization of the
Class A Trust Certificates and Class B
Certificates relative to the aggregate outstanding
Loan Balance of the Home Equity Loans, thereby
reducing the actual level of the
Overcollateralization Amount to the new, lower
Targeted Overcollateralization Amount. This
portion of the Principal Remittance Amount not
distributed as principal of the Class A Trust
Certificates and Class B Certificates therefore
releases overcollateralization from the Trust. The
amount of such release is the
Overcollateralization Release Amount.
On any Payment Date, the sum of the
Monthly Excess Interest Amount (plus any interest
on the Overcollateralization Amount) and the
Overcollateralization Release Amount, if any, is
the "Monthly Excess Cashflow Amount", which is
required to be applied in the following order of
priority on such Payment Date.
(1) to fund the Class A Interest Carry
Forward Amount, from prior periods, if
any;
(2) to pay the Certificate Insurer any
Reimbursement Amount (as defined herein)
for such Payment Date;
(3) to fund the Extra Principal Distribution
Amount for such Payment Date;
(4) to fund the Interest Carry Forward
Amount, if any, with respect to the
Class B Certificates;
(5) to fund the Class B Realized Loss
Amortization Amount for such Payment
Date;
(6) to the Servicer to the extent of any
unreimbursed Delinquency Advances or
Servicing Advances and any other costs
and expenses incurred by the Issuer
including amounts owed to the Auction
Agent other than the Auction Agent Fee;
and
(7) to fund a distribution to Owners of the
Class R Certificates.
Certificate Insurance Policies. MBIA
Insurance Corporation, a New York stock insurance
company (the "Certificate Insurer"), will provide
separate Certificate Insurance Policies with
respect to the Class A Trust Certificates and the
Class A-2 Floating Certificates.
Subject to the terms thereof, the
Certificate Insurance Policies unconditionally and
irrevocably guarantees (a) for the Class A Trust
Certificates, (i) the payment obligation of the
Trust on any Payment Date to the Owners of the
Class A Trust Certificates for the related Current
Interest and any Overcollateralization Deficit and
(ii) the payment obligation of the Trust to pay in
full the Certificate Principal Balances of the
Class A-1 Certificates by the December 15, 1998
Payment Date, and (b) for the Class A-2 Floating
Certificates, the payment obligation of the
Grantor Trust on any Payment Date to the Owners of
the Class A-2 Floating Certificates for
distributions of related Current Interest.
The Certificate Insurance Policies are
noncancellable for any reason.
"Insured Payments" means, with respect
to any Payment Date, (I) with respect to the
Trust, without duplication, (A) the excess, if
any, of (i) the sum of the aggregate Current
Interest of the Class A Trust Certificates and the
then existing Overcollateralization Deficit, if
any, over (ii) Total Available Funds after taking
into account the portion of any Principal
Distribution Amount to be actually distributed on
such Payment Date without regard to any Insured
Payment to be made with respect to such Payment
Date plus (B) an amount equal to the Preference
Amount with respect to the Class A Trust
Certificates plus (C) the excess, if any, on the
December 15, 1998 Payment Date, of (i) the
Certificate Principal Balance of the Class A-1
Certificates, over (ii) the Principal Remittance
Amount for such Payment Date and (II) with respect
to the Grantor Trust, without duplication, (A) the
excess, if any, of (i) Current Interest on the
Class A-2 Floating Certificates at the Class A-2
Floating Pass-Through Rate over (ii) amounts
available to the Grantor Trustee for distribution
of Current Interest on the Class A-2 Floating
Certificates plus (B) an amount equal to the
Preference Amount with respect to the Class A-2
Floating Certificates. "Total Available Funds," as
of any Payment Date, equals the sum of (a) the
Interest Amount Available and (b) the Principal
Remittance Amount, less any such amount that
cannot be distributed to the Owners of the Class A
Trust Certificates as a result of proceedings
under the United States Bankruptcy Code.
Insured Payments do not cover Realized
Losses except to the extent that an
Overcollateralization Deficit exists. Insured
Payments do not cover the Servicer's failure to
make Delinquency Advances, except to the extent
that an Overcollateralization Deficit would
otherwise result therefrom. Nevertheless, the
effect of the related Certificate Insurance Policy
is to guarantee the timely payment of interest on
all Classes of the Class A Trust Certificates and
the ultimate payment of the principal amount of
the Class A Trust Certificates (other than the
Class A-11 IO Certificates). Since the principal
distributions on the Class A-2 Fixed Certificates
are insured under the Certificate Insurance Policy
related to the Class A Trust Certificates, such
principal distributions on the Class A-2 Floating
Certificates are not separately insured under the
Certificate Insurance Policy related to the
Grantor Trust (which relates to interest).
The Certificate Insurance Policies do
not guarantee any specified rate of prepayments,
nor do the Certificate Insurance Policies provide
funds to redeem the Class A Trust Certificates
(except for the Class A-1 Certificates) or the
Class A-2 Floating Certificates on any specified
date. The related Certificate Insurance Policy
provides that the outstanding Certificate
Principal Balance, if any, of the Class A-1
Certificates will be paid in full by the December
15, 1998 Payment Date. The related Certificate
Insurance Policy does not guarantee that the PAC
Certificates will amortize in accordance with
their Planned Principal Balance schedules. The
Certificate Insurer's obligation under each
Certificate Insurance Policy will be discharged to
the extent that funds are received by the Trustee
for distribution to the Owners of the Class A
Trust Certificates and by the Grantor Trustee for
distribution to the Owners of the Class A-2
Floating Certificates as applicable. See "Credit
Enhancement-The Certificate Insurance Policies"
herein.
Optional Termination: The Owners of Class R Certificates of
the first-tier REMIC will have the right to
purchase all the Home Equity Loans on any Monthly
Remittance Date in or after the month in which the
aggregate Loan Balances of the Home Equity Loans
in the Trust has declined to less than 10% of the
Original Aggregate Loan Balances of the Home
Equity Loans as of the Closing Date (the "Clean-Up
Call Date"). See "The Pooling and Servicing
Agreement-Optional Termination" herein.
Book-Entry Registration of the
Offered Certificates: The Offered Certificates will initially
be issued in book-entry form. Persons acquiring
beneficial ownership interests in such Offered
Certificates ("Beneficial Owners") may elect to
hold their interests through The Depository Trust
Company ("DTC"), in the United States, or Cedel
Bank, S.A. ("Cedel") or the Euroclear System
("Euroclear"), in Europe. Transfers within DTC,
Cedel or Euroclear, as the case may be, will be in
accordance with the usual rules and operating
procedures of the relevant system. So long as the
Offered Certificates are Book-Entry Certificates
(as defined herein), such Certificates will be
evidenced by one or more Certificates registered
in the name of Cede & Co. ("Cede"), as the nominee
of DTC or one of the European Depositaries.
Cross-market transfers between persons holding
directly or indirectly through DTC, on the one
hand, and counterparties holding directly or
indirectly through Cedel or Euroclear, on the
other, will be effected in DTC through Citibank
N.A. ("Citibank") or The Chase Manhattan Bank
("Chase" and together with Citibank, the "European
Depositaries"), the relevant depositaries of Cedel
and Euroclear, respectively, and each a
participating member of DTC. The Offered
Certificates will initially be registered in the
name of Cede. The interests of the Owners of such
Certificates will be represented by book-entries
on the records of DTC and participating members
thereof. No Beneficial Owner will be entitled to
receive a definitive certificate representing such
person's interest, except in the event that
Definitive Certificates (as defined herein) are
issued under the limited circumstances described
herein. All references in this Prospectus
Supplement to any Offered Certificates reflect the
rights of Beneficial Owners only as such rights
may be exercised through DTC and its participating
organizations for so long as such Offered
Certificates are held by DTC. See "Description of
the Offered Certificates-Book-Entry Registration
of the Offered Certificates" herein, and Annex III
hereto, and "Description of the
Certificates-Book-Entry Registration" in the
Prospectus.
Ratings: It is a condition of issuance of the
Offered Certificates that each Class of the
Offered Certificates receive at least the ratings
set out below from Moody's Investors Service, Inc.
("Moody's"), Standard & Poor's Ratings Services, a
division of the McGraw-Hill Companies ("Standard &
Poor's") and Fitch IBCA, Inc. ("Fitch"):
Class Moody's Standard & Poor's Fitch
A-1 P-1 A-1+ F-1+
A-2 Floating Aaa AAA AAA
A-3 through A-10 Aaa AAA AAA
A-11 IO Aaa AAAr AAA
B Baa3 BBB- BBB
Moody's, Standard & Poor's and Fitch are
referred to herein collectively as the "Rating
Agencies." 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 entity. See "Prepayment
and Yield Considerations" and "Ratings" herein.
Risk Factors: Credit Considerations. For information
with regard to the Home Equity Loans and their
related risks, see "The Home Equity Loan Pool"
herein.
Prepayment Considerations. For
information regarding the consequences of
prepayments of the Home Equity Loans, see
"Prepayment and Yield Considerations" and "Risk
Factors-Sensitivity to Prepayments" herein.
Other Considerations. For a discussion
of other risk factors that should be considered by
prospective investors in the Offered Certificates,
see "Risk Factors" herein and in the Prospectus.
Federal Tax Aspects: For federal income tax purposes, the
Trust Estate created by the Pooling and Servicing
Agreement will consist of one or more segregated
asset pools (each, a "REMIC") with respect to
which an election will be made to treat each such
pool as a "real estate mortgage investment
conduit" ("REMIC"). The Class A Trust and Class B
Certificates will constitute "regular interests"
in a REMIC. See "Certain Federal Income Tax
Consequences" herein.
Owners of the Class A Trust Certificates
and Class B Certificates, including Owners that
generally report income on the cash method of
accounting, will be required to include interest
on the Offered Certificates in income in
accordance with the accrual method of accounting.
In addition, Class A-11 IO Certificates will be
considered to have been issued with original issue
discount. Any such original issue discount will be
includible in the income of the Owner as it
accrues under a method taking into account the
compounding of interest and using the Prepayment
Assumption. See "Prepayment and Yield
Considerations" and "Certain Federal Income Tax
Consequences" herein. In addition, certain Classes
of the Class A Trust Certificates and Class B
Certificates may be issued at a premium. Premium
may be deductible by the Owner either as it
accrues or when principal is received. No
representation is made as to whether the Home
Equity Loans will prepay in accordance with the
Prepayment Assumption, or any other rate. In
general, as a result of the qualification of the
Class A Trust Certificates and Class B
Certificates as regular interests in a REMIC, the
Class A Trust Certificates and Class B
Certificates will be treated as "regular . . .
interest(s) in a REMIC" under Section
7701(a)(19)(C) of the Internal Revenue Code of
1986, as amended (the "Code") and "real estate
assets" under Section 856(c) of the Code in the
same proportion that the assets in the REMIC
consist of qualifying assets under such sections.
In addition, interest on the Class A Trust
Certificates and Class B Certificates will be
treated as "interest on obligations secured by
mortgages on real property" under Section 856(c)
of the Code to the extent that such Certificates
are treated as "real estate assets" under Section
856(c) of the Code.
No election will be made to treat the
Grantor Trust as a REMIC for federal income tax
purposes. For federal income tax purposes, the
Grantor Trust 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. The Class A-2 Floating Certificates
represent an undivided ownership interest in the
Grantor Trust. See "Certain Federal Income Tax
Consequences" herein.
ERISA Considerations: As described under "ERISA
Considerations" herein, the Offered Certificates
(other than the Subordinated Certificates) may be
purchased by employee benefit plans that are
subject to ERISA. The Subordinate Certificates may
not be purchased by employee benefit plans that
are subject to ERISA except as provided herein.
See "ERISA Considerations" herein and in the
Prospectus.
Legal Investment
Considerations: The Offered Certificates will not
constitute "mortgage related securities" for
purposes of the Secondary Mortgage Market
Enhancement Act of 1984 ("SMMEA"). The appropriate
characterization of the Offered Certificates under
various legal investment restrictions applicable
to the investment activities of certain
institutions, and thus the ability of investors
subject to these restrictions to purchase the
Offered Certificates, may be subject to
significant interpretive uncertainties. In
addition, institutions whose activities are
subject to review by federal or state regulatory
authorities may be or may become subject to
restrictions, which may be retroactively imposed
by such regulatory authorities, on the investment
by such institutions in certain forms of mortgage
related securities. All investors whose investment
authority is subject to legal restrictions should
consult their own legal advisors to determine
whether, and to what extent, the Offered
Certificates will constitute legal investments for
them.
<PAGE>
RISK FACTORS
Prospective investors in the Offered Certificates should consider the
following risk factors (as well as the risk factors set forth under "Risk
Factors" in the Prospectus) in connection with the purchase of the Offered
Certificates.
Sensitivity to Prepayments. A majority of the Home Equity Loans may be
prepaid in whole or in part at any time without penalty. In addition, a
substantial portion of the Home Equity Loans contain due-on-sale provisions
which, to the extent enforced by the Servicer, will result in prepayment of such
Home Equity Loans. See "Prepayment and Yield Considerations" herein and "Certain
Legal Aspects of Mortgage Assets-Enforceability of Certain Provisions" in the
Prospectus. The rate of prepayments on fixed-rate mortgage loans, such as the
Fixed Rate Loans, is sensitive to prevailing interest rates. Generally, if
prevailing interest rates fall significantly below the interest rates on the
Home Equity Loans, the Home Equity Loans are likely to be subject to higher
prepayment rates than if prevailing rates remain at or above the interest rates
on the Home Equity Loans. Conversely, if prevailing interest rates rise
significantly above the interest rates on the Home Equity Loans, the rate of
prepayments is likely to decrease. The average life of the Offered Certificates
and, if purchased at other than par, the yields realized by Owners of the
Offered Certificates will be sensitive to levels of payment (including
prepayments relating to the Home Equity Loans (the "Prepayments")) on the Home
Equity Loans. In general, the yield on an Offered Certificate that is purchased
at a premium from the outstanding principal amount thereof may be adversely
affected by a higher than anticipated level of Prepayments of the Home Equity
Loans. Conversely, the yield on an Offered Certificate that is purchased at a
discount from the outstanding principal amount thereof may be adversely affected
by a lower than anticipated level.
The prepayment experience on the Adjustable Rate Loans, including the
2/28 Loans and the 3/27 Loans, may differ from the prepayment experience on the
Fixed Rate Loans due to the provisions providing for adjustment to the Coupon
Rate and related monthly payment and the applicable periodic reset caps and
maximum rates. In particular, the 2/28 Loans and the 3/27 Loans may be subject
to higher prepayment rates as they approach their initial Coupon Change Dates.
Because cashflows from both the Fixed Rate Loans and the Adjustable Rate Loans
will be used to make the required distributions on the Class A Trust
Certificates and Class B Certificates, and accordingly the Class A-2 Floating
Certificates, the prepayment experience of the Class A Trust Certificates and
Class B Certificates, and accordingly the Class A-2 Floating Certificates, will
not reflect solely the prepayment experience of the Fixed Rate Loans or the
Adjustable Rate Loans. See "Prepayment and Yield Considerations" herein.
Subordination-Allocation of Losses to Subordinate Certificates. The
rights of the Owners of the Subordinate Certificates to receive distributions of
principal with respect to the Home Equity Loans will be subordinate to the
rights of the Owners of the Class A Trust Certificates (other than the Class
A-11 IO Certificates), and accordingly the Class A-2 Floating Certificates, to
receive such distributions. See "Credit Enhancement-Subordination of Subordinate
Certificates" herein.
The yields to maturity on the Subordinate Certificates will be
sensitive to defaults on the Home Equity Loans (and the timing thereof). Credit
enhancement for the Subordinate Certificates is limited to Monthly Excess
Cashflow Amounts and the overcollateralization provisions of the Trust.
Investors should fully consider the risks associated with an investment in the
Subordinate Certificates, including the possibility that such investors may not
fully recover their initial investment as a result of Realized Losses on the
Home Equity Loans. See "Credit Enhancement-Application of Realized Losses" and
"Prepayment and Yield Considerations-Projected Payment and Yield for Offered
Certificates" herein. The Owners of the Subordinate Certificates are not
entitled to the benefits of either Certificate Insurance Policy.
The Subordinate Certificates will not be entitled to any principal
distributions until at least the Stepdown Date (unless the aggregate Certificate
Principal Balance of the Class A Trust Certificates has been reduced to zero).
In addition, on and after the Stepdown Date, principal distributions on the
Subordinate Certificates are also subject to the effects of a Delinquency
Trigger Event or a Cumulative Realized Loss Trigger Event. As a result, the
weighted average life of the Subordinate Certificates will be longer than would
be the case if distributions of principal were to be allocated on a pro rata
basis among the Class A Trust Certificates and the Subordinate Certificates. As
a result of the longer weighted average life of the Subordinate Certificates,
the Owners of such Certificates have a greater risk of suffering a loss on their
investments.
Variability of Principal Distributions to Companion Certificates. The
Companion Certificates will support the relative principal payment stability of
the PAC Certificates by absorbing any amounts available for distribution of
principal of the Class A Trust Certificates (other than the Class A-11 IO
Certificates) in excess of that necessary to reduce the Certificate Principal
Balance of the applicable Class of PAC Certificates to its Planned Principal
Balance on the applicable Payment Date. In addition, if the amount available for
distributions of principal of the Class A Trust Certificates (other than the
Class A-11 IO Certificates) is insufficient to reduce the Certificate Principal
Balance of the applicable Class of PAC Certificates to its Planned Principal
Balance on a Payment Date, the Companion Certificates will not receive any
distributions of principal until such time as the Class Certificate Balance of
such Class of PAC Certificates is reduced to its applicable Planned Principal
Balance on the applicable Payment Date. As a result, the amount and timing of
principal distributions on the Companion Certificates is subject to substantial
variability from Payment Date to Payment Date and over the lives of such
Certificates. Any such variability in receipt of principal distributions will
result in variability in the yields to maturity to the Companion Certificates.
Nature of Collateral. Because 6.43% of the Fixed Rate Loans by Loan
Balance as of the Statistical Calculation Date are secured by second liens
subordinate to the rights of the mortgagee or beneficiary under the related
first mortgage or deed of trust, the proceeds from any liquidation, insurance or
condemnation proceedings with respect to such Home Equity Loans will be
available to satisfy the outstanding balance of a Home Equity Loan only to the
extent that the claims of such first mortgagee or beneficiary have been
satisfied in full, including any related foreclosure costs. In addition, a
second mortgagee may not foreclose on the property securing a second mortgage
unless it forecloses subject to the first mortgage, in which case it must either
pay the entire amount due on the first mortgage to the first mortgagee at or
prior to the foreclosure sale or undertake the obligation to make payments on
the first mortgage. In servicing second mortgages in its portfolio, it is
generally the Servicer's practice to satisfy the first mortgage at or prior to
the foreclosure sale. The Servicer may also advance funds to keep the first
mortgage current until such time as the Servicer satisfies the first mortgage.
The Trust will have no source of funds (and may not be permitted under the REMIC
provisions of the Code) to satisfy the first mortgage or make payments due to
the first mortgagee. See "The Pooling and Servicing Agreement- Servicing and
Sub-Servicing" herein.
An overall decline in the residential real estate market, the general
condition of a Property, or other factors, could adversely affect the value of
the Property such that the outstanding balance of the related Home Equity Loan,
together with any senior liens on the Property, equal or exceed the value of the
Property. A decline in the value of a Property would affect the interest of the
Trust in the Property before having any effect on the interest of the related
first mortgagee, and could cause the Trust's interest in the Property to be
extinguished. If such a decline occurs, the actual rates of delinquencies,
foreclosures and losses on the Home Equity Loans could be higher than those
currently experienced in the mortgage lending industry in general. In addition,
adverse economic conditions (which may or may not affect real property values)
may affect the timely payment by borrowers of scheduled payments of principal
and interest on the Home Equity Loans and, accordingly, the actual rates of
delinquencies, foreclosures and losses with respect to the Trust.
Risk of Home Equity Loan Rates Reducing the Pass-Through Rate on the
Adjustable Rate Certificates. The calculation of the Pass-Through Rate on the
Floating Rate Certificates is based upon (i) the value of an index (LIBOR) which
is different from the value of the index applicable to the Adjustable Rate Loans
as described under "The Home Equity Loan Pool-Home Equity Loans-Adjustable Rate
Loans" (either as a result of the use of a different index, rate determination
date or rate adjustment date) and (ii) the weighted average of the Coupon Rates
of the Home Equity Loans, including both Fixed Rate Loans and Adjustable Rate
Loans which are subject to periodic adjustment caps, maximum rate caps and
minimum rate floors. The Coupon Rates on the Fixed Rate Loans will not adjust.
Although the Coupon Rates on 100% of the Adjustable Rate Loans by aggregate Loan
Balance as of the Statistical Calculation Date adjust every six months, (with
the exception of the first 2 or 3 years from origination in the case of the 2/28
Loans and the 3/27 Loans), such adjustments are based on the London interbank
offered rate for six-month United States dollar deposits ("Six-Month LIBOR"),
whereas the Pass-Through Rate on the Floating Rate Certificates adjusts monthly
based upon LIBOR as described under "Description of the Offered
Certificates-Calculation of LIBOR" herein, and, in the case of the Auction Rate
Certificates, the Auction Rate changes monthly based on the results of the
auction described in Appendix I, subject to the Available Funds Cap.
Consequently, the interest which becomes due on the Home Equity Loans (net of
the Servicing Fee, the Trustee Fee, the Premium Amount, the Auction Agent Fee,
the Broker-Dealer Fee and certain required reductions) during any Remittance
Period may not equal the amount of interest that would accrue at LIBOR plus the
applicable margin on the Floating Rate Certificates or at the Auction Rate on
the Auction Rate Certificates during the related Accrual Period, in which case
the rate calculated based on the Available Funds Cap would control. 69.12% of
the Adjustable Rate Loans by aggregate Loan Balance as of the Statistical
Calculation Date are 2/28 Loans that provide for a fixed interest rate for a
period of approximately two years following origination. 12.47% of the
Adjustable Rate Loans by aggregate Loan Balance as of the Statistical
Calculation Date are 3/27 Loans that provide for a fixed interest rate for a
period of approximately three years following origination. Thereafter, such Home
Equity Loans provide for interest rate and payment adjustments in a manner
similar to the Six-Month LIBOR Loans. In particular, the Pass-Through Rate on
the Adjustable Rate Certificates adjusts monthly, while the interest rates of
the Adjustable Rate Loans adjust less frequently with the result that the
Available Funds Cap may limit increases in the Pass-Through Rate on the
Adjustable Rate Certificates for extended periods in a rising interest rate
environment. In addition, LIBOR and Six-Month LIBOR may respond to different
economic and market factors, and there is not necessarily a correlation between
them. Thus, it is possible, for example, that LIBOR may rise during periods in
which Six-Month LIBOR is stable or is falling or that, even if both LIBOR and
Six-Month LIBOR rise during the same period, LIBOR may rise more rapidly than
Six- Month LIBOR. Furthermore, if the Available Funds Cap determines the
Pass-Through Rate on the Adjustable Rate Certificates for a Payment Date, the
value of the Adjustable Rate Certificates will be temporarily or permanently
reduced. There is no mechanism to compensate the Owners of the Adjustable Rate
Certificates if the applicable Pass-Through Rate is limited by the Available
Funds Cap.
Other Legal Considerations. Applicable state laws generally regulate
interest rates and other charges, require certain disclosure, and require
licensing of the Sellers. In addition, other state laws, public policy and
general principles of equity relating to the protection of consumers, unfair and
deceptive practices and debt collection practices may apply to the origination,
servicing and collection of the Home Equity Loans. The related Seller will be
required to repurchase any Home Equity Loans which, at the time of origination,
did not comply with applicable federal and state laws and regulations. Depending
on the provisions of the applicable law and the specific facts and circumstances
involved, violations of these laws, policies and principles may limit the
ability of the Trust to collect all or part of the principal of or interest on
the Home Equity Loans, may entitle the borrower to a refund of amounts
previously paid and, in addition, could subject the Sellers to damages and
administrative enforcement. See "Certain Legal Aspects of Mortgage Assets" in
the Prospectus.
The Home Equity Loans are also subject to federal laws, including:
(i) the Federal Truth in Lending Act and Regulation Z
promulgated thereunder, which require certain disclosures to the
borrowers regarding the terms of the Home Equity Loans;
(ii) the Equal Credit Opportunity Act and Regulation B
promulgated thereunder, which prohibit discrimination on the basis of
age, race, color, sex, religion, marital status, national origin,
receipt of public assistance or the exercise of any right under the
Consumer Credit Protection Act, in the extension of credit; and
(iii) the Fair Credit Reporting Act, which regulates the use
and reporting of information related to the borrower's credit
experience.
Violations of certain provisions of these federal laws may limit the ability of
the Sellers to collect all or part of the principal of or interest on the Home
Equity Loans and in addition could subject the Sellers to damages and
administrative enforcement. The related Seller will be required to repurchase
any Home Equity Loans which, at the time of origination, did not comply with
such federal laws or regulations. See "Certain Legal Aspects of the Mortgage
Assets" in the Prospectus.
The federal Soldiers' and Sailors' Civil Relief Act of 1940 may affect
the ability of the Servicer to collect full amounts of interest on certain Home
Equity Loans and could interfere with the ability of the Servicer to foreclose
on certain properties. See "Certain Legal Aspects of the Mortgage
Assets-Soldiers' and Sailors' Civil Relief Act of 1940" in the Prospectus.
Up to 10% of the Original Aggregate Loan Balance may represent Home
Equity Loans that are subject to the Riegle Community Development and Regulatory
Improvement Act of 1994 (the "Riegle Act") which incorporates the Home Ownership
and Equity Protection Act of 1994. The Riegle Act adds certain additional
provisions to Regulation Z, the implementing regulation of the Truth-In-Lending
Act. These provisions impose additional disclosure and other requirements on
creditors with respect to non-purchase money mortgage loans with high interest
rates or high upfront fees and charges. In general, mortgage loans within the
purview of the Riegle Act have annual percentage rates over 10% greater than the
yield on Treasury Securities of comparable maturity and/or fees and points which
exceed the greater of 8% of the total loan amount or $400. The provisions of the
Riegle Act apply on a mandatory basis to all mortgage loans within the purview
thereof originated on or after October 1, 1995. These provisions can impose
specific statutory liabilities upon creditors who fail to comply with their
provisions and may affect the enforceability of the related loans. In addition,
any assignee of the creditor would generally be subject to all claims and
defenses that the consumer could assert against the creditor, including, without
limitation, the right to rescind the mortgage loan.
Risk of Higher Default Rates for Home Equity Loans with Balloon
Payments. 48.74% of the Fixed Rate Loans by Loan Balance as of the Statistical
Calculation Date represent Home Equity Loans which are "balloon loans" that
provide for the payment of the unamortized Loan Balance of such Home Equity Loan
in a single payment at maturity ("Balloon Loans"). 0.04% of the Adjustable Rate
Loans by Loan Balance as of the Statistical Calculation Date represent Home
Equity Loans which are "balloon loans". Such Balloon Loans provide for equal
monthly payments, consisting of principal and interest, generally based on a
30-year amortization schedule, and a single payment of the remaining balance of
the Balloon Loan 15 years after origination. Amortization of a Balloon Loan
based on a scheduled period that is longer than the term of the loan results in
a remaining principal balance at maturity that is substantially larger than the
regular scheduled payments. The Depositor does not have any information
regarding the default history or prepayment history of payments on Balloon
Loans. Because borrowers of Balloon Loans are required to make substantial
single payments upon maturity, it is possible that the default risk associated
with the Balloon Loans is greater than that associated with fully-amortizing
Home Equity Loans.
Risk of Seller Insolvency. Each Seller believes that the transfer of
the Home Equity Loans to the Depositor and by the Depositor to the Trust
constitutes a sale by such Seller to the Depositor and by the Depositor to the
Trust and, accordingly, that such Home Equity Loans will not be part of the
assets of either Seller in the event of the insolvency of such Seller and will
not be available to the creditors of such Seller. However, in the event of an
insolvency of a Seller, it is possible that a bankruptcy trustee or a creditor
of such Seller may argue that the transaction between such Seller and the
Depositor was a pledge of such Home Equity Loans in connection with a borrowing
by such Seller rather than a true sale. Such an attempt, even if unsuccessful,
could result in delays in distributions on the Certificates.
On the Closing Date, the Trustee, the Certificate Insurer and the
Sellers will have received an opinion of Stroock & Stroock & Lavan LLP, counsel
to the Sellers, with respect to the true sale of the Home Equity Loans from each
of the Sellers to the Depositor and from the Depositor to the Trustee, in form
and substance satisfactory to the Trustee, the Certificate Insurer and the
Rating Agencies.
Ratings of Class A Trust Certificates and the Class A-2 Floating
Certificates. The respective ratings assigned to the Class A Trust Certificates
and Class A-2 Floating Certificates by the Rating Agencies will be based on the
credit and other characteristics of the Home Equity Loans and on the respective
ratings assigned to the claims paying ability of the Certificate Insurer. Any
reduction in the ratings so assigned to the Certificate Insurer by the Rating
Agencies could result in the reduction of the ratings assigned to the Class A
Trust Certificates and Class A-2 Floating Certificates. Any such reduction in
the ratings assigned to the Class A Trust Certificates and Class A-2 Floating
Certificates could adversely affect the liquidity and market value of such
Certificates.
THE SELLERS AND THE SERVICER
General
ContiMortgage Corporation, a Delaware corporation, will act as the
Servicer and the Originator as well as one of the two Sellers and has been
engaged in the mortgage banking business since 1987. It is engaged in
originating or purchasing and servicing home equity loans secured by first and
second mortgages and deeds of trust in at least 49 states and the District of
Columbia. It is a subsidiary of ContiFinancial Corporation, a subsidiary of
Continental Grain Company and an affiliate of ContiFinancial Services
Corporation, one of the Underwriters and ContiWest Corporation, the other
Seller. ContiFinancial Corporation's common stock is publicly traded on the New
York Stock Exchange.
ContiWest Corporation, a Nevada corporation, will act as the other
Seller and has been engaged in the mortgage banking business since September
1996. It is engaged in the purchase of home equity loans secured by first and
second mortgages and deeds of trust. It is a wholly-owned subsidiary of
ContiFinancial Corporation, a subsidiary of Continental Grain Company and an
affiliate of ContiFinancial Services Corporation, one of the Underwriters and
ContiMortgage Corporation.
The Originator has originated or purchased each of the Home Equity
Loans. A portion of the Home Equity Loans were purchased by ContiWest
Corporation from the Originator. ContiWest Corporation and the Originator (in
its capacity as a Seller) are selling the Home Equity Loans to the Depositor.
The Sellers will sell and assign their respective Home Equity Loans to the
Depositor in consideration of the net proceeds from the sale of the Offered
Certificates and the Retained Certificates which are being issued to affiliates
of the Sellers. The Servicer will service each Home Equity Loan.
The Servicer may not assign its obligations under the Pooling and
Servicing Agreement, in whole or in part, unless it shall have first obtained
the written consent of the Trustee and the Certificate Insurer, which consent is
required not to be unreasonably withheld; provided, however, that any assignee
must meet the eligibility requirements for a successor servicer set forth in the
Pooling and Servicing Agreement.
With the consent of the Certificate Insurer, the Servicer may enter
into sub-servicing agreements (the "Sub-Servicing Agreements") with qualified
sub-servicers (the "Sub-Servicers") with respect to the servicing of the Home
Equity Loans. Under the Pooling and Servicing Agreement, such sub-servicing
arrangements will not discharge the Servicer from its servicing obligations. See
"The Pooling and Servicing Agreement-Servicing and Sub-Servicing" herein.
The Trustee at the direction of the Certificate Insurer, unless a
Certificate Insurer Default has occurred and is continuing, or the Certificate
Insurer (unless a Certificate Insurer Default has occurred) may remove the
Servicer, and the Servicer may resign, only in accordance with the terms of the
Pooling and Servicing Agreement. No removal or resignation shall become
effective until the Trustee or a successor servicer shall have assumed the
Servicer's responsibilities and obligations in accordance therewith.
Any collections received by the Servicer after removal or resignation
shall be endorsed by it to the Trustee and remitted directly to the Trustee.
Upon removal or resignation of the Servicer, the Trustee may solicit
bids for a successor Servicer and, pending the appointment of a successor
Servicer as a result of soliciting such bids, will be required to serve as
Servicer. If the Trustee is unable to obtain a qualifying bid and is prevented
by law from acting as servicer, the Trustee will be required to appoint, or
petition a court of competent jurisdiction to appoint, an eligible successor.
Any successor is required to be a housing and home finance institution, bank or
mortgage servicing institution which has been designated as an approved
seller-servicer by FannieMae or FHLMC for second mortgage loans, having equity
of not less than $5,000,000 as determined in accordance with generally accepted
accounting principles, which is acceptable to the Certificate Insurer and which
shall assume all of the responsibilities, duties or liabilities of the Servicer.
The Certificates will not represent an interest in or obligation of,
nor are the Home Equity Loans guaranteed by, the Sellers or any of their
affiliates or the Certificate Insurer.
Credit and Underwriting Guidelines
The following is a description of the underwriting guidelines
customarily employed by the Originator with respect to home equity loans which
it purchases or originates. Each Home Equity Loan was underwritten according to
these guidelines. The Originator believes its standards are consistent with
those utilized by home equity lenders generally. The underwriting process is
intended to assess both the prospective borrower's ability to repay and the
adequacy of the real property security as collateral for the loan granted. In
certain cases, loans may be made outside of those guidelines with the prior
approval of an underwriting manager of the Originator.
The Originator generally originates or purchases loans which either
fully amortize over a period not to exceed 360 months or provide for
amortization over a 360 month schedule with a "balloon" payment required at the
maturity date, which will not be less than five years after origination. The
loan amounts generally range from a minimum of $10,000 to a maximum of $350,000
unless a higher amount is specifically approved by a senior official of the
Originator. The Originator primarily originates or purchases non-purchase money
first or second mortgage loans although the Originator has programs for
origination of certain purchase money first mortgages.
The homes used for collateral to secure the loans may be either
primary residential (which includes second and vacation homes) or investor owned
one- to four- family homes, condominiums or townhouses and may include
manufactured housing. Generally, each home must have a minimum Appraised Value
(as defined below) of $35,000. Mobile housing or agricultural land are not
accepted as collateral. In addition, mixed-use loans secured by owner-occupied
properties, including one-to-four family and small multifamily residences, are
made where the proceeds may be used for business purposes. In some cases, the
loan may be secured by the owner-occupied residence plus additional collateral
such as rental units and small multifamily properties which may have a
storefront.
Each property proposed as security for a loan must be appraised not
more than 6 months prior to the date of such loan, provided that in the case of
a loan originated as part of the Originator's retention program, the property
must be appraised not more than 12 months prior to the date of such loan. The
combined loan-to-value ratio of the first and second mortgages generally may not
exceed 90%. If a prior mortgage exists, the Originator first reviews the first
mortgage history. If it contains open end, advance or negative amortization
provisions, the maximum potential first mortgage balance is used in calculating
the combined loan-to-value ratio which determines the maximum loan amount. The
Originator does not originate or purchase loans where the first mortgage
contains a shared appreciation clause.
For the Originator's full documentation process, each mortgage
applicant must provide, and the Originator must verify, personal financial
information. The applicant's total monthly obligations (which includes principal
and interest on each mortgage, tax assessments, other loans, charge accounts and
all other scheduled indebtedness) generally cannot exceed 50% of the applicant's
gross monthly income. Applicants who are salaried employees must provide current
employment information in addition to two recent years of employment history and
the Originator verifies this information. Verifications are based on written
confirmation from employers or a combination of the two most recent pay stubs,
the two most recent years' W-2 tax forms and telephone confirmation from the
employer. Self-employed applicants must be self-employed in the same field for a
minimum of two years. The self-employed applicant must provide signed copies of
complete federal income tax returns (including schedules) filed for the most
recent two years.
For the Originator's non-income verifier program, proof of two year's
history of self employment plus proof of current self-employed status is
required. The applicant's debt-to-income ratio is calculated based on income as
certified by the borrower on the application and must be reasonable. The maximum
loan-to- value ratio may not exceed 75% for the non-income verifier program.
Non-income verifier loans are also available to borrowers other than
self-employed borrowers on one-to-four family, owner-occupied properties up to a
loan-to-value ratio not to exceed 65%.
The Originator has a "pay for performance" program, permitting the
lower-credit borrower to which the program applies to receive pre-determined
reductions of the Coupon Rate (0.5% per year) at the end of each of the first
three years of the loan, which reductions are dependent upon the borrower's
making monthly payments on the loan on time and in accordance with its terms.
A credit report by an independent credit reporting agency is required
reflecting the applicant's complete credit history. The credit report should
reflect all delinquencies of 30 days or more, repossessions, judgments,
foreclosures, garnishments, bankruptcies, divorce actions and similar adverse
credit practices that can be discovered by a search of public records. If the
report is obtained more than 60 days prior to the loan closing, the lender must
determine that the reported information has not changed. Written verification is
obtained of any first mortgage balance, its status and whether local taxes,
interest, insurance and assessments are included in the applicant's monthly
payment. All taxes and assessments not included in the payment must be verified
as current.
Generally, the applicant should have an acceptable credit history
given the amount of equity available, the strength of the applicant's employment
history and the level of the applicant's income to debt obligations. The
rescission period must have expired prior to funding a loan. The rescission
period may not be waived by the applicant except as permitted by law. Either an
ALTA title insurance policy or an attorney's opinion of title is required for
all loans.
The applicant is required to secure property insurance in an amount
sufficient to cover the new loan and any prior mortgage. If the sum of the
outstanding first mortgage, if any, and the home equity loan exceeds replacement
value, insurance equal to replacement value may be accepted. The Originator must
ensure that its name and address is properly added to the "Mortgagee Clause" of
the insurance policy. In the event the Originator's name is added to a "Loss
Payee Clause" and the policy does not provide for written notice of policy
changes or cancellation, an endorsement adding such provision is required.
The Originator's credit underwriting guidelines require that any major
deferred maintenance on any property must be cured from the proceeds of the
loan.
Indemnification by the Depositor
Under the Pooling and Servicing Agreement, the Depositor agrees to
indemnify and hold the Trustee, the Certificate Insurer and each Owner harmless
against any and all claims, losses, penalties, fines, forfeitures, legal fees
and related costs, judgments, and any other costs, fees and expenses that the
Trustee or any Owner may sustain in any way related to the failure of the
Depositor to perform its duties in compliance with the terms of the Pooling and
Servicing Agreement. The Depositor will immediately notify the Trustee, the
Certificate Insurer and each Owner if a claim is made by a third party with
respect to the Pooling and Servicing Agreement, and the Depositor will assume
(with the consent of the Trustee) the defense of any such claim and pay all
expenses in connection therewith, including reasonable counsel fees, and
promptly pay, discharge and satisfy any judgment or decree which may be entered
against the Servicer, the Sellers, the Trustee, the Certificate Insurer and/or
the Owner in respect of such claim. The Trustee may, if necessary, reimburse the
Depositor from amounts otherwise distributable on the Retained Certificates for
all amounts advanced by the Depositor pursuant to the immediately preceding
sentence, except when the claim relates directly to the failure of the Servicer,
if it is an affiliate of the Depositor to perform its duties in compliance with
the terms of the Pooling and Servicing Agreement or the failure of the Depositor
to perform its duties in compliance with the terms of the Pooling and Servicing
Agreement.
Delinquency, Loan Loss and Foreclosure Information
The following tables set forth information relating to the
delinquency, loan loss and foreclosure experience of the Servicer for its
servicing portfolio of home equity loans for the past three years. The
information in the tables below has not been adjusted to eliminate the effect of
the significant growth in the size of the Servicer's home equity loan portfolio
during the periods shown. Accordingly, loss and delinquency as percentages of
aggregate principal balance of Home Equity Loans serviced for each period would
be higher than those shown if a group of Home Equity Loans were artificially
isolated at a point in time and the information showed the activity only in that
isolated group.
Delinquency and Foreclosure Experience of the
Servicer's Servicing Portfolio of Home Equity Loans
(Dollars in Thousands)
<TABLE>
<CAPTION>
Nine Months Ending
September 30, Year Ending December 31,
------------------ ------------------- --------------------------------------------------
1997 1996 1995 1994
------------------ ------------------- ----------------------- -----------------------
Number of Dollar Number of Dollar Number of Dollar Number of Dollar
Loans Amount Loans Amount Loans Amount Loans Amount
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Portfolio At 130,734 $8,163,419 93,37245 $5,699,1 58,459 $3,427,190 33,27020 $1,879,920
Delinquency
PERCENTAGE(1)
30-59 days 3.16% 2.92% 3.31% 3.09% 2.32% 2.02% 0.82% 0.67%
60-89 days 0.78% 0.73% 0.74% 0.72% 0.69% 0.70% 0.19% 0.20%
90 days and over 0.57% 0.62% 0.33% 0.36% 0.95% 1.01% 0.55% 0.57%
----- ----- ----- ----- ----- ----- ----- -----
Total 4.51% 4.27% 4.38% 4.17% 3.96% 3.73% 1.56% 1.44%
Delinquency
Total
Delinquency Amount 5,897 $348,180 4,088 $237,642 2,316 $128,063 518 $26,993
Default
PERCENTAGE(2)
Foreclosure 2.82% 2.99% 2.51% 2.62% 1.17% 1.15% 0.33% 0.34%
Bankruptcy 1.44% 1.39% 1.12% 1.12% 0.68% 0.69% 0.34% 0.33%
Real Estate
Owned 0.51% 0.52% 0.43% 0.49% 0.07% 0.08% 0.11% 0.11%
Forbearance 0.06% 0.07% 0.14% 0.15% 0.10% 0.12% N/A N/A
----- ----- ----- -----
Total Default 4.83% 4.97% 4.20% 4.38% 2.02% 2.04% 0.78% 0.78%
Total Default
Amount 6,311 $405,503 3,926 $249,714 1,182 $69,962 260 $14,717
- ---------------
(1) The delinquency percentage represents the number and dollar value of
payments contractually past due, exclusive of home equity loans in
foreclosure, bankruptcy, real estate owned or forbearance.
(2) The default percentage represents the number and dollar value of
delinquent payments on home equity loans in foreclosure, bankruptcy,
real estate owned or forbearance.
</TABLE>
<PAGE>
Loan Loss Experience on the
Servicer's Servicing Portfolio
of Home Equity Loans
(Dollars in Thousands)
<TABLE>
<CAPTION>
Nine
Months
Ending
September 30 Year Ending December 31,
--------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Average Amount Outstanding (1) $7,645,466 $4,261,983 $2,641,686 $1,400,163 $606,272
Gross Losses (2) 9,284 9,487 2,754 1,203 1,469
Recoveries (3) 76 77 65 0 0
Net Losses (4) 9,208 9,410 2,689 1,203 1,469
Net Losses as a
Percentage of Average
Amount Outstanding (5) 0.48% 0.22% 0.10% 0.09% 0.24%
- -----------------
(1) "Average Amount Outstanding" during the period is the arithmetic
average of the principal balances of the home equity loans outstanding
on the last business day of each month during the period.
(2) "Gross Losses" are actual losses incurred on liquidated properties for
each respective period. Losses include all principal, foreclosure
costs and all accrued interest.
(3) "Recoveries" are recoveries from liquidation proceeds and deficiency
judgments.
(4) "Net Losses" means "Gross Losses" minus "Recoveries."
(5) For the 9 months ending September 30, 1997, "Net Losses as a
Percentage of Average Amount Outstanding" was annualized by
multiplying "Net Losses" by 1.33 before calculating the percentage of
"Average Annual Outstanding".
</TABLE>
USE OF PROCEEDS
The Depositor will sell the Home Equity Loans to the Trust
concurrently with delivery of the Certificates. Net proceeds from the sale of
the Offered Certificates will be applied by the Depositor to the purchase of the
Home Equity Loans from the Sellers. Such net proceeds will (together with the
Retained Certificates retained by the Depositor or its affiliates) represent the
purchase price to be paid by the Trust to the Depositor for the Home Equity
Loans.
THE DEPOSITOR
The Depositor was incorporated in the State of Delaware on January 31,
1991 and is a wholly-owned subsidiary of ContiFinancial Corporation and an
affiliate of ContiFinancial Services Corporation, one of the Underwriters. The
Depositor maintains its principal offices at 277 Park Avenue, New York, New York
10172. Neither the Depositor, the Sellers nor the Servicer nor any of their
affiliates will insure or guarantee distributions on the Certificates.
ContiFinancial Corporation's common stock is publicly traded on the New York
Stock Exchange.
THE HOME EQUITY LOAN POOL
General
The statistical information presented in this Prospectus Supplement
concerning the pool of Home Equity Loans is based on the pool of Home Equity
Loans as of the Statistical Calculation Date. Additional Home Equity Loans will
be purchased by the Trust from the Depositor on the Closing Date. The pools
aggregated $818,133,382 with respect to the Fixed Rate Loans and $319,942,797
with respect to the Adjustable Rate Loans as of the Statistical Calculation
Date. The Depositor expects that the actual pools as of the Closing Date will
represent approximately $1,190,000,000 in Fixed Rate Loans and approximately
$470,000,000 in Adjustable Rate Loans. The additional Home Equity Loans will
represent Home Equity Loans acquired or to be acquired by the Depositor on or
prior to the Closing Date. In addition, with respect to the Home Equity Loans as
of the Statistical Calculation Date as to which statistical information is
presented herein, some amortizations of the Home Equity Loans will occur prior
to the Closing Date. Moreover, certain loans included in the pools as of the
Statistical Calculation Date may prepay in full, or may be determined not to
meet the eligibility requirements for the final pools, and may not be included
in the final pools. As a result of the foregoing, the statistical distribution
of characteristics as of the Closing Date for the final Home Equity Loan pools
will vary from the statistical distribution of such characteristics as of the
Statistical Calculation Date as presented in this Prospectus Supplement. Unless
otherwise noted, all statistical percentages in this Prospectus Supplement are
measured by the aggregate principal balance of the Fixed Rate Loans or the
Adjustable Rate Loans, as applicable, as of the Statistical Calculation Date.
The Home Equity Loan pool consists of fixed-rate and adjustable-rate
Home Equity Loans with remaining terms to maturity of not more than 360 months
(including both fully amortizing Home Equity Loans and Balloon Loans). The Home
Equity Loans have the characteristics set forth below as of the Statistical
Calculation Date. Percentages expressed herein based on Loan Balances and number
of Home Equity Loans have been rounded, and in the tables set forth herein the
sum of the percentages may not equal the respective totals due to such rounding.
The Loan-to-Value Ratios and Combined Loan-to-Value Ratios shown below
were calculated based upon the appraised values of the Properties at the time of
origination (the "Appraised Values"). In a limited number of circumstances, and
within the Originator's underwriting guidelines, the Originator has reduced the
Appraised Value of Properties where the Properties are unique, have a high value
or where the comparables are not within FannieMae guidelines. The purpose for
making these reductions is to value the Properties more conservatively than
would otherwise be the case if the appraisal were accepted as written.
No assurance can be given that values of the Properties have remained
or will remain at their levels on the dates of origination of the related Home
Equity Loans. If the residential real estate market has experienced or should
experience an overall decline in property values such that the outstanding
balance of any Home Equity Loan, together with the outstanding balance of any
first mortgage, become equal to or greater than the value of the Property, the
actual rates of delinquencies, foreclosures and losses could be higher than
those now generally experienced in the mortgage lending industry.
Home Equity Loans-Fixed Rate Loans
As of the Statistical Calculation Date, the average Loan Balance of
the Fixed Rate Loans was $61,890.72 the Coupon Rates of such Home Equity Loans
ranged from 7.19% to 19.99%; the weighted average Loan-to-Value Ratio of the
Fixed Rate Loans was 73.56%; the weighted average Combined Loan-to-Value Ratio
of the Fixed Rate Loans was 76.70%; the weighted average Coupon Rate of the
Fixed Rate Loans was 11.094%; the weighted average remaining term to maturity of
the Fixed Rate Loans was 225.03 months; and the weighted average original term
to maturity of the Fixed Rate Loans was 226.25 months. The remaining terms to
maturity as of the Statistical Calculation Date of the Fixed Rate Loans ranged
from 52 months to 360 months. The minimum and maximum Loan Balances of the Fixed
Rate Loans as of the Statistical Calculation Date were $624.83 and $414,000
respectively. Fixed Rate Loans containing "balloon" payments represent 48.74% of
the Loan Balance of the Fixed Rate Loans. No Fixed Rate Loan will mature later
than December 1, 2027. 11,619 of the Fixed Rate Loans are secured by first
mortgages representing 93.57% of the Loan Balances of the Fixed Rate Loans and
1,600 of the Fixed Rate Loans are secured by second lien mortgages representing
in the aggregate 6.43% of the Loan Balance of the Fixed Rate Loans.
Geographic Distribution of Mortgaged Properties - Fixed Rate Loans
The geographic distribution of the Fixed Rate Loans by state, as of the
Statistical Calculation Date, was as follows:
Number of Aggregate % of Aggregate
State Home Equity Loans Loan Balance Loan Balance
Alaska 1 $25,000.00 0.00%
Arizona 133 7,250,113.97 0.89
Arkansas 37 1,702,474.03 0.21
California 283 25,367,828.82 3.10
Colorado 140 10,068,614.54 1.23
Connecticut 110 9,490,071.77 1.16
Delaware 34 2,361,539.03 0.29
District
of Columbia 26 1,932,873.75 0.24
Florida 986 58,544,260.46 7.16
Georgia 378 23,506,921.46 2.87
Hawaii 13 2,172,360.16 0.27
Idaho 23 1,526,598.66 0.19
Illinois 1,137 72,801,860.66 8.90
Indiana 936 45,138,085.10 5.52
Iowa 35 1,633,225.86 0.20
Kansas 49 2,366,827.17 0.29
Kentucky 276 15,281,055.66 1.87
Louisiana 134 6,802,352.89 0.83
Maine 16 1,213,564.95 0.15
Maryland 313 21,966,258.69 2.68
Massachusetts 255 21,907,573.88 2.68
Michigan 1,582 81,530,526.36 9.97
Minnesota 129 8,672,224.31 1.06
Mississippi 105 5,321,988.91 0.65
Missouri 305 15,027,270.91 1.84
Montana 5 329,233.70 0.04
Nebraska 43 1,957,903.47 0.24
Nevada 48 3,874,050.72 0.47
New Hampshire 37 3,299,259.12 0.40
New Jersey 485 47,227,800.78 5.77
New Mexico 98 5,156,922.38 0.63
New York 533 44,000,091.79 5.38
North Carolina 881 51,371,988.81 6.28
Ohio 1,325 78,284,504.23 9.57
Oklahoma 50 2,230,315.56 0.27
Oregon 75 5,784,732.53 0.71
Pennsylvania 888 51,507,967.68 6.30
Rhode Island 79 6,085,307.74 0.74
South Carolina 237 11,879,198.07 1.45
South Dakota 1 32,700.00 0.00
Tennessee 234 14,674,022.48 1.79
Texas 138 8,824,505.05 1.08
Utah 97 6,189,544.14 0.76
Vermont 1 25,580.76 0.00
Virginia 234 12,934,061.85 1.58
Washington 101 7,841,250.78 0.96
West Virginia 23 1,230,303.62 0.15
Wisconsin 164 9,489,111.79 1.16
Wyoming 6 291,552.66 0.04
----- ---------------- ----
Total: 13,219 $818,133,381.71 100.00%
====== ============== =======
Original Loan-to-Value Ratios - Fixed Rate Loans
The original loan-to-value ratios as of the date of origination of the
Fixed Rate Loans based upon appraisals made at the time of origination thereof)
(the "Loan-to-Value Ratios") as of the Statistical Calculation Date were
distributed as follows:
Range of Number of Aggregate % of Aggregate
Original LTV's Home Equity Loans Loan Balance Loan Balance
0.00 to 5.00% 1 $11,341.14 0.00%
5.01 to 10.00 86 1,574,671.19 0.19
10.01 to 15.00 317 7,435,222.31 0.91
15.01 to 20.00 395 11,122,143.45 1.36
20.01 to 25.00 367 11,906,168.08 1.46
25.01 to 30.00 323 10,824,614.11 1.32
30.01 to 35.00 266 9,430,062.98 1.15
35.01 to 40.00 238 8,846,231.67 1.08
40.01 to 45.00 270 11,794,978.64 1.44
45.01 to 50.00 406 14,898,623.57 1.82
50.01 to 55.00 313 13,995,290.31 1.71
55.01 to 60.00 546 25,903,511.57 3.17
60.01 to 65.00 761 40,701,178.05 4.97
65.01 to 70.00 1,082 62,418,419.06 7.63
70.01 to 75.00 1,464 94,897,082.11 11.60
75.01 to 80.00 3,127 219,989,239.25 26.89
80.01 to 85.00 1,948 153,202,473.75 18.73
85.01 to 90.00 1,305 118,761,790.04 14.52
90.01 to 95.00 2 186,897.08 0.02
95.01 to 100.00 2 233,443.35 0.03
----- -------------- ------
Total: 13,219 $818,133,381.71 100.00%
======= =============== ========
<PAGE>
Combined Loan-to-Value Ratios - Fixed Rate Loans
The original combined loan-to-value ratios as of the dates of
origination of the Fixed Rate Loans (based upon appraisals made at the time of
origination thereof) (the "Combined Loan-to-Value Ratios") as of the Statistical
Calculation Date were distributed as follows:
Range of Number of Aggregate % of Aggregate
Original CLTV's Home Equity Loans Loan Balance Loan Balance
5.01 - 10.00% 5 $121,742.84 0.01%
10.01 - 15.00 22 514,805.22 0.06
15.01 - 20.00 44 1,315,511.78 0.16
20.01 - 25.00 57 1,484,210.57 0.18
25.01 - 30.00 99 2,528,731.84 0.31
30.01 - 35.00 130 4,027,640.90 0.49
35.01 - 40.00 177 6,060,558.77 0.74
40.01 - 45.00 229 9,478,045.09 1.16
45.01 - 50.00 420 15,046,743.30 1.84
50.01 - 55.00 300 12,633,052.22 1.54
55.01 - 60.00 574 26,605,436.84 3.25
60.01 - 65.00 808 42,276,216.06 5.17
65.01 - 70.00 1,190 65,230,537.96 7.97
70.01 - 75.00 1,656 100,289,102.10 12.26
75.01 - 80.00 3,592 236,291,391.09 28.88
80.01 - 85.00 2,449 168,149,400.63 20.55
85.01 - 90.00 1,429 123,612,015.40 15.11
90.01 - 95.00 26 1,928,247.54 0.24
95.01 - 100.00 11 448,242.86 0.05
100.01 - 105.00 1 91,748.70 0.01
------ -------------- ------
Total: 13,219 $818,133,381.71 100.00%
====== =============== ========
Statistical Calculation Date Coupon Rates - Fixed Rate Loans
The Coupon Rates borne by the Notes relating to the Fixed Rate Loans
were distributed as follows as of the Statistical Calculation Date:
Range of Number of Aggregate % of Aggregate
Coupon Rates Home Equity Loans Loan Balance Loan Balance
7.01 - 8.00% 65 $6,139,156.67 0.75%
8.01 - 9.00 654 51,314,601.31 6.27
9.01 - 10.00 2,305 171,654,391.07 20.98
10.01 - 11.00 3,402 228,875,601.35 27.98
11.01 - 12.00 2,730 168,525,559.24 20.60
12.01 - 13.00 1,992 105,949,992.78 12.95
13.01 - 14.00 1,125 50,364,354.97 6.16
14.01 - 15.00 592 23,804,703.61 2.91
15.01 - 16.00 179 6,447,275.27 0.79
16.01 - 17.00 134 3,752,100.51 0.46
17.01 - 18.00 37 1,127,181.49 0.14
18.01 - 19.00 3 111,966.35 0.01
19.01 - 20.00 1 66,497.09 0.01
Total: 13,219 $818,133,381.71 100.00%
====== =============== ======
Statistical Calculation Date Loan Balances - Fixed Rate Loans
The distribution of the outstanding principal amounts of the Fixed
Rate Loans as of the Statistical Calculation Date was as follows:
<TABLE>
<CAPTION>
Range of Number of Aggregate % of Aggregate
Loan Balances Home Equity Loans Loan Balance Loan Balance
<S> <C> <C> <C>
$ 0.00 to $ 25,000.00 1,808 $34,948,665.57 4.27%
25,000.01 to 50,000.00 4,552 170,783,503.58 20.87
50,000.01 to 75,000.00 3,408 209,121,461.30 25.56
75,000.01 to 100,000.00 1,604 139,099,085.59 17.00
100,000.01 to 125,000.00 851 94,895,200.44 11.60
125,000.01 to 150,000.00 475 64,759,290.35 7.92
150,000.01 to 175,000.00 213 34,341,277.39 4.20
175,000.01 to 200,000.00 121 22,657,983.62 2.77
200,000.01 to 225,000.00 72 15,258,647.07 1.87
225,000.01 to 250,000.00 38 9,046,443.38 1.11
250,000.01 to 275,000.00 28 7,396,604.48 0.90
275,000.01 to 300,000.00 20 5,776,024.79 0.71
300,000.01 to 325,000.00 8 2,514,636.18 0.31
325,000.01 to 350,000.00 10 3,418,554.32 0.42
350,000.01 to 375,000.00 6 2,152,253.19 0.26
375,000.01 to 400,000.00 3 1,144,750.46 0.14
400,000.01 to 425,000.00 2 819,000.00 0.10
---------- ----------------- --------
Total: 13,219 $818,133,381.71 100.00%
====== ============== ======
</TABLE>
Types of Mortgaged Properties - Fixed Rate Loans
The Properties securing the Fixed Rate Loans as of the Statistical
Calculation Date were of the property types as follows:
<TABLE>
<CAPTION>
Number of Aggregate % of Aggregate
Property Types Home Equity Loans Loan Balance Loan Balance
<S> <C> <C> <C>
Two to Four Family Residence 742 $53,812,116.59 6.58%
Condominium 99 5,094,804.82 0.62
Manufactured Housing 316 16,433,428.88 2.01
Mixed Use 31 3,525,959.18 0.43
Planned Unit Development 104 10,183,236.36 1.24
Single Family Attached 350 17,295,375.60 2.11
Single Family Detached 11,577 711,788,460.28 87.00
------ -------------- -------
Total: 13,219 $818,133,381.71 100.00%
====== =============== =======
</TABLE>
Distribution of Months of Seasoning - Fixed Rate Loans
The distribution of the number of months of seasoning of the Fixed
Rate Loans as of the Statistical Calculation Date was as follows:
<TABLE>
<CAPTION>
Number of Aggregate % of Aggregate
Months of Seasoning Home Equity Loans Loan Balance Loan Balance
<S> <C> <C> <C>
0 - 1 8,979 $558,992,124.80 68.33%
2 - 12 4,231 258,440,286.24 31.59
13 or more 9 700,970.67 0.09
------ -------------- ----
Total:
13,219 $818,133,381.71 100.00%
====== ===============
</TABLE>
Distribution of Remaining Terms to Maturity - Fixed Rate Loans
The distribution of the number of months remaining to maturity of the
Fixed Rate Loans as of the Statistical Calculation Date was as follows:
<TABLE>
<CAPTION>
Months Remaining Number of Aggregate % of Aggregate
to Maturity Home Equity Loans Loan Balance Loan Balance
<S> <C> <C> <C>
0 - 120 556 $15,936,167.31 1.95%
121 - 180 8,409 510,947,025.94 62.45
181 - 240 1,897 109,365,128.87 13.37
241 - 300 95 6,098,018.34 0.75
301 - 360 2,262 175,787,041.25 21.49
----- -------------- -----
Total: 13,219 $818,133,381.71 100.00%
====== =============== =======
Occupancy Status - Fixed Rate Loans
The occupancy status of the Properties securing the Fixed Rate Loans
as of the Statistical Calculation Date was as follows:
</TABLE>
<TABLE>
<CAPTION>
Number of Aggregate % of Aggregate
Occupancy Status Home Equity Loans Loan Balance Loan Balance
<S> <C> <C> <C>
Investor Owned 775 $37,732,980.51 4.61%
Owner Occupied 12,444 780,400,401.20 95.39
------ -------------- -----
Total: 13,219 $818,133,381.71 100.00%
====== =============== =======
</TABLE>
Home Equity Loans - Adjustable Rate Loans
As of the Statistical Calculation Date, the average Loan Balance of
the Adjustable Rate Loans was $95,476.81 the Coupon Rates of the Adjustable Rate
Loans ranged from 6.50% to 16.50%; the weighted average Loan-to-Value Ratio of
the Adjustable Rate Loans was 79.15%; the weighted average Coupon Rate of the
Adjustable Rate Loans was 10.33%; the weighted average remaining term to
maturity of the Adjustable Rate Loans was 358.40 months; and the weighted
average original term to maturity of the Adjustable Rate Loans was 359.76
months. The remaining terms to maturity as of the Statistical Calculation Date
of the Adjustable Rate Loans ranged from 178 months to 360 months. The minimum
and maximum Loan Balances of the Adjustable Rate Loans as of the Statistical
Calculation Date were $10,000 and $435,000, respectively. 0.4% of the Adjustable
Rate Loans contains "balloon" payments. No Adjustable Rate Loan will mature
later than December 1, 2027. All of the Adjustable Rate Loans are secured by
first mortgages.
<PAGE>
All of the Adjustable Rate Loans have maximum Coupon Rates. The
weighted average maximum Coupon Rate of the Adjustable Rate Loans was 16.56%,
with maximum Coupon Rates that range from 12.50% to 23.50%. The Adjustable Rate
Loans have a weighted average gross margin as of the Statistical Calculation
Date of 6.22%. The gross margin for the Adjustable Rate Loans range from 2.5% to
11.10%.
Approximately $58,803,067 or 18.38% of the Adjustable Rate Loans by
aggregate Loan Balance as of the Statistical Calculation Date are Six-Month
LIBOR Loans. The Six-Month LIBOR Loans have periodic reset caps ranging from 1%
to 1.5%.
Approximately $221,131,863 or 69.12% of the Adjustable Rate Loans by
aggregate Loan Balance as of the Statistical Calculation Date are 2/28 Loans.
After the first adjustment, the 2/28 Loans have periodic reset caps ranging from
1% to 6%.
Approximately $39,893,940 or 12.47% of the Adjustable Rate Loans by
aggregate Loan Balance as of the Statistical Calculation Date are 3/27 Loans.
After the first adjustment, the 3/27 Loans have periodic reset caps ranging from
1% to 3%.
<PAGE>
Geographic Distribution of Mortgaged Properties-Adjustable Rate Loans
The geographic distribution of Adjustable Rate Loans by state, as of the
Statistical Calculation Date, was as follows:
Number of Aggregate % of Aggregate
State Home Equity Loans Loan Balance Loan Balance
Arizona 140 $11,541,275.09 3.61%
Arkansas 4 462,436.31 0.14
California 363 48,336,081.77 15.11
Colorado 119 13,716,149.27 4.29
Connecticut 51 4,565,839.04 1.43
Delaware 6 582,715.88 0.18
District of Columbia 5 562,235.68 0.18
Florida 222 20,984,159.52 6.56
Georgia 61 6,111,451.26 1.91
Hawaii 12 2,487,715.47 0.78
Idaho 37 3,027,070.75 0.95
Illinois 162 14,855,823.96 4.64
Indiana 91 5,886,503.85 1.84
Iowa 15 863,464.49 0.27
Kansas 21 1,596,714.97 0.50
Kentucky 36 2,972,514.97 0.93
Louisiana 26 2,347,037.62 0.73
Maine 4 639,456.32 0.20
Maryland 37 3,130,359.27 0.98
Massachusetts 59 7,014,530.88 2.19
Michigan 493 42,066,800.04 13.15
Minnesota 63 4,237,061.90 1.32
Mississippi 4 220,371.33 0.07
Missouri 67 5,390,897.54 1.68
Montana 12 1,320,726.72 0.41
Nebraska 6 541,046.11 0.17
Nevada 42 4,913,236.58 1.54
New Hampshire 7 736,834.25 0.23
New Jersey 31 3,687,781.61 1.15
New Mexico 41 3,264,287.39 1.02
New York 21 2,231,761.36 0.70
North Carolina 62 4,966,750.63 1.55
Ohio 239 17,135,346.14 5.36
Oklahoma 21 1,587,048.48 0.50
Oregon 68 6,908,094.93 2.16
Pennsylvania 92 7,625,505.45 2.38
Rhode Island 29 2,728,685.63 0.85
South Carolina 20 1,911,096.67 0.60
South Dakota 3 298,236.58 0.09
Tennessee 23 1,893,041.86 0.59
Texas 154 15,091,334.57 4.72
Utah 127 14,022,913.18 4.38
Virginia 26 2,267,895.59 0.71
Washington 184 19,771,881.99 6.18
West Virginia 12 1,014,894.49 0.32
Wisconsin 29 2,132,136.07 0.67
Wyoming 4 293,573.05 0.09
------- ---------------- ------
Total: 3,351 $319,942,776.51 100.00%
======== =============== ========
<PAGE>
Original Loan-to-Value Ratios-Adjustable Rate Loans
The original Loan-to-Value Ratios of the Adjustable Rate
Loans as of the Statistical Calculation Date were distributed as follows:
Range of Number of Aggregate % of Aggregate
Original LTV's Home Equity Loan Balance Loan Balance
Loans
9.00 - 10.00% 1 $10,000.00 0.00%
10.01 - 15.00 2 99,851.11 0.03
15.01 - 20.00 1 19,991.79 0.01
20.01 - 25.00 8 283,794.45 0.09
25.01 - 30.00 10 855,880.36 0.27
30.01 - 35.00 9 816,136.29 0.26
35.01 - 40.00 12 750,706.83 0.23
40.01 - 45.00 18 1,267,242.16 0.40
45.01 - 50.00 48 3,248,254.85 1.02
50.01 - 55.00 52 3,120,660.50 0.98
55.01 - 60.00 100 6,782,256.35 2.12
60.01 - 65.00 173 13,060,510.71 4.08
65.01 - 70.00 298 23,305,622.19 7.28
70.01 - 75.00 488 46,401,698.15 14.50
75.01 - 80.00 917 90,771,290.97 28.37
80.01 - 85.00 589 56,727,536.05 17.73
85.01 - 90.00 622 72,086,962.69 22.53
90.01 - 95.00 1 107,062.22 0.03
95.01 - 100.00 2 227,318.84 0.07
-------- ----------------- --------
Total: 3,351 $319,942,776.51 100.00%
-------- =============== ========
Statistical Calculation Date Current Coupon Rates-Adjustable Rate Loans
The Coupon Rates borne by the Notes relating to the Adjustable Rate
Loans were distributed as follows as of the Statistical Calculation Date:
Range of Current Number of Aggregate % of Aggregate
Coupon Rates Home Equity Loans Loan Balance Loan Balance
6.01 to 7.00% 6 $573,487.32 0.18%
7.01 to 8.00 35 3,562,593.66 1.11
8.01 to 9.00 279 31,682,103.72 9.90
9.01 to 10.00 922 98,827,973.29 30.89
10.01 to 11.00 1,213 115,384,741.60 36.06
11.01 to 12.00 641 52,114,430.81 16.29
12.01 to 13.00 161 11,850,175.42 3.70
13.01 to 14.00 66 4,471,665.23 1.40
14.01 to 15.00 25 1,348,179.01 0.42
15.01 to 16.00 2 89,480.31 0.03
16.01 to 17.00% 1 37,946.14 0.01
-------- ------------------ --------
Total: 3,351 $319,942,776.51 100.00%
===== =============== =======
<PAGE>
Statistical Calculation Date Loan Balances-Adjustable Rate Loans
The distribution of the outstanding principal amounts of the Adjustable
Rate Loans as of the Statistical Calculation Date was as follows:
Range of Number of Aggregate % of Aggregate
Loan Balances Home Equity Loans Loan Balance Loan Balance
$0.00 - 25,000.00 45 $980,351.00 0.31%
25,000.01 - 50,000.00 587 23,200,873.85 7.25
50,000.01 - 75,000.00 875 54,575,708.12 17.06
75,000.01 - 100,000.00 655 57,453,522.20 17.96
100,000.01 - 125,000.00 459 51,605,348.29 16.13
125,000.01 - 150,000.00 299 40,633,778.82 12.70
150,000.01 - 175,000.00 143 23,220,799.89 7.26
175,000.01 - 200,000.00 98 18,313,525.33 5.72
200,000.01 - 225,000.00 69 14,582,108.14 4.56
225,000.01 - 250,000.00 30 7,196,254.42 2.25
250,000.01 - 275,000.00 23 5,963,920.33 1.86
275,000.01 - 300,000.00 25 7,209,795.76 2.25
300,000.01 - 325,000.00 15 4,697,067.00 1.47
325,000.01 - 350,000.00 14 4,728,899.88 1.48
350,000.01 - 375,000.00 3 1,113,886.35 0.35
375,000.01 - 400,000.00 6 2,340,247.40 0.73
400,000.01 - 425,000.00 2 826,041.78 0.26
425,000.01 - 450,000.00 3 1,300,647.95 0.41
-------- ------------ -----
Total: 3,351 $319,942,776.51 100.00%
===== =============== =======
Types of Mortgaged Properties-Adjustable Rate Loans
The Properties securing the Adjustable Rate Loans as of the
Statistical Calculation Date were of the property types as follows:
<TABLE>
<CAPTION>
Number of Aggregate % of Aggregate
Property Types Home Equity Loans Loan Balance Loan Balance
<S> <C> <C> <C>
Two-to-Four Family 181 $17,406,472.13 5.44%
Condominium 53 4,265,466.76 1.33
Manufactured Housing 44 3,135,341.99 0.98
Mixed Use 1 83,250.00 0.03
Planned Unit Development 92 11,049,730.87 3.45
Single Family Attached 37 3,021,659.59 0.94
Single Family Detached 2,943 280,980,855.17 87.82
-----
Total: 3,351 $319,942,776.51 100.00%
===== =============== ========
</TABLE>
Distribution of Months of Seasoning-Adjustable Rate Loans
The distribution of the number of months of seasoning of the
Adjustable Rate Loans as of the Statistical Calculation Date was as follows:
<TABLE>
<CAPTION>
Number of Aggregate % of Aggregate
Months of Seasoning Home Equity Loans Loan Balance Loan Balance
<S> <C> <C> <C>
0 - 1 2,146 $204,723,025.86 63.99%
2 - 12 1,199 114,731,537.70 35.86
13 - 16 6 488,212.95 0.15
--------
Total: 3,351 $319,942,776.51 100.00%
===== ================ ========
</TABLE>
Distribution of Remaining Terms to Maturity-Adjustable Rate Loans
The distribution of the number of months remaining to maturity of the
Adjustable Rate Loans as of the Statistical Calculation Date was as follows:
<TABLE>
<CAPTION>
Months Remaining Number of Aggregate % of Aggregate
to Maturity Home Equity Loans Loan Balance Loan Balance
<S> <C> <C> <C>
121 - 180 6 $316,116.43 0.10%
181 - 240 2 162,801.62 0.05
301 - 360 3,343 319,463,858.46 99.85
-----
Total: 3,351 $319,942,776.51 100.00%
=====
</TABLE>
Occupancy Status-Adjustable Rate Loans
The occupancy status of the Properties securing the
Adjustable Rate Loans as of the Statistical Calculation Date was as follows:
<TABLE>
<CAPTION>
Number of Aggregate % of Aggregate
Occupancy Status Home Equity Loans Loan Balance Loan Balance
<S> <C> <C> <C>
Investor Owned 181 $12,493,653.63 3.90%
Owner Occupied 3,170 307,449,122.88 96.10
-----
Total: 3,351 $319,942,776.51 100.00%
===== =============== =======
</TABLE>
<PAGE>
Distribution of Margins-Adjustable Rate Loans
The margins borne by the Notes relating to the Adjustable
Rate Loans as of the Statistical Calculation Date was as follows:
Range of Number of Aggregate % of Aggregate
Margins Home Equity Loans Loan Balance Loan Balance
2.00 - 2.99% 2 $240,843.68 .08%
3.00 - 3.99 13 1,203,147.79 .38
4.00 - 4.99 172 18,117,898.10 5.66
5.00 - 5.99 1,067 10,920,353.60 34.67
6.00 - 6.99 1,436 34,474,296.01 42.03
7.00 - 7.99 480 41,204,587.44 12.88
8.00 - 8.99 144 11,174,004.05 3.49
9.00 - 9.99 29 1,943,735.59 0.61
10.00 - 10.99 7 616,772.25 0.19
11.00 - 11.99 1 47,138.00 0.01
------ ------------ ------
Total: 3,351 $319,942,776.51 100.00%
======= =============== =======
Distribution of Maximum Coupon Rates-Adjustable Rate Loans
The maximum Coupon Rates borne by the Notes relating to the Adjustable
Rate Loans as of the Statistical Calculation Date was as follows:
Number of Aggregate % of Aggregate
Maximum Rate Home Equity Loans Loan Balance Loan Balance
12.01 to 13.00% 4 $307,388.66 0.10%
13.01 to 14.00 25 2,594,610.48 0.81
14.01 to 15.00 186 21,357,910.71 6.68
15.01 to 16.00 810 88,615,708.45 27.70
16.01 to 17.00 1,195 114,619,909.01 35.83
17.01 to 18.00 756 64,277,851.58 20.09
18.01 to 19.00 237 18,329,986.47 5.73
19.01 to 20.00 98 7,558,361.55 2.36
20.01 to 21.00 32 1,952,388.31 0.61
21.01 to 22.00 6 260,940.66 0.08
22.01 to 23.00 1 29,774.49 0.01
23.01 to 24.00 1 37,946.14 0.01
----- ------------- ------
Total: 3,351 $319,942,776.51 100.00%
===== =============== ========
Distribution of Coupon Rates Change-Adjustable Rate Loans
The number of months until the next Coupon Rate change for each of the
Notes relating to the Adjustable Rate Loans as of the Statistical Calculation
Date was as follows:
Month of Next Number of Aggregate % of Aggregate
Coupon Rate Change Home Equity Loans Loan Balance Loan Balance
January, 1998............. 42 $4,125,112.99 1.29%
February, 1998............ 75 6,944,568.95 2.17
March, 1998............... 196 19,747,023.07 6.17
April, 1998............... 200 19,228,304.80 6.01
May, 1998................. 78 7,270,905.60 2.27
June, 1998................ 10 799,569.54 0.25
November, 1998............ 5 687,582.29 0.21
January, 1999............. 1 161,060.72 0.05
February, 1999............ 2 323,526.19 0.10
March, 1999............... 1 171,339.45 0.05
April, 1999............... 3 188,678.37 0.06
May, 1999................. 3 324,289.52 0.10
June, 1999................ 21 2,537,460.46 0.79
July, 1999................ 60 4,908,442.32 1.53
August, 1999.............. 176 15,658,022.83 4.89
September, 1999........... 711 64,542,378.79 20.17
October, 1999............. 979 93,947,648.16 29.36
November, 1999............ 407 38,181,252.49 11.93
December, 1999............ 3 301,670.00 0.09
March, 2000............... 1 249,541.11 0.08
May, 2000................. 1 69,204.58 0.02
June, 2000................ 1 60,297.09 0.02
July, 2000................ 5 493,653.71 0.15
August, 2000.............. 19 1,630,339.53 0.51
September, 2000........... 100 10,596,260.18 3.31
October, 2000............. 165 16,975,604.77 5.31
November, 2000............ 86 9,819,039.00 3.07
------ ---------------- -------
Total: 3,351 $319,942,776.51 100.00%
===== =============== ========
HOME EQUITY LOANS - FIXED RATE AND ADJUSTABLE RATE
As of the Statistical Calculation Date, the average Loan Balance of
the Home Equity Loans was $68,682.93; the Coupon Rates of the Home Equity Loans
ranged from 6.50% to 19.99%; the weighted average Loan-to-Value Ratio of the
Home Equity Loans was 75.13%; the weighted average Combined Loan-to-Value Ratio
of the Home Equity Loans was 77.39%; the weighted average Coupon Rate of the
Home Equity Loans was 10.879%; the weighted average remaining term to maturity
of the Home Equity Loans was 262.52 months; and the weighted average original
term to maturity of the Home Equity Loans was 263.78 months. The remaining terms
to maturity as of the Statistical Calculation Date of the Home Equity Loans
ranged from 52 months to 360 months. The minimum and maximum Loan Balances of
the Home Equity Loans as of the Statistical Calculation Date were $624.83 and
$435,000, respectively.
INTEREST PAYMENTS ON THE HOME EQUITY LOANS
There are a number of Home Equity Loans on which interest is charged
to the obligor (the "Mortgagor") at the Coupon Rate on the outstanding principal
balance calculated based on the number of days elapsed between receipt of the
Mortgagor's last payment through receipt of the Mortgagor's most current payment
(such Home Equity Loans, "Date-of-Payment Loans"). Such interest is deducted
from the Mortgagor's payment amount and the remainder, if any, of the payment is
applied as a reduction to the outstanding principal balance of such Note.
Although the Mortgagor is required to remit equal monthly payments on a
specified monthly payment date that would reduce the outstanding principal
balance of such Note to zero at such Note's maturity date, payments that are
made by the Mortgagor after the due date therefor would cause the outstanding
principal balance of such Note not to be reduced to zero on its maturity date.
In such a case, the Mortgagor would be required to make an additional principal
payment at the maturity date for such Note. If it were assumed that all the
Mortgagors on the Date-of-Payment Loans were to pay on the latest date possible
without the Date-of-Payment Loans being in default, the amount of such
additional principal payment would be a de minimis amount of the aggregate Loan
Balance of the Home Equity Loans. On the other hand, if a Mortgagor makes a
payment (other than a Prepayment) before the due date therefor, the reduction in
the outstanding principal balance of such Note would occur over a shorter period
of time than would have occurred had it been based on the schedule of
amortization in effect on the Cut-Off Date. Accordingly, the timing of principal
payments to the Owners of the Offered Certificates may be affected by the fact
that actual Mortgagor payments on the Date-of-Payment Loans may not be made on
the due date therefor.
The Home Equity Loans which are not Date-of-Payment Loans (the
"Actuarial Loans") provide that interest is charged to the Mortgagors
thereunder, and payments are due from such Mortgagors, as of a scheduled day of
each month which is fixed at the time of origination. Scheduled monthly payments
made by the Mortgagors on the Actuarial Loans either earlier or later than the
scheduled due dates thereof will not affect the amortization schedule or the
relative application of such payments to principal and interest.
PREPAYMENT AND YIELD CONSIDERATIONS
GENERAL
The weighted average life of, and, if purchased at other than par
(disregarding, for purposes of this dis cussion, the effect on an investor's
yield resulting from the timing of the settlement date and those considerations
discussed below under "Payment Lag Feature of Fixed Rate Certificates"), the
yield to maturity on the Offered Certificates will relate to the rate of payment
of principal of the Home Equity Loans, including for this purpose Prepayments,
liquidations due to defaults, casualties and condemnations, and repurchases by
the Sellers of Home Equity Loans and any accelerated payment of principal and
the effect of a Delinquency Trigger Event or a Cumulative Realized Loss Trigger
Event. The actual rate of principal prepayments on pools of mortgage loans is
influenced by a variety of economic, tax, geographic, demographic, social, legal
and other factors and has fluctuated considerably in recent years. In addition,
the rate of principal prepayments may differ among pools of mortgage loans at
any time because of specific factors relating to the mortgage loans in the
particular pool, including, among other things, the age of the mortgage loans,
the geographic locations of the properties securing the loans and the extent of
the mortgagors' equity in such properties, and changes in the mortgagors'
housing needs, job transfers and unemployment.
As with fixed rate obligations generally, the rate of prepayment on a
pool of home equity loans with fixed rates such as the Fixed Rate Loans is
affected by prevailing market rates for home equity loans of a comparable term
and risk level. When the market interest rate is below the mortgage coupon,
mortgagors may have an increased incentive to refinance their home equity loans.
Depending on prevailing market rates, the future outlook for market rates and
economic conditions generally, some mortgagors may sell or refinance mortgaged
properties in order to realize their equity in the mortgaged properties, to meet
cash flow needs or to make other investments.
All of the Adjustable Rate Loans are adjustable-rate home equity
loans. As is the case with conventional fixed-rate home equity loans,
adjustable-rate home equity loans may be subject to a greater rate of principal
prepayments in a declining interest rate environment. For example, if prevailing
interest rates fall significantly, adjustable-rate home equity loans could be
subject to higher prepayment rates than if prevailing interest rates remain
constant because the availability of fixed-rate home equity loans at competitive
interest rates may encourage mortgagors to refinance their adjustable-rate home
equity loan to "lock in" a lower fixed interest rate. However, no assurance can
be given as to the level of prepayments that the Home Equity Loans will
experience.
The prepayment behavior of the 2/28 Loans and 3/27 Loans may differ
from that of the other Adjustable Rate Loans. As a 2/28 Loan or 3/27 Loan
approaches its initial adjustment date, the borrower may become more likely to
refinance such loan to avoid an increase in the Coupon Rate, even if fixed rate
loans are only available at rates that are slightly lower or higher than the
Coupon Rate before adjustment. The existence of the applicable periodic rate
cap, maximum rate and minimum rate also may affect the likelihood of prepayments
resulting from refinancings. In addition, the delinquency and loss experience on
the Adjustable Rate Loans may differ from that on the Fixed Rate Loans because
the amount of the monthly payments on the Adjustable Rate Loans are subject to
adjustment on each adjustment date. Because the cashflows from both the Fixed
Rate Loans and the Adjustable Rate Loans will be used to make the required
distributions on the Class A Trust Certificates and Class B Certificates, the
prepayment experience of the Class A Trust Certificates and Class B Certificates
will not reflect solely the prepayment experience of either the Fixed Rate Loans
or the Adjustable Rate Loans.
The prepayment experience on non-conventional mortgage loans may
differ from that on conventional first mortgage loans, primarily due to the
credit quality of the typical borrower. Because the credit histories of many
non-conventional borrowers may preclude them from other traditional sources of
financing, such borrowers may be less likely to refinance due to a decline in
market interest rates. Non-conventional mortgage loans may experience more
prepayments in a rising interest rate environment as the borrowers' finances are
stressed to the point of default. Prepayments may also affect the yield to the
Owners of the Offered Certificates, if the weighted average margins are reduced.
In addition to the foregoing factors affecting the weighted average
life of each Class of the Offered Certificates, the overcollateralization
provisions of the Trust may result in an additional reduction of the Class A
Trust Certificates relative to the amortization of the Home Equity Loans in
early months of the transaction (but after the first six months). The
accelerated amortization is achieved by the application of the Monthly Excess
Interest Amount to the payment of the Certificate Principal Balance of the
related Classes of Class A Trust Certificates then entitled to distributions of
principal. This creates overcollateralization which results from the excess of
the aggregate Loan Balances of the Home Equity Loans over the Aggregate Trust
Certificate Principal Balance. Once the Targeted Overcollateralization Amount is
reached, the application of the Monthly Excess Interest Amount to pay down
principal will cease, unless necessary to maintain the Overcollateralization
Amount at the Targeted Overcollateralization Amount.
PAC CERTIFICATES
Distributions of principal of the PAC Certificates are intended to be
relatively stable because such distributions will be made in accordance with the
schedules of the respective Planned Principal Balances of such Certificates, so
long as prepayments on the Home Equity Loans occur at rates that are neither too
fast nor too slow to support such schedules. Moreover, the PAC Certificates will
have a cumulative priority for future payments if they fall behind their
schedules. There is a range of prepayment rates (the "Effective Range") at which
the PAC Certificates would adhere to their schedules of Planned Principal
Balances. The Effective Range at any time depends on the actual or assumed
characteristics of the Home Equity Loans at that time. Based on the Modeling
Assumptions, the PAC Certificates would adhere to their Planned Principal
Balances schedules if the Fixed Rate Loans were to prepay anywhere between 125%
Prepayment Assumption and 175% Prepayment Assumption and the Adjustable Rate
Loans were to prepay anywhere between 28% CPR and 38% CPR (or any other
combination of Prepayment Assumption and CPR which result in a paydown identical
to that defined by the above stated prepayments assumptions) until the PAC
Certificates are retired.
The Home Equity Loans will have characteristics that differ from those
of the Modeling Assumptions. The initial Effective Range, if calculated using
the actual characteristics of the Home Equity Loans, could differ from that
shown. Therefore, even if the Home Equity Loans were to prepay at a constant
rate within the initial Effective Range shown, but near its upper or lower end,
one or more Classes of PAC Certificates could fail to adhere to its Planned
Principal Balances schedule. Moreover, the Home Equity Loans will not prepay at
any constant rate. Non-constant prepayment rates can cause any Class of PAC
Certificates not to adhere to its Planned Principal Balances schedule, even if
such rates remain within the initial Effective Range. The Effective Range for
any Class of PAC Certificates can narrow or "drift" upward or downward over
time. In addition, the occurrence of a Delinquency Trigger Event or a Cumulative
Realized Loss Trigger Event may result in one or more Classes of PAC
Certificates failing to adhere to its Planned Principal Balance schedule.
The principal payment stability of the PAC Certificates will be
supported by the Companion Certificates. When the Companion Certificates are
retired, any outstanding Class of PAC Certificates will no longer have an
Effective Range and will become more sensitive to Home Equity Loan prepayments.
If the Home Equity Loans prepay at rates that are generally below the
Effective Range, the Class A Principal Distribution Amount may be insufficient
to reduce one or more Classes of PAC Certificates to their Planned Principal
Balance and the weighted average lives may be extended, perhaps significantly.
If the Home Equity Loans prepay at rates that are generally above the Effective
Range, the weighted average life of one or more Classes of PAC Certificates may
be shortened, perhaps significantly. However, the weighted average lives of one
or more Classes of PAC Certificates could be extended under certain scenarios
involving Home Equity Loan prepayments at rates that are generally above the
Effective Range. The entire Class A Principal Distribution Amount will be
distributed monthly on each Payment Date and will not be retained for
distribution on subsequent Payment Dates. Thus, the likelihood that the PAC
Certificates will adhere to their Planned Principal Balances schedules will not
be enhanced by averaging high and low principal payments in different months.
COMPANION CERTIFICATES
Each Class of Companion Certificates will support the principal
payment stability of the PAC Certificates. Thus, each Class of Companion
Certificates is likely to be much more sensitive to Home Equity Loan prepayments
than is any Class it supports. The Companion Certificates may receive no
principal payments for extended periods of time and may receive principal
payments that vary widely from period to period. Relatively fast Home Equity
Loan prepayments may significantly shorten, and relatively slow Home Equity Loan
prepayments may significantly extend, the weighted average lives of the
Companion Certificates.
AUCTION RATE CERTIFICATES
The Pass-Through Rate for the Auction Rate Certificates for each
Accrual Period after the first Accrual Period will be equal to the lesser of (i)
the per annum rate determined in accordance with the Auction Rate Procedures set
forth in Annex I hereto and (ii) the Available Funds Cap. Although interest on
the Auction Rate Certificates will be distributable on a pro rata basis among
all such Certificates, distributions of principal of the Auction Rate
Certificates will be made in round lots of $25,000 and integral multiples
thereof and will be allocated to specific Auction Rate Certificates as described
in Annex I. On any Payment Date on which principal is to be distributed on the
Auction Rate Certificates, one or more Owners of an Auction Rate Certificate may
receive no distributions of principal while other Owners of such Certificates
receive such distributions.
As Companion Certificates, the Auction Rate Certificates, as a Class,
are subject to substantial uncertainty about the amount and timing of receipt of
distributions of principal. Individual Owners of Auction Rate Certificates are
subject to the additional uncertainty regarding the timing of receipt of such
distributions as described above. As a result, the yield on any Auction Rate
Certificate may vary significantly from period to period and over the life of
such Certificates. The Auction Rate Certificates are not an appropriate
investment for any investor that desires a regular and predictable stream of
principal distributions.
INTEREST-ONLY CERTIFICATES
Because amounts distributable to the Owners of the Class A-11 IO
Certificates consist entirely of interest, the yield to maturity of the Class
A-11 IO Certificates will be sensitive to the repurchase, prepayment and default
experience of the Home Equity Loans, and prospective investors should fully
consider the associated risks, including the risk that such investors may not
fully recover their initial investment. In addition, the Notional Principal
Amount applicable to interest calculations on the Class A-11 IO Certificates is
(x) through the 18th Payment Date, the sum of the Class A-5 and Class-6
Certificate Principal Balance and (y) thereafter, zero. Since the Class A-5 and
Class A-6 Certificates are protected from prepayment volatility for the first 18
Payment Dates through a combination of their position in the sequential order of
principal distribution and through the Companion Certificates, the performance
of the Class A-11 IO Certificates is likely to be more stable than if such
Notional Principal Amount were calculated using the underlying Home Equity Loans
directly, and consequently, the yield sensitivity of such Certificates will only
be impacted at extremely high rates of prepayment.
As indicated above, if purchased at other than par, the yield to
maturity on an Offered Certificate will be affected by the rate of the payment
of principal of the Home Equity Loans. If the actual rate of payments on the
Home Equity Loans is slower than the rate anticipated by an investor who
purchases an Offered Certificate at a discount, the actual yield to such
investor will be lower than such investor's anticipated yield. If the actual
rate of payments on the Home Equity Loans is faster than the rate anticipated by
an investor who purchases an Offered Certificate at a premium, the actual yield
to such investor will be lower than such investor's anticipated yield.
The "Final Scheduled Payment Date" for each Class of the Offered
Certificates is as set forth in the Summary of Terms hereof. Such dates are the
dates on which the "Initial Certificate Principal Balance" set forth in the
Summary of Terms hereof for the related Class as of the Closing Date less all
amounts previously distributed to the Owners on account of principal would be
reduced to zero assuming that no Prepayments are received on the Home Equity
Loans, that scheduled monthly payments of principal of and interest on each of
the Home Equity Loans are timely received and that no Monthly Excess Interest
Amount will be used to make accelerated payments of principal to the Owners of
the Offered Certificates. The Final Scheduled Payment Date for the Class A-10
Certificates and the Subordinate Certificates is the thirteenth Payment Date
following the calendar month in which the Loan Balances of all Home Equity Loans
have been reduced to zero assuming that such Home Equity Loans pay in accordance
with their terms. The weighted average life of each Class of Offered
Certificates is likely to be shorter than would be the case if payments actually
made on the Home Equity Loans conformed to the foregoing assumptions, and the
final Payment Date with respect to any Class of Offered Certificates could occur
significantly earlier than the related Final Scheduled Payment Date because (i)
Prepayments are likely to occur and (ii) the owners of the Class R Certificates
may cause a termination of the Trust on or after the Clean-Up Call Date.
The final Payment Date for the Class A-1 Certificates will be December
15, 1998, at which time the remaining Certificate Principal Balance, if any then
remains outstanding, of the Class A-1 Certificates will be paid in full. If the
Principal Remittance Amount on such Payment Date is not sufficient to pay in
full the remaining Certificate Principal Balance of the Class A-1 Certificates,
a draw will be made on the related Certificate Insurance Policy in the amount of
such shortfall.
"Weighted average life" refers to the average amount of time that will
elapse from the date of issuance of a security until each dollar of principal of
such security will be repaid to the investor. The weighted average life of any
Class of Offered Certificates will be influenced by, among other things, the
rate at which principal of the Home Equity Loans is paid, which may be in the
form of scheduled amortization or prepayments (for this purpose, the term
"Prepayment" includes Prepayments and liquidations due to default).
It is very unlikely that the Home Equity Loans will prepay at rates
consistent with the Prepayment Assumption until maturity or that all of the Home
Equity Loans will prepay at the same rate. There will be discrepancies between
the actual characteristics of the Home Equity Loans included in the Trust and
the assumed characteristics used in preparing the following tables. Any
discrepancy may have an effect upon the percentages of Initial Certificate
Principal Balance outstanding set forth in the table and the weighted average
lives of the Offered Certificates.
The model used in this Prospectus Supplement is the prepayment
assumption (the "Prepayment Assumption") which represents an assumed rate of
prepayment each month relative to the then outstanding principal balance of a
pool of mortgage loans for the life of such mortgage loans. A 100% Prepayment
Assumption assumes constant prepayment rates of 4% per annum of the then
outstanding principal balance of the Home Equity Loans in the first month of the
life of the mortgage loans and an additional approximate 1.455% per annum in
each month thereafter until the twelfth month. Beginning in the twelfth month
and in each month thereafter during the life of the mortgage loans, 100%
Prepayment Assumption assumes a constant prepayment rate of 20% per annum each
month. As used in the table below, 0% Prepayment Assumption assumes prepayment
rates equal to 0% of the Prepayment Assumption i.e., no prepayments.
Correspondingly, 125% Prepayment Assumption assumes prepayment rates equal to
125% of the 100% Prepayment Assumption, and so forth. The Prepayment Assumption
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 Home Equity Loans. The Depositor believes that no existing
statistics of which it is aware provide a reliable basis for holders of Offered
Certificates to predict the amount or the timing of receipt of prepayments on
the Home Equity Loans.
Since the tables were prepared on the basis of the assumptions in the
following paragraph (the "Modeling Assumptions"), there are discrepancies
between the characteristics of the actual Home Equity Loans and the
characteristics of the Home Equity Loans assumed in preparing the tables. Any
such discrepancy may have an effect upon the percentages of the Certificate
Principal Balances outstanding and weighted average lives of the Offered
Certificates set forth in the tables. In addition, since the actual Home Equity
Loans in the Trust have characteristics which differ from those assumed in
preparing the tables set forth below, the distributions of principal on the
Offered Certificates may be made earlier or later than as indicated in the
tables.
For the purpose of the tables below, it is assumed that: (i) the Home
Equity Loans consist of pools of loans with level-pay and balloon amortization
methodologies, Statistical Calculation Date Loan Balances, mortgage rates, net
mortgage rates, original and remaining terms to maturity, and original
amortization terms as applicable, as set forth in the "Representative Loan
Pools" table below; (ii) the Closing Date for the Certificates occurs on
December 23, 1997; (iii) distributions on the Certificates are made on the 15th
day of each month regardless of the day on which the Payment Date actually
occurs, commencing January 15, 1998, in accordance with the priorities described
herein; (iv) the difference between the Gross Coupon Rate and the Net Coupon
Rate is equal to the Servicing Fee and the Net Coupon Rate is further reduced by
the Trustee Fee, the Premium Amount, the Auction Agent Fee and the Broker-Dealer
Fee; (v) the prepayment rates with respect to the Fixed Rate Loans are a
multiple of the applicable Prepayment Assumption and with respect to the
Adjustable Rate Loans are constant percentages of conditional prepayment rates
(CPR) each as stated in the "Prepayment Scenarios" table below; (vi) prepayments
include 30 days' interest thereon; (vii) no optional termination or mandatory
termination is exercised; (viii) the Targeted Overcollateralization Amount is
set initially as specified in this Prospectus Supplement and the Pooling and
Servicing Agreement and thereafter decreases in accordance with its provisions;
(ix) the Coupon Rate for each Adjustable Rate Loan is adjusted on its next rate
adjustment date (and on subsequent rate adjustment dates, if necessary) to equal
the sum of (a) the assumed level of the applicable index of 5.90625%, (b) the
respective gross margin (such sum being subject to the applicable periodic
adjustment cap and maximum interest rate); (x) the Pass-Through Rate for the
Floating Rate Certificates remains constant at its initial rate up to and
including the Clean-Up Call Date and, thereafter, at its initial rate plus the
step-up required after the Clean-Up Call Date; and (xi) the Pass-Through Rate on
the Auction Rate Certificates remains constant at 6.21875% per annum and (c) no
Delinquency Trigger Event or Cumulative Realized Loss Trigger Event occurs.
<TABLE>
<CAPTION>
PREPAYMENT SCENARIOS
SCENARIO I SCENARIO II SCENARIO III SCENARIO IV SCENARIO V SCENARIO VI SCENARIO VII SCENARIO VIII
---------- ----------- ------------ ----------- ---------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed Rate Loans(1) 0% 50 75 100 130 140 160 200
Adjustable Rate
Loans(2) 0% 15 20 25 30 32 36 48
(1) As a percentage of the Prepayment Assumption.
(2) As a conditional prepayment rate (CPR) percentage.
</TABLE>
<PAGE>
REPRESENTATIVE LOAN POOLS
FIXED RATE LOANS
<TABLE>
<CAPTION>
Gross Net Original Term Remaining Term Orig. Amortization
Pool # Principal Balance Coupon Rate Coupon Rate to Maturity to Maturity Term Amort. Method
<S> <C> <C> <C> <C> <C> <C>
1 $579,976,239.38 11.3757 10.8757 180 178 360 Balloon
2 $1,437,419.23 11.2453 10.7453 60 57 60 Level Pay
3 $21,629,744.20 11.2256 10.7256 118 115 118 Level Pay
4 $163,389,517.53 10.9835 10.4835 180 177 180 Level Pay
5 $159,009,703.38 10.7356 10.2356 240 238 240 Level Pay
6 $8,869,753.99 10.4591 9.9591 300 298 300 Level Pay
7 $255,687,622.29 10.7605 10.2605 360 358 360 Level Pay
</TABLE>
<TABLE>
<CAPTION>
ADJUSTABLE RATE LOANS
Gross Net Months to Gross Current Periodic Next Periodic Life Rate
Pool # Principal Balance Coupon Rate Coupon Rate Rate Change Margin Rate Cap Rate Cap Floor
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 $167,329.72 10.3111 9.8111 21 5.9426 3.0000 1.0000 10.3111
2 $324,845,513.85 10.4112 9.9112 22 6.1805 2.8941 1.0626 10.3788
3 $58,604,704.22 10.6218 10.1218 34 6.3878 3.1183 1.0486 10.6218
4 $6,059,843.34 10.2144 9.7144 1 6.6041 1.0000 1.0000 10.1977
5 $10,201,659.94 10.1490 9.6490 2 6.2142 1.0061 1.0000 10.1277
6 $29,008,627.56 9.7367 9.2367 3 6.3210 1.0379 1.0283 9.7261
7 $28,246,623.83 9.7908 9.2908 4 6.2402 1.0251 1.0156 9.7127
8 $11,691,119.74 9.6136 9.1136 5 6.0422 1.0090 1.0000 9.5199
9 $1,174,577.80 10.1413 9.6413 6 6.6481 1.0000 1.0000 10.1413
</TABLE>
<TABLE>
<CAPTION>
Life Rate Original Term Remaining Term Orig. Amortization
Pool # Cap to Maturity to Maturity Term Amort. Method
<S> <C> <C> <C> <C> <C>
1 16.7850 180 178 360 Balloon
2 16.6667 360 358 360 Level Pay
3 16.6351 360 358 360 Level Pay
4 16.4057 360 355 360 Level Pay
5 16.3484 360 356 360 Level Pay
6 16.0220 359 356 359 Level Pay
7 16.0424 359 357 359 Level Pay
8 15.9789 358 357 358 Level Pay
9 16.4635 360 355 360 Level Pay
</TABLE>
<PAGE>
The following tables set forth the percentages of the initial principal amount
of the Offered Certificates that would be outstanding after each of the dates
shown, based on prepayment scenarios described in the table entitled "Prepayment
Scenarios." The percentages have been rounded to the nearest 1%.
<TABLE>
<CAPTION>
PERCENTAGE OF INITIAL CERTIFICATE PRINCIPAL BALANCE
Class A-1
Scenario
-------------------------------------------------------------------------------------
Payment Date I II III IV V VI VII VIII
Initial Percent 100% 100% 100% 100% 100% 100% 100% 100%
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Dec-98 0% 0% 0% 0% 0% 0% 0% 0%
Dec-99 0% 0% 0% 0% 0% 0% 0% 0%
Dec-2000 0% 0% 0% 0% 0% 0% 0% 0%
Dec-2001 0% 0% 0% 0% 0% 0% 0% 0%
Dec-2002 0% 0% 0% 0% 0% 0% 0% 0%
Dec-2003 0% 0% 0% 0% 0% 0% 0% 0%
Dec-2004 0% 0% 0% 0% 0% 0% 0% 0%
Dec-2005 0% 0% 0% 0% 0% 0% 0% 0%
Dec-2006 0% 0% 0% 0% 0% 0% 0% 0%
Dec-2007 0% 0% 0% 0% 0% 0% 0% 0%
Dec-2008 0% 0% 0% 0% 0% 0% 0% 0%
Dec-2009 0% 0% 0% 0% 0% 0% 0% 0%
Dec-2010 0% 0% 0% 0% 0% 0% 0% 0%
Dec-2011 0% 0% 0% 0% 0% 0% 0% 0%
Dec-2012 0% 0% 0% 0% 0% 0% 0% 0%
Dec-2013 0% 0% 0% 0% 0% 0% 0% 0%
Dec-2014 0% 0% 0% 0% 0% 0% 0% 0%
Dec-2015 0% 0% 0% 0% 0% 0% 0% 0%
Dec-2016 0% 0% 0% 0% 0% 0% 0% 0%
Dec-2017 0% 0% 0% 0% 0% 0% 0% 0%
Dec-2018 0% 0% 0% 0% 0% 0% 0% 0%
Dec-2019 0% 0% 0% 0% 0% 0% 0% 0%
Dec-2020 0% 0% 0% 0% 0% 0% 0% 0%
Dec-2021 0% 0% 0% 0% 0% 0% 0% 0%
Dec-2022 0% 0% 0% 0% 0% 0% 0% 0%
Dec-2023 0% 0% 0% 0% 0% 0% 0% 0%
Dec-2024 0% 0% 0% 0% 0% 0% 0% 0%
Dec-2025 0% 0% 0% 0% 0% 0% 0% 0%
Dec-2026 0% 0% 0% 0% 0% 0% 0% 0%
Dec-2027 0% 0% 0% 0% 0% 0% 0% 0%
Weighted
Average 0.86 0.39 0.31 0.26 0.22 0.21 0.19 0.16
Life
Years(1)
Class A-2
Scenario
---------------------------------------------------------------------------------------------------------
Payment Date I II III IV V VI VII VIII
- -- --- -- - -- --- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percent 100% 100% 100% 100% 100% 100% 100% 100%
Dec-98 100% 90% 82% 74% 67% 67% 67% 67%
Dec-99 100% 68% 53% 38% 26% 26% 26% 13%
Dec-2000 100% 49% 28% 10% 0% 0% 0% 0%
Dec-2001 100% 31% 8% 0% 0% 0% 0% 0%
Dec-2002 99% 16% 0% 0% 0% 0% 0% 0%
Dec-2003 96% 3% 0% 0% 0% 0% 0% 0%
Dec-2004 93% 0% 0% 0% 0% 0% 0% 0%
Dec-2005 89% 0% 0% 0% 0% 0% 0% 0%
Dec-2006 85% 0% 0% 0% 0% 0% 0% 0%
Dec-2007 81% 0% 0% 0% 0% 0% 0% 0%
Dec-2008 76% 0% 0% 0% 0% 0% 0% 0%
Dec-2009 71% 0% 0% 0% 0% 0% 0% 0%
Dec-2010 65% 0% 0% 0% 0% 0% 0% 0%
Dec-2011 59% 0% 0% 0% 0% 0% 0% 0%
Dec-2012 0% 0% 0% 0% 0% 0% 0% 0%
Dec-2013 0% 0% 0% 0% 0% 0% 0% 0%
Dec-2014 0% 0% 0% 0% 0% 0% 0% 0%
Dec-2015 0% 0% 0% 0% 0% 0% 0% 0%
Dec-2016 0% 0% 0% 0% 0% 0% 0% 0%
Dec-2017 0% 0% 0% 0% 0% 0% 0% 0%
Dec-2018 0% 0% 0% 0% 0% 0% 0% 0%
Dec-2019 0% 0% 0% 0% 0% 0% 0% 0%
Dec-2020 0% 0% 0% 0% 0% 0% 0% 0%
Dec-2021 0% 0% 0% 0% 0% 0% 0% 0%
Dec-2022 0% 0% 0% 0% 0% 0% 0% 0%
Dec-2023 0% 0% 0% 0% 0% 0% 0% 0%
Dec-2024 0% 0% 0% 0% 0% 0% 0% 0%
Dec-2025 0% 0% 0% 0% 0% 0% 0% 0%
Dec-2026 0% 0% 0% 0% 0% 0% 0% 0%
Dec-2027 0% 0% 0% 0% 0% 0% 0% 0%
Weighted Average 12.83 3.10 2.24 1.75 1.47 1.47 1.47 1.32
Life
Years(1)
- -----------------
(1) The weighted average life of the Offered Certificates is determined by (i)
multiplying the amount of each principal payment by the number of years from the
date of issuance to the related Payment Date, (ii) adding the results, and (iii)
dividing the sum by the initial respective Certificate Principal Balance for
such Class of Offered Certificates.
</TABLE>
<TABLE>
<CAPTION>
PERCENTAGE OF INITIAL CERTIFICATE PRINCIPAL BALANCE
Class A-3
Scenario
--------------------------------------------------------------------------------------- ---------------------------
Payment Date I II III IV V VI VII VIII
- -- --- -- - -- --- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percent 100% 100% 100% 100% 100% 100% 100% 100%
Dec-98 100% 100% 100% 100% 100% 100% 100% 100%
Dec-99 100% 100% 100% 100% 100% 100% 100% 100%
Dec-2000 100% 100% 100% 100% 46% 46% 46% 0%
Dec-2001 100% 100% 100% 0% 0% 0% 0% 0%
Dec-2002 100% 100% 14% 0% 0% 0% 0% 0%
Dec-2003 100% 100% 0% 0% 0% 0% 0% 0%
Dec-2004 100% 18% 0% 0% 0% 0% 0% 0%
Dec-2005 100% 0% 0% 0% 0% 0% 0% 0%
Dec-2006 100% 0% 0% 0% 0% 0% 0% 0%
Dec-2007 100% 0% 0% 0% 0% 0% 0% 0%
Dec-2008 100% 0% 0% 0% 0% 0% 0% 0%
Dec-2009 100% 0% 0% 0% 0% 0% 0% 0%
Dec-2010 100% 0% 0% 0% 0% 0% 0% 0%
Dec-2011 100% 0% 0% 0% 0% 0% 0% 0%
Dec-2012 42% 0% 0% 0% 0% 0% 0% 0%
Dec-2013 8% 0% 0% 0% 0% 0% 0% 0%
Dec-2014 0% 0% 0% 0% 0% 0% 0% 0%
Dec-2015 0% 0% 0% 0% 0% 0% 0% 0%
Dec-2016 0% 0% 0% 0% 0% 0% 0% 0%
Dec-2017 0% 0% 0% 0% 0% 0% 0% 0%
Dec-2018 0% 0% 0% 0% 0% 0% 0% 0%
Dec-2019 0% 0% 0% 0% 0% 0% 0% 0%
Dec-2020 0% 0% 0% 0% 0% 0% 0% 0%
Dec-2021 0% 0% 0% 0% 0% 0% 0% 0%
Dec-2022 0% 0% 0% 0% 0% 0% 0% 0%
Dec-2023 0% 0% 0% 0% 0% 0% 0% 0%
Dec-2024 0% 0% 0% 0% 0% 0% 0% 0%
Dec-2025 0% 0% 0% 0% 0% 0% 0% 0%
Dec-2026 0% 0% 0% 0% 0% 0% 0% 0%
Dec-2027 0% 0% 0% 0% 0% 0% 0% 0%
Weighted
Average 15.16 6.73 4.79 3.68 3.08 3.08 3.08 2.51
Life
Years(1)
Class A-4
Scenario
Payment Date I II III IV V VI VII VIII
Initial Percent - -- --- -- - -- --- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Dec-98 100% 100% 100% 100% 100% 100% 100% 100%
Dec-99 100% 100% 100% 100% 100% 100% 100% 100%
Dec-2000 100% 100% 100% 100% 100% 100% 100% 100%
Dec-2001 100% 100% 100% 100% 100% 100% 100% 54%
Dec-2002 100% 100% 100% 93% 47% 47% 47% 0%
Dec-2003 100% 100% 100% 17% 0% 0% 0% 0%
Dec-2004 100% 100% 45% 0% 0% 0% 0% 0%
Dec-2005 100% 100% 0% 0% 0% 0% 0% 0%
Dec-2006 100% 62% 0% 0% 0% 0% 0% 0%
Dec-2007 100% 21% 0% 0% 0% 0% 0% 0%
Dec-2008 100% 0% 0% 0% 0% 0% 0% 0%
Dec-2009 100% 0% 0% 0% 0% 0% 0% 0%
Dec-2010 100% 0% 0% 0% 0% 0% 0% 0%
Dec-2011 100% 0% 0% 0% 0% 0% 0% 0%
Dec-2012 100% 0% 0% 0% 0% 0% 0% 0%
Dec-2013 100% 0% 0% 0% 0% 0% 0% 0%
Dec-2014 100% 0% 0% 0% 0% 0% 0% 0%
Dec-2015 86% 0% 0% 0% 0% 0% 0% 0%
Dec-2016 67% 0% 0% 0% 0% 0% 0% 0%
Dec-2017 46% 0% 0% 0% 0% 0% 0% 0%
Dec-2018 24% 0% 0% 0% 0% 0% 0% 0%
Dec-2019 8% 0% 0% 0% 0% 0% 0% 0%
Dec-2020 0% 0% 0% 0% 0% 0% 0% 0%
Dec-2021 0% 0% 0% 0% 0% 0% 0% 0%
Dec-2022 0% 0% 0% 0% 0% 0% 0% 0%
Dec-2023 0% 0% 0% 0% 0% 0% 0% 0%
Dec-2024 0% 0% 0% 0% 0% 0% 0% 0%
Dec-2025 0% 0% 0% 0% 0% 0% 0% 0%
Dec-2026 0% 0% 0% 0% 0% 0% 0% 0%
Dec-2027 0% 0% 0% 0% 0% 0% 0% 0%
Weighted 0% 0% 0% 0% 0% 0% 0% 0%
Average
Life 18.83 8.33 5.95 4.57 4.01 4.01 4.01 3.24 --------------
Years(1)
(1) The weighted average life of the Offered Certificates is determined by (i)
multiplying the amount of each principal payment by the number of years from the
date of issuance to the related Payment Date, (ii) adding the results, and (iii)
dividing the sum by the initial respective Certificate Principal Balance for
such Class of Offered Certificates.
</TABLE>
<TABLE>
<CAPTION>
PERCENTAGE OF INITIAL CERTIFICATE PRINCIPAL BALANCE
Class A-5
Scenario
-------------------------------------------------------------------------
Payment Date I II III IV V VI VII VIII
- -- --- -- - -- --- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percent 100% 100% 100% 100% 100% 100% 100% 100%
Dec-98 100% 100% 100% 100% 100% 100% 100% 100%
Dec-99 100% 100% 100% 100% 100% 100% 100% 100%
Dec-2000 100% 100% 100% 100% 100% 100% 100% 100%
Dec-2001 100% 100% 100% 100% 100% 100% 100% 91%
Dec-2002 100% 100% 100% 100% 61% 61% 61% 0%
Dec-2003 100% 100% 100% 0% 0% 0% 0% 0%
Dec-2004 100% 100% 78% 0% 0% 0% 0% 0%
Dec-2005 100% 100% 0% 0% 0% 0% 0% 0%
Dec-2006 100% 100% 0% 0% 0% 0% 0% 0%
Dec-2007 100% 50% 0% 0% 0% 0% 0% 0%
Dec-2008 100% 0% 0% 0% 0% 0% 0% 0%
Dec-2009 100% 0% 0% 0% 0% 0% 0% 0%
Dec-2010 100% 0% 0% 0% 0% 0% 0% 0%
Dec-2011 100% 0% 0% 0% 0% 0% 0% 0%
Dec-2012 100% 0% 0% 0% 0% 0% 0% 0%
Dec-2013 100% 0% 0% 0% 0% 0% 0% 0%
Dec-2014 100% 0% 0% 0% 0% 0% 0% 0%
Dec-2015 100% 0% 0% 0% 0% 0% 0% 0%
Dec-2016 100% 0% 0% 0% 0% 0% 0% 0%
Dec-2017 100% 0% 0% 0% 0% 0% 0% 0%
Dec-2018 100% 0% 0% 0% 0% 0% 0% 0%
Dec-2019 66% 0% 0% 0% 0% 0% 0% 0%
Dec-2020 0% 0% 0% 0% 0% 0% 0% 0%
Dec-2021 0% 0% 0% 0% 0% 0% 0% 0%
Dec-2022 0% 0% 0% 0% 0% 0% 0% 0%
Dec-2023 0% 0% 0% 0% 0% 0% 0% 0%
Dec-2024 0% 0% 0% 0% 0% 0% 0% 0%
Dec-2025 0% 0% 0% 0% 0% 0% 0% 0%
Dec-2026 0% 0% 0% 0% 0% 0% 0% 0%
Dec-2027 0% 0% 0% 0% 0% 0% 0% 0%
Weighted
Average
Life 22.26 10.02 7.20 5.53 5.10 5.10 5.10 4.23
Years(1)
</TABLE>
<TABLE>
<CAPTION>
Class A-6
Scenario
Payment Date I II III IV V VI VII VIII
- -- --- -- - -- --- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percent 100% 100% 100% 100% 100% 100% 100% 100%
Dec-98 100% 100% 100% 100% 100% 100% 100% 100%
Dec-99 100% 100% 100% 100% 100% 100% 100% 100%
Dec-2000 100% 100% 100% 100% 100% 100% 100% 100%
Dec-2001 100% 100% 100% 100% 100% 100% 100% 100%
Dec-2002 100% 100% 100% 100% 100% 100% 100% 76%
Dec-2003 100% 100% 100% 84% 77% 77% 77% 43%
Dec-2004 100% 100% 100% 48% 48% 48% 48% 22%
Dec-2005 100% 100% 75% 28% 28% 28% 28% 10%
Dec-2006 100% 100% 32% 15% 15% 15% 15% 3%
Dec-2007 100% 100% 7% 7% 7% 7% 7% 0%
Dec-2008 100% 79% 2% 2% 2% 2% 2% 0%
Dec-2009 100% 46% 0% 0% 0% 0% 0% 0%
Dec-2010 100% 16% 0% 0% 0% 0% 0% 0%
Dec-2011 100% 0% 0% 0% 0% 0% 0% 0%
Dec-2012 100% 0% 0% 0% 0% 0% 0% 0%
Dec-2013 100% 0% 0% 0% 0% 0% 0% 0%
Dec-2014 100% 0% 0% 0% 0% 0% 0% 0%
Dec-2015 100% 0% 0% 0% 0% 0% 0% 0%
Dec-2016 100% 0% 0% 0% 0% 0% 0% 0%
Dec-2017 100% 0% 0% 0% 0% 0% 0% 0%
Dec-2018 100% 0% 0% 0% 0% 0% 0% 0%
Dec-2019 100% 0% 0% 0% 0% 0% 0% 0%
Dec-2020 99% 0% 0% 0% 0% 0% 0% 0%
Dec-2021 72% 0% 0% 0% 0% 0% 0% 0%
Dec-2022 42% 0% 0% 0% 0% 0% 0% 0%
Dec-2023 8% 0% 0% 0% 0% 0% 0% 0%
Dec-2024 0% 0% 0% 0% 0% 0% 0% 0%
Dec-2025 0% 0% 0% 0% 0% 0% 0% 0%
Dec-2026 0% 0% 0% 0% 0% 0% 0% 0%
Dec-2027 0% 0% 0% 0% 0% 0% 0% 0%
Weighted
Average
Life 24.71 11.93 8.71 7.37 7.31 7.31 7.31 6.09
Years(1)
- ----------------
(1) The weighted average life of the Offered Certificates is determined by (i)
multiplying the amount of each principal payment by the number of years from the
date of issuance to the related Payment Date, (ii) adding the results, and (iii)
dividing the sum by the initial respective Certificate Principal Balance for
such Class of Offered Certificates.
</TABLE>
<TABLE>
<CAPTION>
PERCENTAGE OF INITIAL CERTIFICATE PRINCIPAL BALANCE
Class A-7
Scenario
----------------------------------------------------------------------------
Payment Date I II III IV V VI VII VIII
- -- --- -- - -- --- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percent 100% 100% 100% 100% 100% 100% 100% 100%
Dec-98 100% 88% 78% 69% 61% 61% 61% 61%
Dec-99 100% 61% 43% 25% 10% 10% 10% 0%
Dec-2000 100% 38% 13% 0% 0% 0% 0% 0%
Dec-2001 100% 18% 0% 0% 0% 0% 0% 0%
Dec-2002 99% 0% 0% 0% 0% 0% 0% 0%
Dec-2003 95% 0% 0% 0% 0% 0% 0% 0%
Dec-2004 92% 0% 0% 0% 0% 0% 0% 0%
Dec-2005 87% 0% 0% 0% 0% 0% 0% 0%
Dec-2006 82% 0% 0% 0% 0% 0% 0% 0%
Dec-2007 77% 0% 0% 0% 0% 0% 0% 0%
Dec-2008 71% 0% 0% 0% 0% 0% 0% 0%
Dec-2009 65% 0% 0% 0% 0% 0% 0% 0%
Dec-2010 58% 0% 0% 0% 0% 0% 0% 0%
Dec-2011 51% 0% 0% 0% 0% 0% 0% 0%
Dec-2012 0% 0% 0% 0% 0% 0% 0% 0%
Dec-2013 0% 0% 0% 0% 0% 0% 0% 0%
Dec-2014 0% 0% 0% 0% 0% 0% 0% 0%
Dec-2015 0% 0% 0% 0% 0% 0% 0% 0%
Dec-2016 0% 0% 0% 0% 0% 0% 0% 0%
Dec-2017 0% 0% 0% 0% 0% 0% 0% 0%
Dec-2018 0% 0% 0% 0% 0% 0% 0% 0%
Dec-2019 0% 0% 0% 0% 0% 0% 0% 0%
Dec-2020 0% 0% 0% 0% 0% 0% 0% 0%
Dec-2021 0% 0% 0% 0% 0% 0% 0% 0%
Dec-2022 0% 0% 0% 0% 0% 0% 0% 0%
Dec-2023 0% 0% 0% 0% 0% 0% 0% 0%
Dec-2024 0% 0% 0% 0% 0% 0% 0% 0%
Dec-2025 0% 0% 0% 0% 0% 0% 0% 0%
Dec-2026 0% 0% 0% 0% 0% 0% 0% 0%
Dec-2027 0% 0% 0% 0% 0% 0% 0% 0%
Weighted
Average 12.43 2.60 1.88 1.48 1.25 1.25 1.25 1.15
Life
Years(1)
</TABLE>
<TABLE>
<CAPTION>
Class A-8
Scenario
Payment Date I II III IV V VI VII VIII
- -- --- -- - -- --- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percent 100% 100% 100% 100% 100% 100% 100% 100%
Dec-98 100% 100% 100% 100% 100% 100% 100% 100%
Dec-99 100% 100% 100% 100% 100% 100% 100% 94%
Dec-2000 100% 100% 100% 90% 69% 69% 69% 49%
Dec-2001 100% 100% 87% 60% 47% 47% 47% 32%
Dec-2002 100% 99% 64% 38% 30% 30% 30% 19%
Dec-2003 100% 80% 46% 21% 19% 19% 19% 10%
Dec-2004 100% 65% 31% 12% 12% 12% 12% 5%
Dec-2005 100% 51% 18% 7% 7% 7% 7% 3%
Dec-2006 100% 39% 8% 4% 4% 4% 4% 1%
Dec-2007 100% 29% 2% 2% 2% 2% 2% 0%
Dec-2008 100% 19% 1% 1% 1% 1% 1% 0%
Dec-2009 100% 11% 0% 0% 0% 0% 0% 0%
Dec-2010 100% 4% 0% 0% 0% 0% 0% 0%
Dec-2011 100% 0% 0% 0% 0% 0% 0% 0%
Dec-2012 68% 0% 0% 0% 0% 0% 0% 0%
Dec-2013 64% 0% 0% 0% 0% 0% 0% 0%
Dec-2014 59% 0% 0% 0% 0% 0% 0% 0%
Dec-2015 53% 0% 0% 0% 0% 0% 0% 0%
Dec-2016 47% 0% 0% 0% 0% 0% 0% 0%
Dec-2017 40% 0% 0% 0% 0% 0% 0% 0%
Dec-2018 35% 0% 0% 0% 0% 0% 0% 0%
Dec-2019 30% 0% 0% 0% 0% 0% 0% 0%
Dec-2020 24% 0% 0% 0% 0% 0% 0% 0%
Dec-2021 18% 0% 0% 0% 0% 0% 0% 0%
Dec-2022 10% 0% 0% 0% 0% 0% 0% 0%
Dec-2023 2% 0% 0% 0% 0% 0% 0% 0%
Dec-2024 0% 0% 0% 0% 0% 0% 0% 0%
Dec-2025 0% 0% 0% 0% 0% 0% 0% 0%
Dec-2026 0% 0% 0% 0% 0% 0% 0% 0%
Dec-2027 0% 0% 0% 0% 0% 0% 0% 0%
Weighted
Average 19.10 8.48 6.10 4.86 4.43 4.43 4.43 3.66
Life
Years(1)
- -----------------------------
(1) The weighted average life of the Offered Certificates is determined by (i)
multiplying the amount of each principal payment by the number of years from the
date of issuance to the related Payment Date, (ii) adding the results, and (iii)
dividing the sum by the initial respective Certificate Principal Balance for
such Class of Offered Certificates.
</TABLE>
<TABLE>
<CAPTION>
PERCENTAGE OF INITIAL CERTIFICATE PRINCIPAL BALANCE
Class A-9
Scenario
----------------------------------------------------------------------------------------------
Payment Date I II III IV V VI VII VIII
- -- --- -- - -- --- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percent 100% 100% 100% 100% 100% 100% 100% 100%
Dec-98 100% 100% 100% 100% 50% 0% 0% 0%
Dec-99 100% 100% 100% 100% 18% 0% 0% 0%
Dec-2000 100% 100% 100% 100% 8% 0% 0% 0%
Dec-2001 100% 100% 100% 100% 0% 0% 0% 0%
Dec-2002 100% 100% 100% 100% 0% 0% 0% 0%
Dec-2003 100% 100% 100% 100% 0% 0% 0% 0%
Dec-2004 100% 100% 100% 25% 0% 0% 0% 0%
Dec-2005 100% 100% 100% 0% 0% 0% 0% 0%
Dec-2006 100% 100% 100% 0% 0% 0% 0% 0%
Dec-2007 100% 100% 58% 0% 0% 0% 0% 0%
Dec-2008 100% 100% 0% 0% 0% 0% 0% 0%
Dec-2009 100% 100% 0% 0% 0% 0% 0% 0%
Dec-2010 100% 100% 0% 0% 0% 0% 0% 0%
Dec-2011 100% 56% 0% 0% 0% 0% 0% 0%
Dec-2012 100% 0% 0% 0% 0% 0% 0% 0%
Dec-2013 100% 0% 0% 0% 0% 0% 0% 0%
Dec-2014 100% 0% 0% 0% 0% 0% 0% 0%
Dec-2015 100% 0% 0% 0% 0% 0% 0% 0%
Dec-2016 100% 0% 0% 0% 0% 0% 0% 0%
Dec-2017 100% 0% 0% 0% 0% 0% 0% 0%
Dec-2018 100% 0% 0% 0% 0% 0% 0% 0%
Dec-2019 100% 0% 0% 0% 0% 0% 0% 0%
Dec-2020 100% 0% 0% 0% 0% 0% 0% 0%
Dec-2021 100% 0% 0% 0% 0% 0% 0% 0%
Dec-2022 100% 0% 0% 0% 0% 0% 0% 0%
Dec-2023 100% 0% 0% 0% 0% 0% 0% 0%
Dec-2024 0% 0% 0% 0% 0% 0% 0% 0%
Dec-2025 0% 0% 0% 0% 0% 0% 0% 0%
Dec-2026 0% 0% 0% 0% 0% 0% 0% 0%
Dec-2027 0% 0% 0% 0% 0% 0% 0% 0%
Weighted
Average 26.58 14.08 10.10 6.78 1.25 0.53 0.36 0.30 2
Life
Years(1)
</TABLE>
<TABLE>
<CAPTION>
Class A-10*
Scenario
Payment Date I II III IV V VI VII VIII
- -- --- -- - -- --- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percent 100% 100% 100% 100% 100% 100% 100% 100%
Dec-98 100% 100% 100% 100% 100% 95% 68% 3%
Dec-99 100% 100% 100% 100% 100% 81% 37% 0%
Dec-2000 100% 100% 100% 100% 100% 76% 29% 0%
Dec-2001 100% 100% 100% 100% 85% 63% 24% 0%
Dec-2002 100% 100% 100% 100% 73% 53% 19% 0%
Dec-2003 100% 100% 100% 100% 60% 43% 15% 0%
Dec-2004 100% 100% 100% 100% 49% 35% 12% 0%
Dec-2005 100% 100% 100% 87% 39% 28% 10% 0%
Dec-2006 100% 100% 100% 72% 31% 22% 7% 0%
Dec-2007 100% 100% 100% 58% 24% 16% 5% 0%
Dec-2008 100% 100% 93% 47% 18% 12% 3% 0%
Dec-2009 100% 100% 77% 37% 13% 8% 2% 0%
Dec-2010 100% 100% 62% 27% 8% 4% 0% 0%
Dec-2011 100% 100% 50% 19% 4% 1% 0% 0%
Dec-2012 100% 45% 17% 4% 0% 0% 0% 0%
Dec-2013 100% 37% 12% 2% 0% 0% 0% 0%
Dec-2014 100% 30% 9% 0% 0% 0% 0% 0%
Dec-2015 100% 24% 6% 0% 0% 0% 0% 0%
Dec-2016 100% 19% 3% 0% 0% 0% 0% 0%
Dec-2017 100% 14% 1% 0% 0% 0% 0% 0%
Dec-2018 100% 11% 0% 0% 0% 0% 0% 0%
Dec-2019 100% 8% 0% 0% 0% 0% 0% 0%
Dec-2020 100% 6% 0% 0% 0% 0% 0% 0%
Dec-2021 100% 4% 0% 0% 0% 0% 0% 0%
Dec-2022 100% 2% 0% 0% 0% 0% 0% 0%
Dec-2023 100% 0% 0% 0% 0% 0% 0% 0%
Dec-2024 97% 0% 0% 0% 0% 0% 0% 0%
Dec-2025 66% 0% 0% 0% 0% 0% 0% 0%
Dec-2026 30% 0% 0% 0% 0% 0% 0% 0%
Dec-2027 0% 0% 0% 0% 0% 0% 0% 0%
Weighted
Average 28.43 16.66 13.90 11.10 7.54 5.86 2.85 0.64
Life
Years(1)
- -----------------------------
(1) The weighted average life of the Offered Certificates is determined by (i)
multiplying the amount of each principal payment by the number of years from the
date of issuance to the related Payment Date, (ii) adding the results, and (iii)
dividing the sum by the initial respective Certificate Principal Balance for
such Class of Offered Certificates.
* The information regarding this Class reflects the experience of the Auction
Rate Certificates in the aggregate, without taking into account the special
procedures for allocating distributions of principal among individual Auction
Rate Certificates. As a result, it is unlikely that an Auction Rate Certificate
held by any particular Owner will reflect the experience shown in the table. See
"--Auction Rate Certificates" above.
</TABLE>
<TABLE>
<CAPTION>
PERCENTAGE OF INITIAL CERTIFICATE PRINCIPAL BALANCE
Class B
Scenario
----------------------------------------------------------------------------------------------------------------
Payment Date I II III IV V VI VII VIII
- -- --- -- - -- --- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percent 100% 100% 100% 100% 100% 100% 100% 100%
Dec-98 100% 100% 100% 100% 100% 100% 100% 100%
Dec-99 100% 100% 100% 100% 100% 100% 100% 100%
Dec-2000 100% 100% 100% 100% 100% 100% 100% 100%
Dec-2001 100% 100% 100% 83% 63% 56% 45% 21%
Dec-2002 100% 100% 87% 65% 45% 39% 26% 6%
Dec-2003 100% 100% 71% 50% 29% 22% 12% 0%
Dec-2004 100% 87% 59% 38% 16% 11% 2% 0%
Dec-2005 100% 76% 48% 26% 7% 3% 0% 0%
Dec-2006 100% 66% 39% 16% 1% 0% 0% 0%
Dec-2007 100% 57% 29% 9% 0% 0% 0% 0%
Dec-2008 100% 49% 21% 3% 0% 0% 0% 0%
Dec-2009 100% 42% 14% 0% 0% 0% 0% 0%
Dec-2010 100% 34% 8% 0% 0% 0% 0% 0%
Dec-2011 100% 27% 3% 0% 0% 0% 0% 0%
Dec-2012 90% 2% 0% 0% 0% 0% 0% 0%
Dec-2013 86% 0% 0% 0% 0% 0% 0% 0%
Dec-2014 82% 0% 0% 0% 0% 0% 0% 0%
Dec-2015 77% 0% 0% 0% 0% 0% 0% 0%
Dec-2016 72% 0% 0% 0% 0% 0% 0% 0%
Dec-2017 66% 0% 0% 0% 0% 0% 0% 0%
Dec-2018 62% 0% 0% 0% 0% 0% 0% 0%
Dec-2019 58% 0% 0% 0% 0% 0% 0% 0%
Dec-2020 53% 0% 0% 0% 0% 0% 0% 0%
Dec-2021 48% 0% 0% 0% 0% 0% 0% 0%
Dec-2022 41% 0% 0% 0% 0% 0% 0% 0%
Dec-2023 32% 0% 0% 0% 0% 0% 0% 0%
Dec-2024 21% 0% 0% 0% 0% 0% 0% 0%
Dec-2025 10% 0% 0% 0% 0% 0% 0% 0%
Dec-2026 0% 0% 0% 0% 0% 0% 0% 0%
Dec-2027 0% 0% 0% 0% 0% 0% 0% 0%
1/15/28 Weighted
Average 22.52 10.95 8.31 6.42 5.05 4.72 4.21 3.57
Life
Years(1)
- ---------------
(1) The weighted average life of the Offered Certificates is determined by (i)
multiplying the amount of each principal payment by the number of years from the
date of issuance to the related Payment Date, (ii) adding the results, and (iii)
dividing the sum by the initial respective Certificate Principal Balance for
such Class of Offered Certificates.
</TABLE>
PAYMENT LAG FEATURE OF FIXED RATE CERTIFICATES
Pursuant to the Pooling and Servicing Agreement, interest on the Fixed
Rate Certificates (other than the Class A-1 Certificates, for which the Accrual
Period is Payment Date to Payment Date) generally accrues during the calendar
month immediately preceding the month in which the related Payment Date occurs.
Payment Dates occur on the fifteenth day of each month (or, if such day is not a
Business Day, on the next Business day). Thus, the effective yield to the Owners
of the Fixed Rate Certificates (other than the Class A-1 Certificates) will be
below that otherwise produced by the related Pass-Through Rate because
distributions to Owners of the Fixed Rate Certificates (other than the Class A-1
Certificates) in respect of any given month will not be made until on or after
the 15th day of the following month.
FORMATION OF THE TRUST AND TRUST PROPERTY
ContiMortgage Home Equity Loan Trust 1997-5 (the "Trust") will be
created and established pursuant to the Pooling and Servicing Agreement. The
Depositor will convey without recourse the Home Equity Loans to the Trust and
the Trust will issue the Trust Certificates. The property of the Trust will
include (a) the Home Equity Loans (other than payments received on the Home
Equity Loans on or prior to the Cut-Off Date) together with the related Home
Equity Loan documents and the Seller's interest in any Property which secures a
Home Equity Loan and all payments thereon and proceeds of the conversion,
voluntary or involuntary, of the foregoing, (b) such amounts as may be held by
the Trustee in the Certificate Account and any other accounts held by the
Trustee for the benefit of the Certificateholders and the Certificate Insurer
together with investment earnings on such amounts and such amounts as may be
held in the name of the Trustee in the Principal and Interest Account, if any,
exclusive of investment earnings thereon (except as otherwise provided) whether
in the form of cash, instruments, securities or other properties, (c) the
Certificate Insurance Policy and (d) proceeds of all the foregoing (including,
but not by way of limitation, all proceeds of any hazard insurance and title
insurance policies relating to the Home Equity Loans, cash proceeds, accounts,
accounts receivable, notes, drafts, acceptances, chattel paper, checks, deposit
accounts, rights to payment of any and every kind, and other forms of
obligations and receivables which at any time constitute all or part of or are
included in the proceeds of any of the foregoing) to pay the Trust Certificates
as specified in the Pooling and Servicing Agreement (collectively, the "Trust
Estate").
The Offered Certificates will not represent an interest in or an
obligation of, nor will the Home Equity Loans be guaranteed by, the Depositor,
the Sellers, the Servicer, the Certificate Insurer or any of their affiliates.
Prior to its formation the Trust will have had no assets or
obligations. Upon formation, the Trust will not engage in any business activity
other than acquiring, holding and collecting payments on the Home Equity Loans,
issuing the Trust Certificates, and distributing payments thereon. The Trust
will not acquire any receivables or assets other than the Home Equity Loans and
the rights appurtenant thereto and will not have any need for additional capital
resources. To the extent that borrowers make scheduled payments under the Home
Equity Loans, the Trust will have sufficient liquidity to make interest
distributions on the Trust Certificates. As the Trust does not have any
operating history and will not engage in any business activity other than
issuing the Trust Certificates and making distributions thereon, there has not
been included any historical or pro forma ratio of earnings to fixed charges
with respect to the Trust.
FORMATION OF THE GRANTOR TRUST AND GRANTOR TRUST PROPERTY
ContiMortgage Grantor Trust 1997-A will be created and established
pursuant to the Grantor Trust Agreement. The Depositor will deposit into the
Grantor Trust without recourse $675,000,000 of Class A-2 Fixed Certificates
issued by the Trust, and the Grantor Trust will issue the Class A-2 Floating
Certificates.
The property of the Grantor Trust will include (a) the Class A-2 Fixed
Certificates issued by the Trust and all payments therein and proceeds of the
conversion, voluntary or involuntary of such Certificates, (b) such amounts as
may be held by the Grantor Trustee in the Grantor Trust Account and any other
accounts held by the Grantor Trustee for the benefit of the Owners of the Class
A-2 Floating Certificates and the Certificate Insurer, (c) the rights of the
Grantor Trustee under the related Certificate Insurance Policy, (d) the Swap
Agreement and all payments received thereunder and (e) proceeds of all of the
foregoing (including, but not by way of limitation, cash proceeds, accounts
receivable, notes, drafts, acceptances, chattel paper, checks, deposit accounts,
rights to payments of any and every kind and other forms of obligations and
receivables which at any time constitute all or part of or are included in the
proceeds of any of the foregoing) to pay the Class A-2 Floating Certificates and
to make payments to the Swap Counterparty as specified in the Grantor Trust
Agreement.
Prior to its formation the Grantor Trust will have had no assets or
obligations. Upon formation, the Grantor Trust will not engage in any business
activity other than acquiring, holding and collecting payments on the Class A-2
Fixed Certificates, receiving and making payments under the Swap Agreement,
issuing the Class A-2 Floating Certificates and distributing payments thereon.
The Grantor Trust will not acquire any receivables or assets other than the
Class A-2 Fixed Certificates, the Swap Agreement and the rights appurtenant
thereto and will not have any need for additional capital resources. To the
extent that payments are made on the Class A-2 Fixed Certificates, and payments
are received by the Grantor Trustee as required under the Swap Agreement or
corresponding amounts are received from the Certificate Insurer, the Grantor
Trust will have sufficient liquidity to make interest distributions on the Class
A-2 Floating Certificates. Principal distributions on the Class A-2 Floating
Certificates are not insured by the Certificate Insurance Policy issued with
respect to the Class A-2 Floating Certificates, although the principal
distributions on the Class A-2 Fixed Certificates are insured by the Certificate
Insurance Policy related to the Trust. As the Grantor Trust does not have any
operating history and will not engage in a business activity other than as
described above, there has not been included any historical or pro forma ratio
of earnings to fixed charges with respect to the Grantor Trust.
ADDITIONAL INFORMATION
The description in this Prospectus Supplement of the Home Equity Loans
and the Properties is based upon the pool as constituted at the close of
business on the Statistical Calculation Date. Prior to the issuance of the
Offered Certificates, Home Equity Loans may be removed from the pool as a result
of incomplete documentation or non-compliance with representations and
warranties set forth in the Pooling and Servicing Agreement, if the Depositor
deems such removal necessary or appropriate. A limited number of other Home
Equity Loans may be included in the pool prior to the issuance of the
Certificates.
A current report on Form 8-K will be available to purchasers of the
Offered Certificates and will be filed and incorporated by reference to the
Registration Statement together with the Pooling and Servicing Agreement with
the Securities and Exchange Commission within fifteen days after the initial
issuance of the Offered Certificates. In the event Home Equity Loans are removed
from or added to the pool as set forth in the preceding paragraph, such removal
or addition will be noted in a current report on Form 8-K. A description of the
pool of Home Equity Loans as of the Closing Date will be filed in a current
report on Form 8-K within fifteen days after the initial issuance of the Offered
Certificates.
DESCRIPTION OF THE OFFERED CERTIFICATES
General Each Trust Certificate will represent certain undivided,
fractional ownership interests in the Trust Estate created and held pursuant to
the Pooling and Servicing Agreement and each Class A-2 Floating Certificate will
represent certain undivided, fractional ownership interests in the Grantor Trust
Estate created and held pursuant to the Grantor Trust Agreement, in each case,
subject to the limits and the priority of distribution described therein.
Payment Dates
On each Payment Date, the Owners of each Class of Class A Trust and
Class B Certificates will be entitled to receive, from amounts then on deposit
in the certificate account established and maintained by the Trustee in
accordance with the Pooling and Servicing Agreement (the "Certificate Account")
and until the Certificate Principal Balance (or Notional Amount in the case of
the Class A-11 IO Certificates) of such Class of Class A Trust and Class B
Certificates is reduced to zero, and to the extent funds are available therefor,
the related Current Interest, any Interest Carry Forward Amount and the portion
of the Principal Distribution Amount, if any, allocated therefor as of such
Payment Date, allocated among the Classes of Class A Trust and Class B
Certificates as described below. Distributions will be made in immediately
available funds to Owners of Class A Trust and Class B Certificates by wire
transfer or otherwise, to the account of such Owner at a domestic bank or other
entity having appropriate facilities therefor, if such Owner has so notified the
Trustee, or by check mailed to the address of the person entitled thereto as it
appears on the register (the "Register") maintained by the Trustee as registrar
(the "Registrar"). Beneficial Owners may experience some delay in the receipt of
their payments due to the operations of DTC. See "Risk Factors-Book Entry
Registration" in the Prospectus and "Description of the Offered
Certificates-Book Entry Registration of the Offered Certificates" herein and
"Description of the Certificates-Book Entry Registration" in the Prospectus.
On each Payment Date, the Owners of the Class A-2 Floating
Certificates will be entitled to receive, from amounts then on deposit in the
account established and maintained by the Grantor Trustee in accordance with the
Grantor Trust Agreement (the "Grantor Trust Account"), all distributions of
principal received by the Grantor Trust on such Payment Date with respect to the
Class A-2 Fixed Certificates and interest on the Certificate Principal Balance
of the Class A-2 Floating Certificates at the Class A-2 Floating Pass-Through
Rate.
Each of the Pooling and Servicing Agreement and the Grantor Trust
Agreement will provide that an Owner, upon receiving the final distribution on
such Owner's Certificate, will be required to send such Certificate to the
Trustee.
Except with respect to the Auction Rate Certificates, each Owner of
record of the related Class of the Offered Certificates will be entitled to
receive such Owner's Percentage Interest in the amounts due such Class on such
Payment Date. The "Percentage Interest" of an Offered Certificate as of any date
of determination will be equal to the percentage obtained by dividing the
principal balance of such Certificate as of the Cut-Off Date by the Certificate
Principal Balance for the related Class of the Offered Certificates as of the
Cut-Off Date. Distributions of interest on the Auction Rate Certificates will be
allocated among the Owners thereof in accordance with their Percentage
Interests. Distributions of principal, however, will be made in accordance with
the Auction Procedures set forth in Annex I hereto.
DISTRIBUTIONS
Upon receipt, the Trustee will be required to deposit into the
Certificate Account with respect to the Home Equity Loans (i) the total of the
principal and interest collections on the Home Equity Loans, including any Net
Liquidation Proceeds, remitted by the Servicer, together with any Substitution
Amount and any Loan Purchase Price amount and Insurance Proceeds and (ii) the
proceeds of any liquidation of the Trust Estate.
The Pooling and Servicing Agreement establishes a pass-through rate on
each Class of the Class A Trust and Class B Certificates and the Grantor Trust
Agreement establishes a pass-through rate on the Class A-2 Floating Certificates
(each, a "Pass-Through Rate") as set forth in the Summary of Terms herein.
On each Payment Date, the Trustee is required to make the following
disbursements and transfers from moneys then on deposit in the Certificate
Account as specified below in the following order of priority of each such
transfer and disbursement with respect to interest and principal:
Interest: On each Payment Date the Interest Remittance Amount (plus,
in the case of the Class A Trust Certificates, the interest component of any
Insured Payment which is available only for the payment of the amount described
in SECOND, below) will be distributed in the following order of priority:
FIRST, concurrently, (a) to the Trustee, the Trustee Fee,
(b) to the Certificate Insurer, the Premium Amount, (c) to the
Auction Agent, the Auction Agent Fee, and (d) to the
Broker-Dealer, the Broker-Dealer Fee;
SECOND, to the Owners of the Class A Trust Certificates, the related
Current Interest plus the Interest Carry Forward Amount with respect
to each Class of Class A Trust Certificates without any priority among
such Class A Trust Certificates; PROVIDED, that if the Interest Amount
Available plus the interest component of any Insured Payment is not
sufficient to make a full distribution of interest with respect to all
Classes of the Class A Trust Certificates, such amount will be
distributed among the outstanding Classes of Class A Trust
Certificates pro rata based on the aggregate amount of interest
due on each such Class, and any shortfall will be carried forward with
accrued interest;
THIRD, to the extent of the Interest Amount Available then remaining,
to the Owners of the Class B Certificates, the related Current
Interest; and
FOURTH, the Monthly Excess Interest Amount shall be applied
as described under "Credit Enhancement -- Application of Monthly
Excess Cashflow Amount."
On each Payment Date, interest received by the Grantor Trust as Owner
of the Class A-2 Fixed Certificates will be paid to the Swap Counterparty under
the Swap Agreement in exchange for interest due on the Class A-2 Floating
Certificate at the Class A-2 Floating Pass-Through Rate. The interest received
by the Grantor Trust from the Swap Counterparty under the Swap Agreement plus
the interest component of any related Insured Payment will be distributed to the
Owners of the Class A-2 Floating Certificates. At all times the outstanding
Certificate Principal Balance of the Class A-2 Floating Certificates will equal
the outstanding Certificates Principal Balance of the Class A-2 Fixed
Certificates.
Principal: Prior to the Stepdown Date. On each Payment Date before the
Stepdown Date, the Owners of the Class A Trust Certificates (other than the
Class A-11 IO Certificates) will be entitled to receive payment of 100% of the
Principal Distribution Amount together with the principal component of any
Insured Payment for such Payment Date as follows: (i) to the Class A-1
Certificates until the Certificate Principal Balances thereof have been reduced
to zero, (ii) PRO RATA between the Fixed Rate PAC Group and the Floating Rate
PAC Group based on the outstanding aggregate Certificate Principal Balance of
each Group, sequentially in the order of their numerical Class designations
within each Group (beginning with the Class A-2 Fixed and Class A-7
Certificates, respectively), in an amount up to the amount necessary to reduce
the respective Certificate Principal Balances thereof to their respective
Planned Principal Balances for such Payment Date; (iii) sequentially, to the
Class A-9 and Class A-10 Certificates, in that order, until the respective
Certificate Principal Balances thereof are reduced to zero; and (iv) to the PAC
Certificates as provided in clause (i), but without regard to the Planned
Principal Balances and until the respective Certificate Principal Balances
thereof are reduced to zero.
The final Payment Date for the Class A-1 Certificates will be December
15, 1998, at which time the remaining Certificate Principal Balance, if any, of
the Class A-1 Certificates will be paid in full. If the Principal Remittance
Amount for such Payment Date is not sufficient to pay in full the remaining
Certificate Principal Balance of the Class A-1 Certificates, a draw will be made
on the related Certificate Insurance Policy in the amount of such shortfall.
Prior to the Stepdown Date, the Class B Certificates will not be
entitled to any distribution of principal (unless the Class A Trust Certificate
Principal Balance has been reduced to zero).
On and After the Stepdown Date. On each Payment Date on or after the
Stepdown Date, the Owners of all Classes of the Class A Trust Certificates
(other than the Class A-11 IO Certificates) and Class B Certificates will be
entitled to receive payments of principal, in the order of priority, in the
amounts set forth below and to the extent of the Principal Distribution Amount
(plus, in the case of the Class A Trust Certificates (other than the Class A-11
IO Certificates), the principal component of any Insured Payment) as follows:
FIRST, the lesser of (x) the Principal Distribution Amount together
with the principal component of any Insured Payment and (y) the Class
A Principal Distribution Amount shall be distributed to the Owners of
the Class A Trust Certificates (other than the Class A-11 IO
Certificates) as follows: (i) PRO RATA between the Fixed Rate PAC
Group and the Floating Rate PAC Group based on the outstanding
aggregate Certificate Principal Balance of each Group, sequentially in
the order of their numerical Class designations within each Group
(beginning with the Class A-2 Fixed and Class A-7 Certificates,
respectively), in an amount up to the amount necessary to reduce the
respective Certificate Principal Balances thereof to their respective
Planned Principal Balances for such Payment Date; (ii) sequentially,
to the Class A-9 and Class A-10 Certificates, in that order, until the
respective Certificate Principal Balances thereof are reduced to zero;
and (iii) to the PAC Certificates as provided in clause (i), but
without regard to the Planned Principal Balances and until the
respective Certificate Principal Balances thereof are reduced to zero;
SECOND, the lesser of (x) the excess of (i) the Principal Distribution
Amount over (ii) the amount distributed to the Owners of the Class A
Trust Certificates in clause FIRST above and (y) the Class B Principal
Distribution Amount shall be distributed to the Owners of the Class B
Certificates, until the related Certificate Principal Balance thereof
has been reduced to zero; and
THIRD, any amount of the Principal Remittance Amount remaining after
making all of the distributions in clauses First and SECOND above
shall be included as part of the Monthly Excess Cashflow Amount as
described under "Credit Enhancement -- Application of Monthly Excess
Cashflow Amounts" herein.
On each Payment Date, all principal payments received by the Grantor
Trust as Owner of the Class A-2 Fixed Certificates will be distributed to the
Owners of the Class A-2 Floating Certificates as payments of principal of the
Class A-2 Floating Certificates.
The PAC Certificates are entitled to receive distributions in
reduction of their Certificate Principal Balances in accordance with the
respective Planned Principal Balances set forth in the Planned Principal Balance
Schedule set forth in Annex II hereof. If the amount available for distributions
of principal of the Class A Trust Certificates (other than the Class A-11 IO
Certificates) exceeds the amount necessary to reduce the Certificate Principal
Balance of the applicable Class of PAC Certificates to its Planned Principal
Balance on a Payment Date, such excess will be distributed sequentially to the
Companion Certificates. However, if the amount available for distributions of
principal of the Class A Trust Certificates (other than the Class A-11 IO
Certificates) is less than the amount necessary to reduce the Certificate
Principal Balance of the applicable Class of PAC Certificates to its Planned
Principal Balance on a Payment Date, the Companion Certificates will not receive
any distributions of principal on such Payment Date and on any future Payment
Date until the Certificate Principal Balance of the applicable Class of PAC
Certificates is reduced to its Planned Principal Balance for the applicable
Payment Date.
Notwithstanding the foregoing, on any Payment Date on which the
Certificate Principal Balance of the Subordinate Certificates has been reduced
to zero and on or after which a Certificate Insurer Default (as defined herein)
has occurred and is continuing, distributions of principal of the Class A Trust
Certificates (other than the Class A-11 IO Certificates) will be made on a pro
rata basis without regard to any Planned Principal Balances or the order of
priority described above.
The Trustee or Paying Agent or Grantor Trustee, as the case may be,
shall (i) receive as attorney-in-fact of each Owner of Class A Certificates any
Insured Payment from the Certificate Insurer and (ii) disburse the same to each
Owner of Class A Certificates. The Pooling and Servicing Agreement and the
Grantor Trust Agreement will provide that to the extent the Certificate Insurer
makes Insured Payments, either directly or indirectly (as by paying through the
Trustee or Paying Agent or Grantor Trustee, as the case may be,), to the Owners
of such Class A Certificates, if any, the Certificate Insurer will be subrogated
to the rights of such Owners of Class A Certificates with respect to such
Insured Payments, and shall receive reimbursement for such Insured Payments as
provided in the Pooling and Servicing Agreement and the Grantor Trust Agreement,
but only from the sources and in the manner provided in the Pooling and
Servicing Agreement for the payment of amounts distributable to Owners of Class
A Certificates, if any; such subrogation and reimbursement will have no effect
on the Certificate Insurer's obligations under the Certificate Insurance Policy.
Each Owner of a Class A Certificate will be required promptly to
notify the Trustee or the Grantor Trustee, as the case may be, in writing upon
the receipt of a court order relating to a Preference Amount and will be
required to enclose a copy of such order with such notice to the Trustee or the
Grantor Trustee.
CALCULATION OF LIBOR
On each LIBOR Determination Date (as defined below), the Trustee will
determine LIBOR for the next Accrual Period for each Class of the Floating Rate
Certificates.
"LIBOR" means, as of any LIBOR Determination Date, the rate for
deposits in United States dollars for a period equal to the relevant Accrual
Period (commencing on the first day of such Accrual Period) which appears in the
Telerate Page 3750 as of 11:00 a.m., London time, on such date. If such rate
does not appear on Telerate Page 3750, the rate for that day will be determined
on the basis of the rates at which deposits in United States dollars are offered
by the Reference Banks at approximately 11:00 a.m., London time, on that day to
prime banks in the London interbank market for a period equal to the relevant
Accrual Period (commencing on the first day of such Accrual Period). The Trustee
will request the principal London office of each of the Reference Banks to
provide a quotation of its rate. If at least two such quotations are provided,
the rate for that day will be the arithmetic mean of the quotations. If fewer
than two quotations are provided as requested, the rate for that day will be the
arithmetic mean of the rates quoted by major banks in New York City, selected by
the Servicer, at approximately 11:00 a.m., New York City time, on that day for
loans in United States dollars to leading European banks for a period equal to
the relevant Accrual Period (commencing on the first day of such Accrual
Period).
"LIBOR Determination Date" means, with respect to any Accrual Period,
the first London business day preceding the commencement of such Accrual Period.
For purposes of determining LIBOR, a "London business day" is any day on which
dealings in deposits of United States dollars are transacted in the London
interbank market.
"Telerate Page 3750" means the display page currently so designated on
the Dow Jones Telerate Service (or such other page as may replace that page on
that service for the purpose of displaying comparable rates or prices) and
"Reference Banks" means leading banks selected by the Trustee and engaged in
transactions in Eurodollar deposits in the international Eurocurrency market.
BOOK-ENTRY REGISTRATION OF THE OFFERED CERTIFICATES
The Offered Certificates will be book-entry Certificates (the
"Book-Entry Certificates"). Persons acquiring beneficial ownership interests in
such Book-Entry Certificates ("Beneficial Owners") may elect to hold their
Book-Entry Certificates directly through DTC in the United States, or Cedel or
Euroclear (in Europe) if they are participants of such systems ("Participants")
or indirectly through organizations which are Participants. The Book-Entry
Certificates will be issued in one or more certificates per class of Offered
Certificates which in the aggregate equal the principal balance of such Offered
Certificates and will initially be registered in the name of Cede, the nominee
of DTC. Cedel and Euroclear will hold omnibus positions on behalf of their
Participants through customers' securities accounts in Cedel's and Euroclear's
names on the books of their respective depositaries which in turn will hold such
positions in customers' securities accounts in the depositaries' names on the
books of DTC. Citibank will act as depositary for Cedel and Chase will act as
depositary for Euroclear (in such capacities, individually the "Relevant
Depositary" and collectively the "European Depositaries"). Investors may hold
such beneficial interests in the Book-Entry Certificates in minimum
denominations representing principal amounts of (a) $1,000 and in integral
multiples in excess thereof in the case of the Offered Certificates, other than
the Auction Rate Certificates, and (b) $25,000 and integral multiples thereof,
in the case of the Auction Rate Certificates. Except as described below, no
Beneficial Owner will be entitled to receive a physical certificate representing
such Certificate (a "Definitive Certificate"). Unless and until definitive
Certificates are issued, it is anticipated that the only "Owner" of such
Book-Entry Certificates will be Cede, as nominee of DTC. Beneficial Owners will
not be Owners as that term is used in the Pooling and Servicing Agreement.
Beneficial Owners are only permitted to exercise their rights indirectly through
Participants and DTC.
The Beneficial Owner's ownership of a Book-Entry Certificate will be
recorded on the records of the brokerage firm, bank, thrift institution or other
financial intermediary (each, a "Financial Intermediary") that maintains the
Beneficial Owner's account for such purpose. In turn, the Financial
Intermediary's ownership of such Book-Entry Certificate will be recorded on the
records of DTC (or of a participating firm that acts as agent for the Financial
Intermediary, whose interest will in turn be recorded on the records of DTC, if
the Beneficial Owner's Financial Intermediary is not a DTC Participant, and on
the records of Cedel or Euroclear, as appropriate).
Beneficial Owners will receive all distributions of principal of, and
interest on, the Book-Entry Certificates from the Trustee through DTC and DTC
Participants. While such Certificates are outstanding (except under the
circumstances described below), under the rules, regulations and procedures
creating and affecting DTC and its operations (the "Rules"), DTC is required to
make book-entry transfers among Participants on whose behalf it acts with
respect to such Certificates and is required to receive and transmit
distributions of principal of, and interest on, such Certificates. Participants
and indirect participants with whom Beneficial Owners have accounts with respect
to Book-Entry Certificates are similarly required to make book-entry transfers
and receive and transmit such distributions on behalf of their respective
Beneficial Owners. Accordingly, although Beneficial Owners will not possess
certificates, the Rules provide a mechanism by which Beneficial Owners will
receive distributions and will be able to transfer their interest.
Beneficial Owners will not receive or be entitled to receive
certificates representing their respective interests in the Offered
Certificates, except under the limited circumstances described below. Unless and
until Definitive Certificates are issued, Beneficial Owners who are not
Participants may transfer ownership of Offered Certificates only through
Participants and indirect participants by instructing such Participants and
indirect participants to transfer such Offered Certificates, by book-entry
transfer, through DTC for the account of the purchasers of such Offered
Certificates, which account is maintained with their respective Participants.
Under the Rules and in accordance with DTC's normal procedures, transfers of
ownership of such Offered Certificates will be executed through DTC and the
accounts of the respective Participants at DTC will be debited and credited.
Similarly, the Participants and indirect participants will make debits or
credits, as the case may be, on their records on behalf of the selling and
purchasing Beneficial Owners.
Because of time zone differences, credits of securities received in
Cedel or Euroclear as a result of a transaction with a Participant will be made
during subsequent securities settlement processing and dated the business day
following the DTC settlement date. Such credits or any transactions in such
securities settled during such processing will be reported to the relevant
Euroclear or Cedel Participants on such business day. Cash received in Cedel or
Euroclear as a result of sales of securities by or through a Cedel Participant
(as defined below) or Euroclear Participant (as defined below) to a DTC
Participant will be received with value on the DTC settlement date but will be
available in the relevant Cedel or Euroclear cash account only as of the
business day following settlements in DTC. For information with respect to tax
documentation procedures relating to the Certificates, see "Certain Federal
Income Tax Consequences -- Taxation of Certain Foreign Investors" and "-- Backup
Withholding" in the Prospectus and "Global Clearance, Settlement and Tax
Documentation Procedures-Certain U.S. Federal Income Tax Documentation
Requirements" in Annex III hereto.
Transfers between Participants will occur in accordance with DTC
rules. Transfers between Cedel Participants and Euroclear Participants will
occur in accordance with their respective rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through Cedel
Participants or Euroclear Participants, on the other, will be effected in DTC in
accordance with DTC rules on behalf of the relevant European international
clearing system by the Relevant Depositary; however, such cross market
transactions will require delivery of instructions to the relevant European
international clearing system by the counterparty in such system in accordance
with its rules and procedures and within its established deadlines (European
time). The relevant European international clearing system will, if the
transaction meets its settlement requirements, deliver instructions to the
Relevant Depositary to take action to effect final settlement on its behalf by
delivering or receiving securities in DTC, and making or receiving payment in
accordance with normal procedures for same day funds settlement applicable to
DTC. Cedel Participants and Euroclear Participants may not deliver instructions
directly to the European Depositaries.
DTC, which is a New York-chartered limited purpose trust company,
performs services for its Participants ("DTC Participants"), some of which
(and/or their representatives) own DTC. In accordance with its normal
procedures, DTC is expected to record the positions held by each DTC Participant
in the Book-Entry Certificates, whether held for its own account or as a nominee
for another person. In general, beneficial ownership of Book-Entry Certificates
will be subject to the rules, regulations and procedures governing DTC and DTC
Participants as in effect from time to time.
Cedel Bank, S.A. was incorporated in 1970 as a limited company under
Luxembourg law. Cedel is owned by banks, securities dealers and financial
institutions, and currently has about 100 shareholders, including United States
financial institutions or their subsidiaries. No single entity may own more than
five percent of Cedel's stock.
Cedel is registered as a bank in Luxembourg, and as such is subject to
regulation by the Institut Monetaire Luxembourgeois, "IML," the Luxembourg
Monetary Authority, which supervises Luxembourg banks.
Cedel holds securities for its participant organizations ("Cedel
Participants and facilitates the clearance and settlement of securities
transactions between Cedel Participants through electronic book- entry changes
in accounts of Cedel Participants, thereby eliminating the need for physical
movement of certificates. Transactions may be settled in Cedel in any of 28
currencies, including United States dollars. Cedel provides to its Cedel
Participants, among other things, services for safekeeping, administration,
clearance and settlement of internationally traded securities and securities
lending and borrowing. Cedel interfaces with domestic markets in several
countries. As a professional depository, Cedel is subject to regulation by the
Luxembourg Monetary Institute. Cedel Participants are recognized financial
institutions around the world, including underwriters, securities brokers and
dealers, banks, trust companies, clearing corporations and certain other
organizations. Indirect access to Cedel is also available to others, such as
banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a Cedel Participant, either directly or indirectly.
Euroclear was created in 1968 to hold securities for participants of
Euroclear ("Euroclear Participants") and to clear and settle transactions
between Euroclear Participants through simultaneous electronic book-entry
delivery against payment, thereby eliminating the need for physical movement of
certificates and any risk from lack of simultaneous transfers of securities and
cash. Transactions may now be settled in any of 32 currencies, including United
States dollars. Euroclear includes various other services, including securities
lending and borrowing and interfaces with domestic markets in several countries
generally similar to the arrangements for cross-market transfers with DTC
described above. Euroclear is operated by the Brussels, Belgium office of Morgan
Guaranty Trust Company of New York (the "Euroclear Operator"), under contract
with Euroclear Clearance Systems S.C., a Belgian cooperative corporation (the
"Cooperative"). All operations are conducted by the Euroclear Operator, and all
Euroclear Securities clearance accounts and Euroclear cash accounts are accounts
with the Euroclear Operator, not the Cooperative. The Cooperative establishes
policy for Euroclear on behalf of Euroclear Participants. Euroclear Participants
include banks (including central banks), securities brokers and dealers and
other professional financial intermediaries. Indirect access to Euroclear is
also available to other firms that clear through or maintain a custodial
relationship with a Euroclear Participant, either directly or indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. As such, it is
regulated and examined by the Board of Governors of the Federal Reserve System
and the New York State Banking Department, as well as the Belgian Banking
Commission.
Securities clearance accounts and cash accounts with the Euroclear
Operator are governed by the Terms and Conditions Governing Use of Euroclear and
the related Operating Procedures of the Euroclear System and applicable Belgian
law (collectively, the "Terms and Conditions"). The Terms and Conditions govern
transfers of securities and cash within Euroclear, withdrawals of securities and
cash from Euroclear, and receipts of payments with respect to securities in
Euroclear. All securities in Euroclear are held on a fungible basis without
attribution of specific certificates to specific securities clearance accounts.
The Euroclear Operator acts under the Terms and Conditions only on behalf of
Euroclear Participants, and has no record of or relationship with persons
holding through Euroclear Participants.
Distributions on the Book-Entry Certificates will be made on each
Payment Date by the Trustee to DTC. DTC will be responsible for crediting the
amount of such payments to the accounts of the applicable DTC Participants in
accordance with DTC's normal procedures. Each DTC Participant will be
responsible for disbursing such payment to the Beneficial Owners of the
Book-Entry Certificates that it represents and to each Financial Intermediary
for which it acts as agent. Each such Financial Intermediary will be responsible
for disbursing funds to the Beneficial Owners of the Book-Entry Certificates
that it represents.
Under a book-entry format, Beneficial Owners of the Book-Entry
Certificates may experience some delay in their receipt of payments, since such
payments will be forwarded by the Trustee to Cede. Distributions with respect to
Certificates held through Cedel or Euroclear will be credited to the cash
accounts of Cedel Participants or Euroclear Participants in accordance with the
relevant system's rules and procedures, to the extent received by the Relevant
Depositary. Such distributions will be subject to tax reporting in accordance
with relevant United States tax laws and regulations. Because DTC can only act
on behalf of Financial Intermediaries, the ability of a Beneficial Owner to
pledge Book-Entry Certificates to persons or entities that do not participate in
the Depository system, or otherwise take actions in respect of such Book-Entry
Certificates, may be limited due to the lack of physical certificates for such
Book-Entry Certificates. In addition, issuance of the Book-Entry Certificates in
book-entry form may reduce the liquidity of such Certificates in the secondary
market since certain potential investors may be unwilling to purchase
Certificates for which they cannot obtain physical certificates.
Monthly and annual reports on the Trust provided by the Servicer to
Cede, as nominee of DTC, may be made available to Beneficial Owners upon
request, in accordance with the rules, regulations and procedures creating and
affecting the Depository, and to the Financial Intermediaries to whose DTC
accounts the Book-Entry Certificates of such Beneficial Owners are credited.
DTC has advised the Trustee that, unless and until Definitive
Certificates are issued, DTC will take any action permitted to be taken by the
holders of the Book-Entry Certificates under the Pooling and Servicing Agreement
only at the direction of one or more Financial Intermediaries to whose DTC
accounts the Book-Entry Certificates are credited, to the extent that such
actions are taken on behalf of Financial Intermediaries whose holdings include
such Book-Entry Certificates. Cedel or the Euroclear Operator, as the case may
be, will take any action permitted to be taken by an Owner under the Pooling and
Servicing Agreement on behalf of a Cedel Participant or Euroclear Participant
only in accordance with its relevant rules and procedures and subject to the
ability of the Relevant Depositary to effect such actions on its behalf through
DTC. DTC may take actions, at the direction of the related Participants, with
respect to some Offered Certificates which conflict with actions taken with
respect to other Offered Certificates.
Definitive Certificates will be issued to Beneficial Owners of the
Book-Entry Certificates, or their nominees, rather than to DTC, only if (a) DTC
or the Depositor advises the Trustee in writing that DTC is no longer willing,
qualified or able to discharge properly its responsibilities as a nominee and
depository with respect to the Book-Entry Certificates and the Depositor or the
Trustee is unable to locate a qualified successor, (b) the Depositor, at its
sole option, elects to terminate a book-entry system through DTC or (c) DTC, at
the direction of the Beneficial Owners representing a majority of the
outstanding Percentage Interests of the Class A Certificates, advises the
Trustee in writing that the continuation of a book-entry system through DTC (or
a successor thereto) is no longer in the best interests of Beneficial Owners.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the Trustee will be required to notify all Beneficial
Owners of the occurrence of such event and the availability through DTC of
Definitive Certificates. Upon surrender by DTC of the global certificate or
certificates representing the Book-Entry Certificates and instructions for
re-registration, the Trustee will issue Definitive Certificates, and thereafter
the Trustee will recognize the holders of such Definitive Certificates as Owners
under the Pooling and Servicing Agreement.
Although DTC, Cedel and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of Certificates among Participants
of DTC, Cedel and Euroclear, they are under no obligation to perform or continue
to perform such procedures and such procedures may be discontinued at any time.
Assignment of Rights
An Owner may pledge, encumber, hypothecate or assign all or any part
of its right to receive distributions under any Certificate, but such pledge,
encumbrance, hypothecation or assignment shall not constitute a transfer of an
ownership interest sufficient to render the transferee an Owner of the Trust
without compliance with the provisions of the Pooling and Servicing Agreement
described above.
CREDIT ENHANCEMENT
The Credit Enhancement provided for the benefit of the Owners of the
Class A Trust Certificates and Class B Certificates consists of the
subordination of the Subordinate Certificates and the Retained Certificates to
the Class A Trust Certificates, the priority of application of Realized Losses
and the application of Monthly Excess Cashflow Amounts. Additional Credit
Enhancement for the benefit of the Owners of the Class A Trust Certificates and
the Class A-2 Floating Certificates will be provided separately by each of the
related Certificate Insurance Policies.
SUBORDINATION OF SUBORDINATE CERTIFICATES
The rights of the Owners of the Subordinate Certificates and the
Retained Certificates to receive distributions with respect to the Home Equity
Loans will be subordinated, to the extent described herein, to such rights of
the Owners of the Class A Trust Certificates. This subordination is intended to
enhance the likelihood of regular receipt by the Owners of the Class A Trust
Certificates of the full amount of their scheduled monthly payment of interest
and principal and to afford such Owners protection against Realized Losses.
The protection afforded to the Owners of the Class A Trust
Certificates by means of the subordination of the Subordinate Certificates and
the Retained Certificates will be accomplished by the preferential right of the
Owners of the Class A Trust Certificates to receive, prior to any distribution
being made on a Payment Date in respect of the Subordinate Certificates and the
Retained Certificates, the amounts of interest due them and principal available
for distribution on such Payment Date, and, if necessary, by the right of the
Owners of the Class A Trust Certificates to receive future distributions of
amounts that would otherwise be payable to the Owners of the Subordinate
Certificates and the Retained Certificates.
In addition, the rights of the Owners of the Retained Certificates to
receive distributions will be subordinated, to the extent described herein, to
such rights of the Owners of the Class A Trust Certificates and Class B
Certificates. This subordination is intended to enhance the likelihood of
regular receipt by the Owners of the Class A Trust Certificates and Class B
Certificates of the amount of interest due them and principal available for
distribution and to afford such Owners with protection against Realized Losses.
APPLICATION OF REALIZED LOSSES
If a Home Equity Loan becomes a Liquidated Loan during a Remittance
Period, the Net Liquidation Proceeds relating thereto and allocated to principal
may be less than the Loan Balance of such Home Equity Loan. The amount of such
insufficiency is a Realized Loss. Realized Losses will, in effect, be absorbed
first, by the Retained Certificates (both through the application of the Monthly
Excess Interest Amount to fund such insufficiency and through a potential
reduction in the Overcollateralization Amount), second, by the Owners of the
Class B Certificates and third, to the extent an Overcollateralization Deficit
would occur, a payment under the Certificate Insurance Policy.
To the extent that Realized Losses occur, such Realized Losses will
reduce the aggregate outstanding Loan Balance of the Home Equity Loans (I.E., a
reduction in the collateral balance will occur). Since the Overcollateralization
Amount as of any Payment Date is the excess, if any, of the aggregate
outstanding Loan Balance of the Home Equity Loan as of the last day of the
related Remittance Period over the Aggregate Certificate Principal Balance, of
the Offered Certificate after taking into account the distribution of principal
on such Payment Date, Realized Losses, to the extent experienced and not
accounted for through application of the Monthly Excess Interest Amount, will in
the first instance reduce the Overcollateralization Amount.
The Pooling and Servicing Agreement requires that, beginning on the
sixth Payment Date, the Overcollateralization Amount be initially increased to,
and thereafter maintained at, the Targeted Overcollateralization Amount. This
increase and subsequent maintenance is intended to be accomplished by the
application of Monthly Excess Interest Amounts to the funding of the Extra
Principal Distribution Amounts. Such Extra Principal Distribution Amounts, since
they are funded from interest collections on the Home Equity Loans but are
distributed as principal on the Offered Certificates, will increase the
Overcollateralization Amount.
If, on any Payment Date after taking into account all Realized Losses
experienced during the prior Remittance Period and after taking into account the
distribution of principal (including the Extra Principal Distribution Amount)
with respect to the Class A Trust Certificates and Class B Certificates on such
Payment Date, the Aggregate Certificate Principal Balance exceeds the aggregate
Loan Balance of the Home Equity Loans as of the end of the related Remittance
Period (I.E., if the level of overcollateralization is negative), then the
Certificate Principal Balance of the Subordinate Certificates will be reduced
(in effect, "written down") such that the level of overcollateralization is
zero, rather than negative. Such a negative level of overcollateralization is an
Applied Realized Loss Amount, which will be applied as a reduction in the
Certificate Principal Balance of the Subordinate Certificates. The Pooling and
Servicing Agreement does not permit the "write down" of the Certificate
Principal Balance of any Class A Trust Certificate.
Once the Certificate Principal Balance of the Subordinate Certificates
has been "written down," the amount of such write down will no longer bear
interest, nor will such amount thereafter be "reinstated" or "written up,"
although the amount of such write down may, on future Payment Dates be paid to
Owners of the Subordinate Certificates. The source of funding of such payments
will be the amount, if any, of the Monthly Excess Cashflow Amount remaining on
such future Payment Dates after the funding of the Extra Principal Distribution
Amount, the payment of any Reimbursement Amount to the Certificate Insurer and
after the payment of the Interest Carry Forward Amount with respect to the
Subordinate Certificates on such Payment Date.
APPLICATION OF MONTHLY EXCESS CASHFLOW AMOUNTS
The weighted average net Coupon Rate for the Home Equity Loans is
generally expected to be higher than the weighted average of the Pass-Through
Rates on the Class A Trust Certificates and Class B Certificates, thus
generating certain excess interest collections which, in the absence of losses
will not be necessary to fund interest distributions on the Offered
Certificates. The Pooling and Servicing Agreement provides that this excess
interest be applied to the extent available, to make accelerated payments of
principal (I.E., the Extra Principal Distribution Amount) to the Class or
Classes then entitled to receive distributions of principal; such application
will cause the Aggregate Trust Certificate Principal Balance to amortize more
rapidly than the Home Equity Loans, resulting in overcollateralization. This
excess interest for a Remittance Period, together with interest on the related
Overcollateralization Amount itself, on the related Payment Date is the Monthly
Excess Interest Amount for such Payment Date and Home Equity Loan Group.
The required level of overcollateralization for any Payment Date after
the sixth Payment Date is the Targeted Overcollateralization Amount for such
Payment Date. The Targeted Overcollateralization Amount is initially (I.E.,
prior to the Stepdown Date) $19,920,000. Since the actual level of the
Overcollateralization Amount is essentially zero as of the Closing Date and
through the sixth Payment Date, commencing on the seventh Payment Date subject
to the availability of Monthly Excess Interest Amounts, Extra Principal
Distribution Amounts will be paid, with the result that the
Overcollateralization Amount will increase to the level of the Targeted
Overcollateralization Amount.
If, once the Targeted Overcollateralization Amount has been reached,
Realized Losses not accounted for by an application of the Monthly Excess
Interest Amount occur, such Realized Losses will result in an
Overcollateralization Deficiency (since it will reduce the Loan Balance of the
Home Equity Loans without giving rise to a corresponding reduction of the
Aggregate Trust Certificate Principal Balance). The cashflow priorities of the
Trust require that, in this situation, an Extra Principal Distribution Amount be
paid (subject to the availability of any Monthly Excess Interest Amount in
subsequent months) for the purpose of re-establishing the Overcollateralization
Amount at the then-required Targeted Overcollateralization Amount.
On and after the Stepdown Date and assuming that neither a Cumulative
Realized Loss Trigger Event nor a Delinquency Trigger Event is in effect, the
Targeted Overcollateralization Amount is permitted to decrease or "step-down"
below the initial level to a level equal to 2.58% of the then current aggregate
outstanding Loan Balance of the Home Equity Loans (subject to the
Overcollateralization Floor). If the Targeted Overcollateralization Amount is
permitted to "step-down" on a Payment Date, the Pooling and Servicing Agreement
permits a portion of the Principal Remittance Amount for such Payment Date not
to be passed through as a distribution of principal on such Payment Date. This
has the effect of decelerating the amortization of the Class A Trust
Certificates and Class B Certificates relative to the aggregate outstanding Loan
Balance of the Home Equity Loans, thereby reducing the actual level of the
Overcollateralization Amount to the new, lower Targeted Overcollateralization
Amount. This portion of the Principal Remittance Amount not distributed as
principal on the Class A Trust Certificates and Class B Certificates therefore
releases overcollateralization from the Trust. The amount of such release is the
Overcollateralization Release Amount.
On any Payment Date, the sum of the Monthly Excess Interest Amount
(plus any interest on the Overcollateralization Amount) and the
Overcollateralization Release Amount is the Monthly Excess Cashflow Amount,
which is required to be applied in the following order of priority on such
Payment Date.
(1) to fund the Class A Interest Carry Forward Amount, if any;
(2) to pay the Certificate Insurer any Reimbursement Amount for such
Payment Date;
(3) to fund the Extra Principal Distribution Amount for such Payment
Date;
(4) to fund the Interest Carry Forward Amount, if any, with respect to
the Class B Certificates;
(5) to fund the Class B Realized Loss Amortization Amount for such
Payment Date;
(6) to the Servicer to the extent of any unreimbursed Delinquency
Advances or Servicing Advances; and
(7) to fund a distribution to Owners of the Class R Certificates.
The "Certificate Principal Balance" of any Class of Class A
Certificates is the Original Certificate Principal Balance of such Class as
reduced by all amounts actually distributed to the Owners of such Class of Class
A Certificates as distributions of principal on all prior Payment Dates.
"Class B Applied Realized Loss Amount" means, as of any Payment Date,
the lesser of (x) the Class B Certificate Principal Balance (after taking into
account the distribution of the Principal Distribution Amount on such Payment
Date, but prior to the application of the Class B Applied Realized Loss Amount,
if any, on such Payment Date) and (y) the Applied Realized Loss Amount as of
such Payment Date.
"Class B Certificate Principal Balance" means, as of any date of
determination, the Original Class B Certificate Principal Balance as reduced by
the sum of (x) all amounts actually distributed to the Owners of the Class B
Certificates on all prior Payment Dates on account of principal and (y) the
aggregate, cumulative amount of Class B Applied Realized Loss Amounts on all
prior Payment Dates.
"Class B Realized Loss Amortization Amount" means, as of any Payment
Date, the lesser of (x) the Class B Unpaid Realized Loss Amount as of such
Payment Date and (y) the excess of (i) the Monthly Excess Cashflow Amount over
(ii) the sum of the Extra Principal Distribution Amount, the Class A Interest
Carry Forward Amount, the Reimbursement Amount and the Interest Carry Forward
Amount for the Class B Certificates, in each case for such Payment Date.
"Reimbursement Amount" means as of any Payment Date, any Insured
Payments previously made by the Certificate Insurer to the Trustee or the
Grantor Trustee and any other amounts due and owing by the Trust or the Grantor
Trust to the Certificate Insurer and not reimbursed on prior Payment Dates
together with interest thereon at the rate referred to in the Pooling and
Servicing Agreement.
"Class B Unpaid Realized Loss Amount" means for the Class B
Certificates and as to any Payment Date, the excess of (x) the aggregate
cumulative amount of Class B Applied Realized Loss Amounts with respect to such
Class for all prior Payment Dates over (y) the aggregate, cumulative amount of
Class B Realized Loss Amortization Amounts with respect to for all prior Payment
Dates.
THE CERTIFICATE INSURANCE POLICIES
The Certificate Insurance Policy for the Class A Trust Certificates.
The Certificate Insurer, in consideration of the payment of the premium and
subject to the terms of the Certificate Insurance Policy, thereby
unconditionally and irrevocably guarantees to any Owner of a Class A Trust
Certificate that an amount equal to each full and complete Insured Payment will
be received by the Trustee, or its successor, as trustee for the Owners of the
Class A Trust Certificates, on behalf of the Owners from the Certificate
Insurer, for distribution by the Trustee, to each Owner of a Class A Trust
Certificate of each such Owner's proportionate share of the Insured Payment. The
Certificate Insurer's obligations under the Certificate Insurance Policy with
respect to a particular Insured Payment shall be discharged to the extent funds
equal to the applicable Insured Payment are received by the Trustee, whether or
not such funds are properly applied by the Trustee. Insured Payments shall be
made only at the time set forth in the Certificate Insurance Policy and no
accelerated Insured Payments shall be made regardless of any acceleration of the
Class A Trust Certificates, unless such acceleration is at the sole option of
the Certificate Insurer.
Notwithstanding the foregoing paragraph, the Certificate Insurance
Policy does not cover shortfalls, if any, attributable to the liability of the
Trust, the REMIC, or the Trustee for withholding taxes, if any (including
interest and penalties in respect of any such liability).
The Certificate Insurer will pay any Insured Payment that is a
Preference Amount on the Business Day following receipt on a Business Day by the
Fiscal Agent (as described below) of (i) a certified copy of the order requiring
the return of a preference payment, (ii) an opinion of counsel satisfactory to
the Certificate Insurer that such order is final and not subject to appeal,
(iii) an assignment in such form as is reasonably required by the Certificate
Insurer, irrevocably assigning to the Certificate Insurer all rights and claims
of the Owner relating to or arising under the Class A Trust Certificates against
the debtor which made such preference payment or otherwise with respect to such
preference payment and (iv) appropriate instruments to effect the appointment of
the Certificate Insurer as agent for such Owner in any legal proceeding related
to such preference payment, such instruments being in a form satisfactory to the
Certificate Insurer, provided that if such documents are received after 12:00
noon New York City time on such Business Day, they will be deemed to be received
on the following Business Day. Such payments shall be disbursed to the receiver
or trustee in bankruptcy named in the final order of the court exercising
jurisdiction on behalf of the Owner and not to any Owner directly unless such
Owner has returned principal or interest paid on the Class A Trust Certificates
to such receiver or trustee in bankruptcy, in which case such payment shall be
disbursed to such Owner.
The Certificate Insurer will pay any other amount payable under the
Certificate Insurance Policy no later than 12:00 noon New York City time on the
later of the Payment Date on which the related Insured Payment is due or the
third Business Day following receipt in New York, New York, on a Business Day by
State Street Bank and Trust Company, N.A., as Fiscal Agent for the Certificate
Insurer or any successor fiscal agent appointed by the Certificate Insurer (the
"Fiscal Agent") of a Notice (as described below); provided that if such Notice
is received after 12:00 noon New York City time on such Business Day, it will be
deemed to be received on the following Business Day. If any such Notice received
by the Fiscal Agent is not in proper form or is otherwise insufficient for the
purpose of making a claim under the Certificate Insurance Policy, it shall be
deemed not to have been received by the Fiscal Agent for purposes of this
paragraph, and the Certificate Insurer or the Fiscal Agent, as the case may be,
shall promptly so advise the Trustee, and the Trustee may submit an amended
Notice.
Insured Payments due under the Certificate Insurance Policy unless
otherwise stated therein will be disbursed by the Fiscal Agent to the Trustee on
behalf of Owners of Class A Trust Certificates, by wire transfer of immediately
available funds in the amount of the Insured Payment less, in respect of Insured
Payments related to Preference Amounts, any amount held by the Trustee for the
payment of such Insured Payment and legally available therefor.
The Fiscal Agent is the agent of the Certificate Insurer only and the
Fiscal Agent shall in no event be liable to Owners for any acts of the Fiscal
Agent or any failure of the Certificate Insurer to deposit or cause to be
deposited, sufficient funds to make payments due under the Certificate Insurance
Policy.
As used in the Certificate Insurance Policy, the following terms shall
have the following meanings:
"Agreement" means the Pooling and Servicing Agreement dated as of
December 1, 1997 among ContiSecurities Asset Funding Corp., as Depositor,
ContiMortgage Corporation, as Servicer and a Seller, ContiWest Corporation, as a
Seller and Manufacturers and Traders Trust Company, as Trustee, without regard
to any amendment or supplement thereto unless such amendment or supplement has
been approved in writing by the Certificate Insurer.
"Business Day" means any day other than a Saturday, a Sunday or a day
on which the Certificate Insurer or banking institutions in New York City or in
the city in which the corporate trust office of the Trustee under the Agreement
is located are authorized or obligated by law or executive order to close.
"Insured Payment" means with respect to any Payment Date, without
duplication, (A) the excess, if any, of (i) the sum of the aggregate Current
Interest of the Class A Trust Certificates and the then existing
Overcollateralization Deficit, if any, over (ii) Total Available Funds (net of
the Premium Amounts) after taking into account the portion of any Principal
Distribution Amount to be actually distributed on such Payment Date without
regard to any Insured Payment to be made with respect to such Payment Date plus
(B) an amount equal to the Preference Amount with respect to the Class A Trust
Certificates plus (C) the excess, if any, on the December 15, 1998, Payment Date
of (i) the Certificate Principal Balance of the Class A-1 Certificates over (ii)
the Principal Remittance Amount for such Payment Date.
"Notice" means the telephonic or telegraphic notice, promptly
confirmed in writing by telecopy substantially in the form of Exhibit A attached
to the Certificate Insurance Policy, the original of which is subsequently
delivered by registered or certified mail, from the Trustee specifying the
Insured Payment which shall be due and owing on the applicable Payment Date.
"Owner" means each Owner (as defined in the Agreement) who, on the
applicable Payment Date, is entitled under the terms of the applicable Class A
Trust Certificate to payment thereunder.
"Preference Amount" means any amount previously distributed to an
Owner on the Class A Trust Certificates that is recoverable and sought to be
recovered as a voidable preference by a trustee in bankruptcy pursuant to the
United States Bankruptcy Code (11 U.S.C.) as amended from time to time, in
accordance with a final nonappealable order of a court having competent
jurisdiction.
Capitalized terms used in the Certificate Insurance Policy and not
otherwise defined therein shall have the respective meanings set forth in the
Agreement as of the date of execution of the Certificate Insurance Policy,
without giving effect to any subsequent amendment or modification to the
Agreement unless the amendment or modification has been approved in writing by
the Certificate Insurer.
Any notice under the Certificate Insurance Policy or service of
process on the Fiscal Agent may be made at the address listed below for the
Fiscal Agent or such other address as the Certificate Insurer shall specify in
writing to the Trustee.
The notice address of the Fiscal Agent is 15th Floor, 61 Broadway, New
York, New York, 10006 Attention: Municipal Registrar and Paying Agency or such
other address as the Fiscal Agent shall specify to the Trustee in writing.
The Certificate Insurance Policy is being issued under and pursuant
to, and shall be construed under, the laws of the State of New York, without
giving effect to the conflict of laws principles thereof.
The insurance provided by the Certificate Insurance Policy is not
covered by the Property/Casualty Insurance Security Fund specified in Article 76
of the New York Insurance Law.
The Certificate Insurance Policy is not cancelable for any reason. The
premium on the Certificate Insurance Policy is not refundable for any reason
including payment, or provision being made for payment, prior to the maturity of
the Class A Trust Certificates.
The Certificate Insurance Policy for the Class A-2 Floating
Certificates. The Certificate Insurer, in consideration of the payment of the
premium and subject to the terms of the Certificate Insurance Policy, thereby
unconditionally and irrevocably guarantees to any Owner of a Class A-2 Floating
Certificate that an amount equal to each full and complete Insured Payment will
be received by the Grantor Trustee, or its successor, as trustee for the Owners
of the Class A-2 Floating Certificates, on behalf of the Owners from the
Certificate Insurer, for distribution by the Grantor Trustee, to each Owner of a
Class A-2 Floating Certificate of each such Owner's proportionate share of the
Insured Payment. The Certificate Insurer's obligations under the Certificate
Insurance Policy with respect to a particular Insured Payment shall be
discharged to the extent funds equal to the applicable Insured Payment are
received by the Grantor Trustee, whether or not such funds are properly applied
by the Grantor Trustee. Insured Payments shall be made only at the time set
forth in the Certificate Insurance Policy and no accelerated Insured Payments
shall be made regardless of any acceleration of the Class A-2 Floating
Certificates, unless such acceleration is at the sole option of the Certificate
Insurer.
Notwithstanding the foregoing paragraph, the Certificate Insurance
Policy does not cover shortfalls, if any, attributable to the liability of the
Grantor Trust or the Grantor Trustee for withholding taxes, if any (including
interest and penalties in respect of any such liability).
The Certificate Insurer will pay any Insured Payment that is a
Preference Amount on the Business Day following receipt on a Business Day by the
Fiscal Agent (as described below) of (i) a certified copy of the order requiring
the return of a preference payment, (ii) an opinion of counsel satisfactory to
the Certificate Insurer that such order is final and not subject to appeal,
(iii) an assignment in such form as is reasonably required by the Certificate
Insurer, irrevocably assigning to the Certificate Insurer all rights and claims
of the Owner relating to or arising under the Class A-2 Floating Certificates
against the debtor which made such preference payment or otherwise with respect
to such preference payment and (iv) appropriate instruments to effect the
appointment of the Certificate Insurer as agent for such Owner in any legal
proceeding related to such preference payment, such instruments being in a form
satisfactory to the Certificate Insurer, provided that if such documents are
received after 12:00 noon New York City time on such Business Day, they will be
deemed to be received on the following Business Day. Such payments shall be
disbursed to the receiver or trustee in bankruptcy named in the final order of
the court exercising jurisdiction on behalf of the Owner and not to any Owner
directly unless such Owner has returned principal or interest paid on the Class
A-2 Floating Certificates to such receiver or trustee in bankruptcy, in which
case such payment shall be disbursed to such Owner.
The Certificate Insurer will pay any other amount payable under the
Certificate Insurance Policy no later than 12:00 noon New York City time on the
later of the Payment Date on which the related Insured Payment is due or the
third Business Day following receipt in New York, New York, on a Business Day by
State Street Bank and Trust Company, N.A., as Fiscal Agent for the Certificate
Insurer or any successor fiscal agent appointed by the Certificate Insurer (the
"Fiscal Agent") of a Notice (as described below); provided that if such Notice
is received after 12:00 noon New York City time on such Business Day, it will be
deemed to be received on the following Business Day. If any such Notice received
by the Fiscal Agent is not in proper form or is otherwise insufficient for the
purpose of making a claim under the Certificate Insurance Policy, it shall be
deemed not to have been received by the Fiscal Agent for purposes of this
paragraph, and the Certificate Insurer or the Fiscal Agent, as the case may be,
shall promptly so advise the Grantor Trustee, and the Grantor Trustee may submit
an amended Notice.
Insured Payments due under the Certificate Insurance Policy unless
otherwise stated therein will be disbursed by the Fiscal Agent to the Grantor
Trustee on behalf of Owners of Class A-2 Floating Certificates, by wire transfer
of immediately available funds in the amount of the Insured Payment less, in
respect of Insured Payments related to Preference Amounts, any amount held by
the Grantor Trustee for the payment of such Insured Payment and legally
available therefor.
The Fiscal Agent is the agent of the Certificate Insurer only and the
Fiscal Agent shall in no event be liable to Owners for any acts of the Fiscal
Agent or any failure of the Certificate Insurer to deposit or cause to be
deposited, sufficient funds to make payments due under the Certificate Insurance
Policy.
As used in the Certificate Insurance Policy, the following terms shall
have the following meanings:
"Agreement" means the Grantor Trust Agreement dated as of December 1,
1997 among ContiSecurities Asset Funding Corp., as Depositor, ContiMortgage
Corporation, as Servicer and Manufacturers and Traders Trust Company, as Grantor
Trustee, without regard to any amendment or supplement thereto unless such
amendment or supplement has been approved in writing by the Certificate Insurer.
"Business Day" means any day other than a Saturday, a Sunday or a day
on which the Certificate Insurer or banking institutions in New York City or in
the city in which the corporate trust office of the Grantor Trustee under the
Agreement is located are authorized or obligated by law or executive order to
close.
"Insured Payment" means with respect to any Payment Date, without
duplication, (A) the excess, if any, of (i) the sum of the aggregate Current
Interest of the Class A-2 Floating Certificates at the Class A-2 Floating
Pass-Through Rate over (ii) amounts available to the Grantor Trustee for
distribution of Current Interest on the Class A-2 Floating Certificates plus (B)
an amount equal to the Preference Amount with respect to the Class A-2 Floating
Certificates.
"Notice" means the telephonic or telegraphic notice, promptly
confirmed in writing by telecopy substantially in the form of Exhibit A attached
to the Certificate Insurance Policy, the original of which is subsequently
delivered by registered or certified mail, from the Trustee specifying the
Insured Payment which shall be due and owing on the applicable Payment Date.
"Owner" means each Owner (as defined in the Agreement) who, on the
applicable Payment Date, is entitled under the terms of the applicable Class A-2
Floating Certificate to payment thereunder.
"Preference Amount" means any amount previously distributed to an
Owner on the Class A-2 Floating Certificates that is recoverable and sought to
be recovered as a voidable preference by a trustee in bankruptcy pursuant to the
United States Bankruptcy Code (11 U.S.C.) as amended from time to time, in
accordance with a final nonappealable order of a court having competent
jurisdiction.
Capitalized terms used in the Certificate Insurance Policy and not
otherwise defined therein shall have the respective meanings set forth in the
Agreement as of the date of execution of the Certificate Insurance Policy,
without giving effect to any subsequent amendment or modification to the
Agreement unless such amendment or modification has been approved in writing by
the Certificate Insurer.
Any notice under the Certificate Insurance Policy or service of
process on the Fiscal Agent may be made at the address listed below for the
Fiscal Agent or such other address as the Certificate Insurer shall specify in
writing to the Grantor Trustee.
The notice address of the Fiscal Agent is 15th Floor, 61 Broadway, New
York, New York, 10006 Attention: Municipal Registrar and Paying Agency or such
other address as the Fiscal Agent shall specify to the Trustee in writing.
The Certificate Insurance Policy is being issued under and pursuant
to, and shall be construed under, the laws of the State of New York, without
giving effect to the conflict of laws principles thereof.
The insurance provided by the Certificate Insurance Policy is not
covered by the Property/Casualty Insurance Security Fund specified in Article 76
of the New York Insurance Law.
The Certificate Insurance Policy is not cancelable for any reason. The
premium on the Certificate Insurance Policy is not refundable for any reason
including payment, or provision being made for payment, prior to the maturity of
the Class A-2 Floating Certificates.
THE CERTIFICATE INSURER
The following information has been supplied by the Certificate Insurer
for inclusion in this Prospectus Supplement. No representation is made by the
Underwriters, the Sellers, the Servicer, the Depositor or any of their
affiliates as to the accuracy or completeness of such information.
The Certificate Insurer is the principal operating subsidiary of MBIA
Inc., a New York Stock Exchange listed company. MBIA Inc. is not obligated to
pay the debts of or claims against the Certificate Insurer. The Certificate
Insurer is domiciled in the State of New York and licensed to do business in and
is subject to regulation under the laws of all 50 states, the District of
Columbia, the Commonwealth of Puerto Rico, the Commonwealth of the Northern
Mariana Islands, the Virgin Islands of the United States and the Territory of
Guam. The Certificate Insurer has two European branches, one in the Republic of
France and the other in the Kingdom of Spain. New York has laws prescribing
minimum capital requirements, limiting classes and concentrations of investments
and requiring the approval of policy rates and forms. State laws also regulate
the amount of both the aggregate and individual risks that may be insured, the
payment of dividends by the Certificate Insurer, changes in control and
transactions among affiliates. Additionally, the Certificate Insurer is required
to maintain contingency reserves on its liabilities in certain amounts and for
certain periods of time.
On November 14, 1997, MBIA, Inc. announced the signing of a definitive
agreement to merge with CapMAC Holdings Inc. ("CHI"), the parent company of
Capital Markets Assurance Corporation ("CapMAC"), in a stock-for-stock
transaction valued at $607 million. The announcement also stated that all
outstanding policies issued by CapMAC will be backed by the full financial
resources of MBIA Inc., and that the agreement is subject to regulatory
approvals and approval by CHI shareholders.
The consolidated financial statements of the Certificate Insurer, a
wholly owned subsidiary of MBIA Inc., and its subsidiaries as of December 31,
1996 and December 31, 1995 and for the three years ended December 31, 1996,
prepared in accordance with generally accepted accounting principles, included
in the Annual Report on Form 10-K of MBIA Inc. for the year ended December 31,
1996 and the consolidated financial statements of the Insurer and its
subsidiaries for the nine months ended September 30, 1997 and for the periods
ending September 30, 1997 and September 30, 1996 included in the Quarterly
Report on Form 10-Q of MBIA Inc. for the period ending September 30, 1997, are
hereby incorporated by reference into this Prospectus Supplement and shall be
deemed to be a part hereof. Any statement contained in a document incorporated
by reference herein shall be modified or superseded for purposes of this
Prospectus Supplement to the extent that a statement contained herein or in any
other subsequently filed document which also is incorporated by reference herein
modifies or supersedes such statement. Any statement so modified or superseded
shall not be deemed, except as so modified or superseded, to constitute a part
of this Prospectus Supplement.
All financial statements of the Certificate Insurer and its
subsidiaries included in documents filed by MBIA Inc. pursuant to Section 13(a),
13(c), 14 or 15(d) of the Securities Exchange Act of 1934, as amended,
subsequent to the date of this Prospectus Supplement and prior to the
termination of the offering of the Offered Certificates shall be deemed to be
incorporated by reference into this Prospectus Supplement and to be a part
hereof from the respective dates of filing such documents.
The tables below present selected financial information of the
Certificate Insurer determined in accordance with statutory accounting practices
prescribed or permitted by insurance regulatory authorities ("SAP") and
generally accepted accounting principles ("GAAP"):
SAP
December 31, September 30,
1996 1997
(Audited) (Unaudited)
(in millions)
Admitted Assets $4,476 $5,165
Liabilities 3,009 3,457
Capital and Surplus 1,467 1,708
GAAP
December 31, September 30,
1996 1997
(Audited) (Unaudited)
(in millions)
Assets $5,066 $5,819
Liabilities 2,262 2,594
Shareholder's Equity 2,804 3,225
Copies of the financial statements of the Certificate Insurer
incorporated by reference herein and copies of the Certificate Insurer's 1996
year-end audited financial statements prepared in accordance with statutory
accounting practices are available, without charge, from the Certificate
Insurer. The address of the Certificate Insurer is 113 King Street, Armonk, New
York 10504. The telephone number of the Certificate Insurer is (914) 273-4545.
The Certificate Insurer does not accept any responsibility for the
accuracy or completeness of this Prospectus Supplement or any information or
disclosure contained herein, or omitted herefrom, other than with respect to the
accuracy of the information regarding each Certificate Insurance Policy under
the heading "CREDIT ENHANCEMENT--The Certificate Insurance Policies" and the
information regarding the Certificate Insurer under the heading "THE CERTIFICATE
INSURER." Additionally, the Certificate Insurer makes no representations
regarding the Class A Trust Certificates or the Class A-2 Floating Certificates
or the advisability of investing in the Class A Trust Certificates or the Class
A-2 Floating Certificates.
Moody's Investors Service, Inc. rates the claims paying ability of the
Certificate Insurer "Aaa".
Standard & Poor's Ratings Services, a division of The McGraw-Hill
Companies, Inc. rates the claims paying ability of the Certificate Insurer
"AAA".
Fitch IBCA, Inc. (formerly known as Fitch Investors Service, L.P.)
rates the claims paying ability of the Certificate Insurer "AAA".
Each rating of the Certificate Insurer should be evaluated
independently. The ratings reflect the respective rating agency's current
assessment of the creditworthiness of the Certificate Insurer and its ability to
pay claims on its policies of insurance. Any further explanation as to the
significance of the above ratings may be obtained only from the applicable
rating agency.
The above ratings are not recommendations to buy, sell or hold the
Class A Trust Certificates or the Class A-2 Floating Certificates, and such
ratings may be subject to revision or withdrawal at any time by the rating
agencies. Any downward revision or withdrawal of any of the above ratings may
have an adverse effect on the market price of the Class A Trust Certificates or
the Class A-2 Floating Certificates. The Certificate Insurer does not guaranty
the market price of the Class A Trust Certificates or Class A-2 Floating
Certificates nor does it guaranty that the ratings on the Class A Trust
Certificates or Class A-2 Floating Certificates will not be reversed or
withdrawn.
THE POOLING AND SERVICING AGREEMENT
In addition to the provisions of the Pooling and Servicing Agreement
summarized elsewhere in the Prospectus and this Prospectus Supplement, there is
set forth below a summary of certain other provisions of the Pooling and
Servicing Agreement. Covenant of the Sellers to Take Certain Actions with
Respect to the Home Equity Loans in Certain Situations
Pursuant to the Pooling and Servicing Agreement, upon the discovery by
the Depositor, either Seller, the Servicer, any Sub-Servicer, any Owner, the
Certificate Insurer or the Trustee that any representations and warranties with
respect to the Home Equity Loans were untrue in any material respect as of the
Closing Date with the result that the interests of the Owners or the Certificate
Insurer are materially and adversely affected, the party discovering such breach
is required to give prompt written notice to the other parties.
Upon the earliest to occur of either Seller's discovery, its receipt
of notice of breach from any of the other parties or the Certificate Insurer or
such time as a situation resulting from an existing statement which is untrue
materially and adversely affects the interests of the Owners or the Certificate
Insurer, such Seller will be required promptly to cure such breach in all
material respects or, on the second Monthly Remittance Date next succeeding such
discovery, receipt of notice or such time, such Seller shall (i) substitute in
lieu of each Home Equity Loan which has given rise to the requirement for action
by the Seller a Qualified Replacement Mortgage (as such term is defined in the
Pooling and Servicing Agreement) and deliver the Substitution Amount to the
Trustee on behalf of the Trust as part of the Monthly Remittance remitted by the
Servicer on such Monthly Remittance Date or (ii) purchase such Home Equity Loan
from the Trust at a purchase price equal to the Loan Purchase Price (as defined
below) thereof. Notwithstanding any provision of the Pooling and Servicing
Agreement to the contrary, with respect to any Home Equity Loan which is not in
default or as to which no default is imminent, no such repurchase or
substitution will be made unless such Seller obtains for the Trustee and the
Certificate Insurer an opinion of counsel experienced in federal income tax
matters and acceptable to the Trustee and the Certificate Insurer to the effect
that such a repurchase or substitution would not constitute a Prohibited
Transaction for the Trust or otherwise subject the Trust to tax and would not
jeopardize the status of the REMIC as a REMIC (a "REMIC Opinion") addressed to
the Trustee and the Certificate Insurer and acceptable to the Trustee and the
Certificate Insurer. Any Home Equity Loan as to which repurchase or substitution
was delayed pursuant to the Pooling and Servicing Agreement shall be repurchased
or substituted for (subject to compliance with the provisions of the Pooling and
Servicing Agreement) upon the earlier of (a) the occurrence of a default or
imminent default with respect to such Home Equity Loan and (b) receipt by the
Trustee and the Certificate Insurer of a REMIC Opinion. In connection with any
breach of a representation, warranty or covenant or defect in documentation
giving rise to such repurchase or substitution obligation, each of the Sellers
has agreed that it shall, at its expense, furnish the Trustee and the
Certificate Insurer with a REMIC Opinion as a result of any such repurchase or
substitution. The obligation of the Sellers so to substitute or purchase any
Home Equity Loan as to which such a statement set forth below is untrue in any
material respect and has not been remedied constitutes the sole remedy
respecting a discovery of any such statement which is untrue in any material
respect available to the Owners and the Trustee.
"Loan Purchase Price" means the outstanding Loan Balance of the
related Home Equity Loan as of the date of purchase (assuming that the Monthly
Remittance remitted by the Servicer on such Monthly Remittance Date has already
been remitted), plus one month's interest at the Coupon Rate together with the
aggregate amount of all unreimbursed Delinquency Advances and Servicing Advances
theretofore made with respect to such Home Equity Loan, all Delinquency Advances
and Servicing Advances which the Servicer has theretofore failed to remit with
respect to such Home Equity Loan and all reimbursed Delinquency Advances to the
extent that reimbursement is not made from the Mortgagor or from Liquidation
Proceeds from the respective Home Equity Loan.
ASSIGNMENT OF HOME EQUITY LOANS
Pursuant to the Pooling and Servicing Agreement, each Seller on the
Closing Date will transfer, assign, set over and otherwise convey without
recourse to the Depositor and the Depositor will transfer, assign, set over and
otherwise convey without recourse to the Trustee in trust all of its respective
right, title and interest in and to each Home Equity Loan and all its respective
right, title and interest in and to principal and interest due on each such Home
Equity Loan after the Cut-Off Date; provided, however, that each Seller will
reserve and retain all of its right, title and interest in and to principal
(including Prepayments) and interest due on each Home Equity Loan on or prior to
the Cut-Off Date. Purely as a protective measure and not to be construed as
contrary to the parties' intent that the transfer on the Closing Date is a sale,
each Seller has also been deemed to have granted to the Depositor and the
Depositor has also been deemed to have granted to the Trustee a security
interest in the Trust Estate in the event that the transfer of the Trust Estate
is deemed to be a loan and not a sale.
In connection with the transfer and assignment of the Home Equity
Loans on the Closing Date, each Seller will be required to:
(i) deliver without recourse to the Trustee (A) the original Notes or
certified copies thereof, endorsed in blank or to the order of the
Trustee, (B) the original title insurance policy or a copy certified
by the issuer of the title insurance policy, or the attorney's opinion
of title, (C) originals or certified copies of all intervening
assignments, showing a complete chain of title from origination to the
Trustee, if any, including warehousing assignments, with evidence of
recording thereon, (D) originals of all assumption and modification
agreements, if any and (E) either: (1) the original Mortgage, with
evidence of recording thereon (if such original Mortgage has been
returned to such Seller from the applicable recording office) or (2) a
copy of the Mortgage certified by the public recording office in those
instances where the original recorded Mortgage has been lost;
(ii) cause, within 60 days following the Closing Date, assignments of
the Mortgages to "Manufacturers and Traders Trust Company, as Trustee
of ContiMortgage Home Equity Loan Trust 1997- 5 under the Pooling and
Servicing Agreement dated as of December 1, 1997" to be submitted for
recording in the appropriate jurisdictions; provided, however, that a
Seller shall not be required to prepare any assignment of Mortgage for
a Mortgage with respect to which the original recording information is
lacking or to record an assignment of a Mortgage if such Seller
furnishes to the Trustee and the Certificate Insurer, on or before the
Closing Date, at its expense an opinion of counsel with respect to the
relevant jurisdiction that such recording is not required to perfect
the Trustee's interests in the related Mortgages Loans (in form
satisfactory to the Rating Agencies and the Certificate Insurer); and
(iii) deliver the title insurance policy, the original Mortgages and
such recorded assignments, together with originals or duly certified
copies of any and all prior assignments, to the Trustee within 15 days
of receipt thereof by the related Seller (but in any event, with
respect to any Mortgage as to which original recording information has
been made available to such Seller within one year after the Closing
Date).
The Trustee will agree, for the benefit of the Owners, to review each
File within 45 days after the Closing Date (or the date of receipt of any
documents delivered to the Trustee after such date) to ascertain that all
required documents (or certified copies of documents) have been executed and
received.
If the Trustee during such 45-day period finds any document
constituting a part of a File which is not properly executed, has not been
received, is unrelated to the Home Equity Loans or that any Home Equity Loan
does not conform in a material respect to the description thereof as set forth
in the Schedule of Home Equity Loans, the Trustee will be required to promptly
notify the Depositor, the appropriate Seller and the Certificate Insurer. Each
Seller will agree in the Pooling and Servicing Agreement to use reasonable
efforts to remedy a material defect in a document constituting part of a File of
which it is so notified by the Trustee. If, however, within 60 days after the
Trustee's notice to it respecting such defect the Seller shall not have remedied
the defect and the defect materially and adversely affects the interest in the
related Home Equity Loan of the Owners or the Certificate Insurer, such Seller
will be required on the next succeeding Monthly Remittance Date to (or will
cause an affiliate of the Seller to) (i) substitute in lieu of such Home Equity
Loan another Home Equity Loan of like kind (a "Qualified Replacement Mortgage,"
as such term is defined in the Pooling and Servicing Agreement) and deliver any
"Substitution Amount" (the excess, if any, of the Loan Balance of a Home Equity
Loan being replaced over the outstanding principal balance of a replacement Home
Equity Loan plus accrued and unpaid interest) to the Trustee on behalf of the
Trust as part of the Monthly Remittance remitted by the Servicer on such Monthly
Remittance Date or (ii) purchase such Home Equity Loan at a purchase price equal
to the Loan Purchase Price thereof, which purchase price shall be delivered to
the Trust along with the Monthly Remittance remitted by the Servicer on such
Monthly Remittance Date.
In addition to the foregoing, the Trustee has agreed to make a review
during the 18th month after the Closing Date indicating the current status of
the exceptions previously noted by the Trustee (the "Final Certification").
After delivery of the Final Certification, the Trustee and the Servicer shall
provide to the Certificate Insurer no less frequently than monthly, updated
certifications indicating the then current status of exceptions, until all such
exceptions have been eliminated. Servicing and Sub-Servicing
The Servicer is required to service the Home Equity Loans in
accordance with the Pooling and Servicing Agreement and the servicing standards
set forth in FannieMae's Servicing Guide (the "FannieMae Guide"); provided,
however, that to the extent such standards, such obligations or the FannieMae
Guide is amended by FannieMae after the date of the Pooling and Servicing
Agreement and the effect of such amendment would be to impose upon the Servicer
any material additional costs or other burdens relating to such servicing
obligations, the Servicer may, at its option, determine not to comply with such
amendment.
The Servicer is entitled to the Servicing Fee to the extent received.
In addition, the Servicer will be entitled to retain additional servicing
compensation in the form of prepayment charges, release fees, bad check charges,
assumption fees, late payment charges, or any other servicing-related fees, Net
Liquidation Proceeds not required to be deposited in the Principal and Interest
Account pursuant to the Pooling and Servicing Agreement, and similar items.
The Servicer is required to create, or cause to be created, in the
name of the Trustee at one or more depository institutions a principal and
interest account maintained as a trust account in the trust department of such
institution (the "Principal and Interest Account"). All funds in the Principal
and Interest Account are required to be held (i) uninvested or (ii) invested in
Eligible Investments (as defined in the Pooling and Servicing Agreement). Any
investment of funds in the Principal and Interest Account must mature or be
withdrawable at par on or prior to the immediately succeeding Monthly Remittance
Date. Any investment earnings on funds held in the Principal and Interest
Account are for the account of, and any losses therein are also for the account
of and must be promptly replenished by, the Servicer.
The Servicer is required to deposit to the Principal and Interest
Account, within one business day following receipt, all principal collections on
the Home Equity Loans received, and interest collections on the Home Equity
Loans accrued after the Cut-Off Date, including any Prepayments, the proceeds of
any liquidation of a Home Equity Loan net of expenses and unreimbursed
Delinquency Advances ("Net Liquidation Proceeds"), any income from REO
Properties and Delinquency Advances, but net of (i) the Servicing Fee with
respect to each Home Equity Loan and other servicing compensation, (ii)
principal collected and interest accrued on any Home Equity Loan prior to the
Cut-Off Date, (iii) Net Liquidation Proceeds to the extent that such Net
Liquidation Proceeds exceed the sum of (I) the Loan Balance of the related Home
Equity Loan, plus (II) accrued and unpaid interest on such Home Equity Loan (net
of the Servicing Fee) to the date of such liquidation, (iv) reimbursements for
Delinquency Advances, and (v) reimbursement for amounts deposited in the
Principal and Interest Account representing payments of principal and/or
interest on a Note by a Mortgagor which are subsequently returned by a
depository institution as unpaid (all such net amounts being referred to herein
as the "Daily Collections").
The Servicer may make withdrawals for its own account from the amounts
on deposit in the Principal and Interest Account, in the following order and
only for the following purposes:
(i) to withdraw interest paid with respect to any Home Equity Loans
that had accrued for periods on or prior to the Cut-Off Date;
(ii) to withdraw investment earnings on amounts on deposit in the
Principal and Interest Account;
(iii) to reimburse itself for unrecovered Delinquency Advances and
Servicing Advances;
(iv) to withdraw amounts that have been deposited to the Principal and
Interest Account in error; and
(v) to clear and terminate the Principal and Interest Account
following the termination of the Trust.
The Servicer will remit to the Trustee for deposit in the Certificate
Account the Daily Collections allocable to a Remittance Period not later than
the related Monthly Remittance Date, and Loan Purchase Prices and Substitution
Amounts two Business Days following the related purchase or substitution, as the
case may be.
If the amount on deposit in the Certificate Account as of any Monthly
Remittance Date is less than the sum of (I) the Interest Remittance Amount and
(II) the Principal Remittance Amount on such Monthly Remittance Date, the
Servicer is required to remit to the Trustee for deposit to the Certificate
Account a sufficient amount of its own funds to make the total amount remitted
to the Trustee equal to such sum. Such amounts of the Servicer's own funds so
deposited are "Delinquency Advances," including but not limited to any amount
advanced due to the invocation by a Mortgagor of the relief provisions provided
by the Soldiers' and Sailors' Civil Relief Act of 1940, as amended. The Servicer
may reimburse itself for any Delinquency Advances paid from the Servicer's own
funds, from collections on the Home Equity Loans or from Monthly Excess Cashflow
Amount as specified in the Pooling and Servicing Agreement.
Notwithstanding the foregoing, if the Servicer determines that the
aggregate unreimbursed Delinquency Advances exceed the aggregate remaining
scheduled payments due from the Mortgagors on the Home Equity Loans, the
Servicer shall not be required to make any future Delinquency Advances and shall
be entitled to reimbursement for such aggregate unreimbursed Delinquency
Advances as provided in the immediately prior sentence. The Servicer shall give
written notice of such determination to the Trustee and the Certificate Insurer;
the Trustee shall promptly furnish a copy of such notice to the Owners of the
Class R Certificates; provided, further, that the Servicer shall be entitled to
recover any unreimbursed Delinquency Advances from the Liquidation Proceeds for
the related Home Equity Loans.
The Servicer will be required to pay all "out of pocket" costs and
expenses incurred in the performance of its servicing obligations, including,
but not limited to, (i) expenditures in connection with a foreclosed Home Equity
Loan prior to the liquidation thereof, including, without limitation,
expenditures for real estate property taxes, hazard insurance premiums, property
restoration or preservation ("Preservation Expenses"), (ii) the cost of any
enforcement or judicial proceedings, including foreclosures and (iii) the cost
of the management and liquidation of Property acquired in satisfaction of the
related Mortgage. Such costs will constitute "Servicing Advances." The Servicer
may reimburse itself for a Servicing Advance (x) to the extent permitted by the
Home Equity Loans or, if not theretofore recovered from the Mortgagor on whose
behalf such Servicing Advance was made, from Liquidation Proceeds realized upon
the liquidation of the related Home Equity Loan or (y) from Monthly Excess
Cashflow Amount as specified in the Pooling and Servicing Agreement. Except as
provided above, in no case may the Servicer recover Servicing Advances from the
principal and interest payments on any other Home Equity Loan.
A full month's interest at the related Coupon Rate less the Servicing
Fee will be due to the Trust on the outstanding Loan Balance of each Home Equity
Loan as of the beginning of each Remittance Period. If a Prepayment of a Home
Equity Loan occurs during any calendar month, any difference between the
interest collected from the Mortgagor in connection with such prepayment and the
full month's interest at the Coupon Rate less the Servicing Fee ("Compensating
Interest") plus any Date-of- Payment interest shortfalls (but not in excess of
the aggregate Servicing Fee for the related Accrual Period), will be required to
be deposited to the Principal and Interest Account on the Monthly Remittance
Date by the Servicer and shall be included in the Monthly Remittance to be made
available to the Trustee on the next succeeding Monthly Remittance Date.
The Servicer will have the right and the option, but not the
obligation, to purchase for its own account any Home Equity Loan which becomes
delinquent, in whole or in part, as to four consecutive monthly installments or
any Home Equity Loan as to which enforcement proceedings have been brought by
the Servicer. The purchase price for any such Home Equity Loan is equal to the
Loan Purchase Price thereof, which purchase price shall be delivered to the
Trustee.
The Servicer is required to cause to be liquidated any Home Equity
Loan relating to a Property as to which ownership has been effected in the name
of the Servicer on behalf of the Trust and which has not been liquidated within
23 months of such effecting of ownership at such price as the Servicer deems
necessary to comply with this requirement, or within such period of time as may,
in the opinion of counsel nationally recognized in federal income tax matters,
be permitted under the Code.
If so required by the terms of any Home Equity Loan, the Servicer will
be required to cause hazard insurance to be maintained with respect to the
related Property and to advance sums on account of the premiums therefor if not
paid by the Mortgagor if permitted by the terms of such Home Equity Loan.
The Servicer will have the right under the Pooling and Servicing
Agreement to accept applications of Mortgagors for consent to (i) partial
releases of Mortgages, (ii) alterations of Properties and (iii) removal,
demolition or division of Properties. No application for approval may be
considered by the Servicer unless: (i) the provisions of the related Note and
Mortgage have been complied with; (ii) the loan-to-value ratio and
debt-to-income ratio after any release does not exceed the maximum loan-to-value
ratio and debt-to-income ratio established in accordance with the underwriting
standards set forth under the caption "The Sellers and the Servicer-Credit and
Underwriting Guidelines" herein to be applicable to such Home Equity Loan; and
(iii) the lien priority of the related Mortgage is not affected.
The Servicer will be permitted under the Pooling and Servicing
Agreement to enter into Sub-Servicing Agreements for any servicing and
administration of Home Equity Loans with any institution which (i) is a FHLMC or
FannieMae approved Seller-Servicer for second mortgage loans and has equity of
at least $5,000,000 or (ii) is an affiliate of the Servicer.
Notwithstanding any Sub-Servicing Agreement, the Servicer will not be
relieved of its obligations under the Pooling and Servicing Agreement and the
Servicer will be obligated to the same extent and under the same terms and
conditions as if it alone were servicing and administering the Home Equity
Loans. The Servicer shall be entitled to enter into any agreement with a
Sub-Servicer for indemnification of the Servicer by such Sub-Servicer and
nothing contained in such Sub-Servicing Agreement shall be deemed to limit or
modify the Pooling and Servicing Agreement.
The Servicer (except Manufacturers and Traders Trust Company if it is
required to succeed the Servicer under the Pooling and Servicing Agreement)
agrees to indemnify and hold the Trustee, the Certificate Insurer and each Owner
harmless against any and all claims, losses, penalties, fines, forfeitures,
legal fees and related costs, judgments, and any other costs, fees and expenses
that the Trustee, the Certificate Insurer and any Owner may sustain in any way
related to the failure of the Servicer to perform its duties and service the
Home Equity Loans in compliance with the terms of the Pooling and Servicing
Agreement. The Servicer shall immediately notify the Trustee, the Certificate
Insurer and each Owner if a claim is made by a third party with respect to the
Pooling and Servicing Agreement, and the Servicer shall assume (with the consent
of the Trustee) the defense of any such claim and pay all expenses in connection
therewith, including reasonable counsel fees, and promptly pay, discharge and
satisfy any judgment or decree which may be entered against the Servicer, the
Trustee, the Certificate Insurer and/or Owner in respect of such claim. The
Trustee may, if necessary, reimburse the Servicer from amounts otherwise
distributable on the Retained Certificates for all amounts advanced by it
pursuant to the preceding sentence except when the claim relates directly to the
failure of the Servicer to service and administer the Home Equity Loans in
compliance with the Pooling and Servicing Agreement.
The Servicer will be required to deliver to the Trustee, the
Certificate Insurer and the Rating Agencies: (1) on or before March 31 of each
year, commencing in 1998, an officers' certificate stating, as to each signer
thereof, that (i) a review of the activities of the Servicer during such
preceding calendar year and of performance under the Pooling and Servicing
Agreement has been made under such officers' supervision, and (ii) to the best
of such officers' knowledge, based on such review, the Servicer has fulfilled
all its obligations under the Pooling and Servicing Agreement for such year, or,
if there has been a default in the fulfillment of all such obligation,
specifying each such default known to such officers and the nature and status
thereof including the steps being taken by the Servicer to remedy such default;
and (2) on or before June 30 of any year commencing in 1998, a letter or letters
of a firm of independent, nationally recognized certified public accountants as
of the date of the Servicer's fiscal audit stating that such firm has examined
the Servicer's overall servicing operations in accordance with the requirements
of the Uniform Single Attestation Program for Mortgage Bankers, and stating such
firm's conclusions relating thereto.
REMOVAL AND RESIGNATION OF SERVICER
The Certificate Insurer or the Owners, with the consent of the
Certificate Insurer, will have the right pursuant to the Pooling and Servicing
Agreement, to remove the Servicer upon the occurrence of: (a) certain acts of
bankruptcy or insolvency on the part of the Servicer; (b) certain failures on
the part of the Servicer to perform its obligations under the Pooling and
Servicing Agreement; or (c) the failure to cure material breaches of the
Servicer's representations in the Pooling and Servicing Agreement.
The Pooling and Servicing Agreement also provides that the Certificate
Insurer may remove the Servicer if delinquencies and/or losses exceed certain
levels set forth in the Pooling and Servicing Agreement (the "Servicer
Termination Event").
The Servicer is not permitted to resign from the obligations and
duties imposed on it under the Pooling and Servicing Agreement except upon
determination that its duties thereunder are no longer permissible under
applicable law or are in material conflict by reason of applicable law with any
other activities carried on by it, the other activities of the Servicer so
causing such conflict being of a type and nature carried on by the Servicer on
the date of the Pooling and Servicing Agreement. Any such determination
permitting the resignation of the Servicer is required to be evidenced by an
opinion of counsel to such effect which shall be delivered to the Trustee and
the Certificate Insurer by the Servicer at its expense (provided that if the
Certificate Insurer and such Owners cannot agree as to the acceptability of such
successor Servicer, the decision of the Certificate Insurer shall control).
Upon removal or resignation of the Servicer, the Trustee (x) may
solicit bids for a successor servicer and (y) pending the appointment of a
successor Servicer as a result of soliciting such bids, shall serve as Servicer.
The Trustee, if it is unable to obtain a qualifying bid and is prevented by law
from acting as servicer, will be required to appoint, or petition a court of
competent jurisdiction to appoint, any housing and home finance institution,
bank or mortgage servicing institution designated as an approved seller-servicer
by the Federal Home Loan Mortgage Corporation ("FHLMC") or FannieMae
("FannieMae") having equity of not less than $5,000,000, and acceptable to the
Owners of the Class R Certificates and the Certificate Insurer, as the successor
to the Servicer in the assumption of all or any part of the responsibilities,
duties or liabilities of the Servicer.
No removal or resignation of the Servicer will become effective until
the Trustee or a successor servicer shall have assumed the Servicer's
responsibilities and obligations in accordance with the Pooling and Servicing
Agreement. The Trustee
Manufacturers and Traders Trust Company, a New York banking
corporation, having its principal corporate trust office at One M&T Plaza,
Buffalo, New York, 14240 will be named as Trustee under the Pooling and
Servicing Agreement. Reporting Requirements
On each Payment Date the Trustee is required to report in writing to
each Owner, each Rating Agency and the Certificate Insurer:
(i) the amount of the distribution with respect to the each Class of
Trust Certificates (based on a Certificate in the original principal
amount of $1,000);
(ii) the amount of such distribution allocable to principal on the
Home Equity Loans, separately identifying the aggregate amount of any
Prepayments or other recoveries of principal included therein and any
Extra Principal Distribution Amount;
(iii) the amount of such distribution allocable to interest on the
Home Equity Loans (based on a Certificate in the original principal
amount of $1,000);
(iv) the Interest Carry Forward Amount for each Class;
(v) the principal amount and the Planned Principal Balance, if any, of
each Class of the Offered Certificates (based on a Certificate in the
original principal amount of $1,000) which will be outstanding after
giving effect to any payment of principal on such Payment Date;
(vi) the aggregate Loan Balance of all Home Equity Loans as of the
last day of the related Remittance Period;
(vii) the aggregate Loan Balance of the Fixed Rate Loans as of the
last day of the related Remittance Period;
(viii) the aggregate Loan Balance of the Adjustable Rate Loans as of
the last day of the related Remittance Period;
(ix) based upon information furnished by the Seller such information
as may be required by Section 6049(d)(7)(C) of the Code and the
regulations promulgated thereunder to assist the Owners in computing
their market discount;
(x) the total of any Substitution Amounts or Loan Purchase Price
amounts included in such distribution;
(xi) the weighted average Coupon Rate of the Home Equity Loans;
(xii) the weighted average Coupon rate of the Fixed Rate Loans;
(xiii) the weighted average Coupon Rate of the Adjustable Rate Loans;
(xiv) whether a Delinquency Trigger Event, Cumulative Realized Loss
Trigger Event and/or the Servicer Termination Event has occurred;
(xv) the Senior Enhancement Percentage;
(xvi) the Overcollateralization Amount;
(xvii) the amount of any Applied Realized Loss Amount, Realized Loss
Amortization Amount and Unpaid Realized Loss Amount for the
Subordinate Certificates as of the close of such Payment Date;
(xviii) the Pass-Through Rate for the Floating Rate Certificates and
the Auction Rate Certificates applicable to the related Accrual Period
and if either such Pass-Through Rate was based on the Available Funds
Cap, that such Pass-Through Rate would have been in the absence
thereof;
(xix) the Available Funds Cap for such Payment Date;
(xx) the amount of any Insured Payment included in the distribution to
Owners of Class A Trust Certificates; and
(xxi) any Reimbursement Amount paid on such Payment Date and any
Reimbursement Amount remaining unpaid.
Certain obligations of the Trustee to provide information to the
Owners are conditioned upon such information being received from the Servicer.
In addition, on each Payment Date the Trustee will be required to
distribute to each Owner and the Certificate Insurer, together with the
information described above, the following information prepared by the Servicer
and furnished to the Trustee for such purpose;
(a) the number and aggregate principal balances of all Home Equity
Loans, the Fixed Rate Loans and the Adjustable Rate Loans (i) 30-59
days delinquent, (ii) 60-89 days delinquent and (iii) 90 or more days
delinquent, as of the close of business on the last business day of
the calendar month next preceding the Payment Date and the number and
aggregate Loan Balances of such Loans and related data;
(b) the status and the number and dollar amounts of all Home Equity
Loans, the Fixed Rate Loans and the Adjustable Rate Loans in
foreclosure proceedings as of the close of business on the last
business day of the calendar month next preceding such Payment Date;
(c) the number of Mortgagors and the Loan Balances of the related
Mortgages for all Home Equity Loans, the Fixed Rate Loans and the
Adjustable Rate Loans involved in bankruptcy proceedings as of the
close of business on the last business day of the calendar month next
preceding such Payment Date;
(d) the existence and status of any Properties for all Home Equity
Loans, the Fixed Rate Loans and the Adjustable Rate Loans as to which
title has been taken in the name of, or on behalf of the Trustee, as
of the close of business of the last business day of the month next
preceding the Payment Date;
(e) the book value of any real estate acquired through foreclosure or
grant of a deed in lieu of foreclosure for all Home Equity Loans, the
Fixed Rate Loans and the Adjustable Rate Loans as of the close of
business on the last business day of the calendar month next preceding
the Payment Date;
(f) the amount of cumulative Realized Losses for all Home Equity
Loans, the Fixed Rate Loans and the Adjustable Rate Loans; and
(g) the Three-Month Rolling Average 60+ Delinquency Rate for all Home
Equity Loans, the Fixed Rate Loans and the Adjustable Rate Loans.
REMOVAL OF TRUSTEE FOR CAUSE
The Trustee may be removed upon the occurrence of any one of the
following events (whatever the reason for such event and whether it shall be
voluntary or involuntary or be effected by operation of law or pursuant to any
judgment, decree or order of any court or any order, rule or regulation of any
administrative or governmental body) on the part of the Trustee: (1) failure to
make distributions of available amounts; (2) certain breaches of covenants and
representations by the Trustee; (3) certain acts of bankruptcy or insolvency on
the part of the Trustee; and (4) failure to meet the standards of Trustee
eligibility as set forth in the Pooling and Servicing Agreement.
If any such event occurs and is continuing, then and in every such
case the Certificate Insurer or with the prior written consent of the
Certificate Insurer (such consent not to be withheld unreasonably) (x) the
Sellers or (y) the Owners of a majority of the Percentage Interests represented
by the Offered Certificates or, if there are no Offered Certificates then
Outstanding, by a majority of the Percentage Interests represented by the Class
R Certificates, may appoint a successor trustee.
THE AUCTION AGENT
Bankers Trust Company, a New York banking corporation, will act as
Auction Agent with respect to the Auction Rate Certificates pursuant to an
Auction Agent Agreement to be entered into between the Depositor, the Trustee
and the Auction Agent. Governing Law
The Pooling and Servicing Agreement and each Certificate will be
construed in accordance with and governed by the laws of the State of New York
applicable to agreements made and to be performed therein.
AMENDMENTS
The Trustee, the Depositor, the Sellers and the Servicer with the
consent of the Certificate Insurer may, at any time and from time to time and
without notice to or the consent of the Owners, amend the Pooling and Servicing
Agreement, and the Trustee and the Certificate Insurer will be required to
consent to such amendment, for the purposes of (i) if accompanied by an
approving opinion of counsel experienced in federal income tax matters in form
and substance acceptable to the Certificate Insurer, removing the restriction
against the transfer of a Class R Certificate to a Disqualified Organization (as
such term is defined in the Code), (ii) complying with the requirements of the
Code including any amendments necessary to maintain REMIC status, (iii) curing
any ambiguity, (iv) correcting or supplementing any provisions therein which are
inconsistent with any other provisions therein or (v) for any other purpose,
provided that in the case of clause (v), such amendment shall not adversely
affect in any material respect any Owner. Any such amendment shall be deemed not
to adversely affect in any material respect any Owner if there is delivered to
the Trustee written notification from each Rating Agency that such amendment
will not cause such Rating Agency to reduce its then current rating assigned to
any Class of the Offered Certificates without regard to the related Certificate
Insurance Policy. Notwithstanding anything to the contrary, no such amendment
shall (a) change in any manner the amount of, or delay the timing of, payments
which are required to be distributed to any Owner without the consent of the
Owner of such Certificate or (b) change the percentages of Percentage Interest
which are required to consent to any such amendments, without the consent of the
Owners of all Certificates of the Class or Classes affected then outstanding.
TERMINATION OF THE TRUST
The Pooling and Servicing Agreement provides that the Trust will
terminate upon the payment to the Owners of all Trust Certificates from amounts
other than those available under the related Certificate Insurance Policy of all
amounts required to be paid to such Owners upon the last to occur of (a) the
final payment or other liquidation (or any advance made with respect thereto) of
the last Home Equity Loan, (b) the disposition of all property acquired in
respect of any Home Equity Loan remaining in the Trust Estate and (c) at any
time when a Qualified Liquidation of the Trust Estate is effected as described
below. To effect a termination pursuant to clause (c) above, the Owners of all
Trust Certificates then outstanding will be required (i) unanimously to direct
the Trustee on behalf of the REMIC to adopt a plan of complete liquidation, as
contemplated by Section 860F(a)(4) of the Code and (ii) to furnish to the
Trustee an opinion of counsel experienced in federal income tax matters
acceptable to the Trustee and the Certificate Insurer to the effect that such
liquidation constitutes a Qualified Liquidation.
OPTIONAL TERMINATION
By Owners of Class R Certificates. At their option, the Owners of a
majority of the Percentage Interest represented by the Class R Certificates of
the first-tier REMIC then outstanding may, on any Monthly Remittance Date in or
after the month in which the aggregate outstanding Loan Balances of the Home
Equity Loans has declined to less than 10% of the Original Aggregate Loan
Balance (the "Clean-Up Call Date"), purchase from the Trust all (but not fewer
than all) remaining Home Equity Loans, in whole only, and other property
acquired by foreclosure, deed in lieu of foreclosure, or otherwise then
constituting the Trust Estate (i) on terms agreed upon between the Certificate
Insurer and such Owners of the Class R Certificates of the first-tier REMIC, or
(ii) in the absence of such agreement at a price equal to 100% of the aggregate
Loan Balance of the related Home Equity Loans as of the day of purchase minus
amounts remitted from the Principal and Interest Account to the Certificate
Account representing collections of principal on the Home Equity Loans during
the current Remittance Period, plus one month's interest on such amount computed
at the Adjusted Pass-Through Rate (as defined in the Pooling and Servicing
Agreement), plus all accrued and unpaid Servicing Fees plus the aggregate amount
of any unreimbursed Delinquency Advances and Servicing Advances and Delinquency
Advances which the Servicer has theretofore failed to remit plus any amounts due
and owing to the Certificate Insurer under the Insurance Agreement; PROVIDED
that any such purchase price pursuant to clauses (i) or (ii) shall be sufficient
to pay the outstanding Certificate Principal Balances of and accrued and unpaid
interest on, all Classes of outstanding Class A Trust and Class B Certificates
plus any amounts due and owing to MBIA under the Insurance Agreement.
Accordingly, the Class B Certificateholders would not recover Class B Unpaid
Applied Realized Losses, if any.
Termination Upon Loss of REMIC Status. Following a final determination
by the Internal Revenue Service or by a court of competent jurisdiction, in
either case from which no appeal is taken within the permitted time for such
appeal, or if any appeal is taken, following a final determination of such
appeal from which no further appeal can be taken, to the effect that the REMIC
does not and will no longer qualify as a "REMIC" pursuant to Section 860D of the
Code (the "Final Determination"), at any time on or after the date which is 30
calendar days following such Final Determination, the Owners of a majority in
Percentage Interests represented by the Offered Certificates then Outstanding
with the consent of the Certificate Insurer may direct the Trustee on behalf of
the Trust to adopt a plan of complete liquidation, as contemplated by Section
860F(a)(4) of the Code.
THE GRANTOR TRUST AGREEMENT
In addition to the provisions of the Grantor Trust Agreement
summarized elsewhere in this Prospectus Supplement, there is set forth below a
summary of certain other provisions of the Grantor Trust Agreement. Assignment
of Class A-2 Fixed Certificates
Pursuant to the Grantor Trust Agreement, the Depositor on the Closing
Date will transfer, assign, set over and otherwise convey without recourse to
the Grantor Trustee in trust all of its respective right, title and interest in
and to the Class A-2 Fixed Certificates and all its respective right, title and
interest in and to principal and interest due on each such Class A-2 Fixed
Certificate (together with the Swap Agreement, the amounts on deposit in the
Grantor Trust Account and the related Certificate Insurance Policy, the "Grantor
Trust Estate"). Purely as a protective measure and not to be construed as
contrary to the parties' intent that the transfer on the Closing Date is a sale,
the Depositor has been deemed to have granted to the Grantor Trustee a security
interest in the Grantor Trust Estate in the event that the transfer of the
Grantor Trust Estate is deemed to be a loan and not a sale.
In connection with the transfer and assignment of the Class A-2 Fixed
Certificates on the Closing Date, the Depositor will deliver to the Grantor
Trustee without recourse the Class A-2 Fixed Certificates. Servicing
The Servicer will be required to pay all "out of pocket" costs and
expenses incurred in the performance of its servicing obligations.
The Servicer (except Manufacturers and Traders Trust Company if it is
required to succeed the Servicer under the Grantor Trust Agreement) agrees to
indemnify and hold the Grantor Trustee, the Certificate Insurer and each Owner
of a Class A-2 Floating Certificate harmless against any and all claims, losses,
penalties, fines, forfeitures, legal fees and related costs, judgments, and any
other costs, fees and expenses that the Grantor Trustee, the Certificate Insurer
and any Owner of a Class A-2 Floating Certificate may sustain in any way related
to the failure of the Servicer to perform its duties. The Servicer shall
immediately notify the Grantor Trustee, the Certificate Insurer and each Owner
if a claim is made by a third party with respect to the Grantor Trust Agreement,
and the Servicer shall assume (with the consent of the Grantor Trustee) the
defense of any such claim and pay all expenses in connection therewith,
including reasonable counsel fees, and promptly pay, discharge and satisfy any
judgment or decree which may be entered against the Servicer, the Grantor
Trustee, the Certificate Insurer and/or Owner in respect of such claim.
REMOVAL AND RESIGNATION OF SERVICER
The Certificate Insurer or the Owners, with the consent of the
Certificate Insurer, will have the right pursuant to the Pooling and Servicing
Agreement, to remove the Servicer under the Pooling and Servicing Agreement upon
the occurrence of: (a) certain acts of bankruptcy or insolvency on the part of
the Servicer; (b) certain failures on the part of the Servicer to perform its
obligations under the Pooling and Servicing Agreement; or (c) the failure to
cure material breaches of the Servicer's representations in the Pooling and
Servicing Agreement.
The Pooling and Servicing Agreement also provides that the Certificate
Insurer may remove the Servicer if delinquencies and/or losses exceed certain
levels set forth in the Pooling and Servicing Agreement (the "Servicer
Termination Event").
The removal of the Servicer pursuant to the Pooling and Servicing
Agreement shall also constitute a removal of the Servicer under the Grantor
Trust Agreement.
The Servicer is not permitted to resign from the obligations and
duties imposed on it under the Grantor Trust Agreement except upon determination
that its duties thereunder are no longer permissible under applicable law or are
in material conflict by reason of applicable law with any other activities
carried on by it, the other activities of the Servicer so causing such conflict
being of a type and nature carried on by the Servicer on the date of the Grantor
Trust Agreement. Any such determination permitting the resignation of the
Servicer is required to be evidenced by an opinion of counsel to such effect
which shall be delivered to the Grantor Trustee and the Certificate Insurer by
the Servicer at its expense (provided that if the Certificate Insurer and such
Owners of the Class A-2 Floating Certificates cannot agree as to the
acceptability of such successor Servicer, the decision of the Certificate
Insurer shall control).
The successor servicer appointed pursuant to the Pooling and Servicing
Agreement shall become the successor servicer under the Grantor Trust Agreement.
No removal or resignation of the Servicer will become effective until
the Trustee or a successor servicer shall have assumed the Servicer's
responsibilities and obligations in accordance with the Pooling and Servicing
Agreement.
THE GRANTOR TRUSTEE
Manufacturers and Traders Trust Company, a New York banking
corporation, having its principal corporate trust office at One M&T Plaza,
Buffalo, New York, 14240 will be named as Grantor Trustee under the Grantor
Trust Agreement.
REPORTING REQUIREMENTS
On each Payment Date the Grantor Trustee is required to report in
writing to each Owner of a Class A-2 Floating Certificate, each Rating Agency
and the Certificate Insurer the same information with respect to the Home Equity
Loans required to be reported by the Trustee as described under "The Pooling and
Servicing Agreement--Reporting Requirements" clauses (i) through (xxi) and with
respect to the Class A-2 Floating Certificates, the following information:
(i) the amount of the distribution with respect to the each Class A-2
Floating Certificates (based on a Certificate in the original
principal amount of $1,000);
(ii) the principal amount and the Planned Principal Balance, if any,
of the Class A-2 Floating Certificates (based on a Certificate in the
original principal amount of $1,000) which will be outstanding after
giving effect to any payment of principal on such Payment Date;
(iii) based upon information furnished by the Seller such information
as may be required by Section 6049(d)(7)(C) of the Code and the
regulations promulgated thereunder to assist the Owners in computing
their market discount;
(iv) whether a Delinquency Trigger Event, Cumulative Realized Loss
Trigger Event and/or the Servicer Termination Event has occurred under
the Pooling and Servicing Agreement;
(v) the Senior Enhancement Percentage;
(vi) the Overcollateralization Amount;
(vii) the amount of any Applied Realized Loss Amount, Realized Loss
Amortization Amount and Unpaid Realized Loss Amount for the
Subordinate Certificates as of the close of such Payment Date;
(viii) the Pass-Through Rate for the Class A-2 Floating Certificates;
and
(ix) the amount of any Insured Payment included in the distribution to
Owners of Class A-2 Floating Trust Certificates.
Certain obligations of the Grantor Trustee to provide information to
the Owners are conditioned upon such information being received from the
Servicer.
In addition, on each Payment Date the Grantor Trustee will be required
to distribute to each Owner and the Certificate Insurer, together with the
information described above, the same information distributed to Owners by the
Trustee under the Pooling and Servicing Agreement as described under paragraph
(a) through (g) above under "The Pooling and Servicing Agreement--Reporting
Requirements."
REMOVAL OF GRANTOR TRUSTEE FOR CAUSE
The Grantor Trustee may be removed upon the occurrence of any one of
the following events (whatever the reason for such event and whether it shall be
voluntary or involuntary or be effected by operation of law or pursuant to any
judgment, decree or order of any court or any order, rule or regulation of any
administrative or governmental body) on the part of the Grantor Trustee: (1)
failure to make distributions of available amounts; (2) certain breaches of
covenants and representations by the Grantor Trustee; (3) certain acts of
bankruptcy or insolvency on the part of the Grantor Trustee; and (4) failure to
meet the standards of Grantor Trustee eligibility as set forth in the Grantor
Trustee Agreement.
If any such event occurs and is continuing, then and in every such case
the Certificate Insurer or with the prior written consent of the Certificate
Insurer (such consent not to be withheld unreasonably), the Owners of a majority
of the Percentage Interests represented by the Class A-2 Floating Certificates
may appoint a successor trustee.
GOVERNING LAW
The Grantor Trust Agreement and each Class-A-2 Floating Certificate
will be construed in accordance with and governed by the laws of the State of
New York applicable to agreements made and to be performed therein.
AMENDMENTS
The Grantor Trustee, the Depositor, the Servicer with the consent of
the Certificate Insurer may, at any time and from time to time and without
notice to or the consent of the Owners, amend the Grantor Trust Agreement, and
the Grantor Trustee and the Certificate Insurer will be required to consent to
such amendment, for the purposes of (i) curing any ambiguity, (ii) correcting or
supplementing any provisions therein which are inconsistent with any other
provisions therein or (iii) for any other purpose, provided that in the case of
clause (iii), such amendment shall not adversely affect in any material respect
any Owner of a Class A-2 Floating Certificate. Any such amendment shall be
deemed not to adversely affect in any material respect any Owner of a Class A-2
Floating Certificate if there is delivered to the Trustee written notification
from each Rating Agency that such amendment will not cause such Rating Agency to
reduce its then current rating assigned to the Class A-2 Floating Certificates
without regard to the related Certificate Insurance Policy and an opinion of
counsel is delivered to the Grantor Trustee indicating that such amendment will
not cause the Grantor Trust Estate to fail to be treated as a grantor trust for
federal income tax purposes under Subpart E, Part I of Subchapter J of the Code.
Notwithstanding anything to the contrary, no such amendment shall (a) change in
any manner the amount of, or delay the timing of, payments which are required to
be distributed to any Owner of a Class A-2 Floating Certificate without the
consent of the Owner of such Certificate or (b) change the percentages of
Percentage Interest which are required to consent to any such amendments,
without the consent of the Owners of all Certificates of the Class affected then
outstanding.
TERMINATION OF THE TRUST
The Grantor Trust Agreement provides that the Grantor Trust will
terminate upon the payment to the Owners of all Class A-2 Floating Certificates
from amounts other than those available under the related Certificate Insurance
Policy of all amounts required to be paid to such Owners upon the final payment
of the Class A-2 Fixed Certificate.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following discussion of certain of the material anticipated federal
income tax consequences of the purchase, ownership and disposition of the
Offered Certificates is to be considered only in connection with "Certain
Federal Income Tax Consequences" in the Prospectus. The discussion herein and in
the Prospectus is based upon laws, regulations, rulings and decisions now in
effect, all of which are subject to change. The discussion below and in the
Prospectus does not purport to deal with all federal tax consequences applicable
to all categories of investors, some of which may be subject to special rules.
Investors should consult their own tax advisors in determining the federal,
state, local and any other tax consequences to them of the purchase, ownership
and disposition of the Offered Certificates.
REMIC ELECTION
The Trust Estate created by the Pooling and Servicing Agreement will
consist of one or more segregated asset pools with respect to which an election
will be made to treat each pool as a REMIC for federal income tax purposes. The
Class A Trust Certificates and Class B Certificates which will be designated as
the regular interests in a REMIC. See "Formation of the Trust and Trust
Property" herein.
Qualification as a REMIC requires ongoing compliance with certain
conditions. Stroock & Stroock & Lavan LLP, special tax counsel, is of the
opinion that, for federal income tax purposes, assuming (i) the appropriate
REMIC elections are timely made and (ii) compliance with the Pooling and
Servicing Agreement, each REMIC formed pursuant to the Pooling and Servicing
Agreement will be treated as a REMIC, the Class A Trust Certificates and Class B
Certificates will be treated as "regular interests" in the REMIC, and the Class
R Certificates will be "residual interests" in a REMIC. Except as indicated
below and in the Prospectus, for federal income tax purposes, regular interests
in a REMIC are treated as debt instruments issued by the REMIC on the date on
which those interests are created, and not as ownership interests in the REMIC
or its assets. Owners of the Class A Trust Certificates and Class B Certificates
that otherwise report income under a cash method of accounting will be required
to report income with respect to such Class A Trust Certificates and Class B
Certificates under an accrual method. See "Certain Federal Income Tax
Consequences" in the Prospectus for a discussion of the taxation of holders of
REMIC regular interests.
The Class A-11 IO Certificates will be issued with original issue
discount. Accordingly, holders of such Certificates will be required to include
in gross income such original issue discount as it accrues under a method that
takes into account the compounding of interest and the prepayment assumption.
See "Certain Federal Income Tax Consequences - Taxation of Regular Certificates
- - Original Issue Discount" in the Prospectus. The prepayment assumption for
calculating original issue discount is 130% of the Prepayment Assumption for the
Fixed Rate Loans and 30% CPR for the Adjustable Rate Loans. See "Prepayment and
Yield Considerations -- Projected Prepayment and Yield for Offered Certificates"
herein.
GRANTOR TRUST
Stroock & Stroock & Lavan LLP, special tax counsel, is of the opinion
that for federal income tax purposes, assuming compliance with the terms of the
Grantor Trust Agreement, the Grantor Trust created pursuant to the Grantor Trust
Agreement will constitute a grantor trust under Subpart E, Part I of Subchapter
J of the Code, and not an association taxable as a corporation. Accordingly,
each holder of a Class A-2 Floating Certificate issued by the grantor trust will
be treated as the owner of an undivided interest in the Class A-2 Fixed
Certificates (which as described above are "regular interests" in a REMIC), the
Swap Agreement, the Certificate Insurance Policy and other assets held by the
Grantor Trust. See "Certain Federal Income Tax Consequences--Federal Income Tax
Consequences for Certificates as to Which No REMIC Election Is Made" in the
Prospectus.
Although the Class A-2 Floating Certificates resemble in certain
respects variable rate debt instruments, their tax treatment can differ
substantially from such an investment. The Certificates may not be a suitable
investment for individuals, trusts or estates and certain "pass-thru entities,"
the beneficial owners of which are individuals, trusts or estates. The Class A-2
Floating Certificates may not be a suitable investment for real estate
investment trusts or REMICs. Moreover, other special rules may apply to certain
investors, including dealers in securities, dealers in notional principal
contracts, and persons holding the Class A-2 Floating Certificates or any of the
assets in the Grantor Trust as part of a straddle.
The interest in the Swap Agreement will not constitute a "real estate
asset" within the meaning of Section 856(c)(4)(A) of the Code if held by a real
estate investment trust, a "qualified mortgage" or "permitted investment" within
the meaning of Sections 860G(a)(3) and 860G(a)(5) of the Code, respectively, if
held by a REMIC, nor an asset described in Section 7701(a)(19)(c)(xi) if held by
a domestic building and loan association. Further, the income received under the
Swap Agreement will not constitute income described in Section 856(c)(3)(B) for
a real estate investment trust.
A purchaser of Class A-2 Floating Certificates will be required to
allocate its purchase price between its ownership interest in the various assets
of the grantor trust. In general, such allocation would be based on the relative
fair market values of such assets on the date of purchase of the Class A-2
Floating Certificate. No representation is or will be made as to such relative
fair market values and holders of Class A-2 Floating Certificates should consult
their tax advisors concerning the determination of such fair market values and
the taxation of the holder's interest in the Swap Agreement, the tax treatment
of which is generally governed by the provisions of the Code and Treasury
regulations relating to notional principal contracts and possibly those relating
to straddles.
Each holder of a Class A-2 Floating Certificate must report on its
federal income tax return ordinary income equal to its share of the interest
payable with respect to the Class A-2 Fixed Certificates and a proportionate
share of the net amounts payable to the Grantor Trust under the Swap Agreement,
and may deduct the portion of the expenses incurred by the Grantor Trust that is
allocable to such Certificate (including net payments under the Swap Agreement),
at the same time and to the same extent as such items would be reported by such
holder if it had purchased and held directly the assets held by the Grantor
Trust and incurred directly its share of expenses incurred by the grantor trust.
A holder of Class A-2 Floating Certificates that is an individual, estate or
trust should consult its tax advisers concerning possible limitations on the
deductibility of expenses of the grantor trust. See "Certain Federal Income Tax
Consequences--Federal Income Tax Consequences for Certificates as to Which No
REMIC Election Is Made--Standard Certificates--General" in the Prospectus regard
such limitations.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended
("ERISA") and the Code impose certain restrictions on employee benefit plans
subject to ERISA and other plans or arrangements subject to Section 4975 of the
Code ("Plans") and on persons who are parties in interest or disqualified
persons ("parties in interest") with respect to such Plans. Certain employee
benefit plans, such as governmental plans and church plans (if no election has
been made under section 410(d) of the Code), are not subject to the restrictions
of ERISA, and assets of such plans may be invested in the Certificates without
regard to the ERISA considerations described below, subject to other applicable
federal and state law. However, any such governmental or church plan which is
qualified under section 401(a) of the Code and exempt from taxation under
section 501(a) of the Code is subject to the prohibited transaction rules set
forth in section 503 of the Code.
Investments by Plans are subject to ERISA's general fiduciary
requirements, including the requirement of investment prudence and
diversification and the requirement that a Plan's investments be made in
accordance with the documents governing the Plan.
Section 406 of ERISA prohibits parties in interest with respect to a
Plan from engaging in certain transactions ("prohibited transactions") involving
a Plan and its assets unless a statutory or administrative exemption applies to
the transaction. Section 4975 of the Code imposes certain excise taxes (or, in
some cases, a civil penalty may be assessed pursuant to section 502(i) of ERISA)
on parties in interest which engage in non-exempt prohibited transactions.
The United States Department of Labor ("DOL") has issued a final
regulation (29 C.F.R. Section 2510.3-101) containing rules for determining what
constitutes the assets of a Plan. This regulation provides that, as a general
rule, the underlying assets and properties of corporations, partnerships, trusts
and certain other entities in which a Plan makes an "equity investment" will be
deemed for purposes of ERISA to be assets of the Plan unless certain exceptions
apply.
Under the terms of the regulation, the Trust may be deemed to hold
plan assets by reason of a Plan's investment in a Certificate; such plan assets
would include an undivided interest in the Home Equity Loans and any other
assets held by the Trust. In such an event, persons providing services with
respect to the assets of the Trust, may be parties in interest, subject to the
fiduciary responsibility provisions of Title I of ERISA, including the
prohibited transaction provisions of Section 406 of ERISA (and of Section 4975
of the Code), with respect to transactions involving such assets unless such
transactions are subject to a statutory or administrative exemption.
THE CLASS A TRUST CERTIFICATES
The DOL has granted administrative exemptions to Greenwich Capital
Markets, Inc. (Prohibited Transaction Exemption 90-59) and Merrill Lynch & Co.
(Prohibited Transaction Exemption 90-29) (collectively, the "Exemptions"), which
exempt from the application of certain of the prohibited transaction rules of
ERISA transactions relating to (i) the initial purchase, the holding and the
subsequent resale by Plans of certificates representing interests in certain
asset-backed pass-through trusts with respect to which any Underwriter or any of
its affiliates is the sole underwriter or the manager or co-manager of the
underwriting syndicate; and (ii) the servicing, operation and management of such
asset-backed pass- through trusts, provided that the general conditions and
certain other conditions set forth in the Exemptions are satisfied.
The general conditions which must be satisfied for the Exemptions to
apply to the Class A Trust Certificates are the following:
(i) the acquisition of the Class A Trust Certificates by a Plan is on
terms (including the price for the Class A Certificates) that are at
least as favorable to the Plan as they would be in an arm's length
transaction with an unrelated party;
(ii) the rights and interests evidenced by the Class A Trust
Certificates acquired by the Plan are not subordinated to the rights
and interests evidenced by other certificates of the Trust;
(iii) the Class A Trust Certificates acquired by the Plan have
received a rating at the time of such acquisition that is in one of
the three highest generic rating categories from any of Standard &
Poor's, Moody's, Fitch or Duff & Phelps Credit Rating Co. (the "Rating
Agencies");
(iv) assets of the type included in the Trust have been included in
other investment pools, certificates evidencing interests in such
other investment pools have been both rated in one of the highest
three generic rating categories by one of the Rating Agencies and have
been purchased by investors, other than Plans, for at least one year
prior to a Plans acquisition of the Class A Trust Certificates in
reliance upon the Exemptions.
(v) the Trustee is not an affiliate of the Underwriters, the
Depositor, the Sellers, the Servicer, any sub- servicer, any borrower
whose obligations under one or more Home Equity Loans constitute more
than 5% of the aggregate unamortized principal balance of the assets
in the Trust, or any of their respective affiliates (the "Restricted
Group");
(vi) the sum of all payments made to, and retained by, the
Underwriters in connection with the distribution of the Class A Trust
Certificates represents not more than reasonable compensation for
underwriting the Class A Certificates; the sum of all payments made to
and retained by the Depositor pursuant to the sale of the Home Equity
Loans to the Trust represents not more than the fair market value of
such Home Equity Loans; and the sum of all payments made to and
retained by the Servicer represents not more than reasonable
compensation for the Servicer's services under the Pooling and
Servicing Agreement and reimbursement of the Servicer's reasonable
expenses in connection therewith; and
(vii) the Plan investing in the Class A Trust Certificates is an
"accredited investor" as defined in Rule 501(a)(1) of Regulation D of
the Securities and Exchange Commission under the Securities Act of
1933, as amended.
Section I.A of the Exemptions would provide an exemption from the
restrictions of sections 406(a) and 407(a) of ERISA as well as the excise taxes
imposed by sections 4975(a) and (b) of the Code by reason of sections
4975(c)(1)(A) through (D) of the Code with respect to a Plan's investment in the
Class A Trust Certificates upon their initial offering or in the secondary
market therefor and the Plan's continued holding of such Certificates if the
above-described general conditions of the Exemptions are satisfied.
Section I.B of the Exemptions would provide an exemption from the
restrictions of sections 406(b)(1) and 406(b)(2) of ERISA as well as the excise
taxes imposed by sections 4975(a) and (b) of the Code by reason of section
4975(c)(1)(E) of the Code with respect to a Plan's investment in the Class A
Trust Certificates upon their initial offering or in the secondary market
therefor and the Plan's continued holding of such Certificates if, in addition
to the above-described general conditions of the Exemptions, the following
conditions are satisfied: (i) such Plan is not sponsored by a member of the
Restricted Group; (ii) at least 50% of each Class of Class A Trust Certificates
is acquired by persons independent of the Restricted Group and at least 50% of
the aggregate interest in the Trust is acquired by persons independent of the
Restricted Group; (iii) the total investment of such Plan in each Class of Class
A Trust Certificates does not exceed 25% of all such Class of Class A Trust
Certificates outstanding at the time of the acquisition; and (iv) immediately
after such investment, no more than 25% of the assets of such Plan are invested
in certificates representing an interest in a trust containing assets sold or
serviced by the same entity.
Section I.C of the Exemptions would provide an exemption from the
restrictions of sections 406(a), 406(b) and 407(a) 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 with respect to the servicing, management and
operation of the Trust if, in addition to the above-described general conditions
of the Exemptions, the following conditions are satisfied: (i) such transactions
are carried out in accordance with the terms of the Pooling and Servicing
Agreement, and (ii) the Pooling and Servicing Agreement is made available to
investors prior to their investment in the Trust.
Section I.D of the Exemptions would provide an exemption from the
restrictions of sections 406(a) and 407(a) of ERISA as well as the excise taxes
imposed by sections 4975(a) and (b) of the Code by reason of sections
4975(c)(1)(A) through (D) of the Code with respect to transactions to which
those restrictions or taxes would otherwise apply merely because a person is
deemed to be a party in interest or a disqualified person (including a
fiduciary) with respect to a Plan by virtue of providing services to the Plan
(or by virtue of having a relationship to such service provider described in
section 3(14)(F), (G), (H) or (I) of ERISA or section 4975(e)(2)(F), (G), (H),
or (I) of the Code), solely because of the Plan's ownership of the Class A Trust
Certificates. Before purchasing a Class A Trust Certificate, a fiduciary of a
Plan should make its own determination as to the availability of the exemptive
relief provided in the Exemptions, and whether the conditions of the Exemptions
will be applicable to such Class A Certificate.
THE CLASS A-2 FLOATING CERTIFICATES
The Exemptions do not apply to the purchase, holding or subsequent
resale of the Class A-2 Floating Certificates. However, Prohibited Transaction
Class Exemption ("PTCE") 75-1, Part II, regarding principal transactions by
broker-dealers should be applicable to the acquisition of the Class A-2 Floating
Certificates, provided that the Underwriter is not a fiduciary with respect to
the Plan (and is not a party in interest with respect to the Plan by reason of
being a participating employer or affiliate thereof). In addition, one or more
of the following prohibited transaction class exemptions may be applicable to
the purchase, holding or subsequent resale of the Class A-2 Floating
Certificates by a Plan; (i) PTCE 96-23, regarding investments determined by
in-house asset managers, (ii) PTCE 95-60, regarding investments by insurance
company pooled accounts; (iii) PTCE 91-38, regarding investments by bank
collective investment funds; (iv) PTCE 90-1; regarding investments by insurance
company pooled separate accounts; or (v) PTCE 84-14, regarding transactions
negotiated by qualified professional asset managers. To the extent that the
acquisition of a Class A-2 Floating Certificate by a Plan is deemed for purposes
of ERISA to be a purchase of an interest in the Class A-2 Fixed Certificates,
the Exemption should be applicable to the purchase, holding or subsequent resale
of such interest.
The Exemptions do not apply to the initial purchase, the holding or
the subsequent resale of the Class B Certificates because such Certificates are
subordinate to certain other Classes of Certificates. Accordingly, Plans may not
purchase the Class B Certificates, except that any insurance company may
purchase such Certificates with assets of its general account if the exemptive
relief granted by the DOL for transactions involving insurance company general
accounts in Prohibited Transaction Exemption 95-60, 60 Fed. Reg. 35925 (October
12, 1995) is available with respect to such investment. Any insurance company
proposing to purchase such Certificates for its general account should consider
whether such relief would be available. By its acquisition of an interest in a
Class B Certificate, the Beneficial Owner thereof will be deemed to have
represented that such Beneficial Owner either (i) is not a Plan and is not
acquiring its interest in such Certificate with the assets of a Plan or (ii) is
an insurance company acquiring its interest as permitted by and in accordance
with the provisions of Prohibited Transaction Exemption 95- 60.
In addition to the matters described above, purchasers of Class A
Trust Certificates, Class B Certificates or Class A-2 Floating Certificates that
are insurance companies should consult with their counsel with respect to the
United States Supreme Court case interpreting the fiduciary responsibility rules
of ERISA, JOHN HANCOCK MUTUAL LIFE INSURANCE CO. V. HARRIS TRUST AND SAVINGS
BANK 114 S.Ct. 517 (1993). In JOHN HANCOCK, the Supreme Court ruled that assets
held in an insurance company's general account may be deemed to be "plan assets"
for ERISA purposes under certain circumstances. Prospective purchasers using
insurance company general account assets should determine whether the decision
or federal legislation enacted affecting insurance company general accounts (see
Section 1460 of the Small Business Job Protection Act of 1996) affects their
ability to make purchases of the Class A Trust Certificates and Class A-2
Floating Certificates.
Any fiduciary of a Plan considering whether to purchase a Class A
Trust Certificate or a Class A-2 Floating Certificate or a Class B Certificate
should consult with its own legal advisors concerning the impact of ERISA and
the Code and the potential consequences to its specific circumstances, prior to
making an investment in the such Certificates. Moreover, each Plan fiduciary
should determine whether under the general fiduciary standards of investment
procedure and diversification an investment in the Class A Trust Certificate,
Class A-2 Floating Certificate, or Subordinated Certificate is appropriate for
the Plan, taking into account the overall investment of the Plan and the
composition of the Plan's investment portfolio.
RATINGS
It is a condition of the issuance of the Offered Certificates that the
Offered Certificates receive at least the ratings from the Rating Agencies as
follows:
CLASS Moody's Standard & Fitch
Poor's
A-1 P-1 A-1+ F-1+
A-2 Floating Aaa AAA AAA
A-3 through A-10 Aaa AAA AAA
A-11 IO Aaa AAAr AAA
B Baa3 BBB- BBB
Explanations of the significance of such ratings may be obtained from
Moody's, 99 Church Street, New York, New York 10007, Standard & Poor's, 26
Broadway, New York, New York 10004 and Fitch, One State Street Plaza, 33rd
Floor, New York, New York 10004. Such ratings will be the views only of such
rating agencies. There is no assurance that such ratings will continue for any
period of time or that such ratings will not be revised or withdrawn. Any such
revision or withdrawal of such ratings may have an adverse effect on the market
price of the Offered Certificates. A security rating is not a recommendation to
buy, sell or hold securities.
The ratings assigned by Fitch to pass-through certificates address the
likelihood of the receipt by the Owners of all distributions to which such
Owners are entitled. Fitch's ratings address the structural and legal aspects
associated with the Certificates, including the nature of the underlying loans
and the credit quality of the credit support provider. Fitch's ratings on home
equity pass-through Certificates do not represent any assessment of the
likelihood or rate of principal prepayments. The ratings do not address the
possibility that Owners might suffer a lower than anticipated yield or that
investors in the Class A-11 IO Certificates may not fully recover their
investment.
The ratings of Moody's on home equity pass-through certificates
address the likelihood of the receipt by the Owners of all distributions to
which such Owners are entitled. Moody's rating opinions address the structural
and legal issues and tax-related aspects associated with the Certificates,
including the nature of the underlying home equity loans and the credit quality
of the credit support provider, if any. Moody's ratings on pass-through
certificates do not represent any assessment of the likelihood that principal
prepayments may differ from those originally anticipated.
The ratings of Moody's, Standard & Poor's and Fitch do not address the
possibility that, as a result of principal prepayments, certificateholders may
receive a lower than anticipated yield.
The ratings of the Offered Certificates should be evaluated
independently from similar ratings on other types of securities. A security
rating is not a recommendation to buy, sell or hold securities and may be
subject to revision or withdrawal at any time by the assigning rating agency.
The Depositor has not requested a rating of the Offered Certificates
by any rating agency other than Moody's, Standard & Poor's and Fitch and the
Depositor has not provided information relating to the Offered Certificates or
the Home Equity Loans to any rating agency other than Moody's, Standard & Poor's
and Fitch. However, there can be no assurance as to whether any other rating
agency will rate the Offered Certificates or, if another rating agency rates
such Certificates, what rating would be assigned to such Certificates by such
rating agency. Any such unsolicited rating assigned by another rating agency to
the Offered Certificates may be lower than the rating assigned to such
Certificates by any of Moody's, Standard & Poor's and Fitch.
LEGAL INVESTMENT CONSIDERATIONS
The Offered Certificates will not constitute "mortgage related
securities" for purpose of SMMEA. The appropriate characterization of the
Offered Certificates under various legal investment restrictions, and thus the
ability of investors subject to these restrictions to purchase the Offered
Certificates, may be subject to significant interpretive uncertainties. All
investors whose investment authority is subject to legal restrictions should
consult their own legal advisors to determine whether and to what extent the
Offered Certificates offered hereby will constitute legal investments for them.
The Depositor makes no representation as to the proper characterization
of the Certificates offered hereby for legal investment of financial institution
regulatory purposes, or as to the ability of particular investors to purchase
the Offered Certificates under applicable legal investment restrictions. The
uncertainties described above (and any unfavorable future determinations
concerning legal investment or financial institution regulatory characteristics
of the Offered Certificates offered hereby) may adversely affect the liquidity
of the Offered Certificates.
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting
Agreement relating to the Offered Certificates (the "Underwriting Agreement"),
the Depositor has agreed to sell to each of the Underwriters named below (the
"Underwriters"), and each of the Underwriters has severally agreed to purchase,
the principal amount or Percentage Interest of the Offered Certificates set
forth opposite its name below:
SCHEDULE A
Class A-1 Certificates
UNDERWRITERS Principal Underwriting
Amount Discount
Greenwich Capital $17,223,335 0.080%
Markets, Inc. Bear, Stearns & Co. Inc. $17,223,333 0.080%
Credit Suisse First $17,223,333 0.080%
Boston Corporation
Merrill Lynch, Pierce, $17,223,333 0.080%
Fenner & Smith Incorporated
Morgan Stanley Dean Witter $17,223,333 0.080%
Nomura Securities $17,223,333 0.080%
International, Inc.
Class A-2 Certificates
UNDERWRITERS Principal Underwriting
Amount Discount
Greenwich Capital Markets, Inc. $112,500,000 0.175%
Bear, Stearns & Co. Inc. $112,500,000 0.175%
Credit Suisse First $112,500,000 0.175%
Boston Corporation
Merrill Lynch, Pierce, $112,500,000 0.175%
Fenner & Smith Incorporated
Morgan Stanley Dean Witter $112,500,000 0.175%
Nomura Securities $112,500,000 0.175%
International, Inc.
Class A-3 Certificates
UNDERWRITERS Principal Underwriting
Amount Discount
Greenwich Capital Markets, Inc. $10,500,000 0.250%
Bear, Stearns & Co. Inc. $10,500,000 0.250%
Credit Suisse First $10,500,000 0.250%
Boston Corporation
Merrill Lynch, Pierce, $10,500,000 0.250%
Fenner & Smith Incorporated
Morgan Stanley Dean Witter $10,500,000 0.250%
Nomura Securities $10,500,000 0.250%
International, Inc.
Class A-4 Certificates
UNDERWRITERS PRINCIPAL UNDERWRITING
AMOUNT DISCOUNT
Greenwich Capital Markets, Inc. $23,333,335 0.325%
Bear, Stearns & Co. Inc. $23,333,333 0.325%
Credit Suisse First $23,333,333 0.325%
Boston Corporation
Merrill Lynch, $23,333,333 0.325%
Pierce, Fenner & Smith Incorporated
Morgan Stanley Dean Witter $23,333,333 0.325%
Nomura Securities $23,333,333 0.325%
International, Inc.
Class A-5 Certificates
UNDERWRITERS PRINCIPAL UNDERWRITING
AMOUNT DISCOUNT
Greenwich Capital Markets, Inc. $6,666,670 0.350 %
Bear, Stearns & Co. Inc. $6,666,666 0.350 %
Credit Suisse First $6,666,666 0.350 %
Boston Corporation
Merrill Lynch, Pierce, $6,666,666 0.350 %
Fenner & Smith Incorporated
Morgan Stanley Dean Witter $6,666,666 0.350 %
Nomura Securities $6,666,666 0.350 %
International, Inc.
Class A-6 Certificates
UNDERWRITERS PRINCIPAL UNDERWRITING
AMOUNT DISCOUNT
Greenwich Capital Market, Inc. $19,256,670 0.400%
Bear, Stearns & Co. Inc. $19,256,666 0.400%
Credit Suisse First $19,256,666 0.400%
Boston Corporation
Merrill Lynch, Pierce, $19,256,666 0.400%
Fenner & Smith Incorporated
Morgan Stanley Dean Witter $19,256,666 0.400%
Nomura Securities $19,256,666 0.400%
International, Inc.
Class A-7 Certificates
UNDERWRITERS PRINCIPAL UNDERWRITING
AMOUNT DISCOUNT
Greenwich Capital Markets, Inc. $21,666,670 0.175%
Bear, Stearns & Co. Inc. $21,666,666 0.175%
Credit Suisse First $21,666,666 0.175%
Boston Corporation
Merrill Lynch, Pierce, $21,666,666 0.175%
Fenner & Smith Incorporated
Morgan Stanley Dean Witter $21,666,666 0.175%
Nomura Securities $21,666,666 0.175%
International, Inc.
Class A-8 Certificates
UNDERWRITERS PRINCIPAL UNDERWRITING
AMOUNT DISCOUNT
Greenwich Capital Markets, Inc. $18,253,335 0.250%
Bear, Stearns & Co. Inc. $18,253,333 0.250%
Credit Suisse First $18,253,333 0.250%
Boston Corporation
Merrill Lynch, Pierce, $18,253,333 0.250%
Fenner & Smith Incorporated
Morgan Stanley Dean Witter $18,253,333 0.250%
Nomura Securities $18,253,333 0.250%
International, Inc.
Class A-9 Certificates
UNDERWRITERS PRINCIPAL UNDERWRITING
AMOUNT DISCOUNT
Greenwich Capital Markets, Inc. $5,934,170 0.200%
Bear, Stearns & Co. Inc. $5,934,166 0.200%
Credit Suisse First $5,934,166 0.200%
Boston Corporation
Merrill Lynch, Pierce, $5,934,166 0.200%
Fenner & Smith Incorporated
Morgan Stanley Dean Witter $5,934,166 0.200%
Nomura Securities $5,934,166 0.200%
International, Inc.
Class A-10 Certificates
UNDERWRITERS PRINCIPAL UNDERWRITING
AMOUNT DISCOUNT
Merrill Lynch, Pierce, $194,875,000 0.230%
Fenner & Smith Incorporated
Class A-11 IO Certificates
UNDERWRITERS PRINCIPAL UNDERWRITING
AMOUNT DISCOUNT
Greenwich Capital N/A 0.500%
Markets, Inc.
Class B Certificates
UNDERWRITERS PRINCIPAL UNDERWRITING
AMOUNT DISCOUNT
Greenwich Capital Markets, Inc. $5,728,335 0.600%
Bear, Stearns & Co. Inc. $5,728,333 0.600%
ContiFinancial $18,750,000 0.600%
Services Corporation
Credit Suisse First $5,728,333 0.600%
Boston Corporation
Merrill Lynch, Pierce, $5,728,333 0.600%
Fenner & Smith Incorporated
Morgan Stanley Dean Witter $5,728,333 0.600%
Nomura Securities $5,728,333 0.600%
International, Inc.
In the Underwriting Agreement, the Underwriters have agreed, subject
to the terms and conditions set forth therein, to purchase all of the
Certificates offered hereby, if any are purchased. The Depositor has been
advised by the Underwriters that they propose initially to offer the Offered
Certificates to the public at the respective offering prices set forth on the
cover page hereof and to certain dealers at such price less a concession not in
excess of the respective amounts set forth in the table below (expressed as a
percentage of the related Certificate Principal Balance). The Underwriters may
allow and such dealers may reallow a discount not in excess of the respective
amounts set forth in the table below to certain other dealers. After the initial
public offering of the Offered Securities, the public offering price and such
concessions and reallowances may be changed.
Class Selling Concession Reallowance Discount
A-1 .50 .030
A-2 .105 .070
A-3 .150 .100
A-4 .195 .130
A-5 .210 .140
A-6 .240 .160
A-7 .105 .070
A-8 .150 .100
A-9 .120 .080
A-10 .138 .092
A-11 IO .300 .200
B .360 .240
In connection with this offering and in compliance with applicable law
and industry practice, the Underwriters may over-allot or effect transactions
which stabilize, maintain or otherwise affect the market price of the Offered
Certificates at a level above that which might otherwise prevail in the open
market, including stabilizing bids, effecting syndicate covering transactions or
imposting penalty bids. A stabilizing bid means the placing of any bid, or the
effecting of any purchase, for the purpose of pegging, fixing or maintaining the
price of a security. A syndicate covering transaction means the placing of any
bid on behalf of the underwriting syndicate or the effecting of any purchase to
reduce a short position created in connection with the offering. A penalty bid
means an arrangement that permits Greenwich Capital Markets, Inc., as managing
underwriter, to reclaim a selling concession from a syndicate member in
connection with the offering when Offered Certificates originally sold by the
syndicate member are purchased in syndicate covering transactions. The
Underwriters are not required to engage in any of these activities. Any such
activities, if commenced, may be discontinued at any time.
The Depositor has agreed to indemnify the Underwriters against certain
liabilities, including civil liabilities under the Securities Act of 1934, or
contribute to payments which the Underwriters may be required to make in respect
thereof.
The Depositor is an affiliate of ContiFinancial Services Corporation.
REPORT OF EXPERTS
The consolidated financial statements of the Certificate Insurer, MBIA
Insurance Corporation, as of December 31, 1996, and 1995 and for the three years
ended December 31, 1996 incorporated by reference into this Prospectus
Supplement, have been audited by Coopers & Lybrand L.L.P., independent
accountants, as set forth in their report thereon incorporated by reference
herein in reliance upon such report given upon the authority of such firm as
experts in accounting and auditing.
CERTAIN LEGAL MATTERS
Certain legal matters relating to the validity of the issuance of the
Certificates will be passed upon for the Sellers by Stroock & Stroock & Lavan
LLP, New York, New York and by Michael R. Mayberry, Esquire, Counsel for the
Depositor. Certain legal matters relating to insolvency issues and certain
federal income tax matters concerning the Certificates will be passed upon for
the Depositor by Stroock & Stroock & Lavan LLP. Certain legal matters relating
to the issuance of the Certificates will be passed upon for the Underwriters by
Dewey Ballantine LLP, New York, New York.
ANNEX I
AUCTION PROCEDURES
GENERAL
The following description of the Auction Procedures applies to the
Auction Rate Certificates. The term "Certificate," as used in this Annex, refers
to the Auction Rate Certificates, and the term "Certificateholder" refers to
Owners holding Auction Rate Certificates.
DESCRIPTION OF AUCTION PROCEDURES
The following summarizes certain procedures that will be used in
determining the interest rates on the Auction Rate Certificates. Immediately
following this summary is a more detailed description of these procedures.
Prospective investors in the Auction Rate Certificates should read carefully the
following summary, along with the more detailed description.
The interest rate on the Auction Rate Certificates will be determined
periodically by means of a "Dutch Auction." In this Dutch Auction, investors and
potential investors submit orders through an eligible broker/dealer as to the
principal amount of Auction Rate Certificates such investors wish to buy, hold
or sell at various interest rates. The broker/dealers submit their clients'
orders to the auction agent, who processes all orders submitted by all eligible
broker/dealers and determines the interest rate for the upcoming interest
period. The broker/dealers are notified by the auction agent of the interest
rate for the upcoming interest period and are provided with settlement
instructions relating to purchases and sales of Auction Rate Certificates.
In the auction procedures, the following types of orders may be
submitted:
(i) Bid/Hold Orders - the minimum interest rate that a current
investor is willing to accept in order to continue to HOLD some or all
of its Auction Rate Certificates for the upcoming interest period;
(ii) Sell Orders - an order by a current investor to SELL a specified
principal amount of Auction Rate Certificates, regardless of the
upcoming interest rate; and
(iii) Potential Bid Orders - the minimum interest rate that a
potential investor (or a current investor wishing to purchase
additional Auction Rate Certificates) is willing to accept in order to
BUY a specified principal amount of Auction Rate Certificates.
If an existing investor does not submit orders with respect to all its
Auction Rate Certificates, the investor will be deemed to have submitted a Hold
Order at the new interest rate for that portion of the Auction Rate Certificates
for which no order was received.
In connection with each auction, Auction Rate Certificates will be
purchased and sold between investors and potential investors at a price equal to
their then outstanding principal balance (I.E., par) plus any accrued interest.
The following example helps illustrate how the above-described procedures are
used in determining the interest rate on the Auction Rate Certificates. A.
Assumptions:
1. Denominations (Units) = $100,000
2. Interest Period = 28 Days
3. Principal Amount Outstanding = $50 Million (500 Units)
B. Summary of All Orders Received For The Auction
Bid/Hold Orders Sell Orders Potential Bid Orders
- ------------------------------------------------------------------------------
10 Units at 4.90% 50 Units Sell 20 Units at 4.95%
30 Units at 5.02% 50 Units Sell 30 Units at 5.00%
60 Units at 5.05% 100 Units Sell 50 Units at 5.05%
---
100 Units at 5.10% 200 Units 50 Units at 5.10%
100 Units at 5.12% 50 Units at 5.11%
- ---
300 Units 50 Units at 5.14%
100 Units at 5.15%
---
350 Units
Total units under existing Bid/Hold Orders and Sell Orders always equal issue
size (in this case 500 units).
<TABLE>
<CAPTION>
C. Auction Agent Organizes Orders In Ascending Order
Order Number Cumulative Order Number Cumulative
Number of Total Number of Units Total
Units (Units) % (Units) %
- ------------------------------------------------------------ ----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1 10 (W) 10 4.90% 7 100 (W) 300 5.10%
2 20 (W) 30 4.95% 8 50 (W) 350 5.10%
3 30 (W) 60 5.00% 9 50 (W) 400 5.11%
4 30 (W) 90 5.02% 10 100 (W) 500 5.12%
5 50 (W) 140 5.05% 11 50 (L) 5.14%
6 60 (W) 200 5.05% 12 100 (L) 5.15%
(W) Winning Order (L) Losing Order
</TABLE>
Order #10 is the order that clears the market of all available units.
All winning orders are awarded the winning rate (in this case, 5.12%) as the
interest rate for the next Accrual Period, when another auction will be held.
Multiple orders at the winning rate are allocated units on a pro rata basis.
Notwithstanding the foregoing, in no event will the interest rate exceed the
Maximum Auction Rate (as described below).
The above example assumes that a successful auction has occurred
(I.E., all Sell Orders and all Bid/Hold Orders below the new interest rate were
fulfilled). In certain circumstances, there may be insufficient Potential Bid
Orders to purchase all the Auction Rate Certificates offered for sale. In such
circumstances, the interest rate for the upcoming Accrual Period will equal the
Maximum Auction Rate. Also, if all the Auction Rate Certificates are subject to
Hold Orders (I.E., each holder of Auction Rate Certificates wishes to continue
holding its Auction Rate Certificates, regardless of the interest rate, or if no
existing investors submit any orders) the interest rate for the upcoming Accrual
Period will equal the All Hold Rate (as defined below).
As stated above, the foregoing is only a summary of the auction
procedures. The following is a more detailed description of these procedures.
DEFINITIONS
Capitalized terms used herein and not otherwise defined have the
meanings ascribed in the accompanying Prospectus and Prospectus Supplement.
Additionally, the following terms have the meanings ascribed to them:
"Accrual Period" means, with respect to a Certificate, the Initial
Period for such Certificate and each period commencing on the Rate Adjustment
Date for such Certificate and ending on the day before (i) the next Rate
Adjustment Date for such Certificate or (ii) the Final Scheduled Payment Date of
such Certificate, as applicable.
"Agreement" means the Pooling and Servicing Agreement.
"All Hold Rate" means the lesser of (i) ninety percent (90%) of LIBOR
or (ii) the Available Funds Cap.
"Auction" means the implementation of the Auction Procedures on an
Auction Date.
"Auction Agent" means the initial auction agent under the initial
Auction Agent Agreement unless and until a substitute Auction Agent Agreement
acceptable to the Certificate Insurer becomes effective, after which "Auction
Agent" shall mean the substitute auction agent.
"Auction Agent Agreement" means the initial Auction Agent Agreement
unless and until a substitute Auction Agent Agreement is entered into, after
which "Auction Agent Agreement" shall mean such substitute Auction Agent
Agreement.
"Auction Agent Fee" has the meaning set forth in the Auction Agent
Agreement.
"Auction Agent Fee Rate" has the meaning set forth in the Auction
Agent Agreement.
"Auction Date" means, with respect to each Auction Period following
the Initial Period, the Business Day immediately preceding the first day of each
such Auction Period for each Certificate, other than:
(A) each Auction Period commencing after the ownership of the
Certificates is no longer maintained in Book-Entry Form by the Depository;
(B) each Auction Period commencing after and during the
continuance of a Certificate Insurer Default; or
(C) each Auction Period commencing less than two Business Days
after the cure or waiver of a Certificate Insurer Default.
If the 15th day of a month (I.E., the scheduled first day of an
Auction period) is not a Business Day, with the result that the first day of
such Auction Period is delayed to the next succeeding Business Day, the Auction
Date will be the Business Day immediately preceding such delayed first day of
such Auction Period.
Notwithstanding the foregoing, the Auction Date for one or more
Auction Periods may be changed pursuant to the Agreement, as described herein.
"Auction Period" means, with respect to each Certificate, the Accrual
Period applicable to such Certificate during which time the applicable
Certificate Interest Rate is determined, which Auction Period (after the Initial
Period for such Certificate) shall commence on each Payment Date and shall
continue through the day immediately preceding the next Payment Date for such
Certificate, as the same may be adjusted pursuant to the Agreement.
"Auction Procedures" means the procedures set forth in the Agreement,
and described herein by which the Auction Rate applicable to a Certificate is
determined.
"Auction Rate" means, with respect to any Certificate, the rate of
interest per annum that results from the implementation of the Auction
Procedures and is determined as described in the Agreement and this Annex I.
"Authorized Denominations" means, with respect to any Certificate,
$25,000 and any integral multiple in excess thereof.
"Broker-Dealer" means Merrill Lynch, Pierce, Fenner & Smith
Incorporated or any other broker or dealer (each as defined in the Securities
Exchange Act of 1934, as amended), commercial bank or other entity permitted by
law to perform the functions required of a Broker-Dealer set forth in the
Auction Procedures that (a) is a Participant (or an affiliate of a Participant),
(b) has been appointed as such by the Depositor, (c) is acceptable to the
Certificate Insurer and (d) has entered into a Broker-Dealer Agreement that is
in effect on the date of reference.
"Broker-Dealer Agreement" means each agreement between the Auction
Agent and a Broker- Dealer pursuant to which the Broker-Dealer agrees to
participate in Auctions as set forth in the Auction Procedures, as from time to
time amended or supplemented.
"Broker-Dealer Fee" has the meaning set forth in the Auction Agent
Agreement.
"Broker-Dealer Fee Rate" has the meaning set forth in the Auction
Agent Agreement.
"Business Day" means any day other than (i) a Saturday or Sunday or
(ii) a day on which banking institutions in New York City or the city in which
the corporate trust office of the Trustee or the principal office of the
Certificate Insurer is located are authorized or obligated by law or executive
order to be closed.
"Certificate Initial Rate" means 6.10% per annum.
"Certificate Initial Rate Adjustment Date" means January 15, 1998.
"Certificate Insurer Default" means a default by the Certificate
Insurer under the Certificate Insurance Policy relating to the Auction Rate
Certificates.
"Certificate Interest Rate" means initially the Certificate Initial
Rate until the first Auction Date for such Certificates, at which time the
related Certificate Interest Rate will be reset pursuant to the Auction
Procedures.
"Existing Certificateholder" means (i) with respect to and for the
purpose of dealing with the Auction Agent in connection with an Auction, a
Person who is a Broker-Dealer listed in the Existing Certificateholder Registry
at the close of business on the Business Day immediately preceding such Auction
and (ii) with respect to and for the purpose of dealing with the Broker-Dealer
in connection with an Auction, a Person who is a beneficial owner of any
Certificate.
"Existing Certificateholder Registry" means the registry of Persons
who are beneficial owners of the Certificates, maintained by the Auction Agent
as provided in the Auction Agent Agreement.
"Initial Period" means, as to any Certificate, the period commencing
on the Closing Date and continuing through the day immediately preceding the
Certificate Initial Rate Adjustment Date for such Certificate.
"LIBOR" means, as of any LIBOR Determination Date, the rate for
deposits in United States dollars for a period equal to the relevant Accrual
Period (commencing on the first day of such Accrual Period) which appears in the
Telerate Page 3750 as of 11:00 a.m., London time, on such date. If such rate
does not appear on Telerate Page 3750, the rate for that day will be determined
on the basis of the rates at which deposits in United States dollars are offered
by the Reference Banks at approximately 11:00 a.m., London time, on that day to
prime banks in the London interbank market for a period equal to the relevant
Accrual Period (commencing on the first day of such Accrual Period). The Auction
Agent will request the principal London office of each of the Reference Banks to
provide a quotation of its rate. If at least two such quotations are provided,
the rate for that day will be the arithmetic mean of the quotations. If fewer
than two quotations are provided as requested, the rate for that day will be the
arithmetic mean of the rates quoted by major banks in New York City, selected by
the Auction Agent, at approximately 11:00 a.m., New York City time, on that day
for loans in United States dollars to leading European banks for a period equal
to the relevant Accrual Period (commencing on the first day of such Accrual
Period).
"LIBOR Determination Date" means the date which is both a Business Day
and a London Banking Day prior to the commencement of each related Accrual
Period.
"London Banking Day" means any Business Day on which dealings in
deposits in United States dollars are transacted in the London interbank market.
"Market Agent" means Merrill Lynch, Pierce, Fenner & Smith
Incorporated, in such capacity under the Agreement, or any successor to it in
such capacity thereunder.
"Maximum Auction Rate" means, the lesser of (i) either (A) LIBOR plus
0.60% (if all ratings assigned by the Rating Agencies to the Auction Rate
Certificates are "A-" or better) or (B) LIBOR plus 1.00% (if any one of the
ratings assigned by the Rating Agencies to the Auction Rate Certificates is less
than "A-") and (ii) the Available Funds Cap. For purposes of the Auction Agent
and the Auction Procedures, the ratings referred to in this definition shall be
the last ratings of which the Auction Agent has been given notice pursuant to
the Auction Agent Agreement.
"Non-Payment Rate" means the Maximum Auction Rate. "Payment Date"
means the 15th day of each calendar month, commencing January 15, 1998, or if
such day is not a Business Day, the next succeeding Business Day.
"Person" means any individual, corporation, estate, partnership,
limited liability company, joint venture, association, joint stock company,
trust (including any beneficiary thereof), unincorporated organization or
government or any agency or political subdivision thereof.
"Potential Certificateholder" means any Person (including an Existing
Certificateholder that is (i) a Broker-Dealer when dealing with the Auction
Agent and (ii) a potential beneficial owner when dealing with a Broker-Dealer)
who may be interested in acquiring Certificates (or, in the case of an Existing
Certificateholder thereof, an additional principal amount of Certificates).
"Rate Adjustment Date" means, with respect to each Certificate, the
date on which the applicable Certificate Interest Rate is effective and means,
with respect to each such Certificate, the date of commencement of each Auction
Period.
"Rate Determination Date" means, with respect to any Certificate, the
Auction Date, or if no Auction Date is applicable to such Certificate, the
Business Day immediately preceding the date of commencement of an Auction
Period.
"Reference Banks" means leading banks selected by the Auction Agent
and engaged in transactions in Eurodollar deposits in the international
Eurocurrency market.
EXISTING CERTIFICATEHOLDERS AND POTENTIAL CERTIFICATEHOLDERS
Participants in each Auction will include: (i) "Existing
Certificateholders," which shall mean any Certificateholder according to the
records of the Auction Agent at the close of business on the Business Day
preceding each Auction Date; and (ii) "Potential Certificateholders," which
shall mean any person, including any Existing Certificateholder or a
Broker/Dealer, who may be interested in acquiring Certificates (or, in the case
of an Existing Certificateholder, an additional principal amount of the
Certificate such Certificateholder then holds).
See "Broker-Dealer."
By purchasing a Certificate, whether in an Auction or otherwise, each
prospective purchaser of Certificates or its Broker-Dealer must agree and will
be deemed to have agreed: (i) to participate in Auctions on the terms described
herein; (ii) so long as the beneficial ownership of the Certificates is
maintained in Book-Entry Form to sell, transfer or otherwise dispose of the
Certificates only pursuant to a Bid (as defined below) or a Sell Order (as
defined below) in an Auction, or to or through a Broker-Dealer, provided that in
the case of all transfers other than those pursuant to an Auction, the Existing
Certificateholder of the Certificates so transferred, its Participant or
Broker-Dealer advises the Auction Agent of such transfer; (iii) to have its
beneficial ownership of Certificates maintained at all times in Book-Entry Form
for the account of its Participant, which in turn will maintain records of such
beneficial ownership, and to authorize such Participant to disclose to the
Auction Agent such information with respect to such beneficial ownership as the
Auction Agent may request; (iv) that a Sell Order placed by an Existing
Certificateholder will constitute an irrevocable offer to sell the principal
amount of the Certificate specified in such Sell Order; (v) that a Bid placed by
an Existing Certificateholder will constitute an irrevocable offer to sell the
principal amount of the Certificate specified in such Bid if the rate specified
in such Bid is greater than, or in some cases equal to, the Auction Rate of such
Certificate, determined as described herein; and (vi) that a Bid placed by a
Potential Certificateholder will constitute an irrevocable offer to purchase the
amount, or a lesser principal amount, of the Certificate specified in such Bid
if the rate specified in such Bid is, respectively, less than or equal to the
Certificate Interest Rate of the specified Certificate, determined as described
herein.
The principal amount of the Certificates purchased or sold may be
subject to proration procedures on the Auction Date. Each purchase or sale of
Certificates on the Auction Date will be made for settlement on the first day of
the Accrual Period immediately following such Auction Date at a price equal to
100% of the principal amount thereof, plus accrued but unpaid interest thereon.
The Auction Agent is entitled to rely upon the terms of any Order submitted to
it by a Broker-Dealer.
Auction Agent
Bankers Trust Company will be appointed as Auction Agent to serve as
agent for the Trust in connection with Auctions. The Trustee will enter into the
Auction Agreement with Bankers Trust Company, as the Auction Agent. Any
Substitute Auction Agent will be (i) a bank, national banking association or
trust company duly organized under the laws of the United States of America or
any state or territory thereof having its principal place of business in the
Borough of Manhattan, New York, or such other location as approved by the
Trustee and the Market Agent in writing and having a combined capital stock or
surplus of at least $50,000,000, or (ii) a member of the National Association of
Securities Dealers, Inc. having a capitalization of at least $50,000,000, and,
in either case, authorized by law to perform all the duties imposed upon it
under the Agreement and under the Auction Agent Agreement and approved by the
Certificate Insurer in writing. The Auction Agent may at any time resign and be
discharged of the duties and obligations created by the Agreement by giving at
least 90 days notice to the Trustee and the Market Agent. The Auction Agent may
be removed at any time by the Trustee upon the written direction of the
Certificate Insurer, or, with the consent of the Certificate Insurer, the
Certificateholders of 66-2/3% of the aggregate principal amount of the
Certificates then outstanding, by an instrument signed by the Certificate
Insurer or such Certificateholders or their attorneys and filed with the Auction
Agent, the Trustee and the Market Agent upon at least 90 days' notice. Neither
resignation nor removal of the Auction Agent pursuant to the preceding two
sentences will be effective until and unless a Substitute Auction Agent has been
appointed, has been approved in writing by the Certificate Insurer and has
accepted such appointment. If required by the Certificate Insurer, the
Certificateholders of 66-2/3% of the aggregate principal amount of the
Certificates then outstanding or by the Market Agent, a Substitute Auction Agent
Agreement shall be entered into with a Substitute Auction Agent. Notwithstanding
the foregoing, the Auction Agent may terminate the Auction Agent Agreement if,
within 45 days after notifying the Trustee, the Certificate Insurer and the
Market Agent in writing that it has not received payment of any Auction Agent
Fee due it in accordance with the terms of the Auction Agent Agreement, the
Auction Agent does not receive such payment.
If the Auction Agent should resign or be removed or be dissolved, or
if the property or affairs of the Auction Agent shall be taken under the control
of any state or federal court or administrative body because of bankruptcy or
insolvency, or for any other reason, the Trustee, at the direction of the
Depositor and the Certificate Insurer (after receipt of a certificate from the
Market Agent confirming that any proposed Substitute Auction Agent meets the
requirements described in the immediately preceding paragraph above), shall use
its best efforts to appoint a Substitute Auction Agent.
The Auction Agent is acting as agent for the Trust in connection with
Auctions. In the absence of bad, faith, negligent failure to act or negligence
on its part, the Auction Agent will not be liable for any action taken, suffered
or omitted or any error of judgment made by it in the performance of its duties
under the Auction Agent Agreement and will not be liable for any error of
judgment made in good faith unless the Auction Agent will have been negligent in
ascertaining (or failing to ascertain) the pertinent facts.
The Trustee will pay the Auction Agent the Auction Agent Fee on each
Payment Date and will reimburse the Auction Agent upon its request for all
reasonable expenses, disbursements and advances incurred or made by the Auction
Agent in accordance with any provision of the Auction Agent Agreement or the
Broker-Dealer Agreements (including the reasonable compensation and the expenses
and disbursements of its agents and counsel). The Trust will indemnify and hold
harmless the Auction Agent for and against any loss, liability or expense
incurred without negligence or bad faith on the Auction Agent's part, arising
out of or in connection with the acceptance or administration of its agency
under the Auction Agent Agreement and the Broker-Dealer Agreements including the
reasonable costs and expenses (including the reasonable fees and expenses of its
counsel) of defending itself against any such claim or liability in connection
with its exercise or performance of any of its respective duties thereunder and
of enforcing this indemnification provision; provided that the Trust will not
indemnify the Auction Agent as described in this paragraph for any fees and
expenses incurred by the Auction Agent in the normal course of performing its
duties under the Auction Agent Agreement and under the Broker-Dealer Agreements,
such fees and expenses being payable as described above.
Broker-Dealer
Existing Certificateholders and Potential Certificateholders may
participate in Auctions only by submitting orders (in the manner described
below) through a "Broker-Dealer," including Merrill Lynch, Pierce, Fenner &
Smith Incorporated, each as a Broker-Dealer, or any other broker or dealer (each
as defined in the Securities Exchange Act of 1934, as amended), commercial bank
or other entity permitted by law to perform the functions required of a
Broker-Dealer set forth below which (i) is a Participant or an affiliate of a
Participant, (ii) has been selected by the Trustee and is acceptable to the
Certificate Insurer and (iii) has entered into a Broker-Dealer Agreement with
the Auction Agent that remains effective, in which the Broker-Dealer agrees to
participate in Auctions as described in the Auction Procedures, as from time to
time amended or supplemented.
The Broker-Dealers are entitled to a Broker-Dealer Fee on each Payment
Date, which is payable by the Auction Agent from monies received from the
Trustee.
Market Agent
The "Market Agent," will act solely as agent of the Trust and will not
assume any obligation or relationship of agency or trust for or with any of the
Certificateholders.
AUCTION PROCEDURES
General
Pursuant to the Agreement, Auctions to establish the Auction Rate for
each Certificate issued by the Trust will be held on each applicable Auction
Date, except as described below, by application of the Auction Procedures
described herein.
The Auction Agent will calculate the Maximum Auction Rate, the All
Hold Rate and LIBOR on each Auction Date. The Servicer will calculate and, no
later than the Business Day preceding each Auction Date, will report to the
Auction Agent in writing, the Available Funds Cap applicable to the
Certificates. If a Certificate Insurer Default has occurred, the Trustee will
calculate the Non-Payment Rate on the Rate Determination Date for (i) each
Accrual Period commencing after the occurrence and during the continuance of
such Certificate Insurer Default and (ii) any Accrual Period commencing less
than two Business Days after the cure of any Certificate Insurer Default. If no
Certificate Insurer Default has occurred, any change in the Maximum Auction Rate
or Non-Payment Rate or the method of calculating such rates shall be approved by
the Certificate Insurer. The Auction Agent will determine LIBOR for each Accrual
Period other than the Initial Period for a Certificate; provided, that if the
ownership of the Certificates is no longer maintained in Book-Entry Form, or if
a Certificate Insurer Default has occurred, then the Trustee will determine
LIBOR for each such Accrual Period. The determination by the Trustee or the
Auction Agent, as the case may be, of LIBOR will (in the absence of manifest
error) be final and binding upon the Certificateholders and all other parties.
If calculated or determined by the Auction Agent, the Auction Agent will
promptly advise the Trustee of LIBOR.
Submission of Orders
So long as the ownership of the Certificates is maintained in
Book-Entry Form, an Existing Certificateholder may sell, transfer or otherwise
dispose of Certificates only pursuant to a Bid or Sell Order (as hereinafter
defined) placed in an Auction or through a Broker-Dealer, provided that, in the
case of all transfers other than pursuant to Auctions, such Existing
Certificateholder, its Broker-Dealer or its Participant advises the Auction
Agent of such transfer. Auctions for the Certificates will be conducted on each
applicable Auction Date, if there is an Auction Agent on such Auction Date, in
the following manner.
Prior to the Submission Deadline (defined as 1:00 p.m., eastern time,
on any Auction Date or such other time on any Auction Date by which
Broker-Dealers are required to submit Orders to the Auction Agent as specified
by the Auction Agent from time to time) on each Auction Date relating to a
Certificate:
(a) each Existing Certificateholder of the applicable Certificate may
submit to a Broker-Dealer by telephone or otherwise information as to: (i) the
principal amount of outstanding Certificates, if any, held by such Existing
Certificateholder which such Existing Certificateholder desires to continue to
hold without regard to the Certificate Interest Rate for such Certificates for
the next succeeding Auction Period (a "Hold Order"); (ii) the principal amount
of outstanding Certificates, if any, which such Existing Certificateholder
offers to sell if the Certificate Interest Rate for such Certificates for the
next succeeding Auction Period will be less than the rate per annum specified by
such Existing Certificateholder (a "Bid"); and/or (iii) the principal amount of
outstanding Certificates, if any, held by such Existing Certificateholder which
such Existing Certificateholder offers to sell without regard to the Certificate
Interest Rate for such Certificates for the next succeeding Auction Period (a
"Sell Order"); and
(b) one or more Broker-Dealers may contact Potential
Certificateholders to determine the principal amount of Certificates which each
such Potential Certificateholder offers to purchase, if the Certificate Interest
Rate for such Certificates for the next succeeding Auction Period will not be
less than the rate per annum specified by such Potential Certificateholder (also
a "Bid").
Each Hold Order, Bid and Sell Order will be an "Order." Each Existing
Certificateholder and each Potential Certificateholder placing an Order is
referred to as a "Bidder."
Subject to the provisions described below under "Validity of Orders,"
a Bid by an Existing Certificateholder will constitute an irrevocable offer to
sell: (i) the principal amount of the outstanding Certificates specified in such
Bid if the Certificate Interest Rate for such Certificates will be less than the
rate specified in such Bid, (ii) such principal amount or a lesser principal
amount of the outstanding Certificates to be determined as described below in
"Execution of Orders," if the Certificate Interest Rate for such Certificates
will be equal to the rate specified in such Bid or (iii) such principal amount
or a lesser principal amount of the then outstanding Certificates to be
determined as described below under "Execution of Orders," if the rate specified
therein will be higher than the Certificate Interest Rate for such Certificates
and Sufficient Bids (as defined below) have not been made.
Subject to the provisions described below under "Validity of Orders,"
a Sell Order by an Existing Certificateholder will constitute an irrevocable
offer to sell: (i) the principal amount of the Certificate specified in such
Sell Order or (ii) such principal amount or a lesser principal amount of
outstanding Certificates of the specified Certificate as described below under
"Execution of Orders," if Sufficient Bids have not been made.
Subject to the provisions described below under "Validity of Orders,"
a Bid by a Potential Certificateholder will constitute an irrevocable offer to
purchase: (i) the principal amount of the Certificate specified in such Bid if
the Auction Rate for such Certificates will be higher than the rate specified in
such Bid or (ii) such principal amount or a lesser principal amount of such
Certificates as described below in "Execution of Orders," if the Certificate
Interest Rate is equal to the rate specified in such Bid.
Each Broker-Dealer will submit in writing to the Auction Agent prior
to the Submission Deadline on each Auction Date all Orders obtained by such
Broker-Dealer and will specify with respect to each such Order: (i) the name of
the Bidder placing such Order; (ii) the aggregate principal amount of
Certificate that are the subject of such Order; (iii) to the extent that such
Bidder is an Existing Certificateholder: (a) the principal amount of
Certificates, if any, subject to any Hold Order placed by such Existing
Certificateholder; (b) the principal amount of Certificates, if any, subject to
any Bid placed by such Existing Certificateholder and the rate specified in such
Bid; and (c) the principal amount of Certificates, if any, subject to any Sell
Order placed by such Existing Certificateholder, and (iv) to the extent such
Bidder is a Potential Certificateholder, the rate specified in such Potential
Certificateholder's Bid.
If any rate specified in any Bid contains more than three figures to
the right of the decimal point, the Auction Agent will round such rate up to the
next highest one-thousandth (.001) of one percent.
If an Order or Orders covering all Certificates held by any Existing
Certificateholder are not submitted to the Auction Agent prior to the Submission
Deadline, the Auction Agent will deem a Hold Order to have been submitted on
behalf of such Existing Certificateholder covering the principal amount of
Certificates held by such Existing Certificateholder and not subject to an Order
submitted to the Auction Agent.
Neither the Depositor, the Trustee nor the Auction Agent will be
responsible for any failure of a Broker-Dealer to submit an Order to the Auction
Agent on behalf of any Existing Certificateholder or Potential
Certificateholder.
An Existing Certificateholder may submit multiple Orders, of different
types and specifying different rates, in an Auction with respect to Certificates
then held by such Existing Certificateholder. An Existing Certificateholder that
offers to purchase additional Certificates is, for purposes of such offer,
treated as a Potential Certificateholder.
Any Bid specifying a rate higher than the Maximum Auction Rate will (i)
be treated as a Sell Order if submitted by a Existing Certificateholder and (ii)
not be accepted if submitted by a Potential Certificateholder.
Validity of Orders
If any Existing Certificateholder submits through a Broker-Dealer to
the Auction Agent one or more Orders covering in the aggregate more than the
principal amount of Certificates held by such Existing Certificateholder, such
Orders will be considered valid as follows and in the order of priority
described below.
HOLD ORDERS. All Hold Orders will be considered valid, but only up to
the aggregate principal amount of Certificates held by such Existing
Certificateholder, and if the aggregate principal amount of the class of
Certificates subject to such Hold Orders exceeds the aggregate principal amount
of Certificates held by such Existing Certificateholder, the aggregate principal
amount of Certificates subject to each such Hold Order will be reduced pro rata
so that the aggregate principal amount of Certificates subject to all such Hold
Orders equals the aggregate principal amount of the class of Certificates held
by such Existing Certificateholder.
BIDS. Any Bid will be considered valid up to an amount equal to the
excess of the principal amount of Certificates held by such Existing
Certificateholder over the aggregate principal amount of such Certificate,
subject to any Hold Orders referred to above. Subject to the preceding sentence,
if multiple Bids with the same rate are submitted on behalf of such Existing
Certificateholder and the aggregate principal amount of Certificates subject to
such Bids is greater than such excess, such Bids will be considered valid up to
an amount equal to such excess. Subject to the two preceding sentences, if more
than one Bid with different rates are submitted on behalf of such Existing
Certificateholder, such Bids will be considered valid first in the ascending
order of their respective rates until the highest rate is reached at which such
excess exists and then at such rate up to the amount of such excess. In any
event, the aggregate principal amount of Certificates, if any, subject to Bids
not valid under the provisions described above will be treated as the subject of
a Bid by a Potential Certificateholder at the rate therein specified.
SELL ORDERS. All Sell Orders will be considered valid up to an amount
equal to the excess of the principal amount of Certificates held by such
Existing Certificateholder over the aggregate principal amount of Certificates
subject to valid Hold Orders and valid Bids as referred to above.
If more than one Bid for a Certificate is submitted on behalf of any
Potential Certificateholder, each Bid submitted will be a separate Bid with the
rate and principal amount therein specified. Any Bid or Sell Order submitted by
an Existing Certificateholder covering an aggregate principal amount of
Certificates not equal to an Authorized Denomination or an integral multiple
thereof will not be executed and will be deemed a Hold Order. Any Bid submitted
by a Potential Certificateholder covering an aggregate principal amount of
Certificates not equal to an Authorized Denomination or an integral multiple
thereof will not be executed. Any Order submitted in an Auction by a
Broker-Dealer to the Auction Agent prior to the Submission Deadline on any
Auction Date will be irrevocable.
A Hold Order, a Bid or a Sell Order that has been determined valid
pursuant to the procedures described above is referred to as a "Submitted Hold
Order," a "Submitted Bid" and a "Submitted Sell Order," respectively
(collectively, "Submitted Orders").
Determination of Sufficient Bid and Bid Auction Rate
Not earlier than the Submission Deadline on each Auction Date, the
Auction Agent will assemble all valid Submitted Orders and will determine:
(a) for the applicable Certificate, the excess of the total principal
amount of such Certificates over the sum of the aggregate principal amount of
such Certificates subject to Submitted Hold Orders (such excess being
hereinafter referred to as the "Available Certificates"); and
(b) from such Submitted Orders whether the aggregate principal amount
of Certificates of such class subject to Submitted Bids by Potential
Certificateholders specifying one or more rates equal to or lower than the
Maximum Auction Rate exceeds or is equal to the sum of (i) the aggregate
principal amount of Certificates subject to Submitted Bids by Existing
Certificateholders specifying one or more rates higher than the Maximum Auction
Rate and (ii) the aggregate principal amount of Certificates subject to
Submitted Sell Orders (in the event such excess or such equality exists other
than because all of the Certificates are subject to Submitted Hold Orders, such
Submitted Bids by Potential Certificateholders above will be hereinafter
referred to collectively as "Sufficient Bids"); and
(c) if Sufficient Bids exist, the "Bid Auction Rate," which will be
the lowest rate specified in such Submitted Bids such that if:
(i) each such Submitted Bid from Existing Certificateholders
specifying such lowest rate and all other Submitted Bids from Existing
Certificateholders specifying lower rates were rejected (thus
entitling such Existing Certificateholders to continue to hold the
principal amount of Certificates subject to such Submitted Bids); and
(ii) each such Submitted Bid from Potential Certificateholders
specifying such lowest rate and all other Submitted Bids from
Potential Certificateholders specifying lower rates, were accepted,
the result would be that such Existing Certificateholders
described in subparagraph (c)(i) above would continue to hold an
aggregate principal amount of Certificates which, when added to the
aggregate principal amount of Certificates to be purchased by such
Potential Certificateholders described in subparagraph (ii) above
would equal not less than the Available Certificates.
Determination of Auction Rate and Certificate Interest Rate, Notice
Promptly after the Auction Agent has made the determinations described
above, the Auction Agent is to advise the Trustee of the applicable Available
Funds Cap, the Maximum Auction Rate, the All Hold Rate and the components
thereof on the Auction Date, and based on such determinations, the Auction Rate
for the next succeeding Accrual Period for the applicable Certificate as
follows:
(a) if Sufficient Bids exist, that the Auction Rate for the next
succeeding Accrual Period will be equal to the Bid Auction Rate so determined;
(b) if Sufficient Bids do not exist (other than because all of the
Certificates of the applicable Certificate are subject to Submitted Hold
Orders), that the Auction Rate for the next succeeding Accrual Period will be
equal to the Maximum Auction Rate; or
(c) if all Certificates of the applicable Certificate are subject to
Submitted Hold Orders, that the Auction Rate for the next succeeding Accrual
Period will be equal to the All Hold Rate.
Promptly after the Auction Agent has determined the Auction Rate, the
Auction Agent will determine and advise the Trustee of the Certificate Interest
Rate for each applicable Certificate, which rate will be the lesser of (a) the
Auction Rate for each such Certificate and (b) the applicable Available Funds
Cap.
Execution of Orders
Existing Certificateholders will continue to hold the principal amount
of Certificates of such class that are subject to Submitted Hold Orders. If,
with respect to a Certificate, the Available Funds Cap is equal to or greater
than the Bid Auction Rate and if Sufficient Bids, as described above under
"Determination of Sufficient Bids and Bid Auction Rate," have been received by
the Auction Agent, the Bid Auction Rate will be the Certificate Interest Rate,
and Submitted Bids and Submitted Sell Orders will be executed, or will not be
executed, and the Auction Agent will take such other action as provided in the
Agreement and described below under "Sufficient Bids."
If the Auction Agent has not received Sufficient Bids as described
above under "Determination of Sufficient Bids and Bid Auction Rate" (other than
because all of the Certificates are subject to Submitted Holds Orders), the
Certificate Interest Rate will be the Maximum Auction Rate. In any of the cases
described above in this paragraph, Submitted Orders will be executed, or will
not be executed, and the Auction Agent will take such other action as described
below under "Insufficient Bids."
SUFFICIENT BIDS. If Sufficient Bids have been made with a respect to a
Certificate and the applicable Maximum Auction Rate is equal to or greater than
the Bid Auction Rate (in which case the Certificate Interest Rate shall be the
Bid Auction Rate), all Submitted Sell Orders will be accepted and, subject to
the denomination requirements described below, Submitted Bids will be executed,
or will not be executed, as follows in the following order of priority and all
other Submitted Bids will be rejected:
(a) Existing Certificateholders' Submitted Bids specifying any rate
that is higher than the Certificate Interest Rate will be executed, thus
requiring each such Existing Certificateholder to sell the aggregate principal
amount of Certificates subject to such Submitted Bids;
(b) Existing Certificateholders' Submitted Bids specifying any rate
that is lower than the Certificate Interest Rate will be executed, thus
entitling each such Existing Certificateholder to continue to hold the aggregate
principal amount of Certificates subject to such Submitted Bids;
(c) Potential Certificateholders' Submitted Bids specifying any rate
that is lower than the Certificate Interest Rate will be executed, thus
entitling such Potential Certificateholder to purchase such Certificates;
(d) Each Existing Certificateholder's Submitted Bid specifying a rate
that is equal to the Certificate Interest Rate will be executed, in whole or in
part, up to the aggregate principal amount, if any, of Certificates remaining
unallocated, thus entitling such Existing Certificateholder (i) if such Existing
Certificateholder's Submitted Bid Order is executed in whole, to continue to
hold the aggregate principal amount of Certificates subject to such Submitted
Bid, or (ii) if the aggregate principal amount of Certificates subject to such
Submitted Bids would be greater than the principal amount of Certificates (the
"remaining principal amount") equal to the excess of the Available Certificates
over the aggregate principal amount of Certificates subject to Submitted Bids
described in subparagraphs (b) and (c) above, in which event such Submitted Bid
of such Existing Certificateholder will be executed in part and such Existing
Certificateholder will be entitled to continue to hold the principal amount of
Certificates subject to such Submitted Bid, but only in an amount equal to the
aggregate principal amount of Certificates obtained by multiplying the remaining
principal amount by a fraction, the numerator of which will be the principal
amount of Certificates held by such Existing Certificateholder subject to such
Submitted Bid and the denominator of which will be the sum of the principal
amount of Certificates subject to such Submitted Bids made by all such Existing
Certificateholders that specified a rate equal to the Certificate Interest Rate,
with the result that a Sell Order will be deemed up to apply to the balance of
such Existing Certificateholder's Certificates; and
(e) Each Potential Certificateholder's Submitted Bid specifying a rate
that is equal to the Certificate Interest Rate will be executed, but only in an
amount equal to the principal amount of Certificates obtained by multiplying the
excess of the aggregate principal amount of Available Certificates over the
aggregate principal amount of Certificates subject to Submitted Bids described
in subparagraphs (b), (c) and (d) above by a fraction, the numerator of which
will be the aggregate principal amount of Certificates subject to such Submitted
Bid and the denominator of which will be the sum of the principal amount of
Certificates subject to Submitted Bids made by all such Potential
Certificateholders that specified a rate equal to the Certificate Interest Rate.
INSUFFICIENT BIDS. If Sufficient Bids have not been made with respect
to the Certificates (other than because all of the Certificates of such class
are subject to Submitted Hold Orders) the Certificate Interest Rate shall be the
Maximum Auction Rate, and, subject to the denomination requirements described
below, Submitted Orders will be executed, or will not be executed, as follows in
the following order of priority and all other Submitted Bids will not be
executed:
(a) Existing Certificateholders' Submitted Bids specifying any rate
that is equal to or lower than the Certificate Interest Rate will not be
executed, with the result that such Existing Certificateholders will continue to
hold the aggregate principal amount of Certificates subject to such Submitted
Bids;
(b) Potential Certificateholders' Submitted Bids specifying any rate
that is equal to or lower than the Certificate Interest Rate will be executed,
and specifying any rate that is higher than the Certificate Interest Rate will
not be executed; and
(c) each Existing Certificateholder's Submitted Bid specifying any
rate that is higher than the Certificate Interest Rate and the Submitted Sell
Order of each Existing Certificateholder will be (i) executed in whole, thus
entitling each Existing Certificateholder that submitted any such Submitted Bid
or Submitted Sell Order to sell the Certificates subject to such Submitted Bid
or Submitted Sell Order, or (ii) executed in part in an amount equal to the
aggregate principal amount of Certificates obtained by multiplying the aggregate
principal amount of Certificates subject to Submitted Bids described in
subparagraph (b) above by a fraction, the numerator of which will be the
aggregate principal amount of Certificates held by such Existing
Certificateholder subject to such Submitted Bid or Submitted Sell Order and the
denominator of which will be the aggregate principal amount of Certificates
subject to all such Submitted Bids and Submitted Sell Orders.
ALL HOLD ORDERS. If all Certificates of a class are subject to
Submitted Hold Orders, no Potential Certificateholders' Submitted Bids will be
executed.
AUTHORIZED DENOMINATIONS REQUIREMENT. If, as a result of the
procedures described above regarding Sufficient Bids and Insufficient Bids, any
Existing Certificateholder would be entitled or required to sell, or any
Potential Certificateholder would be entitled or required to purchase, a
principal amount of Certificates that is not equal to an Authorized Denomination
or an integral multiple thereof, the Auction Agent will, in such manner as in
its sole discretion it will determine, round up or down the principal amount of
Certificates to be purchased or sold by any Existing Certificateholder or
Potential Certificateholder so that the principal amount of Certificates
purchased or sold by each Existing Certificateholder or Potential
Certificateholder will be equal to an Authorized Denomination or an integral
multiple in excess thereof. If, as a result of the procedures described above
regarding Insufficient Bids, any Potential Certificateholder would be entitled
or required to purchase less than a principal amount of Certificates equal to an
Authorized Denomination or any integral multiple thereof, the Auction Agent
will, in such manner as in its sole discretion it will determine, allocate
Certificates for purchase among Potential Certificateholders so that only
Certificates in an Authorized Denomination or any integral multiples in excess
thereof are purchased by any Potential Certificateholder, even if such
allocation results in one or more of such Potential Certificateholders not
purchasing any Certificates.
Based on the results of each Auction, the Auction Agent is to
determine the aggregate principal amount of Certificates of each class to be
purchased and the aggregate principal amount of Certificates of each class to be
sold by Potential Certificateholders and Existing Certificateholders on whose
behalf each Broker-Dealer submitted Bids or Sell Orders and, with respect to
each Broker-Dealer, to the extent that such aggregate principal amount of
Certificates to be sold differs from such aggregate principal amount of
Certificates to be purchased, determine to which other Broker-Dealer or
Broker-Dealers acting for one or more purchasers such Broker-Dealer will
deliver, or from which Broker-Dealers acting for one or more sellers such
Broker-Dealer will receive, as the case may be, Certificates.
Any calculation by the Auction Agent (or the Trustee, if applicable)
of the Certificate Interest Rate, LIBOR, the Maximum Auction Rate, the All Hold
Rate, the Available Funds Cap and the Non-Payment Rate will, in the absence of
manifest error, be binding on all other parties.
Notwithstanding anything in the Agreement to the contrary, no Auction
is to be held on any Auction Date on which there are insufficient moneys held by
the Trustee under the Agreement and available to pay the principal of and
interest due on the applicable Certificate on the Payment Date immediately
following such Auction Date.
Settlement Procedures
The Auction Agent is required to advise each Broker-Dealer that
submitted an Order in an Auction of the Certificate Interest Rate for a
Certificate for the next Accrual Period and, if such Order was a Bid or Sell
Order, whether such Bid or Sell Order was accepted or rejected, in whole or in
part, by telephone not later than 3:00 pm., eastern time, on the Auction Date if
the Accrual Rate is the Auction Rate and not later than 4:00 pm. eastern time on
the Auction Date if the Certificate Interest Rate is the Maximum Auction Rate.
Each Broker-Dealer that submitted an Order on behalf of a Bidder is required to
then advise such Bidder of the applicable Certificate Interest Rate for the next
Interest Period and, if such Order was a Bid or a Sell Order, whether such Bid
or Sell Order was accepted or rejected, in whole or in part, confirm purchases
and sales with each Bidder purchasing or selling Certificates as a result of the
Auction and advise each Bidder purchasing or selling Certificates as a result of
the Auction to give instructions to its Participant to pay the purchase price
against delivery of such Certificates or to deliver such Certificates against
payment therefor, as appropriate. Pursuant to the Auction Agent Agreement, the
Auction Agent is to record each transfer of Certificates on the Existing
Certificateholders Registry to be maintained by the Auction Agent.
In accordance with DTC's normal procedures, on the Business Day after
the Auction Date, the transactions described above will be executed through DTC,
so long as DTC is the Depository, and the accounts of the respective
Participants at DTC will be debited and credited and Certificates delivered as
necessary to effect the purchases and sales of Certificates as determined in the
Auction. Purchasers are required to make payment through their Participants in
same-day funds to DTC against delivery through their Participants. DTC will make
payment in accordance with its normal procedures, which now provide for payment
against delivery by its Participants in immediately available funds.
If any Existing Certificateholder selling Certificates in an Auction
fails to deliver such Certificates, the Broker-Dealer of any person that was to
have purchased Certificates in such Auction may deliver to such person a
principal amount of Certificates that is less than the principal amount of
Certificates that otherwise was to be purchased by such person but in any event
equal to an Authorized Denomination or any integral multiple thereof. In such
event, the principal amount of Certificates to be delivered will be determined
by such Broker-Dealer. Delivery of such lesser principal amount of Certificates
will constitute good delivery. Neither the Trustee nor the Auction Agent will
have any responsibility or liability with respect to the failure of a Potential
Certificateholder, Existing Certificateholder or their respective Broker-Dealer
or Participant to deliver the principal amount of Certificates or to pay for the
Certificates purchased or sold pursuant to an Auction or otherwise. For a
further description of the settlement procedures, see "SETTLEMENT PROCEDURES"
below.
TRUSTEE NOT RESPONSIBLE FOR AUCTION AGENT, MARKET AGENT AND BROKER-DEALERS
The Trustee shall not be liable or responsible for the actions of or
failure to act by the Auction Agent, Market Agent or any Broker-Dealer under the
Agreement or under the Auction Agent Agreement, the Market Agent Agreement or
any Broker-Dealer Agreement. The Trustee may conclusively rely upon any
information required to be furnished by the Auction Agent, the Market Agent or
any Broker-Dealer without undertaking any independent review or investigation of
the truth or accuracy of such information.
CHANGES IN THE AUCTION DATE
The Market Agent, at the consent of the Depositor and the Certificate
Insurer, may specify an earlier Auction Date (but in no event more than five
Business Days earlier) than the Auction Date that would otherwise be determined
in accordance with the definition of "Auction Date" with respect to one or more
specified Auction Periods in order to conform with then current market practice
with respect to similar securities or to accommodate economic and financial
factors that may affect or be relevant to the day of the week constituting an
Auction Date and the interest rate borne on the Certificates. The Depositor will
not consent to such change in the Auction Date unless the Depositor will have
received from the Market Agent not less than three days nor more than 20 days
prior to the effective date of such change a written request for consent
together with a certificate demonstrating the need for change in reliance on
such factors. The Market Agent will provide notice of its determination to
specify an earlier Auction Date for one or more Auction Periods by means of a
written notice delivered at least 10 days prior to the proposed changed Auction
Date to the Trustee, the Auction Agent, the Depositor, the Certificate Insurer,
the Rating Agencies and the Depository.
In connection with any change in Auction terms described above, the
Auction Agent is to provide such further notice to such parties as is specified
in the Auction Agent Agreement.
SETTLEMENT PROCEDURES
(a) Not later than (i) 3:00 p.m. if the Certificate Interest Rate is
the Auction Rate or (2) 4:00 p.m. if the Certificate Interest Rate is the
Maximum Auction Rate, the Auction Agent is to notify by telephone each
Broker-Dealer that participated in the Auction held on such Auction Date and
submitted an Order on behalf of an Existing Certificateholder or Potential
Certificateholder of:
(i) the Certificate Interest Rate fixed for the next Accrual
Period;
(ii) whether there were Sufficient Bids in such Auction;
(iii) if such Broker-Dealer (a "Seller's Broker-Dealer")
submitted Bids or Sell Orders on behalf of an Existing
Certificateholder, whether such Bid or Sell Order was executed, or was
not executed, in whole or in part, and the principal amount of
Certificates, if any, to be sold by such Existing Certificateholder;
(iv) if such Broker-Dealer (a "Buyer's Broker-Dealer") submitted
a Bid on behalf of a Potential Certificateholder, whether such Bid was
executed, or was not executed, in whole or in part, and the principal
amount of Certificates, if any, to be purchased by such Potential
Certificateholder;
(v) if the aggregate amount of Certificates to be sold by all
Existing Certificateholders on whose behalf such Seller's
Broker-Dealer submitted Bids or Sell Orders exceeds the aggregate
principal amount of Certificates to be purchased by all Potential
Certificateholders on whose behalf such Buyer's Broker-Dealer
submitted a Bid, the name or names of one or more Buyer's
Broker-Dealers and the name of the Participant, if any, of each such
Buyer's Broker-Dealer (a "Participant") acting for one or more
purchasers of such excess principal amount of Certificates and the
principal amount of Certificates to be purchased from one or more
Existing Certificateholders on whose behalf such Seller's
Broker-Dealer acted by one or more Potential Certificateholders on
whose behalf each of such Buyer's Broker-Dealers acted;
(vi) if the principal amount of Certificates to be purchased by
all Potential Certificateholders on whose behalf such Buyer's
Broker-Dealer submitted a Bid exceeds the amount of Certificates to be
sold by all Existing Certificateholders on whose behalf such Seller's
Broker-Dealer submitted a Bid or a Sell Order, the name or names of
one or more Seller's Broker-Dealers (and the name of the Participant,
if any, of each such Seller's Broker-Dealer) acting for one or more
sellers of such excess principal amount of Certificates and the
principal amount of Certificates to be sold to one or more Potential
Certificateholders on whose behalf such Buyer's Broker-Dealer acted by
one or more Existing Certificateholder on whose behalf each of such
Seller's Broker-Dealers acted; and
(vii) the Auction Date for the next succeeding Auction.
(b) On each Auction Date, each Broker-Dealer that submitted an Order on
behalf of any Existing Certificateholder or Potential Certificateholder is to:
(i) advise each Existing Certificateholder and Potential
Certificateholder on whose behalf such Broker-Dealer submitted a Bid
or Sell Order in the Auction on such Auction Date whether such Bid or
Sell Order was executed, or was not executed, in whole or in part;
(ii) in the case of a Broker-Dealer that is a Buyer's
Broker-Dealer, advise each Potential Certificateholder on whose behalf
such Buyer's Broker-Dealer submitted a Bid that was executed, in whole
or in part, to instruct such Potential Certificateholder's Participant
to pay to such Buyer's Broker-Dealer (or its Participant) through the
Depository the amount necessary to purchase the principal amount of
the Certificates to be purchased pursuant to such Bid against receipt
of such Certificates together with accrued interest;
(iii) in the case of a Broker-Dealer that is a Seller's
Broker-Dealer, instruct each Existing Certificateholder on whose
behalf such Seller's Broker-Dealer submitted a Sell Order that was
executed, in whole or in part, or a Bid that was accepted, in whole or
in part, to instruct such Existing Certificateholder's Participant to
deliver to such Seller's Broker-Dealer (or its Participant) through
the Depository the principal amount of the Certificates to be sold
pursuant to such Order against payment therefor;
(iv) advise each Existing Certificateholder on whose behalf such
Broker-Dealer submitted an Order and each Potential Certificateholder
on whose behalf such Broker-Dealer submitted a Bid of the Certificate
Interest Rate for the next Interest Period;
(v) advise each Existing Certificateholder on whose behalf such
Broker-Dealer submitted an Order of the next Auction Date; and
(vi) advise each Potential Certificateholder on whose behalf such
Broker-Dealer submitted a Bid that was executed, in whole or in part,
of the next Auction Date.
(c) On the basis of the information provided to it pursuant to
paragraph (a) above, each Broker- Dealer that submitted a Bid or Sell Order in
an Auction is required to allocate any funds received by it in connection with
such Auction pursuant to paragraph (b)(ii) above, and any Certificates received
by it in connection with such Auction pursuant to paragraph (b)(iii) above,
among the Potential Certificateholders, if any, on whose behalf such
Broker-Dealer submitted Bids, the Existing Certificateholder, if any, on whose
behalf such Broker-Dealer submitted Bids or Sell Orders in such Auction, and
any Broker-Dealers identified to it by the Auction Agent following such Auction
pursuant to paragraph (a)(v) or (a)(vi) above.
(d) On each Auction Date:
(i) each Potential Certificateholder and Existing
Certificateholder with an Order in the Auction on such Auction Date
will instruct its Participant as provided in (b)(ii) or (b)(iii)
above, as the case may be:
(ii) each Seller's Broker-Dealer that is not a Participant of the
Depository will instruct its Participant to deliver such Certificates
through the Depository to a Buyer's Broker-Dealer (or its Participant)
identified to such Seller's Broker-Dealer pursuant to (a)(v) above
against payment therefor; and
(iii) each Buyer's Broker-Dealer that is not a Participant in the
Depository will instruct its Participant to pay through the Depository
to Seller's Broker-Dealer (or its Participant) identified following
such Auction pursuant to (a)(vi) above the amount necessary to
purchase the Certificates to be purchased pursuant to (b)(ii) above
against receipt of such Certificates.
(e) On the Business Day following each Auction Date;
(i) each Participant for a Bidder in the Auction on such Auction
Date referred to in (d)(i) above will instruct the Depository to
execute the transactions described under (b)(ii) or (b)(iii) above for
such Auction, and the Depository will execute such transactions;
(ii) each Seller's Broker-Dealer or its Participant will instruct
the Depository to execute the transactions described in (d)(ii) above
for such Auction, and the Depository will execute such transactions;
and
(iii) each Buyer's Broker-Dealer or its Participant will instruct
the Depository to execute the transactions described in (d)(iii) above
for such Auction, and the Depository will execute such transactions.
(f) If an Existing Certificateholder selling Certificates in an
Auction fails to deliver such Certificates (by authorized book-entry), a
Broker-Dealer may deliver to the Potential Certificateholder on behalf of which
it submitted a Bid that was accepted a principal amount of Certificates that is
less than the principal amount of Certificates that otherwise was to be
purchased by such Potential Certificateholder. In such event, the principal
amount of Certificates to be so delivered will be determined solely by such
Broker- Dealer (but only in Authorized Denominations). Delivery of such lesser
principal amount of Certificates will constitute good delivery. Notwithstanding
the foregoing terms of this paragraph (f), any delivery or nondelivery of
Certificates which will represent any departure from the results of an Auction,
as determined by the Auction Agent, will be of no effect unless and until the
Auction Agent will have been notified of such delivery or nondelivery in
accordance with the provisions of the Auction Agent Agreement and the
Broker-Dealer Agreements. Neither the Trustee nor the Auction Agent will have
any responsibility or liability with respect to the failure of a Potential
Certificateholder, Existing Certificateholder or their Respective Broker-Dealer
or Participant to take delivery of or deliver, as the case may be, the principal
amount of the Certificates purchased or sold pursuant to an Auction or
otherwise.
ANNEX II
PLANNED PRINCIPAL BALANCES
<TABLE>
<CAPTION>
PAC SCHEDULE
PERIOD Class A-2 Class A-3 Class A-4 Class A-5 Class A-6 Class A-7 Class A-8
- ------ --------- ----------- ---------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
0 675,000,000.00 63,000,000.00 140,000,000.00 40,000,000.00 115,540,000.00 130,000,000.00 109,520,000.00
1 675,000,000.00 63,000,000.00 140,000,000.00 40,000,000.00 115,540,000.00 130,000,000.00 109,520,000.00
2 675,000,000.00 63,000,000.00 140,000,000.00 40,000,000.00 115,540,000.00 130,000,000.00 109,520,000.00
3 675,000,000.00 63,000,000.00 140,000,000.00 40,000,000.00 115,540,000.00 130,000,000.00 109,520,000.00
4 675,000,000.00 63,000,000.00 140,000,000.00 40,000,000.00 115,540,000.00 130,000,000.00 109,520,000.00
5 661,423,538.01 63,000,000.00 140,000,000.00 40,000,000.00 115,540,000.00 126,853,692.96 109,520,000.00
6 636,416,485.47 63,000,000.00 140,000,000.00 40,000,000.00 115,540,000.00 121,058,378.58 109,520,000.00
7 606,881,566.43 63,000,000.00 140,000,000.00 40,000,000.00 115,540,000.00 114,213,743.82 109,520,000.00
8 576,395,467.75 63,000,000.00 140,000,000.00 40,000,000.00 115,540,000.00 107,148,675.85 109,520,000.00
9 544,949,856.92 63,000,000.00 140,000,000.00 40,000,000.00 115,540,000.00 99,861,243.62 109,520,000.00
10 512,793,288.24 63,000,000.00 140,000,000.00 40,000,000.00 115,540,000.00 92,409,048.90 109,520,000.00
11 481,493,920.66 63,000,000.00 140,000,000.00 40,000,000.00 115,540,000.00 85,155,508.13 109,520,000.00
12 453,926,299.70 63,000,000.00 140,000,000.00 40,000,000.00 115,540,000.00 78,766,789.19 109,520,000.00
13 427,093,984.54 63,000,000.00 140,000,000.00 40,000,000.00 115,540,000.00 72,548,475.32 109,520,000.00
14 400,935,215.95 63,000,000.00 140,000,000.00 40,000,000.00 115,540,000.00 66,486,253.97 109,520,000.00
15 375,433,080.83 63,000,000.00 140,000,000.00 40,000,000.00 115,540,000.00 60,576,205.58 109,520,000.00
16 350,571,665.84 63,000,000.00 140,000,000.00 40,000,000.00 115,540,000.00 54,814,642.30 109,520,000.00
17 326,334,803.02 63,000,000.00 140,000,000.00 40,000,000.00 115,540,000.00 49,197,817.23 109,520,000.00
18 302,706,665.36 63,000,000.00 140,000,000.00 40,000,000.00 115,540,000.00 43,722,062.51 109,520,000.00
19 279,671,891.42 63,000,000.00 140,000,000.00 40,000,000.00 115,540,000.00 38,383,818.17 109,520,000.00
20 257,215,629.06 63,000,000.00 140,000,000.00 40,000,000.00 115,540,000.00 33,179,642.27 109,520,000.00
21 235,323,415.04 63,000,000.00 140,000,000.00 40,000,000.00 115,540,000.00 28,106,182.99 109,520,000.00
22 213,981,157.64 63,000,000.00 140,000,000.00 40,000,000.00 115,540,000.00 23,160,174.62 109,520,000.00
23 193,195,749.06 63,000,000.00 140,000,000.00 40,000,000.00 115,540,000.00 18,343,214.40 109,520,000.00
24 172,932,119.06 63,000,000.00 140,000,000.00 40,000,000.00 115,540,000.00 13,647,174.91 109,520,000.00
25 153,177,232.83 63,000,000.00 140,000,000.00 40,000,000.00 115,540,000.00 9,069,035.36 109,520,000.00
26 133,918,380.77 63,000,000.00 140,000,000.00 40,000,000.00 115,540,000.00 4,605,850.34 109,520,000.00
27 115,143,170.38 63,000,000.00 140,000,000.00 40,000,000.00 115,540,000.00 254,747.92 109,520,000.00
28 96,839,518.34 63,000,000.00 140,000,000.00 40,000,000.00 115,540,000.00 0.00 105,532,927.83
29 78,995,642.76 63,000,000.00 140,000,000.00 40,000,000.00 115,540,000.00 0.00 101,397,659.65
30 61,600,055.71 63,000,000.00 140,000,000.00 40,000,000.00 115,540,000.00 0.00 97,366,281.08
31 44,641,555.84 63,000,000.00 140,000,000.00 40,000,000.00 115,540,000.00 0.00 93,436,196.23
32 28,109,221.22 63,000,000.00 140,000,000.00 40,000,000.00 115,540,000.00 0.00 89,604,873.99
33 11,992,402.40 63,000,000.00 140,000,000.00 40,000,000.00 115,540,000.00 0.00 85,869,846.37
34 0.00 59,280,715.58 140,000,000.00 40,000,000.00 115,540,000.00 0.00 82,228,706.96
35 0.00 43,966,796.11 140,000,000.00 40,000,000.00 115,540,000.00 0.00 78,679,749.02
36 0.00 29,161,631.39 140,000,000.00 40,000,000.00 115,540,000.00 0.00 75,248,693.57
37 0.00 29,161,631.39 140,000,000.00 40,000,000.00 115,540,000.00 0.00 75,248,693.57
38 0.00 26,790,109.62 140,000,000.00 40,000,000.00 115,540,000.00 0.00 74,699,100.04
39 0.00 14,815,923.64 140,000,000.00 40,000,000.00 115,540,000.00 0.00 71,924,115.98
40 0.00 3,283,897.99 140,000,000.00 40,000,000.00 115,540,000.00 0.00 69,251,601.34
41 0.00 0.00 132,177,764.51 40,000,000.00 115,540,000.00 0.00 66,677,786.01
42 0.00 0.00 121,481,852.45 40,000,000.00 115,540,000.00 0.00 64,199,038.35
43 0.00 0.00 111,181,066.50 40,000,000.00 115,540,000.00 0.00 61,811,860.06
44 0.00 0.00 101,260,865.69 40,000,000.00 115,540,000.00 0.00 59,512,881.31
45 0.00 0.00 91,707,243.06 40,000,000.00 115,540,000.00 0.00 57,298,856.03
46 0.00 0.00 82,506,706.07 40,000,000.00 115,540,000.00 0.00 55,166,657.35
47 0.00 0.00 73,646,257.69 40,000,000.00 115,540,000.00 0.00 53,113,273.26
48 0.00 0.00 65,113,378.25 40,000,000.00 115,540,000.00 0.00 51,135,802.35
49 0.00 0.00 56,896,007.92 40,000,000.00 115,540,000.00 0.00 49,231,449.79
50 0.00 0.00 48,982,529.83 40,000,000.00 115,540,000.00 0.00 47,397,523.41
51 0.00 0.00 41,361,753.82 40,000,000.00 115,540,000.00 0.00 45,631,429.91
52 0.00 0.00 34,022,900.77 40,000,000.00 115,540,000.00 0.00 43,930,671.28
53 0.00 0.00 26,955,587.54 40,000,000.00 115,540,000.00 0.00 42,292,841.23
54 0.00 0.00 20,149,812.44 40,000,000.00 115,540,000.00 0.00 40,715,621.92
55 0.00 0.00 13,595,941.20 40,000,000.00 115,540,000.00 0.00 39,196,780.61
56 0.00 0.00 7,284,693.53 40,000,000.00 115,540,000.00 0.00 37,734,166.64
57 0.00 0.00 1,207,130.09 40,000,000.00 115,540,000.00 0.00 36,325,708.34
58 0.00 0.00 0.00 35,358,013.66 115,540,000.00 0.00 34,970,191.99
59 0.00 0.00 0.00 29,725,468.72 115,540,000.00 0.00 33,664,865.48
60 0.00 0.00 0.00 24,301,515.24 115,540,000.00 0.00 32,407,879.45
61 0.00 0.00 0.00 19,078,466.41 115,540,000.00 0.00 31,197,452.52
62 0.00 0.00 0.00 14,048,917.86 115,540,000.00 0.00 30,031,868.73
63 0.00 0.00 0.00 9,205,737.33 115,540,000.00 0.00 28,909,475.21
64 0.00 0.00 0.00 4,542,054.63 115,540,000.00 0.00 27,828,679.81
65 0.00 0.00 0.00 51,252.10 115,540,000.00 0.00 26,787,948.90
66 0.00 0.00 0.00 0.00 111,266,955.27 0.00 25,785,805.22
67 0.00 0.00 0.00 0.00 107,103,023.97 0.00 24,820,825.80
68 0.00 0.00 0.00 0.00 103,093,543.75 0.00 23,891,639.99
69 0.00 0.00 0.00 0.00 99,232,817.56 0.00 22,996,927.51
70 0.00 0.00 0.00 0.00 95,515,357.79 0.00 22,135,416.62
71 0.00 0.00 0.00 0.00 91,935,878.59 0.00 21,305,882.35
72 0.00 0.00 0.00 0.00 88,489,288.45 0.00 20,507,144.73
73 0.00 0.00 0.00 0.00 85,170,683.08 0.00 19,738,067.24
74 0.00 0.00 0.00 0.00 81,975,338.54 0.00 18,997,555.09
75 0.00 0.00 0.00 0.00 78,898,704.61 0.00 18,284,553.79
76 0.00 0.00 0.00 0.00 75,936,398.41 0.00 17,598,047.63
77 0.00 0.00 0.00 0.00 73,084,198.29 0.00 16,937,058.24
78 0.00 0.00 0.00 0.00 70,338,037.86 0.00 16,300,643.25
79 0.00 0.00 0.00 0.00 67,694,000.36 0.00 15,687,894.97
80 0.00 0.00 0.00 0.00 65,148,313.08 0.00 15,097,939.07
81 0.00 0.00 0.00 0.00 62,509,828.49 0.00 14,486,477.66
82 0.00 0.00 0.00 0.00 59,903,516.66 0.00 13,882,472.19
83 0.00 0.00 0.00 0.00 57,394,228.07 0.00 13,300,951.59
84 0.00 0.00 0.00 0.00 54,978,376.14 0.00 12,741,084.67
85 0.00 0.00 0.00 0.00 52,652,506.31 0.00 12,202,070.86
86 0.00 0.00 0.00 0.00 50,413,291.19 0.00 11,683,139.02
87 0.00 0.00 0.00 0.00 48,257,525.85 0.00 11,183,546.44
88 0.00 0.00 0.00 0.00 46,182,123.39 0.00 10,702,577.74
89 0.00 0.00 0.00 0.00 44,184,110.56 0.00 10,239,543.86
90 0.00 0.00 0.00 0.00 42,260,623.58 0.00 9,793,781.14
91 0.00 0.00 0.00 0.00 40,408,904.17 0.00 9,364,650.35
92 0.00 0.00 0.00 0.00 38,626,295.63 0.00 8,951,535.82
93 0.00 0.00 0.00 0.00 36,910,239.10 0.00 8,553,844.52
94 0.00 0.00 0.00 0.00 35,258,270.02 0.00 8,171,005.32
95 0.00 0.00 0.00 0.00 33,668,014.63 0.00 7,802,468.08
96 0.00 0.00 0.00 0.00 32,137,186.61 0.00 7,447,702.98
97 0.00 0.00 0.00 0.00 30,663,583.94 0.00 7,106,199.69
98 0.00 0.00 0.00 0.00 29,245,085.73 0.00 6,777,466.70
99 0.00 0.00 0.00 0.00 27,879,649.28 0.00 6,461,030.63
100 0.00 0.00 0.00 0.00 26,565,307.20 0.00 6,156,435.53
101 0.00 0.00 0.00 0.00 25,300,164.63 0.00 5,863,242.29
102 0.00 0.00 0.00 0.00 24,082,396.58 0.00 5,581,027.95
103 0.00 0.00 0.00 0.00 22,910,245.39 0.00 5,309,385.20
104 0.00 0.00 0.00 0.00 21,782,018.21 0.00 5,047,921.71
105 0.00 0.00 0.00 0.00 20,696,084.64 0.00 4,796,259.64
106 0.00 0.00 0.00 0.00 19,650,874.45 0.00 4,554,035.11
107 0.00 0.00 0.00 0.00 18,644,875.33 0.00 4,320,897.63
108 0.00 0.00 0.00 0.00 17,676,630.80 0.00 4,096,509.68
109 0.00 0.00 0.00 0.00 16,744,738.14 0.00 3,880,546.16
110 0.00 0.00 0.00 0.00 15,847,846.40 0.00 3,672,694.01
111 0.00 0.00 0.00 0.00 14,984,654.53 0.00 3,472,651.71
112 0.00 0.00 0.00 0.00 14,153,909.50 0.00 3,280,128.88
113 0.00 0.00 0.00 0.00 13,354,404.57 0.00 3,094,845.85
114 0.00 0.00 0.00 0.00 12,584,977.59 0.00 2,916,533.31
115 0.00 0.00 0.00 0.00 11,844,509.33 0.00 2,744,931.86
116 0.00 0.00 0.00 0.00 11,136,281.03 0.00 2,580,801.94
117 0.00 0.00 0.00 0.00 10,454,627.46 0.00 2,422,830.63
118 0.00 0.00 0.00 0.00 9,798,561.41 0.00 2,270,789.16
119 0.00 0.00 0.00 0.00 9,167,132.11 0.00 2,124,457.19
120 0.00 0.00 0.00 0.00 8,559,423.88 0.00 1,983,622.51
121 0.00 0.00 0.00 0.00 7,974,554.86 0.00 1,848,080.75
122 0.00 0.00 0.00 0.00 7,411,675.76 0.00 1,717,635.10
123 0.00 0.00 0.00 0.00 6,869,968.65 0.00 1,592,095.99
124 0.00 0.00 0.00 0.00 6,348,645.80 0.00 1,471,280.88
125 0.00 0.00 0.00 0.00 5,846,948.62 0.00 1,355,013.96
126 0.00 0.00 0.00 0.00 5,364,146.51 0.00 1,243,125.93
127 0.00 0.00 0.00 0.00 4,899,535.91 0.00 1,135,453.72
128 0.00 0.00 0.00 0.00 4,452,439.25 0.00 1,031,840.32
129 0.00 0.00 0.00 0.00 4,022,204.00 0.00 932,134.51
130 0.00 0.00 0.00 0.00 3,608,201.78 0.00 836,190.66
131 0.00 0.00 0.00 0.00 3,209,827.44 0.00 743,868.52
132 0.00 0.00 0.00 0.00 2,826,498.20 0.00 655,033.04
133 0.00 0.00 0.00 0.00 2,457,652.88 0.00 569,554.17
134 0.00 0.00 0.00 0.00 2,102,751.04 0.00 487,306.66
135 0.00 0.00 0.00 0.00 1,761,272.23 0.00 408,169.91
136 0.00 0.00 0.00 0.00 1,432,715.31 0.00 332,027.76
137 0.00 0.00 0.00 0.00 1,116,597.65 0.00 258,768.38
138 0.00 0.00 0.00 0.00 812,454.52 0.00 188,284.06
139 0.00 0.00 0.00 0.00 519,838.41 0.00 120,471.09
140 0.00 0.00 0.00 0.00 238,318.36 0.00 55,229.61
141 0.00 0.00 0.00 0.00 0.00 0.00 0.00
</TABLE>
ANNEX III
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered
ContiMortgage Home Equity Loan Trust 1997-5 Home Equity Loan Pass-Through
Certificates, Class A and Class B (the "Global Securities") will be available
only in book-entry form. Investors in the Global Securities may hold such Global
Securities through any of DTC, Cedel or Euroclear. The Global Securities will be
tradeable as home market instruments in both the European and U.S. domestic
markets. Initial settlement and all secondary trades will settle in same-day
funds.
Secondary market trading between investors through Cedel and Euroclear
will be conducted in the ordinary way in accordance with the normal rules and
operating procedures of Cedel and Euroclear and in accordance with conventional
eurobond practice (i.e., seven calendar day settlement).
Secondary market trading between investors through DTC will be
conducted according to DTC's rules and procedures applicable to U.S. corporate
debt obligations.
Secondary cross-market trading between Cedel or Euroclear and DTC
Participants holding Certificates will be effected on a delivery-against-payment
basis through the respective Depositaries of Cedel and Euroclear (in such
capacity) and as DTC Participants.
Non-U.S. holders (as described below) of Global Securities will be
subject to U.S. withholding taxes unless such holders meet certain requirements
and deliver appropriate U.S. tax documents to the securities clearing
organizations or their participants.
Initial Settlement
All Global Securities will be held in book-entry form by DTC in the
name of Cede & Co. as nominee of DTC. Investors' interests in the Global
Securities will be represented through financial institutions acting on their
behalf as direct and indirect Participants in DTC. As a result, Cedel and
Euroclear will hold positions on behalf of their participants through their
Relevant Depositary which in turn will hold such positions in their accounts as
DTC Participants.
Investors electing to hold their Global Securities through DTC will
follow DTC settlement practices. Investor securities custody accounts will be
credited with their holdings against payment in same-day funds on the settlement
date.
Investors electing to hold their Global Securities through Cedel or
Euroclear accounts will follow the settlement procedures applicable to
conventional eurobonds, except that there will be no temporary global security
and no "lock-up" or restricted period. Global Securities will be credited to the
securities custody accounts on the settlement date against payment in same-day
funds.
Secondary Market Trading
Since the purchaser determines the place of delivery, it is important
to establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired value
date.
Trading between DTC Participants. Secondary market trading between DTC
Participants will be settled using the procedures applicable to prior home
equity loan asset-backed certificates issues in same-day funds.
Trading between Cedel and/or Euroclear Participants. Secondary market
trading between Cedel Participants or Euroclear Participants will be settled
using the procedures applicable to conventional eurobonds in same-day funds.
Trading between DTC, Seller and Cedel or Euroclear Participants. When
Global Securities are to be transferred from the account of a DTC Participant to
the account of a Cedel Participant or a Euroclear Participant, the purchaser
will send instructions to Cedel or Euroclear through a Cedel Participant or
Euroclear Participant at least one business day prior to settlement. Cedel or
Euroclear will instruct the Relevant Depositary, as the case may be, to receive
the Global Securities against payment. Payment will include interest accrued on
the Global Securities from and including the last coupon payment date to and
excluding the settlement date, on the basis of the actual number of days in such
accrual period and a year assumed to consist of 360 days. For transactions
settling on the 31st of the month, payment will include interest accrued to and
excluding the first day of the following month. Payment will then be made by the
Relevant Depositary to the DTC Participant's account against delivery of the
Global Securities. After settlement has been completed, the Global Securities
will be credited to the respective clearing system and by the clearing system,
in accordance with its usual procedures, to the Cedel Participant's or Euroclear
Participant's account. The securities credit will appear the next day (European
time) and the cash debt will be back-valued to, and the interest on the Global
Securities will accrue from, the value date (which would be the preceding day
when settlement occurred in New York). If settlement is not completed on the
intended value date (i.e., the trade fails), the Cedel or Euroclear cash debt
will be valued instead as of the actual settlement date.
Cedel Participants and Euroclear Participants will need to make
available to the respective clearing systems the funds necessary to process
same-day funds settlement. The most direct means of doing so is to preposition
funds for settlement, either from cash on hand or existing lines of credit, as
they would for any settlement occurring within Cedel or Euroclear. Under this
approach, they may take on credit exposure to Cedel or Euroclear until the
Global Securities are credited to their account one day later.
As an alternative, if Cedel or Euroclear has extended a line of credit
to them, Cedel Participants or Euroclear Participants can elect not to
preposition funds and allow that credit line to be drawn upon to finance
settlement. Under this procedure, Cedel Participants or Euroclear Participants
purchasing Global Securities would incur overdraft charges for one day, assuming
they cleared the overdraft when the Global Securities were credited to their
accounts. However, interest on the Global Securities would accrue from the value
date. Therefore, in many cases the investment income on the Global Securities
earned during that one-day period may substantially reduce or offset the amount
of such overdraft charges, although the result will depend on each Cedel
Participant's or Euroclear Participant's particular cost of funds.
Since the settlement is taking place during New York business hours,
DTC Participants can employ their usual procedures for crediting Global
Securities to the respective European Depositary for the benefit of Cedel
Participants or Euroclear Participants. The sale proceeds will be available to
the DTC seller on the settlement date. Thus, to the DTC Participants a
cross-market transaction will settle no differently than a trade between two DTC
Participants.
Trading between Cedel or Euroclear Seller and DTC Purchaser. Due to
time zone differences in their favor, Cedel Participants and Euroclear
Participants may employ their customary procedures for transactions in which
Global Securities are to be transferred by the respective clearing system,
through the respective Depositary, to a DTC Participant. The seller will send
instructions to Cedel or Euroclear through a Cedel Participant or Euroclear
Participant at least one business day prior to settlement. In these cases Cedel
or Euroclear will instruct the respective Depositary, as appropriate, to credit
the Global Securities to the DTC Participant's account against payment. Payment
will include interest accrued on the Global Securities from and including the
last coupon payment to and excluding the settlement date on the basis of the
actual number of days in such accrual period and a year assumed to consist to
360 days. For transactions settling on the 31st of the month, payment will
include interest accrued to and excluding the first day of the following month.
The payment will then be reflected in the account of Cedel Participant or
Euroclear Participant the following day, and receipt of the cash proceeds in the
Cedel Participant's or Euroclear Participant's account would be back-valued to
the value date (which would be the preceding day, when settlement occurred in
New York). Should the Cedel Participant or Euroclear Participant have a line of
credit with its respective clearing system and elect to be in debt in
anticipation of receipt of the sale proceeds in its account, the back-valuation
will extinguish any overdraft incurred over that one-day period. If settlement
is not completed on the intended value date (i.e., the trade fails), receipt of
the cash proceeds in the Cedel Participant's or Euroclear Participant's account
would instead be valued as of the actual settlement date.
Finally, day traders that use Cedel or Euroclear and that purchase
Global Securities from DTC Participants for delivery to Cedel Participants or
Euroclear Participants should note that these trades would automatically fail on
the sale side unless affirmative action is taken. At least three techniques
should be readily available to eliminate this potential problem:
(a) borrowing through Cedel or Euroclear for one day (until the
purchase side of the trade is reflected in their Cedel or Euroclear accounts) in
accordance with the clearing system's customary procedures;
(b) borrowing the Global Securities in the U.S. from a DTC
Participant no later than one day prior to settlement, which would give the
Global Securities sufficient time to be reflected in their Cedel or Euroclear
account in order to settle the sale side of the trade; or
(c) staggering the value dates for the buy and sell sides
of the trade so that the value date for the purchase from the DTC
Participant is at least one day prior to the value date for the sale to the
Cedel Participant or Euroclear Participant.
Certain U.S. Federal Income Tax Documentation Requirements
A beneficial owner of Global Securities holding securities through
Cedel or Euroclear (or through DTC if the holder has an address outside the
U.S.) will be subject to the 30% U.S. withholding tax that generally applies to
payments of interest (including original issue discount) on registered debt
issued by U.S. Persons (as defined below), unless (i) each clearing system, bank
or other financial institution that holds customers' securities in the ordinary
course of its trade or business in the chain of intermediaries between such
beneficial owner and the U.S. entity required to withhold tax complies with
applicable certification requirements and (ii) such beneficial owner takes one
of the following steps to obtain an exemption or reduced tax rate:
Exemption for Non-U.S. Persons (Form W-8). Beneficial Owners of Global
Securities that are Non-U.S. Persons (as defined below) can obtain a complete
exemption from the withholding tax by filing a signed Form W-8 (Certificate of
Foreign Status). If the information shown on Form W-8 changes, a new Form W-8
must be filed within 30 days of such change.
Exemption for Non-U.S. Persons with effectively connected income (Form
4224). A Non-U.S. Person (as defined below), including a non-U.S. corporation or
bank with a U.S. branch, for which the interest income is effectively connected
with its conduct of a trade or business in the United States, can obtain an
exemption from the withholding tax by filing Form 4224 (Exemption from
Withholding of Tax on Income Effectively Connected with the Conduct of a Trade
or Business in the United States).
Exemption or reduced rate for Non-U.S. Persons resident in treaty
countries (Form 1001). Non- U.S. Persons residing in a country that has a tax
treaty with the United States can obtain an exemption or reduced tax rate
(depending on the treaty terms) by filing Form 1001 (Ownership, Exemption or
Reduced Rate Certificate). If the treaty provides only for a reduced rate,
withholding tax will be imposed at that rate unless the filer alternatively
files Form W-8. Form 1001 may be filed by Certificate Owners or their agent.
Exemption for U.S. Persons (Form W-9). U.S. Persons can obtain a
complete exemption from the withholding tax by filing Form W-9 (Payer's Request
for Taxpayer Identification Number and Certification).
U.S. Federal Income Tax Reporting Procedure. The Owner of a Global
Security or, in the case of a Form 1001 or a Form 4224 filer, his agent, files
by submitting the appropriate form to the person through whom it holds the
security (the clearing agency, in the case of persons holding directly on the
books of the clearing agency). Form W-8 and Form 1001 are effective for three
calendar years and Form 4224 is effective for one calendar year.
The term "U.S. Person" means (i) a citizen or resident of the United
States, (ii) a corporation or partnership, taxable as such, organized in or
under the laws of the United States or any political subdivision thereof (iii)
an estate that is subject to U.S. federal income tax regardless of the source of
its income or (iv) a trust other than a "foreign trust" as defined in Section
7701(a)(31) of the Internal Revenue Code of 1986, as amended. The term "Non-U.S.
Person" means any person who is not a U.S. Person. This summary does not deal
with all aspects of U.S. Federal income tax withholding that may be relevant to
foreign holders of the Global Securities as well as the application of recently
issued Treasury regulations relating to tax documentation requirements that are
generally effective with respect to payments made after December 31, 1998.
Investors are advised to consult their own tax advisors for specific tax advice
concerning their holding and disposing of the Global Securities.
==============================================================================
No dealer, salesperson or other person has been authorized to give any
information or to make any representation not contained in this Prospectus
Supplement or the Prospectus and, if given or made, such information or
representation must not be relied upon as having been authorized by the
Depositor 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 any of
the securities offered hereby in any jurisdiction to any person to whom it is
unlawful to make such offer in such jurisdiction. Neither the delivery of this
Prospectus Supplement or the Prospectus nor any sale made hereunder shall, under
any circumstances, create any implication that information herein is correct as
of any time subsequent to the date hereof or that there has been no change in
the affairs of the Depositor since such date.
TABLE OF CONTENTS Merrill Lynch & Co.
PAGE
PROSPECTUS SUPPLEMENT
Summary of Terms S- 4
Risk Factors S-26
The Sellers And The Servicer S-29
Use of Proceeds S-34
The Depositor S-34
The Home Equity Loan Pool S-34
Prepayment and Yield Considerations S-48
Formation of The Trust And Trust
Property S-60
Formation of The Grantor Trust and
Trust Property S-60
Additional Information S-61
Description of The Offered Certificates S-61
Credit Enhancement S-68
The Certificate Insurer S-75
The Pooling and Servicing Agreement S-77
The Grantor Trust Agreement S-86
Certain Federal Income Tax Consequences S-89
ERISA Considerations S-90
Ratings S-93
Legal Investment Considerations S-94
Underwriting S-95
Report of Experts S-99
Certain Legal Matters S-99
Global Clearance, Settlement and Tax
Documentation Procedures Annex I
Index to Location of Principal Defined
Terms A-1
PROSPECTUS
Summary of Prospectus 1
Risk Factors 6
Description of the Certificates 9
The Trusts 14
Credit Enhancement 18
Servicing of the Mortgage Loans and
Contracts 23
Administration 30
Use of Proceeds 37
The Depositor 37
Certain Legal Aspects of the
Mortgage Assets 37
Legal Investment Matters 50
ERISA Considerations 51
Certain Federal Income Tax Consequences 52
Plan of Distribution 74
Legal Matters 74
Financial Information 74
Index to Location of Principal
Defined Terms 76
$1,660,000,000
ContiMortgage Home Equity Loan
Pass-Through Certificates
Series 1997-5
ContiMortgage Corporation
Seller and Servicer
ContiWest Corporation
Seller
ContiSecurities Asset Funding
Corp.
Depositor
PROSPECTUS SUPPLEMENT
Greenwich Capital Markets, Inc.
Bear, Stearns & Co. Inc.
ContiFinancial Services
Corporation
Credit Suisse First Boston
Morgan Stanley Dean Witter
Nomura Securities International, Inc.
December 16, 1997
<PAGE>
TABLE OF CONTENTS
PAGE
SUMMARY OF TERMS 4
RISK FACTORS 26
THE SELLERS AND THE SERVICER 29
General 29
Credit and Underwriting Guidelines 30
Indemnification by the Depositor 32
Delinquency, Loan Loss and Foreclosure Information 32
USE OF PROCEEDS 34
THE DEPOSITOR 34
THE HOME EQUITY LOAN POOL 34
General 34
Home Equity Loans-Fixed Rate Loans 35
Home Equity Loans - Adjustable Rate Loans 40
Home Equity Loans - Fixed Rate and Adjustable Rate 47
Interest Payments on the Home Equity Loans 47
PREPAYMENT AND YIELD CONSIDERATIONS 48
General 48
PAC Certificates 49
Companion Certificates 50
Auction Rate Certificates 50
Interest- Only Certificates 50
Payment Lag Feature of Fixed Rate Certificates 60
FORMATION OF THE TRUST AND TRUST PROPERTY 60
FORMATION OF THE GRANTOR TRUST AND TRUST PROPERTY 60
ADDITIONAL INFORMATION 61
DESCRIPTION OF THE OFFERED CERTIFICATES 61
General 61
Payment Dates 61
Distributions 62
Calculation of LIBOR 64
Book-Entry Registration of the Offered Certificates 65
Assignment of Rights 68
CREDIT ENHANCEMENT 68
Subordination of Subordinate Certificates 68
Application of Realized Losses 69
Application of Monthly Excess Cashflow Amounts 70
The Certificate Insurance Policies 71
THE CERTIFICATE INSURER 75
THE POOLING AND SERVICING AGREEMENT 77
Covenant of the Sellers to Take Certain Actions
with Respect to the Home Equity Loans in
Certain Situations 77
Assignment of Home Equity Loans 78
Servicing and Sub-Servicing 79
Removal and Resignation of Servicer 82
The Trustee 82
Reporting Requirements 83
Removal of Trustee for Cause 84
The Auction Agent 85
Governing Law 85
Amendments 85
Termination of the Trust 85
Optional Termination 85
THE GRANTOR TRUST AGREEMENT 86
Assignment of Class A-2 Fixed Certificates 86
Removal and Resignation of Servicer 87
The Grantor Trustee 87
Reporting Requirements 87
Removal of Trustee for Cause 88
Governing Law 88
Amendments 88
Termination of the Trust 89
CERTAIN FEDERAL INCOME TAX CONSEQUENCES 89
REMIC Election 89
ERISA CONSIDERATIONS 90
RATINGS 93
LEGAL INVESTMENT CONSIDERATIONS 94
UNDERWRITING 95
REPORT OF EXPERTS 99
CERTAIN LEGAL MATTERS 99
INDEX OF TERMS
PAGE
2/28 Loans 8
3/27 Loans 9
Accrual Period 10
Actuarial Loans 47
Adjustable Rate Certificates 6
Adjustable Rate Loans 7
Aggregate Certificate Principal Balance 5
Applied Realized Loss Amount 19
Appraised Values 34
Auction Agent 6
Auction Rate Certificates 2, 5
Available Certificates 11
Available Funds Cap 5
Average Amount Outstanding 33
Balloon Loans 28
Beneficial Owners 22, 64
Bid 9
Bid Auction Rate 11
Bidder 9
Book-Entry Certificates 64
Business Day 10
Buyer's Broker-Dealer 15
CapMAC 74
Cede 22
Cedel 22
Cedel Participants 65
Certificate 1
Certificate Account 60
Certificate Insurer 21
Certificate Principal Balance 4
Certificateholder 1
Certificates 7
Chase 22
CHI 74
Citibank 22
Class 4
Class A Certificates 1
Class A Offered Certificates 6
Class A Principal Distribution Amount 14
Class A Trust Certificates 5
Class B Applied Realized Loss Amount 70
Class B Certificate Principal Balance 70
Class B Optimal Balance 14
Class B Principal Distribution Amount 14
Class B Realized Loss Amortization Amount 70
Class B Unpaid Realized Loss Amount 70
Class Distribution Amount 9
Class R Certificates 1
Clean-Up Call Date 22, 85
Closing Date 5, 6
Code 24
Combined Loan-to-Value Ratios 37
Commission 3
Companion Certificates 6
Compensating Interest 80
Cooperative 66
Coupon Rates 7
Cumulative Realized Loss Trigger Event 17
Current Interest 11
Cut-Off Date 2, 6
Daily Collections 79
Date-of-Payment Loans 46
Definitive Certificate 64
Delinquency Advances 79
Delinquency Trigger Event 14
Depositor 6
DOL 90
DTC 22
DTC Participants 65
Dutch Auction 1
Effective Range 48
ERISA 89
Euroclear 22
Euroclear Operator 66
Euroclear Participants 66
European Depositaries 22, 64
Exemptions 90
Existing Certificateholders 6
Extra Principal Distribution Amount 17
FannieMae 81
FannieMae Guide 78
FHLMC 81
Final Certification 78
Final Determination 85
Final Scheduled Payment Date 49
Final Scheduled Payment Dates 9
Financial Intermediary 64
Fiscal Agent 71, 73
Fitch 23
Fixed Rate Certificates 6
Fixed Rate Loans 7
Fixed Rate PAC Certificates 6
Floating Rate Certificates 5
Floating Rate PAC Certificates 6
GAAP 75
Global Securities 1
Grantor Trust 2, 4
Grantor Trust Account 61
Grantor Trust Agreement 2, 7
Grantor Trust Certificates 1, 6
Grantor Trust Estate 85
Grantor Trustee 2, 6
Gross Losses 33
Hold Order 9
Home Equity Loans 2, 7
IML 65
Initial Certificate Principal Balance 49
Insured Payments 21
Interest Amount Available 10
Interest Carry Forward Amount 11
Interest Remittance Amount 11
Interest-Only Certificates 6
LIBOR 63
LIBOR Determination Date 64
Liquidated Home Equity Loan 13
Loan Balance 7
Loan Purchase Price 77
Loan-to-Value Ratios 36
Monthly Excess Cashflow Amount 21
Monthly Remittance Date 13
Moody's 23
Mortgages 7
Mortgagor 46
Net Liquidation Proceeds 78
Net Losses 33
Non-U.S. Person 3
Notes 7
Notional Amount 4
Offered Certificates 6, 7
Order 9
Original Aggregate Loan Balance 7
Originator 6
Overcollateralization Amount 16
Overcollateralization Deficiency 17
Overcollateralization Deficit 19
Overcollateralization Floor 14
Overcollateralization Release Amount 17
Participant 15
Participants 64
Pass-Through Rate 2, 61
Payment Date 9
Percentage Interest 61
Planned Amortization Class ("PAC") Certificates 6
Plans 89
Pooling and Servicing Agreement 2
Preference Amount 17
Prepayment Assumption 50
Prepayments 25
Preservation Expenses 79
Principal and Interest Account 78
Principal Distribution Amount 13
Principal Remittance Amount 13
PTCE 92
Qualified Replacement Mortgage 78
Rating Agencies 23, 90
Realized Loss 18
Record Date 9
Recoveries 33
Register 61
Registrar 61
Reimbursement Amount 70
Relevant Depositary 64
REMIC 2, 23
REMIC Opinion 76
Remittance Period 13
Restricted Group 91
Retained Certificates 7
Riegle Act 27
Rules 64
SAP 75
Sell Order 9
Seller's Broker-Dealer 15
Sellers 6
Senior Enhancement Percentage 16
Senior Optimal Balance 15
Senior Specified Enhancement Percentage 17
Servicer 6
Servicer Termination Event 81, 86
Servicing Fee 18
Six-Month LIBOR 26
Six-Month LIBOR Loans 8
SMMEA 24
Standard & Poor's 23
Statistical Calculation Date 6
Stepdown Date 14
Submitted Hold Order 11
Submitted Orders 11
Subordinate Certificates 6
Sub-Servicers 29
Sub-Servicing Agreements 29
Substitution Amount 78
Sufficient Bids 11
Swap Agreement 2
Swap Counterparty 2, 9
Targeted Overcollateralization Amount 17
Telerate Page 3750 64
Terms and Conditions 66
Trust 2, 4
Trust Certificates 5
Trust Estate 59
Trust Offered Certificates 6
Trustee 6
U.S. Person 3
Underwriters 94
Underwriting Agreement 94
Weighted average life 50
<PAGE>
PROSPECTUS
ASSET BACKED CERTIFICATES
(Issuable in Series)
CONTISECURITIES ASSET FUNDING CORP.
(DEPOSITOR)
This Prospectus relates to Asset Backed Certificates to be issued from time
to time in one or more series (and one or more classes within a series), certain
classes of which may be offered on terms determined at the time of sale and
described in this Prospectus and the related Prospectus Supplement. Each series
of Certificates will be issued by a separate trust (each, a "Trust") and will
evidence either a beneficial ownership interest in, such Trust. The assets of a
Trust will include one or more of the following: (i) one-to-four family and/or
multifamily residential mortgage loans, including mortgage loans secured by
junior liens on the related mortgaged properties and Title I loans and other
types of home improvement retail installment contracts, (ii) conditional sales
contracts and installment sales or loan agreements or participation interests
therein secured by manufactured housing, (iii) mortgage-backed securities, (iv)
other mortgage-related assets and securities and (v) reinvestment income,
reserve funds, cash accounts, insurance policies, guaranties, letters of credit
or other assets as described in the related Prospectus Supplement.
One or more classes of Certificates of a series may be (i) entitled to
receive distributions allocable to principal, principal prepayments, interest or
any combination thereof prior to one or more other classes of Certificates of
such series or after the occurrence of certain events or (ii) subordinated in
the right to receive such distributions to one or more senior classes of
Certificates of such series, in each case as specified in the related Prospectus
Supplement. Interest on each class of Certificates entitled to distributions
allocable to interest may accrue at a fixed rate or at a rate that is subject to
change from time to time as specified in the related Prospectus Supplement. The
Depositor or its affiliates may retain or hold for sale from time to time one or
more classes of a series of Certificates.
Distributions on the Certificates will be made at the intervals and on the
dates specified in the related Prospectus Supplement from the assets of the
related Trust and any other assets pledged for the benefit of the Certificates.
An affiliate of the Depositor may make or obtain for the benefit of the
Certificates limited representations and warranties with respect to mortgage
assets assigned to the related Trust. Neither the Depositor nor any affiliates
will have any other obligation with respect to the Certificates.
The yield on Certificates will be affected by the rate of payment of
principal (including prepayments) of mortgage assets in the related Trust. Each
series of Certificates will be subject to early termination under the
circumstances described herein and in the related Prospectus Supplement.
If specified in a Prospectus Supplement, one or more separate elections may
be made to treat the Trust for the related series or specified portions thereof
as a "real estate mortgage investment conduit" ("REMIC") for federal income tax
purposes. See "Certain Federal Income Tax Consequences" herein and in the
related Prospectus Supplement.
It is a condition to the issuance of the Certificates that the Certificates
be rated in not less than the fourth highest rating category by a nationally
recognized rating organization.
SEE "RISK FACTORS" BEGINNING ON PAGE 6 HEREIN AND IN THE RELATED PROSPECTUS
SUPPLEMENT FOR A DISCUSSION OF SIGNIFICANT MATTERS AFFECTING INVESTMENTS IN THE
CERTIFICATES.
See "ERISA Considerations" herein and in the related Prospectus Supplement
for a discussion of restrictions on the acquisition of Certificates by "plan
fiduciaries."
THE ASSETS OF A TRUST ARE THE SOLE SOURCE OF PAYMENTS ON THE RELATED
CERTIFICATES. THE CERTIFICATES DO NOT REPRESENT AN INTEREST IN OR OBLIGATION OF
THE DEPOSITOR, ANY SERVICER, ANY MASTER SERVICER, ANY ORIGINATOR, ANY TRUSTEE OR
ANY OF THEIR AFFILIATES, EXCEPT AS SET FORTH HEREIN AND IN THE RELATED
PROSPECTUS SUPPLEMENT. NEITHER THE CERTIFICATES NOR THE UNDERLYING MORTGAGE
ASSETS WILL BE GUARANTEED OR INSURED BY ANY GOVERNMENTAL AGENCY OR
INSTRUMENTALITY OR BY THE DEPOSITOR, ANY SERVICER, ANY MASTER SERVICER, ANY
ORIGINATOR, ANY TRUSTEE OR ANY OF THEIR AFFILIATES, EXCEPT AS SET FORTH IN THE
RELATED PROSPECTUS SUPPLEMENT.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS OR ANY RELATED PROSPECTUS SUPPLEMENT.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Offers of the Certificates may be made through one or more different
methods, including offerings through underwriters, as more fully described
herein and in the related Prospectus Supplement. See "Plan of Distribution"
herein and in the related Prospectus Supplement. Prior to their issuance there
will have been no market FOR the Certificates nor can there by any assurance
that one will develop or if it does develop, that it will provide the Owners of
the Certificates with liquidity or will continue for the life of the
Certificates.
RETAIN THIS PROSPECTUS FOR FUTURE REFERENCE. THIS PROSPECTUS MAY NOT BE
USED TO CONSUMMATE SALES OF CERTIFICATES UNLESS ACCOMPANIED BY A PROSPECTUS
SUPPLEMENT.
The date of this Prospectus is December 16, 1997
<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 Certificates
offered hereby and thereby or an offer of such Certificates to any person in any
state or other jurisdiction in which such offer would be unlawful. The delivery
of this Prospectus at any time does not imply that information herein is correct
as of any time subsequent to its date; however, if any material change occurs
while this Prospectus is required by law to be delivered, this Prospectus will
be amended or supplemented accordingly
TABLE OF CONTENTS
PAGE
SUMMARY OF PROSPECTUS........................................1
RISK FACTORS.................................................6
DESCRIPTION OF THE CERTIFICATES..............................9
General................................................10
Classes of Certificates................................10
Distributions of Principal and Interest................11
Book Entry Registration................................13
List of Owners of Certificates.........................13
THE TRUSTS..................................................14
Mortgage Loans.........................................14
Contracts..............................................17
Mortgage-Backed Securities.............................18
Other Mortgage Securities..............................18
CREDIT ENHANCEMENT..........................................18
SERVICING OF MORTGAGE LOANS AND CONTRACTS...................23
Payments on Mortgage Loans.............................24
Advances...............................................24
Collection and Other Servicing Procedures..............25
Primary Mortgage Insurance.............................27
Standard Hazard Insurance..............................27
Title Insurance Policies...............................28
Claims Under Primary Mortgage Insurance Policies and
Standard Hazard Insurance Policies; Other Realization
Upon Defaulted Loan..................................28
Realization Upon or Sale of Defaulted Multifamily
Loans.................................................29
Servicing Compensation and Payment of Expenses.........30
Master Servicer........................................30
ADMINISTRATION..............................................30
Assignment of Mortgage Assets..........................30
Evidence as to Compliance..............................33
The Trustee............................................33
Administration of the Certificate Account..............34
Reports................................................34
Forward Commitments; Pre-Funding.......................35
Servicer Events of Default.............................35
Rights Upon Servicer Event of Default..................36
Amendment..............................................36
Termination............................................36
USE OF PROCEEDS.............................................37
THE DEPOSITOR...............................................37
CERTAIN LEGAL ASPECTS OF THE MORTGAGE ASSETS................37
General................................................37
Foreclosure............................................38
Soldiers' and Sailors' Civil Relief Act................43
The Contracts..........................................43
The Title I Program....................................46
LEGAL INVESTMENT MATTERS....................................50
ERISA CONSIDERATIONS........................................51
CERTAIN FEDERAL INCOME TAX CONSEQUENCES.....................52
Federal Income Tax Consequences For REMIC Certificates.53
Taxation of Regular Certificates.......................54
Taxation of Residual Certificates......................59
Treatment of Certain Items of REMIC Income and Expense.61
Tax-Related Restrictions on Transfer of Residual
Certificates.........................................62
Sale or Exchange of a Residual Certificate.............64
Taxes That May Be Imposed on the REMIC Pool............64
Liquidation of the REMIC Pool..........................65
Administrative Matters.................................65
Limitations on Deduction of Certain Expenses...........66
Taxation of Certain Foreign Investors..................66
Backup Withholding.....................................67
Reporting Requirements.................................67
Federal Income Tax Consequences for Certificates as
to Which No REMIC Election Is Made...................68
Standard Certificates..................................68
Premium and Discount...................................69
Stripped Certificates..................................71
Reporting Requirements and Backup Withholding..........73
Taxation of Certain Foreign Investors..................73
Taxation of Securities Classified as Partnership
Interests............................................73
PLAN OF DISTRIBUTION........................................74
LEGAL MATTERS...............................................74
FINANCIAL INFORMATION.......................................74
INDEX TO LOCATION OF PRINCIPAL DEFINED TERMS................76
UNTIL 90 DAYS AFTER THE DATE OF EACH PROSPECTUS SUPPLEMENT, ALL DEALERS
EFFECTING TRANSACTIONS IN THE RELATED CERTIFICATES, 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 Depositor 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 Depositor
can be inspected and copied at the public reference facilities maintained by the
Commission at its Public Reference Section, 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 at prescribed rates from the Public Reference
Section of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, and
electronically through the Commission's Electronic Data Gathering, Analysis and
Retrieval System at the Commission's web site (http:\\www.sec.gov). The
Depositor does not intend to send any financial reports to Owners.
<PAGE>
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 Depositor has filed with the Commission under the Securities
act of 1933 (the "Securities Act") and to which reference is hereby made.
REPORTS TO OWNERS
The Trustee or other designated person will be required to provide periodic
unaudited reports concerning the Certificates and the Trust to all registered
holders of Certificates of the related series. See "Administration-Reports."
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All documents filed with respect to each respective Trust pursuant to
Sections 13(a), 13(c), 14 and 15(d) of the Exchange Act subsequent to the date
of this Prospectus and prior to the termination of the offering of the
securities of such Trust offered hereby shall be deemed to be incorporated by
reference into this Prospectus when delivered with respect to such Trust. Any
statement contained in a document incorporated or deemed to be incorporated by
reference herein shall be deemed to be modified or superseded for purposes of
this Prospectus to the extent that a statement contained herein or in any other
subsequently filed document which also is or is deemed to be incorporated by
reference herein modifies or supersedes such statement. Any statement so
modified or superseded shall not be deemed, except as so modified or superseded,
to constitute a part of this Prospectus.
Any person receiving a copy of this Prospectus may obtain, without charge,
upon written or oral request, a copy of any of the documents incorporated by
reference herein, except for the exhibits to such documents (other than the
documents expressly incorporated therein by reference). Requests should be
directed to ContiSecurities Asset Funding Corp., 277 Park Avenue, 38th Floor,
New York, New York 10172 (telephone number (212) 207-2840).
<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 Prospectus Supplement relating to a particular series of Certificates and to
the related Agreement which will be prepared in connection with each series of
Certificates. Unless otherwise specified, capitalized terms used and not defined
in this Summary of Prospectus have the meanings given to them in this
Prospectus. An index indicating where certain capitalized terms used herein are
defined appears in Appendix A hereto.
SECURITIES............................ Asset Backed Certificates, issuable from
time to time in series, in fully
registered form or book entry only form,
in authorized denominations, as
described in the Prospectus Supplement
(the "Certificates"). Each Certificate
will represent a beneficial ownership
interest in a trust (a "Trust") created
from time to time pursuant to a pooling
and servicing agreement or trust
agreement (each, an "Agreement").
THE DEPOSITOR......................... ContiSecurities Asset Funding Corp. (the
"Depositor") is a Delaware corporation.
The Depositor's principal executive
offices are located at 277 Park Avenue,
38th Floor, New York, New York, 10172;
telephone number (212) 207-2840. See
"The Depositor" herein. The Depositor or
its affiliates may retain or hold for
sale from time to time one or more
classes of a series of Certificates.
THE SERVICER.......................... The entity or entities named as the
Servicer in the Prospectus Supplement
(the "Servicer"), will act as servicer,
with respect to the Mortgage Loans and
Contracts included in the related Trust.
The Servicer may be an affiliate of the
Depositor and may be a seller of
Mortgage Assets to the Depositor (each,
a "Seller").
THE MASTER SERVICER................... A "Master Servicer" may be specified in
the related Prospectus Supplement for
the related series of Certificates.
THE TRUSTEE........................... The trustee (the "Trustee") for each
series of Certificates will be specified
in the related Prospectus Supplement.
TRUST ASSETS.......................... The assets of a Trust will be
mortgage-related assets (the "Mortgage
Assets") consisting of one or more of
the following types of assets:
A. The Mortgage Loans................ "Mortgage Loans" may include: (i)
conventional (I.E., not insured or
guaranteed by any governmental agency)
Mortgage Loans secured by one-to-four
family residential properties; (ii)
conventional multifamily mortgage loans
("Conventional Multifamily Loans") or
mortgages insured by the Federal Housing
Administration (the "FHA") ("FHA-Insured
Multifamily Loans" and together with the
Conventional Multifamily Loans, the
"Multifamily Loans"); (iii) Mortgage
Loans secured by security interests in
shares issued by private, non-profit,
cooperative housing corporations
("Cooperatives") and in the related
proprietary leases or occupancy
agreements granting exclusive rights to
occupy specific dwelling units in such
Cooperatives' buildings; and, (iv)
Mortgage Loans secured by junior liens
on the related mortgaged properties,
including Title I Loans and other types
of home improvement retail installment
contracts. The Mortgage Loans may be
located in any one of the 50 states, the
District of Columbia or the Commonwealth
of Puerto Rico. See "The Trusts -
Mortgage Loans" herein.
B. Contracts......................... Contracts may include conditional sales
contracts and installment sales or loan
agreements or participation interests
therein secured by new or used
Manufactured Homes (as defined herein).
Contracts may be conventional (I.E., not
insured or guaranteed by any government
agency) or insured by the FHA, including
Title I Contracts, or partially
guaranteed by the Veterans
Administration ("VA"), as specified in
the related Prospectus Supplement. See
"The Trusts - Contracts" herein.
C. Mortgage-Backed Securities......... "Mortgage-Backed Securities" (or "MBS")
may include (i) private (that is, not
guaranteed or insured by the United
States or any agency or instrumentality
thereof) mortgage participations,
mortgage pass-through certificates or
other mortgage-backed securities or (ii)
certificates insured or guaranteed by
Federal Home Loan Mortgage Corporation
("FHLMC") or Federal National Mortgage
Association ("FNMA") or Government
National Mortgage Association ("GNMA").
See "The Trusts - Mortgage- Backed
Securities" herein.
D. Other Mortgage Securities......... Other Mortgage Securities may include
other securities that directly or
indirectly represent an ownership
interest in, or are secured by and
payable from, mortgage loans on real
property or mortgage-backed securities,
such as residual interests in issuances
of collateralized mortgage obligations
or mortgage pass-through certificates.
See "The Trusts - Other Mortgage
Securities" herein.
Trust assets may also include
reinvestment income, reserve funds, cash
accounts, insurance policies,
guaranties, letters of credit or other
assets as described in the related
Prospectus Supplement.
The related Prospectus Supplement for a
series of Certificates will describe the
Mortgage Assets to be included in the
Trust for such series.
THE CERTIFICATES...................... The Certificates of any series may be
issued in one or more classes, as
specified in the Prospectus Supplement.
One or more classes of Certificates of
each series (i) may be entitled to
receive distributions allocable only to
principal, only to interest or to any
combination thereof; (ii) may be
entitled to receive distributions only
of prepayments of principal throughout
the lives of the Certificates or during
specified periods; (iii) may be
subordinated in the right to receive
distributions of scheduled payments of
principal, prepayments of principal,
interest or any combination thereof to
one or more other classes of
Certificates of such series throughout
the lives of the Certificates or during
specified periods; (iv) may be entitled
to receive such distributions only after
the occurrence of events specified in
the Prospectus Supplement; (v) may be
entitled to receive distributions in
accordance with a schedule or formula or
on the basis of collections from
designated portions of the assets in the
related Trust; (vi) as to Certificates
entitled to distributions allocable to
interest, may be entitled to receive
interest at a fixed rate or a rate that
is subject to change from time to time;
(vii) may accrue interest, with such
accrued interest added to the principal
or notional amount of the Certificates,
and no payments being made thereon until
certain other classes of the series have
been paid in full; and (viii) as to
Certificates entitled to distributions
allocable to interest, may be entitled
to distributions allocable to interest
only after the occurrence of events
specified in the Prospectus Supplement
and may accrue interest until such
events occur, in each case as specified
in the related Prospectus Supplement.
The timing and amounts of such
distributions may vary among classes,
over time, or otherwise as specified in
the related Prospectus Supplement.
DISTRIBUTIONS ON
THE CERTIFICATES.................... The related Prospectus Supplement will
specify (i) whether distributions on the
Certificates entitled thereto will be
made monthly, quarterly, semi-annually
or at other intervals and dates out of
the payments received in respect of the
Mortgage Assets included in the related
Trust and other assets, if any, pledged
for the benefit of the related Owners of
Certificates; (ii) the amount allocable
to payments of principal and interest on
any Distribution Date; and (iii) whether
all distributions will be made PRO RATA
to Owners of Certificates of the class
entitled thereto.
The aggregate original principal balance
of the Certificates will equal the
aggregate distributions allocable to
principal that such Certificates will be
entitled to receive; the Certificates
will have an aggregate original
principal balance equal to or less than
the aggregate unpaid principal balance
of the related Mortgage Assets (plus
amounts held in a Pre- Funding Account,
if any) as of the first day of the month
of creation of the Trust; and the
Certificates will bear interest in the
aggregate at a rate (the "Pass-Through
Rate") equal to the interest rate borne
by the related Mortgage Assets net of
servicing fees and any other specified
amounts.
PRE-FUNDING ACCOUNT................... A Trust may enter into an agreement
(each, a "Pre-Funding Agreement") with
the Depositor whereby the Depositor will
agree to transfer additional Mortgage
Assets to such Trust following the date
on which such Trust is established and
the related Certificates are issued. Any
Pre-Funding Agreement will require that
any Mortgage Loans so transferred
conform to the requirements specified in
such Pre-Funding Agreement. If a Pre-
Funding Agreement is to be utilized, the
related Trustee will be required to
deposit in a segregated account (each, a
"Pre-Funding Account") all or a portion
of the proceeds received by the Trustee
in connection with the sale of one or
more classes of Certificates of the
related series; subsequently, the
additional Mortgage Assets will be
transferred to the related Trust in
exchange for money released to the
Depositor from the related Pre- Funding
Account. Each Pre-Funding Agreement will
set a specified period during which any
such transfers must occur. If all moneys
originally deposited to such Pre-Funding
Account are not used by the end of such
specified period, then any remaining
moneys will be applied as a mandatory
prepayment of a class or classes of
Certificates as specified in the related
Prospectus Supplement. The specified
period for the acquisition by a Trust of
additional Mortgage Loans will generally
not exceed three months from the date
such Trust is established.
OPTIONAL TERMINATION.................. The Servicer, the Seller, the Depositor,
or, if specified in the related
Prospectus Supplement, the Owners of a
related class of Certificates or a
credit enhancer may at their respective
options effect early retirement of a
series of Certificates through the
purchase of the Mortgage Assets in the
related Trust. See "Administration -
Termination" herein.
MANDATORY TERMINATION................. The Trustee, the Servicer or certain
other entities specified in the related
Prospectus Supplement may be required to
effect early retirement of a series of
Certificates by soliciting competitive
bids for the purchase of the assets of
the related Trust or otherwise. See
"Administration - Termination" herein.
ADVANCES.............................. The Servicer of the Mortgage Loans and
Contracts will be obligated (but only to
the extent set forth in the related
Prospectus Supplement) to advance
delinquent installments of principal
and/or interest (less applicable
servicing fees) on the Mortgage Loans
and Contracts in a Trust. Any such
obligation to make advances may be
limited to amounts due to the Owners of
Certificates of the related series, to
amounts deemed to be recoverable from
late payments or liquidation proceeds,
to specified periods or to any
combination thereof, in each case as
specified in the related Prospectus
Supplement. Any such advance will be
recoverable as specified in the related
Prospectus Supplement. See "Servicing of
Mortgage Loans and Contracts" herein.
CREDIT ENHANCEMENT.................... If specified in the related Prospectus
Supplement, a series of Certificates, or
certain classes within such series, may
have the benefit of one or more types of
credit enhancement ("Credit
Enhancement") including but not limited
to overcollateralization, cross support,
mortgage pool insurance, special hazard
insurance, a bankruptcy bond, reserve
funds, other insurance, guaranties and
similar instruments and arrangements.
Credit Enhancement also may be provided
in the form of subordination of one or
more classes of Certificates in a series
under which losses are first allocated
to any Subordinated Certificates up to a
specified limit. The protection against
losses afforded by any such Credit
Enhancement will be limited as described
in the related Prospectus Supplement.
See "Credit Enhancement" herein.
BOOK ENTRY REGISTRATION............... Certificates of one or more classes of a
series may be issued in book entry form
("Book Entry Certificates") in the name
of a clearing agency (a "Clearing
Agency") registered with the Securities
and Exchange Commission, or its nominee.
Transfers and pledges of Book Entry
Certificates may be made only through
entries on the books of the Clearing
Agency in the name of brokers, dealers,
banks and other organizations eligible
to maintain accounts with the Clearing
Agency ("Clearing Agency Participants")
or their nominees. Transfers and pledges
by purchasers and other beneficial
owners of Book Entry Certificates
("Beneficial Owners") other than
Clearing Agency Participants may be
effected only through Clearing Agency
Participants. All references to the
Owners of Certificates shall mean
Beneficial Owners to the extent
Beneficial Owners may exercise their
rights through a Clearing Agency. Except
as otherwise specified in this
Prospectus or a related Prospectus
Supplement, the term "Owners" shall be
deemed to include Beneficial Owners. See
"Risk Factors - Book Entry Registration"
and "Description of the Certificates -
Book Entry Registration" herein.
CERTAIN FEDERAL INCOME TAX
CONSEQUENCES...................... Federal income tax consequences will
depend on, among other factors, whether
one or more elections are made to treat
a Trust or specified portions thereof as
a "real estate mortgage investment
conduit" ("REMIC") under the Internal
Revenue Code of 1986, as amended (the
"Code"), or, if no REMIC election is
made, whether the Certificates are
considered to be Standard Certificates,
Stripped Certificates or Partnership
Interests. The related Prospectus
Supplement for each series of
Certificates will specify whether one or
more REMIC elections will be made. See
"Certain Federal Income Tax
Consequences" herein and in the related
Prospectus Supplement.
ERISA CONSIDERATIONS.................. A fiduciary of any employee benefit plan
subject to the Employee Retirement
Income Security Act of 1974, as amended
("ERISA"), or the Code should carefully
review with its own legal advisors
whether the purchase or holding of
Certificates could give rise to a
transaction prohibited or otherwise
impermissible under ERISA or the Code.
Certain classes of Certificates may not
be transferred unless the Trustee and
the Depositor are furnished with a
letter of representation or an opinion
of counsel to the effect that such
transfer will not result in a violation
of the prohibited transaction provisions
of ERISA and the Code and will not
subject the Trustee, the Depositor or
the Servicer to additional obligations.
See "Description of the Certificates -
General" herein and "ERISA
Considerations" herein and in the
related Prospectus Supplement.
LEGAL INVESTMENT MATTERS.............. Certificates that constitute "mortgage
related securities" under the Secondary
Mortgage Market Enhancement Act of 1984
("SMMEA") will be so described in the
related Prospectus Supplement.
Certificates that are not so qualified
may not be legal investments for certain
types of institutional investors,
subject, in any case, to any other
regulations which may govern investments
by such institutional investors. See
"Legal Investment Matters" herein and in
the related Prospectus Supplement.
USE OF PROCEEDS....................... Substantially all the net proceeds from
the sale of a series of Certificates
will be applied to the simultaneous
purchase of the Mortgage Assets included
in the related Trust (or to reimburse
the amounts previously used to effect
such purchase), the costs of carrying
the Mortgage Assets until sale of the
Certificates and to pay other expenses.
See "Use of Proceeds" herein.
RATING................................ Each class of Certificates offered by a
Prospectus Supplement will be rated in
one of the four highest rating
categories of a nationally recognized
statistical rating agency; PROVIDED,
HOWEVER, that one or more classes of
Subordinated Certificates and Residual
Certificates, which will not be so
offered, need not be so rated.
RISK FACTORS.......................... Investment in the Certificates will be
subject to one or more risk factors,
including declines in the value of
Mortgaged Properties, prepayment of
Mortgage Loans, higher risks of defaults
on particular types of Mortgage Loans,
limitations on security for the Mortgage
Loans, limitations on credit enhancement
and various other factors. See "Risk
Factors" herein and in the related
Prospectus Supplement.
<PAGE>
RISK FACTORS
Prospective investors should consider, among other things, the following
risk factors in connection with the purchase of the Certificates:
GENERAL. If the residential real estate market in general or a regional or
local area where Mortgage Assets for a Trust are concentrated should experience
an overall decline in property values, or a significant downturn in economic
conditions, rates of delinquencies, foreclosures and losses could be higher than
those now generally experienced in the mortgage lending industry. See "The
Trusts - Mortgage Loans" herein.
LIMITED OBLIGATIONS. The Certificates will not represent an interest in or
obligation of the Depositor. The Certificates of each series will not be insured
or guaranteed by any government agency or instrumentality, the Depositor, any
Servicer or the Seller.
PREPAYMENT CONSIDERATIONS. The prepayment experience on Mortgage Loans or
Contracts constituting or underlying the Mortgage Assets will affect the average
life of each class of Certificates relating to a Trust. Prepayments may be
influenced by a variety of economic, geographic, social and other factors,
including changes in interest rate levels. In general, if mortgage interest
rates fall, the rate of prepayment would be expected to increase. Conversely, if
mortgage interest rates rise, the rate of prepayment would be expected to
decrease. Other factors affecting prepayment of mortgage loans include changes
in housing needs, job transfers, unemployment and servicing decisions. See
"Prepayment and Yield Considerations" in the related Prospectus Supplement.
RISK OF HIGHER DEFAULT RATES FOR MORTGAGE LOANS WITH BALLOON PAYMENTS. A
portion of the aggregate principal balance of the Mortgage Loans at any time may
be "balloon loans" that provide for the payment of the unamortized principal
balance of such Mortgage Loan in a single payment at maturity ("Balloon Loans").
Such Balloon Loans provide for equal monthly payments, consisting of principal
and interest, generally based on a 30- year amortization schedule, and a single
payment of the remaining balance of the Balloon Loan generally 5, 7, 10, or 15
years after origination. Amortization of a Balloon Loan based on a scheduled
period that is longer than the term of the loan results in a remaining principal
balance at maturity that is substantially larger than the regular scheduled
payments. The Depositor does not have any information regarding the default
history or prepayment history of payments on Balloon Loans. Because borrowers of
Balloon Loans are required to make substantial single payments upon maturity, it
is possible that the default risk associated with the Balloon Loans is greater
than that associated with fully-amortizing Mortgage Loans.
SECURITY INTERESTS AND OTHER ASPECTS OF THE CONTRACTS. Contracts may be
secured by a security interest in a Manufactured Home. Perfection of security
interests in the Manufactured Homes and enforcement of rights to realize upon
the value of the Manufactured Homes as collateral for the Contracts are subject
to a number of Federal and state laws, including the Uniform Commercial Code as
adopted in each state and each state's certificate of title statutes. The steps
necessary to perfect the security interest in a Manufactured Home will vary from
state to state. Because of the expense and administrative inconvenience
involved, no party will be required to amend any certificates of title to change
the lienholder specified therein to the Trustee and no party will be required to
deliver any certificate of title to the Trustee or note thereon the Trustee's
interest. Consequently, in some states, in the absence of such an amendment, the
assignment to the Trustee of the security interest in the Manufactured Home may
not be effective or such security interest may not be perfected and, in the
absence of such notation or delivery to the Trustee, the assignment of the
security interest in the Manufactured Home may not be effective against
creditors of the previous owner of the related Contract or a trustee in
bankruptcy of such previous owner. In addition, numerous Federal and state
consumer protection laws impose requirements on lending under conditional sales
contracts and installment loan agreements such as the Contracts, and the failure
by the lender or seller of goods to comply with such requirements could give
rise to liabilities of assignees for amounts due under such agreements and
claims by such assignees may be subject to set-off as a result of such lender's
or seller's noncompliance. These laws would apply to the Trustee as assignee of
the Contracts. Each Seller of Contracts will warrant that each Contract sold by
it complies with all requirements of law and will make certain warranties
relating to the validity, subsistence, perfection and priority of the security
interest in each Manufactured Home securing a Contract. A breach of any such
warranty that materially adversely affects any Contract would create an
obligation of the Seller to repurchase such Contract unless such breach is
cured. If any related Credit Enhancement is exhausted and recovery of amounts
due on the Contracts is dependent on repossession and resale of Manufactured
Homes securing Contracts that are in default, certain other factors may limit
the ability of the Trust to realize upon the Manufactured Homes or may limit the
amount realized to less than the amount due. See "Certain Legal Aspects of the
Mortgage Assets - The Contracts" herein.
LIMITED LIQUIDITY. There will be no market for the Certificates of any
series prior to the issuance thereof, and there can be no assurance that a
secondary market will develop or, if it does develop, that it will provide
liquidity of investment or will continue for the life of the Certificates of
such series. The market value of the Certificates will fluctuate with changes in
prevailing rates of interest. Consequently, the sale of Certificates in any
market that may develop may be at a discount from the Certificates' par value or
purchase price. Owners of Certificates generally have no right to request
redemption of Certificates, and the Certificates are subject to redemption only
under the limited circumstances described in the related Prospectus Supplement.
In addition, the Certificates will not be listed on any securities exchange.
LIMITED ASSETS. Owners of Certificates of each series must rely upon
distributions on the related Mortgage Assets, together with the other specific
assets pledged for the benefit of such series (which assets may be subject to
release from such pledge prior to payment in full of the Certificates), for the
payment of principal of, and interest on, that series of Certificates. If the
assets comprising the Trust are insufficient to make payments on such
Certificates, no other assets of the Depositor will be available for payment of
the deficiency. Because payments of principal will be applied to classes of
outstanding Certificates of a series in the priority specified in the related
Prospectus Supplement, a deficiency may have a disproportionately greater effect
on the Certificates of classes having lower priority in payment. In addition,
due to the priority of payments and the allocation of losses, defaults
experienced on the assets comprising a Trust may have a disproportionate effect
on a specified class or classes within such series.
Certain of the Mortgage Loans included in a Trust, particularly those
secured by Multifamily Properties, 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, the
availability of credit for loans secured by comparable real properties and, in
the case of Multifamily Properties, the financial condition and operating
history of the Mortgagor and the related Mortgaged Property, tax laws and rent
control laws.
It is anticipated that some or all of the Mortgage Loans included in any
Trust, particularly Mortgage Loans secured by Multifamily Properties, 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 real 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.
LIMITATIONS, REDUCTION AND SUBSTITUTION OF CREDIT ENHANCEMENT. Credit
Enhancement may be provided in one or more of the forms described in the related
Prospectus Supplement, including, but not limited to, prioritization as to
payments of one or more classes of such series, a Mortgage Pool Insurance
Policy, a Special Hazard Insurance Policy, a bankruptcy bond, one or more
Reserve Funds, other insurance, guaranties and similar instruments and
agreements, or any combination thereof. See "Credit Enhancement" herein.
Regardless of the Credit Enhancement provided, the amount of coverage may be
limited in amount and in most cases will be subject to periodic reduction in
accordance with a schedule or formula. Furthermore, such Credit Enhancement may
provide only very limited coverage as to certain types of losses and may provide
no coverage as to certain other types of losses. The Trustee may be permitted to
reduce, terminate or substitute all or a portion of the Credit Enhancement for
any series of Certificates, if the applicable rating agencies indicate that the
then-current rating thereof will not be adversely affected.
ORIGINAL ISSUE DISCOUNT. All the Compound Interest Certificates and
Stripped Certificates that are entitled only to interest distributions will be,
and certain of the other Certificates may be, issued with original issue
discount for federal income tax purposes. An Owner of a Certificate issued with
original issue discount will be required to include original issue discount in
ordinary gross income for federal income tax purposes as it accrues, in advance
of receipt of the cash attributable to such income. Accrued but unpaid interest
on such Certificates generally will be treated as original issue discount for
this purpose. See "Certain Federal Income Tax Consequences - Federal Income Tax
Consequences for REMIC Certificates," "- Taxation of Regular Certificates -
Variable Rate Regular Certificates," "Certain Federal Income Tax Consequences -
Federal Income Tax Consequences for Certificates as to Which No REMIC Election
Is Made - Standard Certificates," and "Certain Federal Income Tax Consequences -
Premium and Discount" and "- Stripped Certificates" herein.
BOOK ENTRY REGISTRATION. Because transfers and pledges of Book Entry
Certificates may be effected only through book entries at a Clearing Agency
through Clearing Agency Participants, the liquidity of the secondary market for
Book Entry Certificates may be reduced to the extent that some investors are
unwilling to hold Certificates in book entry form in the name of Clearing Agency
Participants and the ability to pledge Book Entry Certificates may be limited
due to lack of a physical certificate. Beneficial Owners of Book Entry
Certificates may, in certain cases, experience delay in the receipt of payments
of principal and interest because such payments will be forwarded by the Trustee
to the Clearing Agency who will then forward payment to the Clearing Agency
Participants who will thereafter forward payment to Beneficial Owners. In the
event of the insolvency of the Clearing Agency or of a Clearing Agency
Participant in whose name Certificates are recorded, the ability of Beneficial
Owners to obtain timely payment and (if the limits of applicable insurance
coverage by the Securities Investor Protection Corporation are exceeded, or if
such coverage is otherwise unavailable) ultimate payment of principal and
interest on Book Entry Certificates may be impaired.
CERTAIN MATTERS RELATING TO INSOLVENCY. The Sellers of the Mortgage Assets
to the Depositor and the Depositor intend that the transfers of such Mortgage
Assets to the Depositor, and in turn to the applicable Trust, constitute sales
rather than pledges to secure indebtedness for insolvency purposes. If, however,
a seller of Mortgage Assets were to become a debtor under the federal bankruptcy
code, it is possible that a creditor, trustee-in-bankruptcy or receiver of such
seller may argue that the sale thereof by such Seller is a pledge rather than a
sale. This position, if argued or accepted by a court, could result in a delay
in or reduction of distributions on the related Certificates.
JUNIOR LIEN MORTGAGE LOANS. Because Mortgage Loans secured by junior (I.E.,
second, third, etc.) liens are subordinate to the rights of the beneficiaries
under the related senior deeds of trust or senior mortgages, a decline in the
residential real estate market would adversely affect the position of the
related Trust as a junior beneficiary or junior mortgagee before having such an
effect on the position of the related senior beneficiaries or senior mortgagees.
A rise in interest rates over a period of time, the general condition of a
Mortgaged Property and other factors may also have the effect of reducing the
value of the Mortgaged Property from the value at the time the junior lien
Mortgage Loan was originated and, as a result, may reduce the likelihood that,
in the event of a default by the borrower, liquidation or other proceeds will be
sufficient to satisfy the junior lien Mortgage Loan after satisfaction of any
senior liens and the payment of any liquidation expenses.
Liquidation expenses with respect to defaulted Mortgage Loans do not vary
directly with the outstanding principal balance of the Mortgage Loans at the
time of default. Therefore, assuming that a Servicer took the same steps in
realizing upon defaulted Mortgage Loans having small remaining principal
balances as in the case of defaulted Mortgage Loans having larger principal
balances, the amount realized after expenses of liquidation would be smaller as
a percentage of the outstanding principal balance of the smaller Mortgage Loans.
To the extent the average outstanding principal balances of the Mortgage Loans
in a Trust are relatively small, realizations net of liquidation expenses may
also be relatively small as a percentage of the principal amount of the Mortgage
Loans.
LIMITATIONS ON INTEREST PAYMENTS AND FORECLOSURES. Generally, under the
terms of the Soldiers' and Sailors' Civil Relief Act of 1940, as amended (the
"Relief Act"), or similar state legislation, a Mortgagor who enters military
service after the origination of the related Mortgage Loan (including a
Mortgagor who is a member of the National Guard or is in reserve status at the
time of the origination of the Mortgage Loan and is later called to active duty)
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. It is possible that such action
could have an effect, for an indeterminate period of time, on the ability of the
related Servicer to collect full amounts of interest on certain of the Mortgage
Loans. In addition, the Relief Act imposes limitations that would impair the
ability of the related Servicer to foreclose on an affected Mortgage Loan during
the Mortgagor's period of active duty status. Thus, in the event that such a
Mortgage Loan goes into default, there may be delays and losses occasioned by
the inability to realize upon the Mortgaged Property in a timely fashion.
SECURITY RATINGS. The rating of Certificates credit enhanced through
external credit enhancement such as a letter of credit, financial guaranty
insurance policy or mortgage pool insurance will depend primarily on the
creditworthiness of the issuer of such external credit enhancement device (a
"Credit Enhancer"). Any reduction in the rating assigned to the claims-paying
ability of the related Credit Enhancer below the rating initially given to the
related Certificates would likely result in a reduction in the rating of the
Certificates. See "Ratings" in the Prospectus Supplement.
OTHER LEGAL CONSIDERATIONS. 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 Contracts and may entitle the borrower to a refund of amounts
previously paid. See "Certain Legal Aspects of the Mortgage Assets" herein.
DESCRIPTION OF THE CERTIFICATES
Each Trust will be created pursuant to an Agreement entered into among the
Depositor, the Trustee, the Master Servicer, if any, and the Servicer. The
provisions of each Agreement will vary depending upon the nature of the
Certificates to be issued thereunder and the nature of the related Trust.
Certificates which represent beneficial interests in the Trust will be issued
pursuant to the Agreement similar to the form filed as an Exhibit to the
Registration Statement of which this Prospectus is a part. The following
summaries and the summaries set forth under "Administration" describe certain
provisions relating to each series of Certificates. THE PROSPECTUS SUPPLEMENT
FOR A SERIES OF CERTIFICATES WILL DESCRIBE THE SPECIFIC PROVISIONS RELATING TO
SUCH SERIES. The Depositor will provide Owners of Certificates, without charge,
on written request a copy of the Agreement for the related series. Requests
should be addressed to ContiSecurities Asset Funding Corp., 277 Park Avenue,
38th Floor, New York, New York 10172. The Agreement relating to a series of
Certificates will be filed with the Securities and Exchange Commission within 15
days after the date of issuance of such series of Certificates (the "Delivery
Date").
The Certificates of a series will be entitled to payment only from the
assets of the Trust and any other assets pledged for the benefit of the
Certificates and will not be entitled to payments in respect of the assets
included in any other trust fund established by the Depositor. The Certificates
will not represent obligations of the Depositor, the Trustee, the Master
Servicer, if any, any Servicer or any affiliate thereof and will not be
guaranteed by any governmental agency. See "The Trusts" herein.
The Mortgage Assets relating to a series of Certificates, other than Title
I Loans and GNMA MBS, will not be insured or guaranteed by any governmental
entity and, to the extent that delinquent payments on or losses in respect of
defaulted Mortgage Assets, are not advanced or paid from any applicable Credit
Enhancement, such delinquencies may result in delays in the distribution of
payments on, or losses allocated to one or more classes of Certificates of such
series.
GENERAL
The Certificates of each series will be issued either in book entry form or
in fully registered form. The minimum original denomination of each class of
Certificates will be specified in the related Prospectus Supplement. The
original "Certificate Principal Balance" of each Certificate will equal the
aggregate distributions or payments allocable to principal to which such
Certificate is entitled and distributions allocable to interest on each
Certificate that is not entitled to distributions allocable to principal will be
calculated based on the "Notional Principal Balance" of such Certificate. The
Notional Principal Balance of a Certificate will not evidence an interest in or
entitlement to distributions allocable to principal but will be used solely for
convenience in expressing the calculation of interest and for certain other
purposes.
Except as described below under "Book Entry Registration" with respect to
Book Entry Certificates, the Certificates of each series will be transferable
and exchangeable on a "Certificate Register" to be maintained at the corporate
trust office or such other office or agency maintained for such purposes by the
Trustee. The Trustee will be appointed initially as the "Certificate Registrar"
and no service charge will be made for any registration of transfer or exchange
of Certificates, but payment of a sum sufficient to cover any tax or other
governmental charge may be required.
Under current law the purchase and holding of certain classes of
Certificates may result in "prohibited transactions" within the meaning of ERISA
and the Code. See "ERISA Considerations" herein and in the related Prospectus
Supplement. Transfer of Certificates of such a class will not be registered
unless the transferee (i) executes a representation letter stating that it is
not, and is not purchasing on behalf of, any such plan, account or arrangement
or (ii) provides an opinion of counsel satisfactory to the Trustee and the
Depositor that the purchase of Certificates of such a class by or on behalf of
such plan, account or arrangement is permissible under applicable law and will
not subject the Trustee, the Servicer or the Depositor to any obligation or
liability in addition to those undertaken in the Agreement.
As to each series, one or more elections may be made to treat the related
Trust or designated portions thereof as a REMIC for federal income tax purposes.
The related Prospectus Supplement will specify whether a REMIC election is to be
made. Alternatively, the Agreement for a series may provide that a REMIC
election may be made at the discretion of the Depositor or the Servicer and may
only be made if certain conditions are satisfied. See "Certain Federal Income
Tax Considerations" herein. As to any such series, the terms and provisions
applicable to the making of a REMIC election, as well as any material federal
income tax consequences to Owners of Certificates not otherwise described
herein, will be set forth in the related Prospectus Supplement. If such an
election is made with respect to a series, one of the classes will be designated
as evidencing the "residual interests" in the related REMIC, as defined in the
Code. All other classes of Certificates in such a series will constitute
"regular interests" in the related REMIC, as defined in the Code. As to each
series with respect to which a REMIC election is to be made, the Servicer, the
Trustee, an Owner of Residual Certificates or another person as specified in the
related Prospectus Supplement will be obligated to take all actions required in
order to comply with applicable laws and regulations and will be obligated to
pay any prohibited transaction taxes. The person so specified will be entitled
to reimbursement for any such payment.
CLASSES OF CERTIFICATES
Each series of Certificates will be issued in one or more classes which
will evidence the beneficial ownership in the assets of the Trust that are
allocable to (i) principal of such class of Certificates and (ii) interest on
such Certificates. If specified in the Prospectus Supplement, one or more
classes of a series of Certificates may evidence beneficial ownership interests
in separate groups of assets included in the related Trust.
The Certificates will have an aggregate original Certificate Principal
Balance equal to the aggregate unpaid principal balance of the Mortgage Assets
(plus, amounts held in a Pre-Funding Account, if any) as of the time and day
prior to creation of the Trust specified in the related Prospectus Supplement
(the "Cut-Off Date") after deducting payments of principal due before the
Cut-Off Date and will bear interest at rates which, on a weighted basis, will be
equal to the Pass-Through Rate. The Pass-Through Rate will equal the weighted
average rate of interest borne by the related Mortgage Assets, net of the
aggregate servicing fees, amounts allocated to the residual interests and any
other amounts as are specified in the Prospectus Supplement. The original
Certificate Principal Balance (or Notional Principal Balance) of the
Certificates of a series and the interest rate on the classes of such
Certificates will be determined in the manner specified in the Prospectus
Supplement.
Each class of Certificates that is entitled to distributions allocable to
interest will bear interest at a fixed rate or a rate that is subject to change
from time to time (a) in accordance with a schedule, (b) by reference to an
index, or (c) otherwise (each, a "Certificate Interest Rate"). One or more
classes of Certificates may provide for interest that accrues but is not
currently payable ("Compound Interest Certificates"). With respect to any class
of Compound Interest Certificates, any interest that has accrued but is not paid
on a given Distribution Date will be added to the aggregate Certificate
Principal Balance of such class of Certificates on that Distribution Date.
A series of Certificates may include one or more classes entitled only to
distributions or payments (i) allocable to interest, (ii) allocable to principal
(and allocable as between scheduled payments of principal and Principal
Prepayments, as defined below), or (iii) allocable to both principal (and
allocable as between scheduled payments of principal and Principal Prepayments)
and interest. A series of Certificates may consist of one or more classes as to
which distributions or payments will be allocated (i) on the basis of
collections from designated portions of the assets of the Trust, (ii) in
accordance with a schedule or formula, (iii) in relation to the occurrence of
events, or (iv) otherwise. The timing and amounts of such distributions or
payments may vary among classes, over time or otherwise.
A series of Certificates may include one or more Classes of Scheduled
Amortization Certificates and Companion Certificates. "Scheduled Amortization
Certificates" are Certificates with respect to which payments of principal are
to be made in specified amounts on specified Distribution Dates, to the extent
of funds available on such Distribution Date. "Companion Certificates" are
Certificates which receive payments of all or a portion of any funds available
on a given Distribution Date which are in excess of amounts required to be
applied to payments on Scheduled Amortization Certificates on such Distribution
Date. Because of the manner of application of payments of principal to Companion
Certificates, the weighted average lives of Companion Certificates of a series
may be expected to be more sensitive to the actual rate of prepayments on the
Mortgage Assets in the related Trust than will the Scheduled Amortization
Certificates of such series.
One or more series of Certificates may constitute series of "Special
Allocation Certificates", which may include Senior Certificates, Subordinated
Certificates, Priority Certificates and Non-Priority Certificates. As specified
in the related Prospectus Supplement for a series of Special Allocation
Certificates, the timing and/or priority of payments of principal and/or
interest may favor one or more classes of Certificates over one or more other
classes of Certificates. Such timing and/or priority may be modified or
reordered upon the occurrence of one or more specified events. Losses on Trust
assets for such series may be disproportionately borne by one or more classes of
such series, and the proceeds and distributions from such assets may be applied
to the payment in full of one or more classes within such series before the
balance, if any, of such proceeds are applied to one or more other classes
within such series. For example, Special Allocation Certificates in a series may
be comprised of one or more classes of Senior Certificates having a priority in
right to distributions of principal and interest over one or more classes of
Subordinated Certificates, as a form of Credit Enhancement. See "Credit
Enhancement - Subordination" herein. Typically, the Subordinated Certificates
will carry a rating by the rating agencies lower than that of the Senior
Certificates. In addition, one or more classes of Certificates ("Priority
Certificates") may be entitled to a priority of distributions of principal or
interest from assets in the Trust over another class of Certificates
("Non-Priority Certificates"), but only after the exhaustion of other Credit
Enhancement applicable to such series. The Priority Certificates and
Non-Priority Certificates nonetheless may be within the same rating category.
DISTRIBUTIONS OF PRINCIPAL AND INTEREST
GENERAL. Distributions of principal and interest will be made to the extent
of funds available therefor, on the dates specified in the Prospectus Supplement
(each, a "Distribution Date") to the persons in whose names the Certificates are
registered (the "Owners") at the close of business on the dates specified in the
Prospectus Supplement (each, a "Record Date"). With respect to Certificates
other than Book Entry Certificates, distributions will be made by check or money
order mailed to the person entitled thereto at the address appearing in the
Certificate Register or, if specified in the Prospectus Supplement, in the case
of Certificates that are of a certain minimum denomination as specified in the
Prospectus Supplement, upon written request by the Owner of a Certificate, by
wire transfer or by such other means as are agreed upon with the person entitled
thereto; PROVIDED, HOWEVER, that the final distribution in retirement of the
Certificates (other than Book Entry Certificates) will be made only upon
presentation and surrender of the Certificates at the office or agency of the
Trustee specified in the notice of such final distribution. With respect to Book
Entry Certificates, such payments will be made as described below under "Book
Entry Registration".
Distributions will be made out of, and only to the extent of, funds in a
separate account established and maintained for the benefit of the Certificates
of the related series (the "Certificate Account" with respect to such series),
including any funds transferred from any related Reserve Fund. Amounts may be
invested in the Eligible Investments specified herein and in the Prospectus
Supplement, and all income or other gain from such investments will be deposited
in the related Certificate Account and may be available to make payments on the
Certificates of the applicable series on the next succeeding Distribution Date
or pay after amounts owed by the Trust.
DISTRIBUTIONS OF INTEREST. Interest will accrue on the aggregate
Certificate Principal Balance (or, in the case of Certificates entitled only to
distributions allocable to interest, the aggregate Notional Principal Balance
(as defined below)) of each class of Certificates entitled to interest from the
date, at the applicable Certificate Interest Rate and for the periods (each, an
"Interest Accrual Period") specified in the Prospectus Supplement. The aggregate
Certificate Principal Balance of any class of Certificates entitled to
distributions of principal will be the aggregate original Certificate Principal
Balance of such class of Certificates, reduced by all distributions allocable to
principal, and, in the case of Compound Interest Certificates, increased by all
interest accrued but not then distributable on such Compound Interest
Certificates. With respect to a class of Certificates entitled only to
distributions allocable to interest, such interest will accrue on a notional
principal balance (the "Notional Principal Balance") of such class, computed
solely for purposes of determining the amount of interest accrued and payable on
such class of Certificates.
To the extent funds are available therefor, interest accrued during each
Interest Accrual Period on each class of Certificates entitled to interest
(other than a class of Compound Interest Certificates) will be distributable on
the Distribution Dates specified in the Prospectus Supplement until the
aggregate Certificate Principal Balance of the Certificates of such class has
been distributed in full or, in the case of Certificates entitled only to
distributions allocable to interest, until the aggregate Notional Principal
Balance of such Certificates is reduced to zero or for the period of time
designated in the Prospectus Supplement. Distributions of interest on each class
of Compound Interest Certificates will commence only after the occurrence of the
events specified in the Prospectus Supplement and, prior to such time, the
aggregate Certificate Principal Balance (or Notional Principal Balance) of such
class of Compound Interest Certificates, will increase on each Distribution Date
by the amount of interest that accrued on such class of Compound Interest
Certificates during the preceding Interest Accrual Period but that was not
required to be distributed to such class on such Distribution Date. Any such
class of Compound Interest Certificates will thereafter accrue interest on its
outstanding Certificate Principal Balance (or Notional Principal Balance) as so
adjusted.
DISTRIBUTIONS OF PRINCIPAL. The Prospectus Supplement will specify the
method by which the amount of principal to be distributed on the Certificates on
each Distribution Date will be calculated and the manner in which such amount
will be allocated among the classes of Certificates entitled to distributions of
principal.
One or more classes of Certificates may be entitled to receive all or a
disproportionate percentage of the payments of principal which are received on
the related Mortgage Assets in advance of their scheduled due dates and are not
accompanied by amounts representing scheduled interest due after the month of
such payments ("Principal Prepayments"). Any such allocation may have the effect
of accelerating the amortization of such Certificates relative to the interests
evidenced by the other Certificates.
UNSCHEDULED DISTRIBUTIONS. The Certificates of a series may be subject to
receipt of distributions before the next scheduled Distribution Date under the
circumstances and in the manner described below and in the related Prospectus
Supplement. If applicable, such unscheduled distributions will be made on the
Certificates of a series on the date and in the amount specified in the related
Prospectus Supplement if, due to substantial payments of principal (including
Principal Prepayments) on the related Mortgage Assets, low rates then available
for reinvestment of such payments or both, it is determined, based on specified
assumptions, that the amount anticipated to be on deposit in the Certificate
Account for such series on the next related Distribution Date, together with, if
applicable, any amounts available to be withdrawn from any related Reserve Fund
or from any other Credit Enhancement provided for such series, may be
insufficient to make required distributions on the Certificates on such
Distribution Date. The amount of any such unscheduled distribution that is
allocable to principal will not exceed the amount that would otherwise have been
required to be distributed as principal on the Certificates on the next
Distribution Date and will include interest at the applicable Certificate
Interest Rate (if any) on the amount of the unscheduled distribution allocable
to principal for the period and to the date specified in the Prospectus
Supplement.
All distributions allocable to principal in any unscheduled distribution
will be made in the same priority and manner as distributions of principal on
the Certificates would have been made on the next Distribution Date except as
otherwise stated in the related Prospectus Supplement, and, with respect to
Certificates of the same class, unscheduled distributions of principal will be
made on a PRO RATA basis. Notice of any unscheduled distribution will be given
by the Trustee prior to the date of such distribution.
BOOK ENTRY REGISTRATION
Certificates may be issued as Book Entry Certificates and held in the name
of a Clearing Agency registered with the Securities and Exchange Commission or
its nominee. Transfers and pledges of Book Entry Certificates may be made only
through entries on the books of the Clearing Agency in the name of Clearing
Agency Participants or their nominees. Clearing Agency Participants may also be
Beneficial Owners of Book Entry Certificates.
Purchasers and other Beneficial Owners may not hold Book Entry Certificates
directly but may hold, transfer or pledge their ownership interest in the
Certificates only through Clearing Agency Participants. Furthermore, Beneficial
Owners will receive all payments of principal and interest with respect to the
Certificates and, if applicable, may request redemption of Certificates, only
through the Clearing Agency and the Clearing Agency Participants. Beneficial
Owners will not be registered Owners of Certificates or be entitled to receive
definitive certificates representing their ownership interest in the
Certificates except under the limited circumstances, if any, described in the
related Prospectus Supplement. See "Risk Factors - Book Entry Registration"
herein.
If Certificates of a series are issued as Book Entry Certificates, the
Clearing Agency will be required to make book entry transfers among Clearing
Agency Participants, to receive and transmit payments of principal and interest
with respect to the Certificates of such series, and to receive and transmit
requests for redemption with respect to such Certificates. Clearing Agency
Participants with whom Beneficial Owners have accounts with respect to such Book
Entry Certificates will be similarly required to make book entry transfers and
receive and transmit payments and redemption requests on behalf of their
respective Beneficial Owners. Accordingly, although Beneficial Owners will not
be registered Owners of Certificates and will not possess physical certificates,
a method will be provided whereby Beneficial Owners may receive payments,
transfer their interests, and submit redemption requests.
LIST OF OWNERS OF CERTIFICATES
Upon written request of a specified number or percentage interests of
Owners of Certificates of record of a series of Certificates for purposes of
communicating with other Owners of Certificates with respect to their rights as
Owners of Certificates, the Trustee will afford such Owners access during
business hours to the most recent list of Owners of Certificates of that series
held by the Trustee. With respect to Book Entry Certificates, the only named
Owner on the Certificate Register will be the Clearing Agency.
The Agreement will not provide for the holding of any annual or other
meetings of Owners of Certificates.
<PAGE>
THE TRUSTS
The Trust for a series of Certificates will consist of: (i) the Mortgage
Assets (subject, if specified in the Prospectus Supplement, to certain
exclusions) received on and after the related Cut-Off Date; (ii) all payments
(subject, if specified in the Prospectus Supplement, to certain exclusions) in
respect of such Mortgage Assets, which may be adjusted, to the extent specified
in the related Prospectus Supplement, in the case of interest payments on
Mortgage Assets, to the Pass-Through Rate; (iii) if specified in the Prospectus
Supplement, reinvestment income on such payments; (iv) with respect to a Trust
that includes Mortgage Loans, or Contracts, all property acquired by foreclosure
or deed in lieu of foreclosure with respect to any such Mortgage Loan or
Contract; (v) certain rights of the Trustee, the Depositor and the Servicer
under any policies required to be maintained in respect of the related Mortgage
Assets; (vi) certain rights of the Depositor or one of its affiliates under any
Mortgage Loan purchase agreement, including in respect of any representations
and warranties therein; and (vii) if so specified in the Prospectus Supplement,
one or more forms of Credit Enhancement.
The Certificates of each series will be entitled to payment only from the
assets of the related Trust and any other assets pledged therefor and will not
be entitled to payments in respect of the assets of any other trust established
by the Depositor.
Mortgage Assets may be acquired by the Depositor from affiliated or
unaffiliated originators. The following is a brief description of the Mortgage
Assets expected to be included in the Trusts. If specific information respecting
the Mortgage Assets is not known at the time the related series of Certificates
initially are offered, more general information of the nature described below
will be provided in the related Prospectus Supplement, and specific information
will be set forth in a report on Form 8-K to be filed with the Securities and
Exchange Commission within fifteen days after the initial issuance of such
Certificates. A copy of the Agreement with respect to each series of
Certificates will be attached to the Form 8-K and will be available for
inspection at the corporate trust office of the Trustee specified in the related
Prospectus Supplement. A schedule of the Mortgage Assets relating to each series
of Certificates, will be attached to the related Agreement delivered to the
Trustee upon delivery of such Certificates.
MORTGAGE LOANS
The Mortgage Loans will be evidenced by promissory notes (the "Mortgage
Notes") secured by mortgages or deeds of trust (the "Mortgages") creating liens
on residential properties (the "Mortgaged Properties"). Such Mortgage Loans will
be within the broad classifications of single family mortgage loans, defined
generally as loans on residences containing one-to-four dwelling units or
multifamily loans. If specified in the Prospectus Supplement, the Mortgage Loans
may include cooperative apartment loans ("Cooperative Loans") secured by
security interests in shares issued by Cooperatives and in the related
proprietary leases or occupancy agreements granting exclusive rights to occupy
specific dwelling units in such Cooperatives' buildings, or the Mortgage Loans
may be secured by junior liens on the related mortgaged properties, including
Title I Loans and other types of home improvement retail installment contracts.
The Mortgaged Properties securing the Mortgage Loans may include investment
properties and vacation and second homes. The Mortgaged Property for such loans
may also consist of residential properties consisting of five or more rental or
cooperatively-owned dwelling units in high-rise, mid-rise or garden apartment
buildings or projects ("Multifamily Properties"). Each Mortgage Loan will be
selected by the Depositor for inclusion in the Trust from among those acquired
by the Depositor or originated or acquired by one or more affiliated or
unaffiliated originators, including newly originated loans. 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 be "conventional" mortgage loans, that is they will
not be insured or guaranteed by any governmental agency, the principal and
interest on the Mortgage Loans included in the Trust for a series of
Certificates will be payable either on the first day of each month or on
different scheduled days throughout each month, and the interest will be
calculated either on a simple-interest or accrual method as described in the
related Prospectus Supplement. When a full principal amount is paid on a
Mortgage Loan during a month, the mortgagor is generally charged interest only
on the days of the month actually elapsed up to the date of such prepayment, at
a daily interest rate that is applied to the principal amount of the Mortgage
Loan so prepaid.
The payment terms of the Mortgage Loans to be included in a Trust for a
series will be described in the related Prospectus Supplement and may include
any of the following features or combinations thereof or other features
described in the related Prospectus Supplement:
(a) Interest may be payable at a fixed rate, a rate adjustable
from time to time in relation to an index, a rate that is fixed for a
period of time or under certain circumstances and followed by an
adjustable rate, a rate that otherwise varies from time to time, or a
rate that is convertible from an adjustable rate to a fixed rate.
Changes to an adjustable rate may be subject to periodic limitations,
maximum rates, minimum rates or a combination of such limitations.
Accrued interest may be deferred and added to the principal of a
Mortgage Loan for such periods and under such circumstances as may be
specified in the related Prospectus Supplement. Mortgage Loans may
provide for the payment of interest at a rate lower than the specified
mortgage rate for a period of time or for the life of the Mortgage Loan
with the amount of any difference contributed from funds supplied by
the seller of the Mortgaged Property or another source.
(b) Principal may be payable on a level debt service basis to
fully amortize the Mortgage Loan over its term, may be calculated on
the basis of an amortization schedule that is longer than the original
term to maturity or on an interest rate that is different from the
interest rate on the Mortgage Loan or may not be amortized during all
or a portion of the original term. Payment of all or a substantial
portion of the principal may be due on maturity. Principal may include
interest that has been deferred and added to the principal balance of
the Mortgage Loan.
(c) Monthly payments of principal and interest may be fixed for
the life of the Mortgage Loan, may increase over a specified period of
time or may change from period to period. Mortgage Loans may include
limits on periodic increases or decreases in the amount of monthly
payments and may include maximum or minimum amounts of monthly
payments.
(d) Prepayments of principal may be subject to a prepayment fee,
which may be fixed for the life of the Mortgage Loan or may decline
over time, and may be prohibited for the life of the Mortgage Loan or
for certain periods ("lockout periods"). Certain Mortgage Loans may
permit prepayments after expiration of the applicable lockout period
and may require the payment of a prepayment fee in connection with any
such subsequent prepayment. Other Mortgage Loans may permit prepayments
without payment of a fee unless the prepayment occurs during specified
time periods. The Mortgage Loans may include "due-on-sale" clauses
which permit the mortgagee to demand payment of the entire Mortgage
Loan in connection with the sale or certain transfers of the related
mortgaged property. Other Mortgage Loans may be assumable by persons
meeting the then applicable underwriting standards of the Servicer, or
as may be required by any applicable government program.
(e) Another type of mortgage loan described in the Prospectus
Supplement.
With respect to a series for which the related Trust includes Mortgage
Loans, the related Prospectus Supplement may specify, among other things,
information regarding the interest rates (the "Mortgage Rates"), the average
Principal Balance and the aggregate Principal Balance, the years of origination
and original principal balances and the original loan-to-value ratios. The
"Principal Balance" of any Mortgage Loan will be the unpaid principal balance of
such Mortgage Loan as of the Cut-Off Date, after deducting any principal
payments due before the Cut-Off Date, reduced by all principal payments,
including principal payments advanced pursuant to the related Agreement,
previously distributed with respect to such Mortgage Loan and reported as
allocable to principal.
The "Loan-to-Value Ratio" of any Mortgage Loan will be determined by
dividing the amount of the Mortgage Loan by the Original Value (defined below)
of the related Mortgaged Property. The "principal amount" of the Mortgage Loan,
for purposes of computation of the Loan-to-Value Ratio of any Mortgage Loan,
will include any part of an origination fee that has been financed. In some
instances, it may also include amounts which the seller or some other party to
the transaction has paid to the mortgagee, such as minor reductions in the
purchase price made at the closing. The "Original Value" of a Mortgage Loan is
(a) in the case of any purchase money Mortgage Loan, the lesser of (i) the value
of the mortgaged property, based on an appraisal thereof and (ii) the selling
price, and (b) otherwise the value of the mortgaged property, based on an
appraisal thereof.
There can be no assurance that the Original Value will reflect actual real
estate values during the term of a Mortgage Loan. If the residential real estate
market should experience an overall decline in property values such that the
outstanding principal balances of the Mortgage Loans become equal to or greater
than the values of the Mortgaged Properties, the actual rates of delinquencies,
foreclosures and losses could be significantly higher than those now generally
experienced in the mortgage lending industry. In addition, adverse economic
conditions (which may or may not affect real estate values) may affect the
timely and ultimate payment by mortgagors of scheduled payments of principal and
interest on the Mortgage Loans and, accordingly, the actual rates of
delinquencies, foreclosures and losses with respect to the Mortgage Loans.
Multifamily Loans will consist of Multifamily Loans consisting of either
Conventional Multifamily Loans or FHA-Insured Multifamily Loans secured by
mortgages or deeds of trust or other similar security instruments creating a
lien on rental apartment buildings or projects containing five or more units,
including, but not limited to, high-rise, mid-rise and garden apartments or
secured by apartment buildings owned by cooperative housing corporations. The
Multifamily Properties may include mixed commercial and residential structures.
Unless otherwise specified in the related Prospectus Supplement, each Mortgage
Loan will create a first priority mortgage lien on a Mortgaged Property. A
Multifamily Loan may create a lien on a borrower's leasehold estate in a
property; however, unless otherwise specified in the related Prospectus
Supplement, the term of any such leasehold will exceed the term of the Mortgage
Loan by at least two years. The Depositor expects that Mortgage Loans will have
been originated by mortgagees in the ordinary course of their real estate
lending activities. Each Multifamily Loan will bear interest at an annual fixed
rate or adjustable rate of interest specified in the Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement, all of the
Multifamily Loans will have had original terms to maturity of not more than 40
years and will provide for scheduled payments of principal, interest or both, to
be made on specified dates ("Due Dates") that occur monthly, quarterly or
semi-annually. A Multifamily Loan (i) may provide for accrual of interest
thereon at an interest rate (a "Mortgage Loan Rate") that is fixed over its term
of that adjusts from time to time, or that may be converted at the borrower's
election from an adjustable to a fixed Mortgage Loan Rate, or from a fixed to an
adjustable Mortgage Loan Rate, (ii) may provide for level payments to maturity
or for payments that adjust from time to time to accommodate changes in the
Mortgage Loan Rate or to reflect the occurrence of certain events, and may
permit negative amortization, (iii) may be fully amortizing over its term to
maturity, or may provide for little or no amortization over its term and thus
require a balloon payment on its stated maturity date, and (iv) 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 Premium") in connection
with a prepayment, in each case as described in the related Prospectus
Supplement. A Multifamily Loan may also contain a provision that entitles the
lender to a share of profits realized from the operation or disposition of the
Mortgaged Property (an "Equity Participation"), as described in the related
Prospectus Supplement. If holders of any class or classes of Certificates of a
series will be entitled to all or a portion of an Equity Participation, the
related Prospectus Supplement will describe the Equity Participation and the
method or methods by which distributions in respect thereof will be made to such
holders.
Lenders typically look to the Debt Service Coverage Ratio of a loan secured
by income-producing property as an important measure of the risk of default on
such loan. Unless otherwise defined in the related Prospectus Supplement, the
"Debt Service Coverage Ratio" of a Multifamily Loan at any given time is the
ratio of (i) the Net Operating Income of the related Mortgaged Property for a
twelve-month period to (ii) the annualized scheduled payments on the Multifamily
Loan and on any other loan that is secured by a lien on the Mortgaged Property
prior to the lien of the related Mortgage. Unless otherwise defined in the
related Prospectus Supplement, "Net Operating Income" means, for any given
period, the total operating revenues derived from a Mortgaged Property during
such period, minus the total operating expenses incurred in respect of such
Mortgaged Property during such period other than (i) non-cash items such as
depreciation and amortization, (ii) capital expenditures and (iii) debt service
on loans (including the related Multifamily Loan) secured by liens on the
Mortgaged Property. The Net Operating Income of a Mortgage Property will
fluctuate over time and may or may not be sufficient to cover debt service on
the related Multifamily Loan at any given time. As the primary source of the
operating revenues of a non-owner occupied income-producing property, rental
income (and maintenance payments from tenant-stockholders of a Cooperative) may
be affected by the condition of the applicable real estate market and/or area
economy.
Increases in operating expenses due to the general economic climate or
economic conditions in a locality or industry segment, such as increases in
interest rates, real estate tax rates, energy costs, labor costs and other
operating expenses and/or to changes in governmental rules, regulations and
fiscal policies, may also affect the risk of default on a Multifamily Loan. As
may be further described in the related Prospectus Supplement, in some cases
leases of Mortgaged Properties may provide that the lessee, rather than the
borrower/landlord, is responsible for payment of operating expenses ("Net
Leases"). However, the existence of such "net of expense" provisions will result
in stable Net Operating Income to the borrower/landlord only to the extent that
the lessee is able to absorb operating expense increases while continuing to
make rent payments.
CONTRACTS
Each pool of Contracts included in the Trust with respect to a series of
Certificates (the "Contract Pool") will consist of manufactured housing
conditional sales contracts and installment loan agreements or participation
interests therein (collectively, "Contracts"). The Contracts may be conventional
manufactured housing contracts or contracts insured by the FHA, including Title
I Contracts, or partially guaranteed by the VA. Each Contract is secured by a
Manufactured Home. The Prospectus Supplement will specify whether the Contracts
will be fully amortizing or have a balloon payment and whether they will bear
interest at a fixed or variable rate.
The Manufactured Homes securing the Contracts 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 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." Moreover, if an
election is made to treat the Trust as a REMIC as described in "Certain Federal
Income Tax Consequences - Federal Income Tax Consequences for REMIC
Certificates" herein, Manufactured Homes will have a minimum of 400 square feet
of living space and a minimum width in excess of 102 inches.
For purposes of calculating the loan-to- value ratio of a Contract relating
to a new Manufactured Home, the "Collateral 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. The Collateral Value of a used Manufactured Home is the least of the
sales 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.
The related Prospectus Supplement may specify for the Contracts contained
in the related Contract Pool, among other things, the date of origination of the
Contracts; the annual percentage rates on the Contracts; the loan-to-value
ratios; the minimum and maximum outstanding principal balance as of the Cut-Off
Date and the average outstanding principal balance; the outstanding principal
balances of the Contracts included in the Contract Pool; the original maturities
of the Contracts; and the last maturity date of any Contract.
MORTGAGE-BACKED SECURITIES
"Mortgage-Backed Securities" (or "MBS") may include (i) private (that is,
not guaranteed or insured by the United States or any agency or instrumentality
thereof) mortgage participations, mortgage pass-through certificates or other
mortgage-backed securities or (ii) certificates insured or guaranteed by FHLMC
or FNMA or GNMA.
Any MBS will have been issued pursuant to a participation and servicing
agreement, a pooling and servicing agreement, an indenture or similar agreement
(an "MBS Agreement"). A seller (the "MBS Issuer") and/or servicer (the "MBS
Servicer") of the underlying mortgage loans will have entered into the MBS
Agreement with a trustee or a custodian under the MBS Agreement (the "MBS
Trustee"), if any, or with the original purchaser or purchasers of the MBS.
The MBS may have been issued in one or more classes with characteristics
similar to the classes of Certificates described herein. Distributions in
respect of the MBS will be made by the MBS Servicer or the MBS Trustee on the
dates specified in the related Prospectus Supplement. The MBS Issuer or the MBS
Servicer or another person specified in the related Prospectus Supplement may
have the right or obligation to repurchase or substitute assets underlying the
MBS after a certain date or under other circumstances specified in the related
Prospectus Supplement.
Reserve funds, subordination, cross-support or other credit enhancement
similar to that described for the Certificates under "Credit Enhancement" may
have been provided with respect to the MBS. The type, characteristics and amount
of such credit enhancement, if any, will be a function of the characteristics of
the underlying mortgage loans and other factors and generally will have been
established on the basis of the requirements of any rating agency that may have
assigned a rating to the MBS, or by the initial purchasers of the MBS.
The Prospectus Supplement for a series of Certificates that evidence
interests in MBS will specify, to the extent available, (i) the aggregate
approximate initial and outstanding principal amount and type of the MBS to be
included in the Trust, (ii) the original and remaining term to stated maturity
of the MBS, if applicable, (iii) the pass-through or bond rate of the MBS or the
formula for determining such rates, (iv) the payment characteristics of the MBS,
(v) the MBS Issuer, MBS Servicer and MBS Trustee, as applicable, (vi) a
description of the credit support, if any, (vii) the circumstances under which
the stated underlying mortgage loans, or the MBS themselves may be purchased
prior to their maturity, (viii) the terms on which mortgage loans may be
substituted for those originally underlying the MBS, (ix) the servicing fees
payable under the MBS Agreement, (x) to the extent available to the Depositor,
information in respect of the underlying mortgage loans, and (xi) the
characteristics of any cash flow agreements that relate to the MBS.
OTHER MORTGAGE SECURITIES
Other Mortgage Securities include other securities that directly or
indirectly represent an ownership interest in, or are secured by and payable
from, mortgage loans on real property or mortgage-backed securities, including
residual interests in issuances of collateralized mortgage obligations or
mortgage pass-through certificates. Any Other Mortgage Securities that are
privately placed securities will not be included in a Trust until such time as
such privately placed securities would be freely transferable pursuant to Rule
144A of the Securities Act of 1933, as amended. Further (i) such privately
placed securities will have been acquired in the secondary market and not
pursuant to an initial offering thereof and (ii) the underlying issuer of such
securities will not be affiliated with the Depositor and will not have an
interest in the Trust. The Prospectus Supplement for a series of Certificates
will describe any Other Mortgage Securities to be included in the Trust for such
series.
CREDIT ENHANCEMENT
GENERAL. Various forms of Credit Enhancement may be provided with respect
to one or more classes of a series of Certificates or with respect to the assets
in the related Trust. Credit Enhancement may be in the form of the subordination
of one or more classes of the Certificates of such series, the establishment of
one or more Reserve Funds, the use of a cross-support feature, use of a Mortgage
Pool Insurance Policy, Special Hazard Insurance Policy, bankruptcy bond, or
another form of Credit Enhancement described in the related Prospectus
Supplement, or any combination of the foregoing. Credit Enhancement may not
provide protection against all risks of loss and may not guarantee repayment of
the entire principal balance of the Certificates and interest thereon. If losses
occur which exceed the amount covered by Credit Enhancement or which are not
covered by the Credit Enhancement, Owners of Certificates will bear their
allocable share of deficiencies.
FINANCIAL GUARANTY INSURANCE POLICIES. If so specified in the related
Prospectus Supplement, a financial guaranty insurance policy or surety bond
("Financial Guaranty Insurance Policy") may be obtained and maintained for each
class or series of Certificates. The issuer of any Financial Guaranty Insurance
Policy (a "Financial Guaranty Insurer") will be described in the related
Prospectus Supplement. Such description will include financial information on
the Financial Guaranty Insurer. In addition, the audited financial statements of
a Financial Guaranty Insurer and an auditors consent to use such financial
statements will be filed with the Securities and Exchange Commission on Form 8-K
or will be incorporated by reference to financial statements already on file
with the Securities and Exchange Commission.
Unless otherwise specified in the related Prospectus Supplement, a
Financial Guaranty Insurance Policy will unconditionally and irrevocably
guarantee to Certificateholders that an amount equal to each full and completed
insured payment will be received by an agent of the Trustee (an "Insurance
Paying Agent") on behalf of Certificateholders, for distribution by the Trustee
to each Certificateholder. The "insured payment" will be defined in the related
Prospectus Supplement, and will generally equal the full amount of the
distributions of principal and interest to which Certificateholders are entitled
under the related Agreement plus any other amounts specified therein or in the
related Prospectus Supplement (the "Insured Payment").
Financial Guaranty Insurance Policies may apply only to certain specified
classes, or may apply at the Mortgage Asset level and only to specified Mortgage
Assets.
The specific terms of any Financial Guaranty Insurance Policy will be as
set forth in the related Prospectus Supplement. Financial Guaranty Insurance
Policies may have limitations including (but not limited to) limitations on the
insurer's obligation to guarantee the obligations of the Seller or Depositor to
repurchase or substitute for any Mortgage Loans, Financial Guaranty Insurance
Policies will not guarantee any specified rate of prepayments and/or to provide
funds to redeem Certificates on any specified date.
Subject to the terms of the related Agreement, the Financial Guaranty
Insurer may be subrogated to the rights of Certificateholder to receive payments
under the Certificates to the extent of any payment by such Financial Guaranty
Insurer under the related Financial Guaranty Insurance Policy.
SUBORDINATION. Distributions in respect of scheduled principal, interest or
any combination thereof otherwise payable to one or more classes of Certificates
of a series (the "Subordinated Certificates") may be paid to one or more other
classes of such series (the "Senior Certificates") under the circumstances and
to the extent provided in the Prospectus Supplement. If specified in the
Prospectus Supplement, delays in receipt of scheduled payments on the Mortgage
Assets and losses on defaulted Mortgage Assets will be borne first by the
various classes of Subordinated Certificates and thereafter by the various
classes of Senior Certificates, in each case under the circumstances and subject
to the limitations specified in the Prospectus Supplement. The aggregate
distributions in respect of delinquent payments on the Mortgage Assets over the
lives of the Certificates or at any time, the aggregate losses in respect of
defaulted Mortgage Assets which must be borne by the Subordinated Certificates
by virtue of subordination and the amount of the distributions otherwise
distributable to the Subordinated Certificates that will be distributable to
Owners of Senior Certificates on any Distribution Date may be limited as
specified in the Prospectus Supplement. If aggregate distributions in respect of
delinquent payments on the Mortgage Assets or aggregate losses in respect of
such Mortgage Assets were to exceed the total amounts payable and available for
distribution to Owners of Subordinated Certificates or, if applicable, were to
exceed the specified maximum amount, Owners of Senior Certificates could
experience losses on the Certificates.
In addition to or in lieu of the foregoing, all or any portion of
distributions otherwise payable to Subordinated Certificates on any Distribution
Date may instead be deposited into one or more Reserve Funds (as defined below)
established by the Trustee. If so specified in the Prospectus Supplement, such
deposits may be made on each Distribution Date, on each Distribution Date for
specified periods, or on each Distribution Date until the balance in the Reserve
Fund has reached a specified amount and, following payments from the Reserve
Fund to Owners of Senior Certificates or otherwise, thereafter to the extent
necessary to restore the balance in the Reserve Fund to required levels, in each
case as specified in the Prospectus Supplement. If so specified in the
Prospectus Supplement, amounts on deposit in the Reserve Fund may be released to
the Depositor or the Owners of any class of Certificates at the times and under
the circumstances specified in the Prospectus Supplement.
If specified in the Prospectus Supplement, various classes of Subordinate
Certificates and Subordinated Certificates may themselves be subordinate in
their right to receive certain distributions to other classes of Senior and
Subordinated Certificates, respectively, through a cross-support mechanism or
otherwise.
As between classes of Senior Certificates and as between classes of
Subordinated Certificates, distributions may be allocated among such classes (i)
in the order of their scheduled final distribution dates, (ii) in accordance
with a schedule or formula, (iii) in relation to the occurrence of events, or
(iv) otherwise, in each case as specified in the Prospectus Supplement. As
between classes of Subordinated Certificates, payments with respect to Senior
Certificates on account of delinquencies or losses and payments to any Reserve
Fund will be allocated as specified in the Prospectus Supplement.
OVERCOLLATERALIZATION. If specified in the Prospectus Supplement,
subordination provisions of a Trust may be used to accelerate to a limited
extent the amortization of one or more classes of Certificates relative to the
amortization of the related Mortgage Loans. The accelerated amortization is
achieved by the application of certain excess interest to the payment of
principal of one or more classes of Certificates. This acceleration feature
creates, with respect to the Mortgage Loans or groups thereof,
overcollateralization which results from the excess of the aggregate principal
balance of the related Mortgage Loans, or a group thereof, over the principal
balance of the related class of Certificates. Such acceleration may continue for
the life of the related Certificates, or may be limited. In the case of limited
acceleration, once the required level of overcollateralization is reached, and
subject to certain provisions specified in the related Prospectus Supplement,
such limited acceleration feature may cease, unless necessary to maintain the
required level of overcollateralization.
CROSS-SUPPORT. If specified in the related Prospectus Supplement, the
beneficial ownership of separate groups of assets included in the Trust for a
series may be evidenced by separate classes of related series of Certificates.
In such case, Credit Enhancement may be provided by a cross-support feature
which may require that distributions be made with respect to Certificates
evidencing beneficial ownership of one or more asset groups prior to
distributions to Subordinated Certificates evidencing a beneficial ownership
interest in other asset groups within the same Trust. The Prospectus Supplement
for a series which includes a cross-support feature will describe the manner and
conditions for applying such cross-support feature.
If specified in the Prospectus Supplement, the coverage provided by one or
more forms of Credit Enhancement may apply concurrently to two or more separate
Trusts for a separate series of Certificates. If applicable, the Prospectus
Supplement will identify the Trusts to which such credit support relates and the
manner of determining the amount of the coverage provided thereby and of the
application of such coverage to the identified Trusts.
POOL INSURANCE. If specified in the related Prospectus Supplement, one or
more mortgage pool insurance policies (each, a "Mortgage Pool Insurance Policy")
will be obtained.
Any such Mortgage Pool Insurance Policy will, subject to the limitations
described below and in the Prospectus Supplement, cover loss by reason of
default in payments on such Mortgage Loans up to the amounts specified in the
Prospectus Supplement or report on Form 8-K and for the periods specified in the
Prospectus Supplement. The Trustee under the related Agreement will agree to use
its best reasonable efforts to cause to be maintained in effect any such
Mortgage Pool Insurance Policy and to supervise the filing of claims thereunder
to the issuer of such Mortgage Pool Insurance Policy (the "Pool Insurer") for
the period of time specified in the related Prospectus Supplement. A Mortgage
Pool Insurance Policy, however, is not a blanket policy against loss, because
claims thereunder may only be made respecting particular defaulted Mortgage
Loans and only upon satisfaction of certain conditions precedent set forth in
such policy as described in the related Prospectus Supplement. The Mortgage Pool
Insurance Policies, if any, will not cover loss due to a failure to pay or
denial of a claim under a primary mortgage insurance policy, irrespective of the
reason therefor. The related Prospectus Supplement will describe the terms of
any applicable Mortgage Pool Insurance Policy and will set forth certain
information with respect to the related Pool Insurer.
In general, a Mortgage Pool Insurance Policy may 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 or persons involved in the origination
thereof or (ii) failure to construct a Mortgaged Property in accordance with
plans and specifications. If so specified in the related Prospectus Supplement,
a failure of coverage attributable to one of the foregoing events might result
in a breach of a representation of the Seller and in such event might give rise
to an obligation on the part of the Seller to purchase the defaulted Mortgage
Loan if the breach materially and adversely affects the interests of the Owners
of the Certificates and cannot be cured by the Seller.
The original amount of coverage under any Mortgage Pool Insurance Policy
will be reduced over the life of such Certificates by the aggregate dollar
amount of claims paid less the aggregate of the net amounts realized by the Pool
Insurer upon disposition of all foreclosed properties. The amount of claims paid
will generally include certain expenses incurred with respect to the applicable
Mortgage Loans as well as accrued interest on delinquent Mortgage Loans to the
date of payment of the claim. See "Certain Legal Aspects of the Mortgage Assets
- - Foreclosure" herein. 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 one or more classes of Certificates unless otherwise covered by
another form of Credit Enhancement, as specified in the Prospectus Supplement.
Since any Mortgage Pool Insurance Policy may require that the Mortgaged
Property subject to a defaulted Mortgage Loan be restored to its original
condition prior to claiming against the Pool Insurer, such policy may not
provide coverage against hazard losses. As set forth under "Servicing of
Mortgage Loans and Contracts C Standard Hazard Insurance", the hazard policies
concerning 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 the full replacement cost of
such losses. Even if special hazard insurance is applicable as specified in the
Prospectus Supplement, no coverage in respect of special hazard losses will
cover all risks, and the amount of any such coverage will be limited. See
"Special Hazard Insurance" below. As a result, certain hazard risks will not be
insured against and will therefore be borne by Owners of the Certificates,
unless otherwise covered by another form of Credit Enhancement, as specified in
the Prospectus Supplement.
The terms of any Mortgage Pool Insurance Policy relating to a Contract Pool
will be described in the related Prospectus Supplement.
SPECIAL HAZARD INSURANCE. If specified in the related Prospectus
Supplement, one or more special hazard insurance policies (each, a "Special
Hazard Insurance Policy") will be obtained.
Any such Special Hazard Insurance Policy will, subject to limitations
described below and in the Prospectus Supplement, cover (i) loss by reason of
damage to Mortgaged Properties caused by certain hazards (including earthquakes
and, to a limited extent, tidal waves and related water damage) not covered by
the standard form of hazard insurance policy for the respective states in which
the Mortgaged Properties are located or under flood insurance policies, if any,
covering the Mortgaged Properties, and (ii) loss caused by reason of the
application of the coinsurance clause contained in hazard insurance policies.
See "Servicing of Mortgage Loans and Contracts C Standard Hazard Insurance." Any
Special Hazard Insurance Policy may not cover losses occasioned by war, civil
insurrection, certain governmental actions, errors in design, faulty workmanship
or materials (except under certain circumstances), nuclear reaction, flood (if
the Mortgaged Property is located in a federally designated flood are"-,
chemical contamination and certain other risks. Aggregate claims under each
Special Hazard Insurance Policy will be limited as described in the related
Prospectus Supplement. Any Special Hazard Insurance Policy may also provide that
no claim may be paid unless hazard and, if applicable, flood insurance on the
Mortgaged Property has been kept in force and other protection and preservation
expenses have been paid.
Subject to the foregoing limitations, any Special Hazard Insurance Policy
generally 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 with respect to such Mortgage Loan, the
issuer of the Special Hazard Insurance Policy (the "Special Hazard 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 special hazard 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 to
the date of claim settlement and certain expenses incurred with respect to such
property. If the unpaid principal balance plus accrued interest and certain
expenses is paid by the Special Hazard 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 or replacement of the property will also reduce coverage by such
amount. Restoration of the property with the proceeds described under (i) above
will satisfy the condition under any applicable 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
unnecessary presentation of a claim in respect of such Mortgage Loan under any
related Mortgage Pool Insurance Policy. Therefore, so long as a Mortgage Pool
Insurance Policy remains in effect, the payment by the Special Hazard Insurer
under a Special Hazard Insurance Policy of the cost of repair or replacement or
the unpaid principal balance of the Mortgage Loan plus accrued interest and
certain expenses will not affect the total insurance proceeds but will affect
the relative amounts of coverage remaining under any related Special Hazard
Insurance Policy and any related Mortgage Pool Insurance Policy.
The terms of any Special Hazard Insurance Policy relating to a Contract
Pool will be described in the related Prospectus Supplement.
BANKRUPTCY BOND. In the event of a bankruptcy of a borrower, the bankruptcy
court may establish the value of the property securing the related Mortgage Loan
at an amount less than the then outstanding principal balance of such Mortgage
Loan. The amount of the secured debt could be reduced to such value and the
holder of such Mortgage Loan thus would become an unsecured creditor to the
extent the outstanding principal balance of such Mortgage Loan exceeds the value
so assigned to the property by the bankruptcy court. In addition, certain other
modifications of the terms of a Mortgage Loan can result from a bankruptcy
proceeding, including the reduction in monthly payments required to be made by
the borrower. See "Certain Legal Aspects of the Mortgage Assets" herein. If so
provided in the related Prospectus Supplement, the Depositor will obtain a
bankruptcy bond or similar insurance contract (the "bankruptcy bond") for
proceedings with respect to borrowers under the Bankruptcy Code. The bankruptcy
bond will cover certain losses resulting from a reduction by a bankruptcy court
of scheduled payments of principal of and interest on a Mortgage Loan or a
reduction by such court of the principal amount of a Mortgage Loan and will
cover certain unpaid interest on the amount of such a principal reduction from
the date of the filing of a bankruptcy petition.
The bankruptcy bond will provide coverage in the aggregate amount specified
in the related Prospectus Supplement. Such amount will be reduced by payments
made under such bankruptcy bond in respect of the related Mortgage Loans and
will not be restored.
If specified in the related Prospectus Supplement, other forms of Credit
Enhancement may be provided to cover such bankruptcy-related losses. Any
bankruptcy bond or other form of Credit Enhancement provided to cover
bankruptcy-related losses will be described in the related Prospectus
Supplement.
RESERVE FUNDS. If specified in the Prospectus Supplement, cash, U.S.
Treasury securities, instruments evidencing ownership of principal or interest
payments thereon, letters of credit, surety bonds, demand notes, certificates of
deposit or a combination thereof in the aggregate amount specified in the
Prospectus Supplement will be deposited by the Depositor on the Delivery Date in
one or more accounts (each, a "Reserve Fund") established and maintained with
the Trustee. Such cash and the principal and interest payments on such other
investments will be used to enhance the likelihood of timely payment of
principal of, and interest on, or, if so specified in the Prospectus Supplement,
to provide additional protection against losses in respect of, the assets in the
related Trust, to pay the expenses of the Trust or for such other purposes
specified in the Prospectus Supplement. Whether or not the Depositor has any
obligation to make such a deposit, certain amounts to which the Owners of
Subordinated Certificates, if any, would otherwise be entitled may instead be
deposited into the Reserve Fund from time to time and in the amounts as
specified in the Prospectus Supplement. Any cash in any Reserve Fund and the
proceeds of any other instrument upon maturity will be invested in Eligible
Investments. If a letter of credit is deposited with the Trustee, such letter of
credit will be irrevocable. Any instrument deposited therein will name the
Trustee as a beneficiary and will be issued by an entity acceptable to each
rating agency that rates the Certificates. Additional information with respect
to such instruments deposited in the Reserve Funds may be set forth in the
Prospectus Supplement.
Any amounts so deposited and payments on instruments so deposited will be
available for withdrawal from the Reserve Fund for distribution with respect to
the Certificates for the purposes, in the manner and at the times specified in
the Prospectus Supplement.
OTHER INSURANCE, GUARANTIES AND SIMILAR INSTRUMENTS OR AGREEMENTS. If
specified in the Prospectus Supplement, the related Trust may also include
insurance, guaranties, surety bonds, letters of credit, guaranteed investment
contracts or similar arrangements for the purpose of (i) maintaining timely
payments or providing additional protection against losses on the assets
included in such Trust, (ii) paying administrative expenses, (iii) establishing
a minimum reinvestment rate on the payments made in respect of such assets or
principal payment rate on such assets, (iv) guaranteeing timely payment of
principal and interest under the Certificates, or for such other purpose as is
specified in such Prospectus Supplement. Such arrangements may include
agreements under which Owners of Certificates are entitled to receive amounts
deposited in various accounts held by the Trustee upon the terms specified in
the Prospectus Supplement. Such arrangements may be in lieu of any obligation of
the Servicers or the Seller to advance delinquent installments in respect of the
Mortgage Loans. See "Servicing of Mortgage Loans and Contracts - Advances"
herein.
SERVICING OF MORTGAGE LOANS AND CONTRACTS
With respect to each series of Certificates, the related Mortgage Loans and
Contracts will be serviced by a sole servicer or by a master servicer with
various sub-servicers pursuant to, or as provided for in, the Agreement. The
Prospectus Supplement for each series will specify the servicer and the master
servicer, if any, for such series.
The related Prospectus Supplement will specify whether the Servicer is a
FNMA- or FHLMC-approved servicer of conventional mortgage loans. In addition,
the Depositor will require adequate servicing experience, where appropriate, and
financial stability, generally including a net worth requirement (to be
specified in the Agreement) as well as satisfaction of certain other criteria.
Each Servicer will be required to perform the customary functions of a
mortgage loan servicer, including collection of payments from borrowers (the
"Mortgagors") and remittance of such collections to the Trustee, maintenance of
applicable standard hazard insurance or primary mortgage insurance policies,
attempting to cure delinquencies, supervising foreclosures, management of
Mortgaged Properties under certain circumstances, and maintaining accounting
records relating to the Mortgage Loans and Contracts, as applicable, and, if
specified in the related Prospectus Supplement, maintenance of escrow or
impoundment accounts of Mortgagors for payment of taxes, insurance, and other
items required to be paid by the Mortgagor pursuant to the Mortgage Loan or
Contract. Each Servicer will also be obligated to make advances in respect of
delinquent installments on Mortgage Loans and Contracts, as applicable, as
described more fully under "- Payments on Mortgage Loans" and "- Advances" below
and in respect of certain taxes and insurance premiums not paid on a timely
basis by Mortgagors.
Each Servicer will be entitled to a monthly servicing fee as specified in
the related Prospectus Supplement. Each Servicer will also generally be entitled
to collect and retain, as part of its servicing compensation, late payment
charges and assumption underwriting fees. Each Servicer will be reimbursed from
proceeds of one or more of the insurance policies described herein ("Insurance
Proceeds") or from proceeds received in connection with the liquidation of
defaulted Mortgage Loans ("Liquidation Proceeds") for certain expenditures
pursuant to the Agreement. See "- Advances" and "- Servicing Compensation and
Payment of Expenses" below.
Each Servicer will be required to service each Mortgage Loan and Contract,
as applicable, pursuant to the terms of the Agreement for the entire term of
such Mortgage Loan and Contract, as applicable, unless such Agreement is earlier
terminated. Upon termination, a replacement for the Servicer will be appointed.
PAYMENTS ON MORTGAGE LOANS
Each Servicer will establish and maintain a separate account (each, a
"Custodial Account"). Subject to the following paragraph, each Custodial Account
must be an account the deposits in which are fully insured by either the Federal
Deposit Insurance Corporation ("FDIC") or the National Credit Union
Administration ("NCUA") or are, to the extent such deposits are in excess of the
coverage provided by such insurance, continuously secured by certain obligations
issued or guaranteed by the United States of America. If at any time the amount
on deposit in such Custodial Account shall exceed the amount so insured or
secured, the applicable Servicer must remit to the Trustee the amount on deposit
in such Custodial Account which exceeds the amount so insured or secured, less
any amount such Servicer may retain for its own account pursuant to its
Servicing Agreement.
Notwithstanding the foregoing, the deposits in a Servicer's Custodial
Account will not be required to be fully insured or secured as described above,
and such Servicer will not be required to remit amounts on deposit therein in
excess of the amount so insured or secured, so long as such Servicer meets
certain requirements established by the rating agencies requested to rate the
Certificates.
Each Servicer is required to deposit into its Custodial Account on a daily
basis all amounts in respect of each Mortgage Loan received by such Servicer,
with interest adjusted to a rate (the "Remittance Rate") equal to the related
Mortgage Rate less the Servicer's servicing fee rate. On the day of each month
specified in the related Prospectus Supplement (the "Remittance Date"), each
Servicer of the Mortgage Loans will remit to the Trustee all funds held in its
Custodial Account with respect to each Mortgage Loan; PROVIDED, HOWEVER, that
Principal Prepayments may be remitted on the Remittance Date in the month
following the month of such prepayment. Each Servicer will be required pursuant
to the terms of the Agreement and as specified in the related Prospectus
Supplement, to remit with each Principal Prepayment interest thereon at the
Remittance Rate through the last day of the month in which such Principal
Prepayment is made. Each Servicer may also be required to advance its own funds
as described below.
ADVANCES
With respect to a delinquent Mortgage Loan or Contract, the related
Servicer may be obligated (but only to the extent set forth in the related
Prospectus Supplement) to advance its own funds or funds from its Custodial
Account equal to the aggregate amount of payments of principal and interest
(adjusted to the applicable Remittance Rate) which were due on a due date and
which are delinquent as of the close of business on the business day preceding
the Remittance Date ("Monthly Advance"). Generally, such advances will be
required to be made by the Servicer unless the Servicer determines that such
advances ultimately would not be recoverable under any applicable insurance
policy, from the proceeds of liquidation of the related Mortgaged Properties, or
from any other source (any amount not so reimbursable being referred to herein
as a "Nonrecoverable Advance"). Such advance obligation generally will continue
through the month following the month of final liquidation of such Mortgage Loan
or Contract. Any Servicer funds thus advanced will be reimbursable to such
Servicer out of recoveries on the Mortgage Loans or Contracts with respect to
which such amounts were advanced. Each Servicer will also be obligated to make
advances with respect to certain taxes and insurance premiums not paid by
Mortgagors on a timely basis. Funds so advanced are reimbursable to the
Servicers out of recoveries on the related Mortgage Loans or Contracts. Each
Servicer's right of reimbursement for any advance will be prior to the rights of
the Trust to receive any related Insurance Proceeds or Liquidation Proceeds.
Failure by a Servicer to make a required Monthly Advance will be grounds for
termination under the related Agreement.
COLLECTION AND OTHER SERVICING PROCEDURES
Each Servicer will service the Mortgage Loans and Contracts pursuant to
guidelines established in the related Agreement.
MORTGAGE LOANS. The Servicer will be responsible for making reasonable
efforts to collect all payments called for under the Mortgage Loans. The
Servicer will be obligated to follow such normal practices and procedures as it
deems necessary or advisable to realize upon a defaulted Mortgage Loan. In this
regard, the Servicer may (directly or through a local assignee) sell the
property at a foreclosure or trustee's sale, negotiate with the Mortgagor for a
deed in lieu of foreclosure or, in the event a deficiency judgment is available
against the Mortgagor or other person (see "Certain Legal Aspects of the
Mortgage Assets C Foreclosure - Anti-Deficiency Legislation and Other
Limitations on Lenders" for a description of the limited availability of
deficiency judgments), foreclose against such property and proceed for the
deficiency against the appropriate person. The amount of the ultimate net
recovery (including the proceeds of any Mortgage Pool Insurance Policy or other
applicable Credit Enhancement), after reimbursement to the Servicer of its
expenses incurred in connection with the liquidation of any such defaulted
Mortgage Loan and prior unreimbursed advances of principal and interest with
respect thereto will be deposited in the Certificate Account when realized and
will be distributed to Owners of Certificates on the next Distribution Date
following the month of receipt.
With respect to Cooperative Loans, any prospective purchaser will generally
have to obtain the approval of the board of directors of the relevant
Cooperative before purchasing the shares and acquiring rights under the related
proprietary lease or occupancy agreement. See "Certain Legal Aspects of the
Mortgage Assets" herein. This approval is usually based on the purchaser's
income and net worth and numerous other factors. Although the Cooperative's
approval is unlikely to be unreasonably withheld or delayed, the necessity of
acquiring such approval could limit the number of potential purchasers for those
shares and otherwise limit the Trust's ability to sell and realize the value of
those shares.
In general, a "tenant-stockholder" (as defined in Code Section 216(b) (2))
of a corporation that qualifies as a "cooperative housing corporation" within
the meaning of Code Section 216(b)(1) is allowed a deduction for amounts paid or
accrued within his taxable year to the corporation representing his
proportionate share of certain interest expenses and certain real estate taxes
allowable as a deduction under Code Section 216(a) to the corporation under Code
Sections 163 and 164. In order for a corporation to qualify under Code Section
216(b)(1) for its taxable year in which such items are allowable as a deduction
to the corporation, such Section requires, among other things, that at least 80%
of the gross income of the corporation be derived from its tenant-stockholders.
By virtue of this requirement, the status of a corporation for purposes of Code
Section 216(b)(1) must be determined on a year-to-year basis. Consequently,
there can be no assurance that Cooperatives relating to the Cooperative Loans
will qualify under such Section for any particular year. In the event that such
a Cooperative fails to qualify for one or more years, the value of the
collateral securing any related Cooperative Loans could be significantly
impaired because no deduction would be allowable to its tenant-stockholders
under Code Section 216(a) with respect to those years. In view of the
significance of the tax benefits accorded tenant-stockholders of a corporation
that qualifies as a cooperative housing corporation, however, the likelihood
that such a failure would be permitted to continue over a period of years
appears remote.
The Servicer will expend its own funds to restore property securing a
Mortgage Loan which has sustained uninsured damage only if it determines that
such restoration will increase the proceeds to the Trust of liquidation of the
Mortgage Loan after the reimbursement to the Servicer of its expenses.
If a Mortgaged Property has been or is about to be conveyed by the
Mortgagor, the Servicer will be obligated (to the extent it has knowledge of
such conveyance) to accelerate the maturity of the Mortgage Loan, unless it
reasonably believes it is unable to enforce that Mortgage Loan's "due-on-sale"
clause under the applicable law. If it reasonably believes it may be restricted
by law, for any reason, from enforcing such a "due-on-sale" clause, the 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 Note, provided such person satisfies the
criteria required to maintain the coverage provided by applicable insurance
policies (unless otherwise restricted by applicable law). Any fee collected by
the Servicer for entering into an assumption agreement will be retained by the
Servicer as additional servicing compensation. For a description of
circumstances in which the Servicer may be unable to enforce "due-on-sale"
clauses, see "Certain Legal Aspects of the Mortgage Assets - Foreclosure -
Enforceability of Certain Provisions" herein. In connection with any such
assumption, the Mortgage Rate borne by the related Mortgage Note may not be
decreased.
If specified in the related Prospectus Supplement, the Servicer will
maintain with one or more depository institutions one or more accounts into
which it will deposit all payments of taxes, insurance premiums, assessments or
comparable items received for the account of the Mortgagors. Withdrawals from
such account or accounts may be made only to effect payment of taxes, insurance
premiums, assessments or comparable items, to reimburse the Servicer out of
related collections for any cost incurred in paying taxes, insurance premiums
and assessments or otherwise preserving or protecting the value of the
Mortgages, to refund to mortgagors any amounts determined to be overages and to
pay interest to Mortgagors on balances in such account or accounts to the extent
required by law.
So long as it acts as servicer of the Mortgage Loans, the Servicer will be
required to maintain certain insurance covering errors and omissions in the
performance of its obligations as servicer and certain fidelity bond coverage
ensuring against losses through wrongdoing of its officers, employees and
agents.
In the case of Multifamily Loans, a Mortgagor's failure to make required
Mortgage Loan payments may mean that operating income is insufficient to service
the mortgage debt, or may reflect the diversion of that income from the
servicing of the mortgage debt. In addition, a Mortgagor under a Multifamily
Loan that is unable to make Mortgage Loan payments may also be unable to make
timely payment of taxes and otherwise to maintain and insure the related
Mortgaged Property. In general, the Servicer will be required to monitor any
Multifamily Loan that is in default, evaluate whether the causes of the default
can be corrected over a reasonable period without significant impairment of the
value of the related Mortgaged Property, initiate corrective action in
cooperation with the Mortgagor if cure is likely, inspect the related Mortgaged
Property and take such other actions as are consistent with the Agreement. A
significant period of time may elapse before the Servicer is able to assess the
success of any such corrective action or the need for additional in initiatives.
The time within which the Servicer can make the initial determination of
appropriate action, evaluate the success of corrective action, develop
additional initiatives, institute foreclosure proceedings and actually foreclose
(or accept a deed to a Mortgaged Property in lieu of foreclosure) on behalf of
the Owners of the related series may vary considerably depending on the
particular Multifamily Loan, the Mortgaged Property, the Mortgagor, the presence
of an acceptable party to assume the Multifamily Loan and the laws of the
jurisdiction in which the Mortgaged Property is located. If a Mortgagor files a
bankruptcy petition, the Servicer may not be permitted to accelerate the
maturity of the related Multifamily Loan or to foreclose on the Mortgaged
Property for a considerable period of time. See "Certain Legal Aspects of
Mortgage Loans."
CONTRACTS. Pursuant to the Agreement, the Servicer will service and
administer the Contracts assigned to the Trustee as more fully set forth below.
The Servicer, either directly or through sub-servicers subject to general
supervision by the Servicer, will perform diligently all services and duties
required to be performed under the Agreement, in the same manner as performed by
prudent lending institutions of manufactured housing installment sales contracts
of the same type as the Contracts in those jurisdictions where the related
Manufactured Homes are located. The duties to be performed by the Servicer will
include collection and remittance of principal and interest payments, collection
of insurance claims and, if necessary, repossession.
Each Agreement will provide that when any Manufactured Home securing a
Contract is about to be conveyed by the borrower, the Servicer (to the extent it
has knowledge of such prospective conveyance and prior to the time of the
consummation of such conveyance) may exercise its rights to accelerate the
maturity of such Contract under the applicable "due-on-sale" clause, if any,
unless the Servicer reasonably believes it is unable to enforce such
"due-on-sale" clause under applicable law. In such case the Servicer is
authorized to take or enter into an assumption agreement from or with the person
to whom such Manufactured Home has been or is about to be conveyed, pursuant to
which such person becomes liable under the Contract, provided such person
satisfies the criteria required to maintain the coverage provided by applicable
insurance policies (unless otherwise restricted by applicable law). Where
authorized by the Contract, the annual percentage rate may be increased, upon
assumption, to the then-prevailing market rate but will not be decreased.
Under each Agreement the Servicer will repossess or otherwise comparably
convert the ownership of properties securing such of the related Contracts as
come into and continue in default and as to which no satisfactory arrangements
can be made for collection of delinquent payments. In connection with such
repossession or other conversion, the Servicer will follow such practices and
procedures as it deems necessary or advisable and as shall be normal and usual
in its general servicing activities. The Servicer, however, will not be required
to expend its own funds in connection with any repossession or towards the
restoration of any property unless it determines (i) that such restoration or
repossession will increase the proceeds of liquidation of the related Contract
to the Trust after reimbursement to itself for such expenses and (ii) that such
expenses will be recoverable to it either through Liquidation Proceeds or
through Insurance Proceeds.
PRIMARY MORTGAGE INSURANCE
Mortgage Loans that the Depositor acquires will generally not have primary
mortgage insurance. If obtained, the primary mortgage insurance policies will
not insure against certain losses which may be sustained in the event of a
personal bankruptcy of the mortgagor under a Mortgage Loan.
STANDARD HAZARD INSURANCE
MORTGAGE LOANS. The Servicer will be required to cause to be maintained for
each Mortgage Loan a standard hazard insurance policy. The coverage of such
policy is required to be in an amount not less than the maximum insurable value
of the improvements securing such Mortgage Loan from time to time or the
principal balance owing on such Mortgage Loan from time to time, whichever is
less. In all events, such coverage shall be in an amount sufficient to ensure
avoidance of the applicability of the co-insurance provisions under the terms
and conditions of the applicable policy. The ability of each Servicer to assure
that hazard insurance proceeds are appropriately applied may be dependent on its
being named as an additional insured under any standard 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 such Servicer by Mortgagors.
Each Agreement may provide that the related Servicer may satisfy its obligation
to cause hazard insurance policies to be maintained by maintaining a blanket
policy insuring against hazard losses on the Mortgage Loans serviced by such
Servicer.
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, wind-storm and hail, riot, strike and civil
commotion, subject to the conditions and exclusions particularized in each
policy. Although the policies relating to the Mortgage Loans will be
underwritten by different insurers and, therefore, will not contain identical
terms and conditions, the basic terms thereof are dictated by state law. Such
policies typically do not cover any physical damage resulting from the
following: war, revolution, governmental actions, floods and other water-related
causes, earth movement (including earthquakes, landslides and mud flow), nuclear
reactions, wet or dry rot, vermin, rodents, insects or domestic animals, theft
and, in certain cases, vandalism. The foregoing list is merely indicative of
certain kinds of uninsured risks and is not intended to be all-inclusive. If the
property securing a Mortgage Loan is located in a federally designated flood
area, flood insurance will be required to be maintained in such amounts as would
be required by FNMA in connection with its mortgage loan purchase program. The
Depositor may also purchase special hazard insurance against certain of the
uninsured risks described above. See "Credit Enhancement - Special Hazard
Insurance".
Since the amount of hazard insurance the Servicer is required to cause to
be maintained on the improvements securing the Mortgage Loans declines as the
principal balances owing thereon decrease, if the residential properties
securing the Mortgage Loans appreciate in value over time, the effect of
coinsurance in the event of partial loss may be that hazard insurance proceeds
will be insufficient to restore fully the damaged property.
The Depositor will not require that a standard hazard or flood insurance
policy be maintained on the cooperative dwelling relating to any Cooperative
Loan. Generally, the Cooperative itself is responsible for maintenance of hazard
insurance for the property owned by the Cooperative and the tenant-stockholders
of that Cooperative do not maintain individual hazard insurance policies. To the
extent, however, that a Cooperative and the related borrower on a Cooperative
Loan do not maintain such insurance or do not maintain adequate coverage or any
insurance proceeds are not applied to the restoration of damaged property, any
damage to such borrower's cooperative dwelling or such Cooperative's building
could significantly reduce the value of the collateral securing such Cooperative
Loan to the extent not covered by other credit support.
CONTRACTS. The Servicer will generally be required to cause to be
maintained with respect to each Contract one or more hazard insurance policies
which provide, at a minimum, the same coverage as a standard form fire and
extended coverage insurance policy that is customary for manufactured housing,
issued by a company authorized to issue such policies in the state in which the
Manufactured Home is located and in an amount which is not less than the maximum
insurable value of such Manufactured Home or the principal balance due from the
borrower on the related Contract, whichever is less. When a Manufactured Home's
location was, at the time of origination of the related Contract, within a
federally designated special flood hazard area, the Servicer also shall cause
such flood insurance to be maintained, which coverage shall be at least equal to
the minimum amount specified in the preceding sentence or such lesser amount as
may be available under the federal flood insurance program.
The Servicer may maintain, in lieu of causing individual hazard insurance
policies to be maintained with respect to each Manufactured Home, and shall
maintain, to the extent that the related Contract does not require the borrower
to maintain a hazard insurance policy with respect to the related Manufactured
Home, one or more blanket insurance policies covering losses on the borrowers'
interests in the Contracts resulting from the absence or insufficiency of
individual hazard insurance policies.
The Servicer, to the extent practicable, will cause the borrowers to pay
all taxes and similar governmental charges when and as due. To the extent that
nonpayment of any taxes or charges would result in the creation of a lien upon
any Manufactured Home having a priority equal or senior to the lien of the
related Contract, the Servicer will pay any such delinquent tax or charge.
If the Servicer repossesses a Manufactured Home on behalf of the Trustee,
the Servicer will either (i) maintain at its expense hazard insurance with
respect to such Manufactured Home or (ii) indemnify the Trustee against any
damage to such Manufactured Home prior to resale or other disposition.
TITLE INSURANCE POLICIES
The Agreements will generally require that a title insurance policy be in
effect on each of the Mortgaged Properties and that such title insurance policy
contain no coverage exceptions, except customary exceptions generally accepted
in the mortgage banking industry.
CLAIMS UNDER PRIMARY MORTGAGE INSURANCE POLICIES AND STANDARD HAZARD
INSURANCE POLICIES; OTHER REALIZATION UPON DEFAULTED LOAN
Each Servicer will present claims to any primary insurer under any related
primary mortgage insurance policy and to the hazard insurer under any related
standard hazard insurance policy. All collections under any related primary
mortgage insurance policy or any related standard hazard insurance policy (less
any proceeds to be applied to the restoration or repair of the related Mortgaged
Property or to the reimbursement of Advances by the Servicer) will be remitted
to the Trustee.
If any Mortgaged Property securing a defaulted Mortgage Loan is damaged and
proceeds, if any, from the related standard hazard insurance policy are
insufficient to restore the damaged property to a condition sufficient to permit
recovery under any applicable Mortgage Pool Insurance Policy or any related
primary mortgage insurance policy, each Servicer may be required to expend its
own finds to restore the damaged property to the extent specified in the related
Prospectus Supplement, but only to the extent it determines such expenditures
are recoverable from Insurance Proceeds or Liquidation Proceeds.
If recovery under any applicable Mortgage Pool Insurance Policy or any
related primary mortgage insurance policy is not available, the Servicer will
nevertheless be obligated to attempt to realize upon the defaulted Mortgage
Loan. Foreclosure proceedings will be conducted by the Servicer in accordance
with the Agreement. If the proceeds of any liquidation of the Mortgaged Property
securing the defaulted Mortgage Loan are less than the Principal Balance of the
defaulted Mortgage Loan plus interest accrued thereon, a loss will be realized
on such Mortgage Loan, to the extent the applicable Credit Enhancement is not
sufficient, in the amount of such difference plus the aggregate of expenses
which are incurred by the Servicer in connection with such proceedings and are
reimbursable under the Agreement. In such case there will be a reduction in the
value of the Mortgage Loans and Trust may be unable to recover the full amount
of principal and interest due thereon.
In addition, where a Mortgaged Property securing a defaulted Mortgage Loan
can be resold for an amount exceeding the principal balance of the related
Mortgage Loan together with accrued interest and expenses, it may be expected
that, where retention of any such amount is legally permissible, the Pool
Insurer will exercise its right under the related Mortgage Pool Insurance
Policy, if any, to purchase such Mortgaged Property and realize for itself any
excess proceeds. Any amounts remaining in the Certificate Account after such
foreclosure or liquidation and attributable to such Mortgage Loan will be
distributed to Owners of the Certificates.
REALIZATION UPON OR SALE OF DEFAULTED MULTIFAMILY LOANS
Unless otherwise specified in the related Prospectus Supplement, the
Servicer may not acquire title to any Multifamily Property securing a Mortgage
Loan or take any other action that would cause the related Trustee, for the
benefit of Owners of the related series, or any other specified person to be
considered to hold title to, to be a "mortgagee-in-possession" of, or to be an
"owner" or an "operator" of such Mortgaged Property within the meaning of
certain federal environmental laws, unless the Servicer has previously
determined, based on a report prepared by a person who regularly conducts
environmental audits, that either:
(i) the Mortgaged Property is in compliance with applicable
environmental laws and regulations or, if not, that taking such actions
are necessary to bring the Mortgaged Property into compliance therewith
is reasonably likely to produce a greater recovery on a present value
basis than not taking such actions; and
(ii) there are no circumstances or conditions present at the
Mortgaged Property that have resulted in any contamination for which
investigation, testing, monitoring, containment, clean-up or
remediation could be required under any applicable environmental laws
and regulations or, if such circumstances or conditions are present for
which any such action could be required, taking such actions with
respect to the Mortgaged Property is reasonably likely to produce a
greater recovery on a present value basis than not taking such actions.
See "Certain Legal Aspects of Mortgage Loans)Foreclosure -
Environmental Legislation."
In addition, unless otherwise specified in the related Prospectus
Supplement, the Servicer will not be obligated to foreclose upon or otherwise
convert the ownership of any Mortgaged Property securing a single family
Mortgage 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 will generally be required. The
Servicer will not be liable to the Owners of the related series if, based on its
belief that no such contamination or affect exists, the 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.
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
As compensation for its servicing duties, each Servicer will be entitled to
a monthly servicing fee in the amount specified in the related Prospectus
Supplement. In addition to the primary compensation, a Servicer may be permitted
to retain all assumption underwriting fees and late payment charges, to the
extent collected from Mortgagors.
As set forth above, each Servicer will be entitled to reimbursement for
certain expenses incurred by it in connection with the liquidation of defaulted
Mortgage Loans and Contracts and in connection with advancing delinquent
payments. No loss will be suffered on the Certificates by reason of such
expenses to the extent claims for such expenses are paid directly under any
applicable Mortgage Pool Insurance Policy, a primary mortgage insurance policy,
the special hazard insurance policy or from other forms of Credit Enhancement.
In the event, however, that the defaulted Mortgage Loans are not covered by a
Mortgage Pool Insurance Policy, primary mortgage insurance policies, the Special
Hazard Insurance Policy or another form of Credit Enhancement, or claims are
either not made or paid under such policies or Credit Enhancement, or if
coverage thereunder has ceased, such a loss will occur to the extent that the
proceeds from the liquidation of a defaulted Mortgage Loan or Contract, after
reimbursement of the Servicer's expenses, are less than the Principal Balance of
such defaulted Mortgage Loan or Contract.
MASTER SERVICER
A Master Servicer may be specified in the related Prospectus Supplement for
the related series of Certificates. Customary servicing functions with respect
to Mortgage Loans constituting the Mortgage Pool will be provided by the
Servicer directly or through one or more Sub-Servicers subject to supervision by
the Master Servicer. If the Master Servicer is not directly servicing the
Mortgage Loans, then the Master Servicer will (i) administer and supervise the
performance by the Servicer of its servicing responsibilities under the
Agreement with the Master Servicer, (ii) maintain a current data base with the
payment histories of each Mortgagor, (iii) review monthly servicing reports and
data relating to the Mortgage Pool for discrepancies and errors, and (iv) act as
back-up Servicer during the term of the transaction unless the Servicer is
terminated or resigns in such case the Master Servicer shall assume the
obligations of the Servicer.
The Master Servicer will be a party to the Agreement for any series for
which Mortgage Loans comprise the assets of a Trust. The Master Servicer will be
required to satisfy the standard established for the qualification of the Master
Servicer in the related Agreement. The Master Servicer will be compensated for
the performance of its services and duties under each Agreement as specified in
the related Prospectus Supplement.
ADMINISTRATION
The following summary describes certain provisions which will be common to
each Agreement. The summary does not purport to be complete and is subject to
the provisions of a particular Agreement.
ASSIGNMENT OF MORTGAGE ASSETS
ASSIGNMENT OF THE MORTGAGE LOANS. At the time of issuance of the
Certificates, the Depositor will assign the Mortgage Loans to the Trustee,
together with all principal and interest adjusted to the Remittance Rate,
subject to exclusions specified in the Prospectus Supplement, due on or with
respect to such Mortgage Loans on or after the Cut-Off Date. The Trustee will,
concurrently with such assignment, execute, countersign and deliver the
Certificates to the Depositor in exchange for the Mortgage Loans. Each Mortgage
Loan will be identified in a schedule appearing as an exhibit to the Agreement.
Such schedule may include information as to the Principal Balance of each
Mortgage Loan as of the Cut-Off Date, as well as information respecting the
Mortgage Rate, the scheduled monthly payment of principal and interest as of the
Cut-Off Date and the maturity date of each Mortgage Note.
In addition, as to each Mortgage Loan, the Depositor will deliver to the
Trustee the Mortgage Note and Mortgage, any assumption and modification
agreement, an assignment of the Mortgage in recordable form (but not necessarily
recorded), evidence of title insurance, if obtained, and, if applicable, the
certificate of private mortgage insurance. In instances where recorded documents
cannot be delivered due to delays in connection with recording, the Depositor
may deliver copies thereof and deliver the original recorded documents promptly
upon receipt.
With respect to any Mortgage Loans which are Cooperative Loans, the
Depositor will cause to be delivered to the Trustee, the related original
Cooperative note endorsed to the order of the Trustee, the original security
agreement, the proprietary lease or occupancy agreement, the recognition
agreement, an executed financing agreement and the relevant stock certificate
and related blank stock powers. The Depositor will file in the appropriate
office an assignment and a financing statement evidencing the Trustee's security
interest in each Cooperative Loan.
Each Seller generally will represent and warrant to the Depositor with
respect to the Mortgage Loans sold by it, among other things, that (i) the
information set forth in the schedule of Mortgage Loans attached thereto is
correct in all material respects: (ii) a lender's title insurance policy or
binder for each Mortgage Loan subject to the Agreement was issued on the date of
origination thereof and each such policy or binder assurance is valid and
remains in full force and effect or a legal opinion concerning title or title
search was obtained or conducted in connection with the origination of the
Mortgage Loans; (iii) at the date of initial issuance of the Certificates, the
Seller has good title to the Mortgage Loans and the Mortgage Loans are free of
offsets, defenses or counterclaims; (iv) at the date of initial issuance of the
Certificates, each Mortgage is a valid first lien on the property securing the
Mortgage Note (subject only to (a) the lien of current real property taxes and
assessments, (b) covenants, conditions, and restrictions, rights of way,
easements and other matters of public record as of the date of the recording of
such Mortgage, such exceptions appearing of record being acceptable to mortgage
lending institutions generally in the area wherein the property subject to the
Mortgage is located or specifically reflected in the appraisal obtained by the
Depositor and (c) other matters to which like properties are commonly subject
which do not materially interfere with the benefits of the security intended to
be provided by such Mortgage) and such property is free of material damage and
is in good repair or, with respect to a junior lien Mortgage Loan, that such
Mortgage is a valid junior lien Mortgage, as the case may be and specifying the
percentage of the Mortgage Loan Pool comprised of junior lien Mortgage Loans;
(v) at the date of initial issuance of the Certificates, no Mortgage Loan is 31
or more days delinquent (with such exceptions as may be specified in the related
Prospectus Supplement) and there are no delinquent tax or assessment liens
against the property covered by the related Mortgage; (vi) at the date of
initial issuance of the Certificates, the portion of each Mortgage Loan, if any,
which in the circumstances set forth below under "Servicing of Mortgage Loans
and Contracts - Primary Mortgage Insurance" should be insured with a private
mortgage insurer is so insured; and (vii) each Mortgage Loan at the time it was
made complied in all material respects with applicable state and federal laws,
including, with out limitation, usury, equal credit opportunity and disclosure
laws. The Depositor's rights against the Seller in the event of a breach of its
representations will be assigned to the Trustee for the benefit of the
Certificates of such series.
ASSIGNMENT OF CONTRACTS. The Depositor will cause the Contracts to be
assigned to the Trustee, together with principal and interest due on or with
respect to the Contracts on and after the Cut-Off Date. Each Contract will be
identified in a loan schedule ("Contract Loan Schedule") appearing as an exhibit
to the related Agreement. Such Contract Loan Schedule may specify, with respect
to each Contract, among other things: the original principal balance and the
outstanding Principal Balance as of the Cut-Off Date; the interest rate; the
current scheduled payment of principal and interest; and the maturity date.
In addition, with respect to each Contract, the Depositor will deliver or
cause to be delivered to the Trustee, the original Contract and copies of
documents and instruments related to each Contract and the security interest in
the Manufactured Home securing each Contract. To give notice of the right, title
and interest of the Trust to the Contracts, the Depositor will cause a UCC-1
financing statement to be filed identifying the Trustee as the secured party and
identifying all Contracts as collateral. The Contracts will not be stamped or
otherwise marked to reflect their assignment from the Depositor to the Trustee.
Therefore, if a subsequent purchaser were able to take physical possession of
the Contracts without notice of such assignment, the interest of the Trust in
the Contracts could be defeated. See "Certain Legal Aspects of the Mortgage
Assets" herein.
The Depositor or the related Seller, as the case may be, may provide
limited representations and warranties to the Trustee concerning the Contracts.
Such representations and warranties may include: (i) that the information
contained in the Contract Loan Schedule provides an accurate listing of the
Contracts and that the information respecting such Contracts set forth in such
Contract Loan Schedule is true and correct in all material respects at the date
or dates respecting which such information is furnished; (ii) that, immediately
prior to the conveyance of the Contracts, the Depositor had good title to and
was sole owner of, each such Contract; and (iii) that there has been no other
sale by it of such Contract and that the Contract is not subject to any lien,
charge, security interest or other encumbrance.
ASSIGNMENT OF MORTGAGE-BACKED SECURITIES AND OTHER MORTGAGE SECURITIES.
With respect to each series, the Depositor will cause any Mortgage-Backed
Securities and Other Mortgage Securities included in the related Trust to be
registered in the name of the Trustee (directly or through a participant in a
depository). The Trustee (or its custodian) will have possession of any
certificated Mortgage-Backed Securities and Other Mortgage Securities. The
Trustee will not be in possession of or be assignee of record of any underlying
assets for a Mortgage-Backed Security or Other Mortgage Security. Each
Mortgage-Backed Security and Other Mortgage Security will be identified in a
schedule appearing as an exhibit to the related Agreement which may specify
certain information with respect to such security, including, as applicable, the
original principal amount, outstanding principal balance as of the Cut-Off Date,
annual pass-through rate or interest rate and maturity date and certain other
pertinent information for each such security. The Depositor will represent and
warrant to the Trustee, among other things, the information contained in such
schedule is true and correct and that immediately prior to the transfer of the
related securities to the Trustee, the Depositor had good title to, and was the
sole owner of, each such security.
REPURCHASE OR SUBSTITUTION OF MORTGAGE LOANS AND CONTRACTS. The Trustee
will review the documents delivered to it with respect to the Mortgage Loans and
Contracts included in the related Trust. If any document is not delivered or is
found to be defective in any material respect and the Depositor or the related
Seller, if so required cannot deliver such document or cure such defect within
the period specified in the related Prospectus Supplement after notice thereof
(which the Trustee will undertake to give within the period specified in the
related Prospectus Supplement), and if any other party obligated to deliver such
document or cure such defect has not done so and has not substituted or
repurchased the affected Mortgage Loan or Contract then the Depositor will cause
the Seller, not later than the first date designated for the deposit of payments
into the Certificate Account (a "Deposit Date") which is more than a specified
number of days after such period, (a) if so provided in the Prospectus
Supplement to remove the affected Mortgage Loan or Contract from the Trust and
substitute one or more other Mortgage Loans or Contracts therefor or (b)
repurchase the Mortgage Loan or Contract from the Trustee for a price equal to
100% of its Principal Balance plus one month's interest thereon at the
applicable Remittance Rate. This repurchase and, if applicable, substitution
obligation will generally constitute the sole remedy available to the Trustee
for a material defect in a document relating to a Mortgage Loan or Contract.
The Depositor is required to cause the Seller to do either of the following
(a) cure any breach of any representation or warranty that materially and
adversely affects the interests of the Owners of the Certificates in a Mortgage
Loan (each, a "Defective Mortgage Loan") or Contract within a specified number
of days of its discovery by the Depositor or its receipt of notice thereof from
the Trustee, (b) repurchase such Defective Mortgage Loan or Contract not later
than the first Deposit Date which is more than a specified number of days after
such period for a price equal to 100% of its Principal Balance plus one month's
interest thereon at the applicable Remittance Rate, or (c) if so specified in
the Prospectus Supplement, remove the affected Mortgage Loan or Contract from
the Trust and substitute one or more other mortgage loans or contracts therefor.
This repurchase and, if applicable, substitution obligation will generally
constitute the sole remedies available to the Trustee for any such breach.
If the related Prospectus Supplement so provides, the Depositor or a
designated affiliate may be obligated to repurchase or substitute Mortgage Loans
or Contracts as described above, whether or not the Depositor obtains such an
agreement from the Seller which sold such Mortgage Loans or Contracts.
If a REMIC election is to be made with respect to all or a portion of a
Trust, there may be federal income tax limitations on the right to substitute
Mortgage Loans or Contracts.
EVIDENCE AS TO COMPLIANCE
The 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 on
and after the Cut-Off Date, a firm of independent public accountants will
furnish a statement to the Trustee to the effect that, based on an examination
of certain specified documents and records relating to the servicing of the
Depositor's mortgage loan portfolio conducted substantially in compliance with
the audit program for mortgages serviced for FNMA or FHLMC, the United States
Department of Housing and Urban Development Mortgage Audit Standards or the
Uniform Single Audit Program for Mortgage Bankers or in accordance with other
standards specified in the Agreement (the "Applicable Accounting Standards"),
such firm is of the opinion that such servicing has been conducted in compliance
with the Applicable Accounting Standards except for (a) such exceptions as such
firm shall believe to be immaterial and (b) such other exceptions as shall be
set forth in such statement.
THE TRUSTEE
Any commercial bank or trust company serving as Trustee may have normal
banking relationships with the Depositor. In addition, the Depositor and the
Trustee acting jointly will have the power and the responsibility for appointing
co-trustees or separate trustees of all or any part of the Trust relating to a
particular series of Certificates. In the event of such appointment, all rights,
powers, duties and obligations conferred or imposed upon the Trustee by the
Agreement shall be conferred or imposed upon the Trustee and such separate
trustee or co-trustee jointly, or, in any jurisdiction in which the Trustee
shall be incompetent or unqualified to perform certain acts, singly upon such
separate trustee or co-trustee who shall exercise and perform such rights,
powers, duties and obligations solely at the direction of the Trustee.
The Trustee will make no representations as to the validity or sufficiency
of the Agreement, the Certificates or of any Mortgage Asset or related document,
and will not be accountable for the use or application by the Depositor of any
funds paid to the Depositor in respect of the Certificates or the related
assets, or amounts deposited in the Certificate Account or deposited into the
Distribution Account. If no Event of Default has occurred, the Trustee will be
required to perform only those duties specifically required of it under the
Agreement. However, upon receipt of the various certificates, reports or other
instruments required to be furnished to it, the Trustee will be required to
examine them to determine whether they conform to the requirements of the
Agreement.
The Trustee may resign at any time, and the Depositor may remove the
Trustee if the Trustee ceases to be eligible to continue as such under the
Agreement, if the Trustee becomes insolvent or in such other instances, if any,
as are set forth in the Agreement. Following any resignation or removal of the
Trustee, the Depositor will be obligated to appoint a successor Trustee. 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.
ADMINISTRATION OF THE CERTIFICATE ACCOUNT
The Agreement will require that the Certificate Account be either (i)
maintained with a depository institution the debt obligations of which (or, in
the case of a depository institution which is a part of a holding company
structure, the debt obligations of the holding company of which) have a rating
acceptable to each rating agency that was requested to rate the Certificates, or
(ii) an account or accounts the deposits in which are fully insured by either
the Bank Insurance Fund (the "BIF") of the FDIC or the Savings Association
Insurance Fund (as successor to the Federal Savings and Loan Insurance
Corporation) ("SAIF") of the FDIC. The collateral eligible to secure amounts in
the Certificate Account is limited to United States government securities and
other investments acceptable to the rating agencies rating such series of
Certificates, and may include one or more Certificates of a series ("Eligible
Investments"). If so specified in the related Prospectus Supplement, a
Certificate Account may be maintained as an interest bearing account, or the
funds held therein may be invested pending each succeeding Payment Date in
Eligible Investments. If so specified in the related Prospectus Supplement, the
Servicer or its designee will be entitled to receive any such interest or other
income earned on funds in the Certificate Account as additional compensation.
The Servicer will deposit in the Certificate Account from amounts previously
deposited by it into the Servicer's Custodial Account on the related Remittance
Date the following payments and collections received or made by it on and after
the Cut-Off Date (including scheduled payments of principal and interest due on
and after the Cut-Off Date but received before the Cut-Off Date):
(i) all Mortgagor payments on account of principal, including
Principal Prepayments and, if specified in the related Prospectus
Supplement, prepayment penalties:
(ii) all Mortgagor payments on account of interest, adjusted to the
Remittance Rate;
(iii) all Liquidation Proceeds net of certain amounts reimbursed to
the Servicer or other person entitled thereto, as described above;
(iv) all Insurance Proceeds, other than proceeds to be applied to the
restoration or repair of the related property or released to the Mortgagor
and net of certain amounts reimbursed to the Servicer or other person
entitled thereto, as described above;
(v) all condemnation awards or settlements which are not released to
the Mortgagor in accordance with normal servicing procedures;
(vi) any Advances made as described under "Servicing of Mortgage Loans
and Contracts Advances" herein and certain other amounts required under the
Agreement to be deposited in the Certificate Account;
(vii) all proceeds of any Mortgage Loan or Contract or property
acquired in respect thereof repurchased by the Depositor, the Seller or
otherwise as described above or under "Termination" below;
(viii) all amounts, if any, required to be deposited in the
Certificate Account from any Credit Enhancement for the related series; and
(ix) all other amounts required to be deposited in the Certificate
Account pursuant to the related Agreement.
REPORTS
Concurrently with each distribution on the Certificates, there will be
mailed to Owners a statement generally setting forth, to the extent applicable
to any series, among other things:
(i) the aggregate amount of such distribution allocable to principal,
separately identifying the amount allocable to each class;
(ii) the amount of such distribution allocable to interest, separately
identifying the amount allocable to each class;
(iii) the aggregate Certificate Principal Balance of each class of the
Certificates after giving effect to distributions on such Distribution
Date;
(iv) the aggregate Certificate Principal Balance of any class of
Compound Interest Certificates after giving effect to any increase in such
Principal Balance that results from the accrual of interest that is not yet
distributable thereon;
(v) if applicable, the amount otherwise distributable to any class of
Certificates that was distributed to other classes of Certificates;
(vi) if any class of Certificates has priority in the right to receive
Principal Prepayments, the amount of Principal Prepayments in respect of
the related Mortgage Assets;
(vii) the aggregate Principal Balance and number of Mortgage Loans and
Contracts which were delinquent as to a total of two installments of
principal and interest; and
(viii) the aggregate Principal Balances of Mortgage Loans and
Contracts which (a) were delinquent 30-59 days, 60-89 days, and 90 days or
more, and (b) were in foreclosure.
Customary information deemed necessary for Owners to prepare their tax
returns will be furnished annually.
FORWARD COMMITMENTS; PRE-FUNDING
The Trustee of a Trust may enter into a Pre-Funding Agreement for the
transfer of additional Mortgage Loans to such Trust following the date on which
such Trust is established and the related Certificates are issued. The Trustee
of a Trust may enter into Pre-Funding Agreements to permit the acquisition of
additional Mortgage Loans that could not be delivered by the Depositor or have
not formally completed the origination process, in each case prior to the
Delivery Date. Any Pre-Funding Agreement will require that any Mortgage Loans so
transferred to a Trust conform to the requirements specified in such Pre-Funding
Agreement. If a Pre-Funding Agreement is to be utilized, the related Trustee
will be required to deposit in the Purchase Account all or a portion of the
proceeds received by the Trustee in connection with the sale of one or more
classes of Certificates of the related series; the additional Mortgage Loans
will be transferred to the related Trust in exchange for money released from the
related Pre-Funding Account. Each Pre-Funding Agreement will set a specified
period during which any such transfers must occur. The Pre-Funding Agreement or
the related Agreement will require that, if all moneys originally deposited to
such Pre-Funding Account are not so used by the end of such specified period,
then any remaining moneys will be applied as a mandatory prepayment of the
related class or classes of Certificates as specified in the related Prospectus
Supplement. The specified period for the acquisition by a Trust of additional
Mortgage Loans is not expected to exceed three months from the date such Trust
is established.
SERVICER EVENTS OF DEFAULT
"Events of Default" under the Agreement will consist of (i) any failure by
the Servicer to duly observe or perform in any material respect any other of its
covenants or agreements in the Agreement materially affecting the rights of
Owners which continues unremedied for a specified number of days after the
giving of written notice of such failure to the Depositor by the Trustee or to
the Servicer and the Trustee by the Owners of Certificates evidencing interests
aggregating not less than 25% of the affected class of Certificates; and (ii)
certain events of insolvency, readjustment of debt, marshaling of assets and
liabilities or similar proceedings and certain actions by the Servicer
indicating its insolvency, reorganization or inability to pay its obligations.
RIGHTS UPON SERVICER EVENT OF DEFAULT
As long as an Event of Default under the Agreement remains unremedied by
the Servicer, the Trustee, or Owners of Certificates may terminate all the
rights and obligations of the Servicer under the Agreement, whereupon the
Trustee or Master Servicer, if any, or a new Servicer appointed pursuant to the
Agreement, will succeed to all the responsibilities, duties and liabilities of
the Servicer under the Agreement and will be entitled to similar compensation
arrangements. Following such termination, the Depositor shall appoint any
established mortgage loan servicer satisfying the qualification standards
established in the Agreement to act as successor to the Servicer under the
Agreement. If no such successor shall have been appointed within a specified
number of days following such termination, then either the Depositor or the
Trustee may petition a court of competent jurisdiction for the appointment of a
successor Servicer. Pending the appointment of a successor Servicer, the Trustee
or the Master Servicer, if any, shall act as Servicer.
The Owners of Certificates will not have any right under the Agreement to
institute any proceeding with respect to the Agreement, unless they previously
have given to the Trustee written notice of default and unless the Owners of the
percentage of the Certificates specified in the Prospectus Supplement have made
written request to the Trustee to institute such proceeding in its own name as
Trustee thereunder and have offered to the Trustee reasonable indemnity and the
Trustee for a specified number of days has neglected or refused to institute any
such proceedings. However, the Trustee is under no obligation to exercise any of
the trusts or powers vested in it by the Agreement or to make any investigation
of matters arising thereunder or to institute, conduct or defend any litigation
thereunder or in relation thereto at the request, order or direction of any of
the Owners, unless such Owners have offered to the Trustee reasonable security
or indemnity against the costs, expenses and liabilities which may be incurred
therein or thereby.
AMENDMENT
An Agreement generally may be amended by the Depositor, the Servicer and
the Trustee, without the consent of the Owners of the Certificates, to cure any
ambiguity, to correct or supplement any provision therein which may be defective
or inconsistent with any other provision therein, to take any action necessary
to maintain REMIC status of any Trust as to which a REMIC election has been
made, to add any other provisions with respect to matters or questions arising
under the Agreement which are not materially inconsistent with the provisions of
the Agreement or for any other purpose, provided that with respect to amendments
for any other purpose (a) the Depositor shall deliver an opinion of counsel
satisfactory to the Trustee, that such amendment will not adversely affect in
any material respect the interests of any Owners of Certificates of that series
and (B) such amendment will not result in a withdrawal or reduction of the
rating of any rated Certificate. Notwithstanding the foregoing, no such
amendment may (i) reduce in any manner the amount of, or delay the timing of,
collections of payments received on the related Mortgage Assets or distributions
which are required to be made on any Certificate without the consent of the
Owner of such Certificate, (ii) adversely affect in any material respect the
interests of the Owners of any class of Certificates in any manner other than as
described in (i), without the consent of the Owners of Certificates of such
class evidencing not less than a majority of the interests of such class or
(iii) reduce the aforesaid percentage of Certificates of any class required to
consent to any such amendment, without the consent of the Owners of all
Certificates of such class then outstanding. Any other amendment provisions
inconsistent with the foregoing shall be specified in the related Prospectus
Supplement.
TERMINATION
The obligations of the Depositor, the Servicer, and the Trustee created by
the Agreement will terminate upon the payment as required by the Agreement of
all amounts held by the Servicer or in the Certificate Account and required to
be paid to them pursuant to the Agreement after the later of (i) the maturity or
other liquidation of the last Mortgage Asset subject thereto or the disposition
of all property acquired upon foreclosure of any such Mortgage Loan or Contract
or (ii) the repurchase by the Depositor from the Trust of all the outstanding
Certificates or all remaining assets in the Trust. The Agreement will establish
the repurchase price for the assets in the Trust and the allocation of such
purchase price among the classes of Certificates. The exercise of such right
will effect early retirement of the Certificates of that series, but the
Depositor's right so to repurchase will be subject to the conditions described
in the related Prospectus Supplement. If a REMIC election is to be made with
respect to all or a portion of a Trust, there may be additional conditions to
the termination of such Trust which will be described in the related Prospectus
Supplement. In no event, however, will the trust created by the Agreement
continue beyond the expiration of 21 years from the death of the survivor of
certain persons named in the Agreement. The Trustee will give written notice of
termination of the Agreement to each Owner, and the final distribution will be
made only upon surrender and cancellation of the Certificates at an office or
agency of the Trustee specified in such notice of termination.
USE OF PROCEEDS
Substantially all the net proceeds to be received from the sale of each
series of Certificates will be applied to the simultaneous purchase of the
Mortgage Assets related to such series (or to reimburse the amounts previously
used to effect such a purchase), the costs of carrying such Mortgage Assets
until sale of the Certificates and to pay other expenses.
THE DEPOSITOR
The Depositor will have no ongoing servicing obligations or
responsibilities with respect to any Mortgage Pool or Contract Pool. The
Depositor does not have, nor is it expected in the future to have, any
significant net worth.
The Depositor anticipates that it will acquire Mortgage Assets in the open
market or in privately negotiated transactions, which may be through or from an
affiliate.
Neither the Depositor nor any of its affiliates will insure or guarantee
the Certificates of any series.
CERTAIN LEGAL ASPECTS OF THE MORTGAGE ASSETS
The following discussion contains summaries of certain legal aspects of
mortgage loans and manufactured housing contracts which are general in nature.
Because such legal aspects are governed primarily by applicable state law (which
laws may differ substantially), the summaries do not purport to be complete nor
to reflect the laws of any particular state, nor to encompass the laws of all
states in which the security for the Mortgage Loans and Contracts is situated.
The summaries are qualified by reference to the applicable federal and state
laws governing the Mortgage Loans and Contracts.
GENERAL
MORTGAGES. The Mortgage Loans will be secured either by deeds of trust or
mortgages. A mortgage creates a lien upon the real property encumbered by the
mortgage. It is not prior to liens for real estate taxes and assessments.
Priority between mortgages depends on their terms and generally on the order of
filing with a state or county office. There are two parties to a mortgage: the
mortgagor, who is the borrower and homeowner or the land trustee (as described
below), and the mortgagee, who is the lender. Under the mortgage instrument, the
mortgagor delivers to the mortgagee a note or bond and the mortgage. Although a
deed of trust is similar to a mortgage, a deed of trust formally has three
parties, the borrower-homeowner called the trustor (similar to a mortgager), a
lender (similar to a mortgagee) called the beneficiary, 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 and generally with a
power of sale, to the trustee to secure payment of the obligation. The trustee's
authority under a deed of trust and the mortgagee's authority under a mortgage
are governed by law, the express provisions of the deed of trust or mortgage
and, in some cases, the directions of the beneficiary.
COOPERATIVES. Certain of the Mortgage Loans may be Cooperative Loans. The
private, non-profit, cooperative apartment corporation owns all the real
property that comprises the project, including the land, separate dwelling units
and all common areas. The cooperative is directly responsible for project
management and, in most cases, payment of real estate taxes and hazard and
liability insurance. If there is a blanket mortgage on the cooperative apartment
building and or underlying land, as is generally the case, the cooperative, as
project mortgagor, is also responsible for meeting these mortgage obligations. A
blanket mortgage is ordinarily incurred by the cooperative in connection with
the construction or purchase of the cooperative's apartment building. The
interest of the occupant under proprietary leases or occupancy agreements to
which that cooperative is a party are generally subordinate to the interest of
the holder of the blanket mortgage in that building. If the cooperative is
unable to meet the payment obligations arising under its blanket mortgage, the
mortgagee holding the blanket mortgage could foreclose on that mortgage and
terminate all subordinate proprietary leases and occupancy agreements. In
addition, the blanket mortgage on a cooperative may provide financing in the
form of a mortgage that does not fully amortize with a significant portion of
principal being due in one lump sum at final maturity. The inability of the
cooperative to refinance this mortgage and its consequent inability to make such
final payment could lead to foreclosure by the mortgagee providing the
financing. A foreclosure in either event by the holder of the blanket mortgage
could eliminate or significantly diminish the value of any collateral held by
the lender who financed the purchase by an individual tenant-stockholder of
cooperative shares or in the case of a Trust including Cooperative Loans, the
collateral securing the Cooperative Loans.
The cooperative is owned by tenant-stockholders who, through ownership of
stock shares or membership certificates in the corporation, receive proprietary
leases or occupancy agreements which confer exclusive rights to occupy specific
units. Generally, a tenant-stockholder of a cooperative must make a monthly
payment to the cooperative representing such tenant-stockholder's PRO RATA share
of the cooperative's payments for its blanket mortgage, real property taxes,
maintenance expenses and other capital or ordinary expenses. An ownership
interest in a cooperative and accompanying occupancy rights is financed through
a cooperative share loan evidenced by a promissory note and secured by a
security interest in the occupancy agreement or proprietary lease and in the
related cooperative shares. The lender 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 lenders interest in its collateral. Subject to the limitations
discussed below, upon default of the tenant-stockholder, the lender may sue for
judgment on the promissory note, dispose of the collateral at a public or
private sale or otherwise proceed against the collateral or tenant-stockholder
as an individual as provided in the security agreement covering the assignment
of the proprietary lease or occupancy agreement and the pledge of cooperative
shares.
FORECLOSURE
MORTGAGES. Foreclosure of a deed of trust is generally accomplished by a
non-judicial trustee's sale under a specific provision in the deed of trust that
authorizes the trustee to sell the property to a third party upon any default by
the borrower under the terms of the note or deed of trust. In some states, the
trustee must record a notice of default and send a copy to the borrower-trustor
or and any person who has recorded a request for a copy of a notice of default
and notice of sale. In addition, the trustee must provide notice in some states
to any other individual having an interest in the real property, including any
junior lienholders. 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. Generally, state law controls the amount
of foreclosure expenses and costs, including attorney's fees' which may be
recovered by a lender. If the deed of trust is not reinstated, 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 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 in the real property.
Foreclosure of a mortgage is generally accomplished by judicial action. The
action is initiated by the service of legal pleadings upon all parties having an
interest in the real property. Delays in completion of the foreclosure may
occasionally result from difficulties in locating necessary parties defendant.
Judicial foreclosure proceedings are often not protested by any of the parties
defendant. However, when the mortgagee's right to foreclose is contested, the
legal proceedings necessary to resolve the issue can be time consuming. After
the completion of judicial foreclosure, the court generally issues a judgment of
foreclosure and appoints a referee or other court officer to conduct the sale of
the property.
In 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 foreclosure proceedings, it is uncommon
for a third party to purchase the property at the foreclosure sale. Rather it is
common for the lender to purchase the property from the trustee or referee for
an amount equal to the principal amount of the mortgage or deed of trust,
accrued and unpaid interest and expenses of foreclosure. Thereafter, the lender
will assume the burdens of ownership, including paying real estate taxes,
obtaining casualty insurance and making such repairs at its own expense as are
necessary to render the property suitable for sale. The lender will commonly
obtain the services of a real estate broker and pay the broker's commission in
connection with the sale of the property. Depending upon market conditions, the
ultimate proceeds of the sale of the property may not equal the lender's
investment in the property. Any loss may be reduced by the receipt of any
mortgage insurance proceeds.
When the junior mortgagee or beneficiary under a junior deed of trust cures
the default and state law allows it to reinstate or redeem by paying the full
amount of the senior mortgage or deed of trust, then in those states the amount
paid so to cure or redeem generally becomes a part of the indebtedness secured
by the junior mortgage or deed of trust. See "Junior Liens; Rights of Senior
Mortgagors or Beneficiaries" below.
A sale conducted in accordance with the terms of the power of sale
contained in a mortgage or deed of trust is generally presumed to be conducted
regularly and fairly, and a conveyance of the real property by the trustee
confers, in most states, legal title to the real property to the purchaser, free
of all junior mortgages or deeds of trust and free of all other liens and claims
subordinate to the mortgage or deed of trust under which the sale is made (with
the exception of certain governmental liens). The purchaser's title is, however,
subject to all senior liens, encumbrances and mortgages and may be subject to
mechanic's and materialman's liens in some states. Thus, if the mortgage or deed
of trust being foreclosed is a junior mortgage or deed of trust, the sheriff or
trustee will convey title to the purchaser of the real property, subject to any
existing first mortgage or deed of trust and any other prior liens and claims.
The foreclosure of a junior mortgage or deed of trust, generally, will have an
effect on the first mortgage or deed of trust, if the senior mortgage or deed of
trust grants to the senior mortgagee or beneficiary the right to accelerate its
indebtedness under a "due-on-sale" clause or "due on further encumbrance" clause
contained in the senior mortgage or deed of trust. See "Anti-Deficiency
Legislation and Other Limitations on Lenders" below.
The proceeds received by the sheriff or trustee from the sale are applied
pursuant to the terms of the deed of trust, which may require application 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. In some states, any surplus money remaining may be available to
satisfy claims of the holders of junior mortgages or deeds of trust and other
junior liens and claims in order of their priority, whether or not the mortgagor
or trustee is in default, while in some states, any surplus money remaining may
be payable directly to the mortgagor or trustor. Any balance remaining is
generally payable to the mortgagor or trustor. Following the sale, in some
states the mortgagee or beneficiary following a foreclosure of a mortgage or
deed of trust may not obtain a deficiency judgment against the mortgagor or
trustor. A junior lienholder whose rights in the property are terminated by the
foreclosure by a senior lienholder will not share in the proceeds from the
subsequent disposition of the property.
COOPERATIVE LOANS. The cooperative shares owned by the tenant-stockholder
and pledged to the lender are, in almost all cases, subject to restrictions on
transfer as set forth in the cooperative's Certificate of Incorporation and
Bylaws, as well as the proprietary lease or occupancy agreement, and may be
canceled by the cooperative for failure by the tenant-stockholder to pay rent or
other obligations or charges owned by such tenant-stockholder, including
mechanics' liens against the cooperative apartment building incurred by such
tenant-stockholder. The proprietary lease or occupancy agreement generally
permits the cooperative to terminate such lease or agreement in the event an
obligor fails to make payments or defaults in the performance of covenants
required thereunder. Typically, the lender and the cooperative enter into a
recognition agreement which establishes the rights and obligations of both
parties in the event of a default by the tenant-stockholder on its obligations
under the proprietary lease or occupancy agreement. A default by the
tenant-stockholder under the proprietary lease or occupancy agreement will
usually constitute a default under the security agreement between the lender and
the tenant-stockholder.
The recognition agreement generally provides that, in the event that the
tenant-stockholder has defaulted under the proprietary lease or occupancy
agreement, the cooperative will take no action to terminate such lease or
agreement until the lender has been provided with an opportunity to cure the
default. The recognition agreement typically provides that if the proprietary
lease or occupancy agreement is terminated, the cooperative will recognize the
lender's lien against proceeds from a sale of the cooperative apartment,
subject, however, to the cooperative's right to sums due under such proprietary
lease or occupancy agreement. The total amount owed to the cooperative by the
tenant-stockholder, which the lender generally cannot restrict and does not
monitor, could reduce the value of the collateral below the outstanding
principal balance of the cooperative loan and accrued and unpaid interest
thereon.
Recognition agreements also provide that in the event of a foreclosure on a
cooperative loan, the lender must obtain the approval or consent of the
cooperative as required by the proprietary lease before transferring the
cooperative shares or assigning the proprietary lease. Generally, the lender is
not limited in any rights it may have to dispossess the tenant-stockholders.
In some states, foreclosure on the cooperative shares is accomplished by a
sale in accordance with the provisions of Article 9 of the Uniform Commercial
Code (the "UCC") and the security agreement relating to those shares. Article 9
of the UCC requires that a sale be conducted in a "commercially reasonable"
manner. Whether a foreclosure sale has been conducted in a "commercially
reasonable" manner will depend on the facts in each case. In determining
commercial reasonableness, a court will look to the notice given the debtor and
the method, manner, time, place and terms of the foreclosure. Generally, a sale
conducted according to the usual practice of banks selling similar collateral
will be considered reasonably conducted. Article 9 of the UCC provides that the
proceeds of the sale will be applied first to pay the costs and expenses of the
sale and then to satisfy the indebtedness secured by the lender's security
interest. The recognition agreement, however, generally provides that the
lender's right to reimbursement is subject to the right of the cooperative
corporation to receive sums due under the proprietary lease or occupancy
agreement. If there are proceeds remaining, the lender must account to the
tenant-stockholder for the surplus. Conversely, if a portion of the indebtedness
remains unpaid, the tenant-stockholder is generally responsible for the
deficiency. See "Anti-Deficiency Legislation and Other Limitations on Lenders"
below.
JUNIOR LIENS; RIGHTS OF SENIOR MORTGAGEES OR BENEFICIARIES. Certain of the
Mortgage Loans, including Title I Loans, may be secured by mortgages or deeds of
trust providing for junior (i.e., second, third, etc.) liens on the related
Mortgaged Properties which are junior to the other mortgages or deeds of trust
held by other lenders or institutional investors. The rights of the beneficiary
under a junior deed of trust or as mortgagee under a junior mortgage are
subordinate to those of the mortgagee or beneficiary under the senior mortgage
or deed of trust, including the prior rights of the senior mortgagee or
beneficiary to receive hazard insurance and condemnation proceeds and to cause
the property securing the Mortgage Loans to be sold upon default of the
mortgagor or trustor. As discussed more fully below, a junior mortgagee or
beneficiary in some states may satisfy a defaulted senior loan in full and in
some states may cure such default and bring the senior loan current, in either
event adding the amounts expended to the balance due on the junior loan. In most
states, absent a provision in the senior mortgage or deed of trust, no notice of
default is required to be given to a junior mortgagee or beneficiary.
The forms of the mortgage or deed of trust used by most institutional
lenders generally confer on the mortgagee or beneficiary the right both to
receive all proceeds collected under any hazard insurance policy and all awards
made in connection with any 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 or beneficiary may determine. Thus, in the event
improvements on the property are damaged or destroyed by fire or other casualty,
or in the event the bankruptcy is taken by condemnation, the mortgagee or
beneficiary under the underlying first mortgage or deed of trust may 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 first mortgage or deed of trust. In
those situations, proceeds in excess of the amount of first mortgage
indebtedness generally may be applied to the indebtedness of a junior mortgage
or trust deed.
Other provisions typically found in the form of the mortgagee or deed of
trust generally used by most institutional lenders obligate the mortgagor or
trustor to pay before delinquency all taxes and assessments on the property and,
when due, all encumbrances, charges and liens on the property which appear prior
to the mortgage or deed of trust, to provide and maintain fire insurance on the
property, to maintain and repair the property and not to commit or permit any
waste thereof, and to appear in and defend any action or proceeding purporting
to affect the property or the rights of the mortgagee or beneficiary under the
mortgage or deed of trust. Upon a failure of the mortgagor or trustor to perform
any of these obligations, the mortgagee or beneficiary typically is given the
right under the mortgage or deed of trust to perform the obligation itself at
its election, with the mortgagor or trustor agreeing to reimburse the mortgagee
or beneficiary for any sums expended by the mortgagee or beneficiary on behalf
of the trustor. All sums so expended by the mortgagee or beneficiary generally
become part of the indebtedness secured by the mortgage or deed of trust
RIGHT 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 following foreclosure.
In some states, redemption may occur only upon payment of the entire principal
balance of the loan, accrued interest and expenses of foreclosure. In other
states, redemption may be authorized 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. The rights of
redemption would defeat the title of any purchaser from the lender subsequent to
foreclosure or sale under a deed of trust. Consequently, the practical effect of
the redemption right is to force the lender to retain the property and pay the
expenses of ownership until the redemption period has run.
ANTI-DEFICIENCY LEGISLATION AND OTHER LIMITATIONS ON LENDERS. Certain
states have imposed statutory prohibitions that limit the remedies of a
beneficiary under a deed of trust or a mortgagee under a mortgage. In some
states, statutes limit the right of the beneficiary or mortgagee to obtain a
deficiency judgment against the borrower following foreclosure or sale under a
deed of trust. A deficiency judgment would be 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. Other 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.
Finally, other statutory provisions limit any deficiency judgment against the
former borrower following a judicial sale to the excess of the outstanding debt
over the fair market value of the property at the time of the public sale. The
purpose of these statutes is generally to prevent a beneficiary or a mortgagee
from obtaining a large deficiency judgment against the former borrower as a
result of low or no bids at the judicial sale.
In addition to laws limiting or prohibiting deficiency judgments, numerous
other 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 and/or enforce a deficiency
judgment. For example, 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 arrearages within a reasonable
time period and reinstating the original mortgage loan payment schedule even
though the lender accelerated the mortgage loan and final judgment of
foreclosure had been entered in state court (provided no 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
fact of the reorganization case, that effected the curing of a mortgage loan
default by paying arrearages 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 suggested that such modifications may include reducing the
amount of each monthly payment, changing the rate of interest, altering the
repayment schedule and reducing the lender's security interest to the value of
the 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. Federal bankruptcy law and limited case law indicate that the foregoing
modifications could not be applied to the terms of a loan secured by property
that is the principal residence of the debtor.
The Code provides priority to certain tax liens over the lien of the
mortgage. In addition, substantive requirements are imposed upon mortgage
lenders in connection with the origination and the servicing of mortgage loans
by numerous federal and some state consumer protection laws. These laws include
the federal Truth-in-Lending Act, Real Estate Settlement Procedures Act, Equal
Credit Opportunity Act, Fair Credit Billing Act, Fair Credit Reporting Act and
related statutes. These federal laws impose specific statutory liabilities upon
lenders who originate mortgage loans and who fail to comply with the provisions
of the law. In some cases, this liability may affect assignees of the mortgage
loans.
Generally, Article 9 of the UCC governs foreclosure on cooperative shares
and the related proprietary lease or occupancy agreement. Some courts have
interpreted section 9-504 of the UCC to prohibit a deficiency award unless the
creditor establishes that the sale of the collateral (which, in the case of a
Cooperative Loan, would be the shares of the cooperative and the related
proprietary lease or occupancy agreement) was conducted in a commercially
reasonable manner.
ENFORCEABILITY OF CERTAIN PROVISIONS. Certain of the Mortgage Loans will
contain due-on-sale clauses. These clauses permit the lender to accelerate the
maturity of a loan if the borrower sells, transfers, or conveys the property.
The enforceability of these clauses was 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 prohibiting 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 (including federal savings
and loan associations and federal savings banks) may not exercise a due-on-sale
clause, notwithstanding the fact that a transfer of the property may have
occurred. These include intra-family transfers, certain transfers by operation
of law, leases of fewer than three years and the creation of a junior
encumbrance. Regulations promulgated under the Garn-St. Germain Act by the
Federal Home Loan Bank Board as succeeded by the Office of Thrift Supervision
(the "OTS"), also prohibit the imposition of a prepayment penalty upon the
acceleration of a loan pursuant to a due-on-sale clause. Any inability of the
Depositor to enforce due-on-sale clauses may affect the average life of the
Mortgage Loans and the number of Mortgage Loans that may be outstanding until
maturity.
Upon foreclosure, courts have imposed general equitable principles. These
equitable principles are generally designed to relieve the borrower from the
legal effect of his defaults under the loan documents. Examples of judicial
remedies that have been fashioned include 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 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 the lender to
foreclose if the default under the mortgage instrument is not monetary, such as
the borrower falling to adequately maintain the property or the borrower
executing 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 statutory-prescribed minimum. For the most part, these cases
have upheld the notice provisions as being reasonable or have found that the
sale by a trustee under a deed of trust, or under a mortgage having a power of
sale, does not involve sufficient state action to afford constitutional
protections to the borrower.
The standard forms of note, mortgage and deed of trust generally contain
provisions obligating the borrower to pay a late charge if payments are not
timely made, and in some circumstances may provide for prepayment fees or
penalties if the obligation is paid prior to maturity. In certain states, there
are or may be specific limitations upon late charges which a lender may collect
from a borrower for delinquent payments. Certain states also limit the amounts
that a lender may collect from a borrower as an additional charge if the loan is
prepaid. Under the Agreement, late charges (to the extent permitted by law and
not waived by the Servicer) will be retained by the Servicer as additional
servicing compensation.
ADJUSTABLE RATE LOANS. The laws of certain states may provide that mortgage
notes relating to adjustable rate loans are not negotiable instruments under the
UCC. In such event, the Trustee will not be deemed to be a "holder in due
course," within the meaning of the UCC and may take such a mortgage note subject
to certain restrictions on its ability to foreclose and to certain contractual
defenses available to a mortgagor.
ENVIRONMENTAL LEGISLATION. Certain states impose a statutory lien for
associated costs on property that is the subject of a cleanup action by the
state on account of hazardous wastes or hazardous substances released or
disposed of on the property. Such a lien will generally have priority over all
subsequent liens on the property and, in certain of these states, will have
priority over prior recorded liens including the lien of a mortgage. In
addition, under federal environmental legislation and under state law in a
number of states, a secured party which takes a deed in lieu of foreclosure or
acquires a mortgaged property at a foreclosure sale or assumes active control
over the operation or management of a property so as to be deemed an "owner" or
"operator" of the property may be liable for the costs of cleaning up a
contaminated site. Although such costs could be substantial, it is unclear
whether they would be imposed on a secured lender (such as a Trust) to
homeowners. In the event that title to a Mortgaged Property securing a Mortgage
Loan in a Trust was acquired by the Trust and cleanup costs were incurred in
respect of the Mortgaged Property, the Trust might realize a loss if such costs
were required to be paid by the Trust.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT
Generally, under the terms of the Relief Act, a borrower who enters
military service after the origination of a Mortgage Loan or Contract by such
borrower (including a borrower who is a member of the National Guard or is in
reserve status at the time of the origination of the Mortgage Loan and is later
called to active duty) may not be charged interest above an annual rate of 6%
during the period of such borrower's active duty status, unless a court orders
otherwise upon application of the lender. It is possible that such interest rate
limitation or similar limitations under state law could have an effect, for an
indeterminate period of time, on the ability of the Servicer to collect full
amounts of interest on certain of the Mortgage Loans. In addition, the Relief
Act imposes limitations which would impair the ability of the Servicer to
foreclose on an affected Mortgage Loan during the borrower's period of active
duty status. Thus, in the event that such a Mortgage Loan goes into default
there may be delays and losses occasioned by the inability to realize upon the
Mortgaged Property in a timely fashion.
Any shortfalls in interest collections resulting from application of the
Relief Act could adversely affect Certificates.
THE CONTRACTS
GENERAL. As a result of the Depositor's assignment of the Contracts to the
Trustee, the Owners of Certificates will succeed collectively to all the rights
(including the right to receive payment on the Contracts) and will assume
certain obligations of the Depositor. Each Contract evidences both (a) the
obligation of the obligor to repay the loan evidenced thereby, and (b) the grant
of a security interest in the Manufactured Home to secure repayment of such
loans. Certain aspects of both features of the Contracts are described more
fully below.
The Contracts generally are "chattel paper" as defined in the UCC in effect
in the states which the Manufactured Homes initially were registered. Pursuant
to the UCC, the sale of chattel paper is treated in a manner similar to
perfection of a security interest in chattel paper. Under the Agreement, the
Depositor will transfer physical possession of the Contracts to the Trustee or
its custodians. In addition, the Depositor will make an appropriate filing of a
UCC-1 financing statement in the appropriate states to give notice of the
Trustee's ownership of the Contracts. The Contracts will not be stamped or
marked otherwise to reflect their assignment from the Depositor to the Trustee.
Therefore, if a subsequent purchaser were able to take physical possession of
the Contracts without notice of such assignment the Trustee's interest in
Contracts could be defeated.
SECURITY INTERESTS IN THE MANUFACTURED HOMES. The Manufactured Homes
securing the Contracts may be located in all 50 states. Security interests in
manufactured homes may be perfected either by notation of the secured party's
lien on the certificate of title or by delivery of the required documents and
payment of a fee to the state motor vehicle authority, depending on state law.
In some nontitle states, perfection pursuant to the provisions of the UCC is
required. The Depositor may effect such notation or delivery of the required
documents and fees, and obtain possession of the certificate of title, as
appropriate under the laws of the state in which any manufactured home securing
a manufactured housing conditional sales contract is registered. In the event
the Depositor fails, due to clerical errors, 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 to move them, courts
in many states have held that manufactured homes, under certain circumstances,
may become subject to real estate title and recording laws. As a result, a
security interest in a manufactured home could be rendered subordinate to the
interests of other parties claiming an interest in the home under applicable
state real estate law. In order to perfect a security interest in a manufactured
home under real estate law, 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 state records office of the county where the home is
located. So long as the borrower does not violate this agreement, a security
interest in the Manufactured Home will be governed by the certificate of title
laws or the UCC, and the notation of the security interest on the certificate of
title or the filing of a UCC financing statement will be effective to maintain
the priority of the security interest in the Manufactured Home. If, however, a
Manufactured Home is permanently attached to this site, other parties could
obtain an interest in the Manufactured Home which is prior to the security
interest transferred to the Trustee. With respect to a series of Certificates
and as described in the related Prospectus Supplement, the Depositor may be
required to perfect a security interest in the Manufactured Home under
applicable real estate laws. If such real estate filings are not required and if
any of the foregoing events were to occur, the only recourse would be to pursue
the Trust's rights to require repurchase for breach of warranties.
The Depositor will assign its security interest in the Manufactured Homes
to the Trustee. Neither the Depositor nor the Trustee will amend the
certificates of title to identify the Trust as the new secured party.
Accordingly, the Depositor 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 Depositor'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 Depositor.
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 Depositor on
the certificate of title or delivery of the required documents and fees will be
sufficient to protect the Trust against the rights of subsequent purchasers of a
Manufactured Home or subsequent lenders who take a security interest in the
Manufactured Home. If there are any Manufactured Homes as to which the security
interest is not perfected, such security interest would be subordinate to, among
others, subsequent purchasers for value of Manufactured Homes and holders of
perfected security interests. There also exists a risk in not identifying the
Trust as the new secured party on the certificate of title that, through fraud
or negligence, the security interest of the Trust could be released.
ENFORCEMENT OF SECURITY INTERESTS IN MANUFACTURED HOMES. The Servicer on
behalf of the Trustee, to the extent required by the related Agreement, may take
action to enforce the Trustee's security interest with respect to Contracts in
default by repossession and resale of the Manufactured Homes securing such
Contracts in default. So long as the Manufactured Home has not become subject to
the real estate law, a creditor can repossess a Manufactured Home securing a
Contract by voluntary surrender, by "self-help" repossession that is "peaceful"
(I.E., without breach of the peace) or in the absence of voluntary surrender and
the ability to repossess without breach of the peace, by judicial process. The
holder of a Contract must give the debtor a number of days' notice, which varies
from 10 to 30 days depending on the state, prior to commencement of any
repossession. The UCC and consumer protection laws in most states place
restrictions on repossession sales, including requiring prior notice to the
debtor and commercial reasonableness in effecting such a sale. The law in most
states also requires that the debtor be given notice of any sale prior to resale
of the unit so that the debtor may redeem at or before such resale. In the event
of such repossession and resale of a Manufactured Home, the Trustee would be
entitled to be paid out of the sale proceeds before such proceeds could be
applied to the payment of the claims of unsecured creditors or the holders of
subsequently perfected security interests or, thereafter, to the debtor.
If the owner of a Manufactured Home moves it to a state other than the
state in which such Manufactured Home initially is registered, under the laws of
most states the perfected security interest in the Manufactured Home would
continue for four months after such relocation and thereafter only if and after
the owner registers the Manufactured Home in such state. If the owner were to
relocate a Manufactured Home to another state and not re- register the
Manufactured Home in such state, and if steps are not taken to re-perfect the
Trustee's security interest in such state, the security interest in the
Manufactured Home would cease to be perfected. A majority of states generally
requires surrender of a certificate of title to re-register a Manufactured Home;
accordingly, the Trustee must surrender possession if it holds the certificate
of title to such Manufactured Home or, in the case of Manufactured Homes
registered in states which provide for notation of lien, the Trustee would
receive notice of surrender if the security interest in the Manufactured Home is
noted on the certificate of title. Accordingly, the Trustee would have the
opportunity to re-perfect its security interest in the Manufactured Home in the
state of relocation. In states which do not require a certificate of title for
registration of a manufactured home, re- registration could defeat perfection.
In the ordinary course of servicing the manufactured housing conditional sales
contracts, the Servicer will be required to take steps to effect such
re-perfection upon receipt of notice of re- registration or information from the
obligor as to relocation. Similarly, when an obligor under a manufactured
housing conditional sales contract sells a manufactured home, the Trustee must
surrender possession of the certificate of title or 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 Agreement the Servicer is
obligated to take such steps, at the Servicer's expense, as are necessary to
maintain perfection of security interests in the Manufactured Homes.
Under the laws of most states, liens for repairs performed on a
Manufactured Home take priority even over a perfected security interest. The
Depositor will represent in the Agreement that it has no knowledge of any such
liens with respect to any Manufactured Home securing payment on any Contract.
However, such liens could arise at any time during the term of a Contract. No
notice will be given to the Trustee in the event such a lien arises.
Under the laws applicable in most states, a creditor is entitled to obtain
a deficiency judgment from a debtor for any deficiency on repossession and
resale of the manufactured home securing such debtor's loan. However, some
states impose prohibitions or limitations on deficiency judgments.
Certain other statutory provisions, including federal and state bankruptcy
and insolvency laws and general equitable principles, may limit or delay the
ability of a lender to repossess and resell collateral or enforce a deficiency
judgment.
CONSUMER PROTECTION LAWS. The so-called "Holder-in-Due-Course" rule of the
Federal Trade Commission is intended to defeat the ability of the transferor of
a consumer credit contract which is the seller of goods which gave rise to the
transaction (and certain related lenders and assignees) to transfer such
contract free of notice of claims by the debtor thereunder. The effect of this
rule is to subject the assignee of such a contract to all claims and defenses
which the debtor could assert against the seller of goods. Liability under this
rule is limited to amounts paid under a Contract; however, the obligor also may
be able to assert the rule to set off remaining amounts due as a defense against
a claim brought by the Trust against such obligor. Numerous other federal and
state consumer protection laws impose requirements applicable to the origination
of and lending pursuant to the Contracts, including the Truth-in-Lending Act,
the Federal Trade Commission Act, the Fair Credit Billing Act, the Fair Credit
Reporting Act, the Equal Credit Opportunity Act, the Fair Debt Collection
Practices Act and the Uniform Consumer Credit Code. In the case of some of these
laws, the failure to comply with their provisions may affect the enforceability
of the related Contract
TRANSFERS OF MANUFACTURED HOMES; ENFORCEABILITY OF "DUE-ON-SALE" CLAUSES.
The Contracts, in general, prohibit the sale or transfer of the related
Manufactured Homes without the consent of the Depositor and permit the
acceleration of the maturity of the Contracts by the Depositor upon any such
sale or transfer for which consent has not been granted. In certain cases, the
transfer may be made by a delinquent obligor in order to avoid a repossession
proceeding with respect to a Manufactured Home.
In the case of a transfer of a Manufactured Home after which the Servicer
desires to accelerate the maturity of the related Contract, the Servicer's
ability to do so will depend on the enforceability under state law of the
"due-on-sale" clause. The Garn-St. Germain 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 states the
Servicer may be prohibited from enforcing a "due-on-sale" clause in respect of
certain Manufactured Homes.
THE TITLE I PROGRAM
Certain of the Mortgage Loans or Contracts contained in a Trust may be
loans insured under the FHA Title I credit insurance program created pursuant to
Sections 1 and 2(a) of the National Housing Act of 1934 (the "Title I Program").
Under the Title I Program, the FHA is authorized and empowered to insure
qualified lending institutions against losses on eligible loans. The Title I
Program operates as a coinsurance program in which the FHA insures up to 90% of
certain losses incurred on an individual insured loan, including the unpaid
principal balance of the loan, but only to the extent of the insurance coverage
available in the lender's FHA insurance coverage reserve account. The owner of
the loan bears the uninsured loss on each loan.
The types of loans, which are eligible for insurance by the FHA under the
Title I Program, include property improvement loans ("Property Improvement
Loans" or "Title I Loans") and manufactured home loans ("Manufactured Home
Loans" or "Title I Contracts"). A Property Improvement Loan or Title I Loan
means a loan made to finance actions or items that substantially protect or
improve the basic livability or utility of a property and includes: (1) single
family, multifamily and nonresidential property improvement loans; (2)
manufactured home improvement loans, where the home is classified as personalty;
(3) historic preservation loans; and (4) fire safety equipment loans in existing
health care facilities. A Manufactured Home Loan or Title I Contract means a
loan for the purchase or refinancing of a manufactured home and/or the lot on
which to place such home and includes: (1) manufactured home purchase loans; (2)
manufactured home lot loans; and (3) combination loans.
In addition to these types of loans, there are two basic methods of lending
or originating loans which include a "direct loan" or a "dealer loan". With
respect to a direct loan, the borrower makes application directly to a lender
without any assistance from a dealer, which application may be filled out by the
borrower or by a person acting at the direction of the borrower who does not
have a financial interest in the loan transaction, and the lender may disburse
the loan proceeds solely to the borrower or jointly to the borrower and other
parties to the transaction. With respect to a dealer loan, the dealer, who has a
direct or indirect financial interest in the loan transaction, assists the
borrower in preparing the loan application or otherwise assists the borrower in
obtaining the loan from the lender and the lender may disburse proceeds solely
to the dealer or the borrower or jointly to the borrower and the dealer or other
parties. With respect to a dealer Title I Loan, a dealer may include a seller, a
contractor or supplier of goods or services' and with respect to a dealer Title
I Contract, a dealer is a person engaged in the business of manufactured home
retail sales.
Loans insured under the Title I Program are required to have fixed interest
rates and, generally, provide for equal installment payments due weekly,
biweekly, semi-monthly, or monthly, except that a loan may be payable quarterly
or semi-annually in order to correspond with the borrower's irregular flow of
income The first or last payments (or both) may vary in amount but may not
exceed 150% of the regular installment payment, and the first payment may be due
no later than two months from the date of the loan. The note must contain a
provision permitting full or partial prepayment of the loan. The interest rate
may be established by the lender and must be fixed for the term of the loan and
recited in the note. Interest on an insured loan must accrue from the date of
the loan and be calculated according to the actuarial method. The lender must
assure that the note and all other documents evidencing the loan are in
compliance with applicable Federal, state and local laws.
Each insured lender is required to use prudent lending standards in
underwriting individual loans and to satisfy the applicable loan underwriting
requirements under the Title I Program prior to its approval of the loan and
disbursement of loan proceeds. Generally, the lender must exercise prudence and
diligence to determine whether the borrower and any co-maker are solvent and
acceptable credit risks, with a reasonable ability to make payments on the loan
obligation. The lender's credit application and review must determine whether
the borrower's income will be adequate to meet the periodic payments required by
the loan, as well as the borrower's other housing and recurring expenses, which
determination must be made in accordance with the expense-to-income ratios
published by the Secretary of the United States Department of Housing and Urban
Development ("HUD").
Under the Title I Program, the FHA does not review or approve for
qualification for insurance the individual loans insured thereunder at the time
of approval by the lending institution. If, after a loan has been made and
reported for insurance under the Title I Program, the lender discovers any
material misstatement of fact or that the loan proceeds have been misused by the
borrower, dealer or any other party, it shall promptly report this to the FHA.
In such case, provided that the validity of any lien on the property has not
been impaired, the insurance of the loan under the Title I Program will not be
affected unless such material misstatement of fact or misuse of loan proceeds
was caused by (or was knowingly sanctioned by) the lender or its employees.
REQUIREMENTS FOR TITLE I LOANS. The maximum principal amounts for Title I
Loans must not exceed the actual cost of the project plus any applicable fees
and charges allowed under the Title I Program; provided that such maximum amount
does not exceed the following loan amounts: (i) $25,000 for a single family
property improvement loan and nonresidential property improvement loans; (ii)
the lesser of $60,000 or an average of $12,000 per dwelling unit for multifamily
property improvement loans; and (iii) $17,500 for a manufactured home
improvement loan. Generally, the term of a Title I Loan may not be less than six
months nor greater than 20 years and 32 days, except that the maximum term of a
single family property improvement loan on a manufactured home is limited to 15
years and 32 days and the maximum term of a manufactured home improvement loan
is limited to 12 years and 32 days. A borrower may obtain multiple Title I Loans
with respect to multiple properties, and a borrower may obtain more than one
Title I Loan with respect to a single property, in each case as long as the
total outstanding balance of all Title I Loans on the same property does not
exceed the maximum loan amount for the type of Title I Loan thereon having the
highest permissible loan amount
Borrower eligibility for a Title I Loan requires that the borrower have at
least a one-half interest in either fee simple title to the real property, a
lease thereof for a term expiring at least six months after the final maturity
of the Title I Loan or a recorded land installment contract for the purchase of
the real property, and that the borrower have equity in the property being
improved at least equal to the amount of the Title I Loan if such loan amount
exceeds $15,000. Any Title I Loan in excess of $5,000 must be secured by a
recorded lien on the improved property which is evidenced by a mortgage or deed
of trust executed by the borrower and all other owners in fee simple.
The proceeds from a Title I Loan may be used only to finance property
improvements which substantially protect or improve the basic livability or
utility of the property as disclosed in the loan application. The Secretary of
HUD has published a list of items and activities which cannot be financed with
proceeds from any Title I Loan and from time to time the Secretary of HUD may
amend such list of items and activities. With respect to any dealer Title I
Loan, before the lender may disburse funds, the lender must have in its
possession a completion certificate on a HUD-approved form, signed by the
borrower and the dealer. With respect to any direct Title I Loan the lender is
required to obtain, promptly upon completion of the improvements but not later
than 6 months after disbursement of the loan proceeds with one 6 month extension
if necessary, a completion certificate, signed by the borrower. The lender is
required to conduct an on-site inspection on any Title I Loan where the
principal obligation is $7,500 or more, and or any direct Title I Loan where the
borrower fails to submit a completion certificate.
REQUIREMENTS FOR TITLE I CONTRACTS. The maximum principal amount for any
Title I Contract must not exceed the sum of certain itemized amounts, which
include a specified percentage of the purchase price of the manufactured home
depending on whether it is a new or existing home; provided that such maximum
amount does not exceed the following loan amounts: (i) $40,500 for a new or
existing manufactured home purchase loan; (ii) $13,500 for a manufactured home
lot purchase; and (iii) $54,000 for a combination loan (i.e., a loan to purchase
a new or existing manufactured home and the lot for such home). Generally, the
term of a Title I Contract may not be less than six months nor greater than 20
years and 32 days, except that the maximum term of a manufactured home lot loan
is limited to 15 years and 32 days and the maximum term of a multimodule
manufactured home and lot in combination is limited to 25 years and 32 days.
Borrower eligibility for a Title I Contract requires that the borrower
become the owner of the property to be financed with such loan and occupy the
manufactured home as the borrower's principal residence, except for a
manufactured home lot loan which allows six months to occupy the home as the
borrower's principal residence. If a manufactured home is classified as realty,
then ownership of the home must be in fee simple, and also, the ownership of the
manufactured home lot must be in fee simple, except for a lot which consists of
a share in a cooperative association that owns the manufactured home park. The
borrower's minimum cash down payment requirement to obtain financing through a
Title I Contract is as follows: (i) at least 5% of the first $5,000 and 10% of
the balance of the purchase price of a new manufactured home and at least 10% of
the purchase price of an existing manufactured home for a manufactured home
purchase loan, or in lieu of a full or partial cash down payment, the trade-in
of the borrower's equity in an existing manufactured home; (ii) at least 10% of
the purchase price and development costs of a lot for a manufactured home lot
loan; and (iii) at least 5% of the first $5,000 and 10% of the balance of the
purchase price of the manufactured home and lot for a combination loan.
Any manufactured home financed by a Title I Contract must be certified by
the manufacturer to have been constructed in compliance with the National
Manufactured Housing Construction and Safety Standards Act of 1974 (42 U.S.C.
5401-5426), so as to conform to all applicable Federal construction and safety
standards, and with respect to the purchase of a new manufactured home, the
manufacture must furnish the borrower with a one year written warranty on a HUD
approved form which obligates the manufacturer to correct any nonconformity with
all applicable Federal construction and safety standards or any defects in
materials or workmanship for the one year period after the date of delivery. The
proceeds from a Title I Contract may be used as follows: the purchase or
refinancing of a manufactured home, a suitably developed lot for a manufactured
home already owned by the borrower, or a manufactured home and suitably
developed lot for the home in combination; or the refinancing of an existing
manufactured home already owned by the borrower in connection with the purchase
of a manufactured home lot or an existing lot already owned by the borrower in
connection with the purchase of a manufactured home. In addition, the proceeds
for a Title I Contract which is a manufactured home purchase loan or a
combination loan may be used for the purchase, construction or installation of a
garage, carport, patio or other comparable appurtenance to the home. The
proceeds from a Title I Contract cannot be used for the purchase of furniture or
the financing of any items and activities which are set forth on the list
published by the Secretary of HUD as amended from time to time.
Any Title I Contract must be secured by a recorded lien on the manufactured
home, its furnishings, equipment, accessories and appurtenance, which lien must
be a first lien, superior to any other lien on the property. With respect to any
Title I Contract involving a manufactured home purchase loan or combination loan
and the sale of the manufactured home by a dealer, the lender or its agent
(other than the dealer) must conduct a site-of-placement inspection within 60
days after the date of the loan to verify that the terms and conditions of the
purchase contract have been met, the manufactured home and any options and
appurtenances included in the purchase price or financed with the loan have been
delivered and installed, and the placement certificate executed by the borrower
and the dealer is in order.
FHA INSURANCE COVERAGE. Under the Title I Program the FHA establishes an
insurance coverage reserve account for each lender which has been granted a
Title I insurance contract. The amount of insurance coverage in this account is
10% of the amount disbursed, advanced or expended by the lender in originating
or purchasing eligible loans registered with the FHA for Title I insurance, with
certain adjustments. The balance in the insurance coverage reserve account is
the maximum amount of insurance claims the FHA is required to pay. Loans to be
insured under the Title I Program will be registered for insurance by the FHA
and the insurance coverage attributable to such loans will be included in the
insurance coverage reserve account for the originating or purchasing lender
following the receipt and acknowledgment by the FHA of a loan report on the
prescribed form pursuant to the Title I regulations. The FHA charges a fee of
0.50% per annum of the net proceeds (the original balance) of any eligible loan
so reported and acknowledged for insurance by the originating lender. The FHA
bills the lender for the insurance premium on each insured loan annually, on
approximately the anniversary date of the loan's origination. If an insured loan
is prepaid during the year, the FHA will not refund or abate the insurance
premium.
Under the Title I Program the FHA will reduce the insurance coverage
available in the lender's FHA insurance coverage reserve account with respect to
loans insured under the lender's contract of insurance by (i) the amount of the
FHA insurance claims approved for payment relating to such insured loans, (ii)
the amount of the Annual Reductions attributable to such insured loans and (iii)
the amount of insurance coverage attributable to insured loans sold by the
lender, and such insurance coverage may be reduced for any FHA insurance claims
rejected by the FHA. After a lender has held its Title I contract of insurance
for five years, the lender's FHA insurance coverage reserve account is subject
to an annual reduction (the "Annual Reduction") on each October in an amount
equal to 10% of the insurance coverage reserves available on such date with
respect to such contract of insurance; provided that such Annual Reduction shall
not reduce the insurance coverage to an amount less than $50,000. The balance of
the lender's FHA insurance coverage reserve account will be further adjusted as
required under Title I or by the FHA, and the insurance coverage therein may be
earmarked with respect to each or any eligible loans insured thereunder, if a
determination is made by the Secretary of HUD that it is in its interest to do
so. Originations and acquisitions of new eligible loans will continue to
increase a lender's insurance coverage reserve account balance by 10% of the
amount disbursed, advanced or expended in originating or acquiring such eligible
loans registered with the FHA for insurance under the Title I Program. The
Secretary of HUD may transfer insurance coverage between insurance coverage
reserve accounts with earmarking with respect to a particular insured loan or
group of insured loans when a determination is made that it is in the
Secretary's interest to do so.
The lender may transfer (except as collateral in a bona fide loan
transaction) insured loans and loans reported for insurance only to another
qualified lender under a valid Title I contract of insurance. Unless an insured
loan is transferred with recourse or with a guarantee or repurchase agreement,
the FHA, upon receipt of written notification of the transfer of such loan in
accordance with the Title I regulations, will transfer from the transferor's
insurance coverage reserve account to the transferee's insurance coverage
reserve account an amount, if available, equal to 10% of the actual purchase
price or the net unpaid principal balance of such loan (whichever is less).
However, under the Title I Program not more than $5,000 in insurance coverage
shall be transferred to or from a lender's insurance coverage reserve account
during any October 1 to September 30 period without the prior approval of the
Secretary of HUD.
CLAIMS PROCEDURES UNDER TITLE I. Under the Title I Program the lender may
accelerate an insured loan following a default on such loan only after the
lender or its agent has contacted the borrower in a face-to-face meeting or by
telephone to discuss the reasons for the default and to seek its cure. If the
borrower does not cure the default or agree to a modification agreement or
repayment plan, the lender will notify the borrower in writing that, unless
within 30 days the default is cured or the borrower enters into a modification
agreement or repayment plan, the loan will be accelerated and that, if the
default persists, the lender will report the default to an appropriate credit
agency. The lender may rescind the acceleration of maturity after full payment
is due and reinstate the loan only if the borrower brings the loan current,
executes a modification agreement or agrees to an acceptable repayment plan.
Following acceleration of maturity upon a secured Title I Loan, the lender
may either (a) proceed against the Mortgaged Property under any security
instrument or (b) make a claim under the lender's contract of insurance. If the
lender chooses to proceed against the Mortgaged Property under a security
instrument (or if it accepts a voluntary conveyance or surrender of the
Mortgaged Property), the lender may file an insurance claim only with the prior
approval of the Secretary of HUD. After acceleration of maturity on a defaulted
Title I Contract, the lender must proceed against the loan security by
foreclosure or repossession, as appropriate, and acquire good, marketable title
to the property securing the loan. The lender must take all actions necessary
under applicable law to preserve its rights, if any, to obtain a deficiency
judgment against the borrower. Before filing a claim for insurance with the FHA,
the lender must sell for the best price obtainable any property which the lender
acquired by the foreclosure or repossession of such property securing a
defaulted Title I Contract.
When a lender files an insurance claim with the FHA under the Title I
Program, the FHA reviews the claim, the complete loan file and documentation of
the lender's efforts to obtain recourse against any dealer who has agreed
thereto, certification of compliance with applicable state and local laws in
carrying out any foreclosure or repossession, and evidence that the lender has
properly filed proofs of claims, where the borrower is bankrupt or deceased.
Generally, a claim for reimbursement for loss on any eligible loan must be filed
with the FHA no later than (i) for any Title I Loan, 9 months after the date of
default of such loan, or (ii) for any Title I Contract, 3 months after the date
of sale of the property securing such loan, but not to exceed 18 months after
the date of default. Concurrently with filing the insurance claim, the lender
shall assign to the United States of America the lender's entire interest in the
loan note (or a judgment in lieu of the note), in any security held and in any
claim filed in any legal proceedings. If, at the time the note is assigned the
Secretary has reason to believe that the note is not valid or enforceable
against the borrower, the FHA may deny the claim and reassign the note to the
lender. If either such defect is discovered after the FHA has paid a claim, the
FHA may require the lender to repurchase the paid claim and to accept a
reassignment of the loan note. If the lender subsequently obtains a valid and
enforceable judgment against the borrower, the lender may resubmit a new
insurance claim with an assignment of the judgment. The FHA may contest any
insurance claim and make a demand for repurchase of the loan at any time up to
two years from the date the claim was certified for payment and may do so
thereafter in the event of fraud or misrepresentation on the part of the lender.
Under the Title I Program the amount of an FHA insurance claim payment,
when made, is equal to the Claimable Amount, up to the amount of insurance
coverage in the lender's insurance coverage reserve account. The "Claimable
Amount" is equal to 90% of the sum of: (a) the unpaid loan obligation (net
unpaid principal and the uncollected interest earned to the date of default)
with adjustments thereto if the lender has proceeded against property securing
such loan; (b) the interest on the unpaid amount of the loan obligation from the
date of default to the date of the claim's initial submission for payment plus
15 calendar days (but not to exceed 9 months from the date of default),
calculated at the rate of 7% per annum; (c) the uncollected court costs; (d) the
attorneys fees not to exceed $500; (e) the expenses for recording the assignment
of the security to the United States; and (f) if the loan is a Title I Contract,
certain costs incurred in connection with the foreclosure or repossession of the
manufactured home and/or lot.
LEGAL INVESTMENT MATTERS
The Certificates may constitute "mortgage related securities" for purposes
of SMMEA, so long as they are rated in one of the two highest rating categories
by the Rating Agency or Agencies identified in the related Prospectus Supplement
and, as such, would be legal investments for persons, trusts, corporations,
partnerships, associations, business trusts and business entities (including but
not limited to state-chartered savings banks, commercial banks, saving and loan
associations and insurance companies, as well as trustees and state government
employee retirement systems) created pursuant to or existing under the laws of
the United States or any State (including the District of Columbia and Puerto
Rico) whose authorized investments are subject to State regulation to the same
extent that, under applicable law, obligations issued by or guaranteed as to
principal and interest by the United States or any agency or instrumentality
thereof constitute legal investments for such entities. Under SMMEA, in all
States which enacted legislation prior to October 4, 1991 specifically limiting
the legal investment authority of any of such entities with respect to "mortgage
related securities," the Certificates will constitute legal investments for
entities subject to such legislation only to the extent provided in such
legislation SMMEA provides, however, that in no event will the enactment of any
such legislation affect the validity of any contractual commitment to purchase,
bold or invest in any securities or require the sale or over disposition of any
securities, so long as such contractual commitment was made or such securities
were acquired prior to the enactment of such legislation. Alaska, Arkansas,
Colorado, Connecticut, Delaware, Florida, Georgia, Illinois, Kansas, Louisiana,
Maryland, Michigan, Missouri, Nebraska, New Hampshire, New York, North Carolina,
Ohio, South Dakota, Utah, Virginia and West Virginia each enacted legislation
overriding the exemption afforded by SMMEA prior to the October 4, 1991
deadline.
Institutions whose investment activities are subject to legal investment
laws or regulations or review by certain regulatory authorities may be subject
to restrictions on investment in certain classes of the Certificates. Any
financial institution which is subject to the jurisdiction of the Comptroller of
the Currency, the Board of Governors of the Federal Reserve System, the FDIC,
the OTS, the NCUA or other federal or state agencies with similar authority
should review any applicable rules, guidelines and regulations prior to
purchasing the certificates. The Federal Financial Institutions Examination
Council, for example, has issued a Supervisory Policy Statement on Securities
Activities effective February 10, 1992 (the "Policy Statement"). The Policy
Statement has been adopted by the Comptroller of the Currency, the Federal
Reserve Board, the FDIC and the OTS with respect to the depository institutions
that they regulate. The Policy Statement prohibits depository institutions from
investing in certain "high-risk mortgage securities" except under limited
circumstances, and sets forth certain investment practices deemed to be
unsuitable for regulated institutions. The NCUA issued final regulations
effective December 2, 1991 that restrict and in some instances prohibit the
investment by federal credit unions in certain types of mortgage related
securities.
The foregoing does not take into consideration the applicability of
statutes, rules, regulations, orders, guidelines or agreements generally
governing investments made by a particular investor, including, but not limited
to "prudent investor" provisions, percentage-of-assets limits and provisions
which may restrict or prohibit investment in securities which are not "interest
bearing" or "income paying," or in securities which are issued in book-entry
form.
Investors should consult their own legal advisors in determining whether
and to what extent the Certificates constitute legal investments for such
investors.
ERISA CONSIDERATIONS
ERISA imposes requirements on employee benefit plans (and on certain other
retirement plans and arrangements, including individual retirement accounts and
annuities, Keogh plans and collective investment funds and separate accounts in
which such plans, accounts or arrangements are invested) (collectively, "Plans")
subject to ERISA and on persons who are fiduciaries with respect to such Plans.
Among other things, ERISA requires that the assets of Plans be held in trust and
that the trustee, or other duly authorized fiduciary, have exclusive authority
and discretion to manage and control the assets of such Plans. ERISA also
imposes certain duties on persons who are fiduciaries of Plans. Under ERISA, any
person who exercises any authority or control respecting the management or
disposition of the assets of a Plan is considered to be a fiduciary of such Plan
(subject to certain exceptions not here relevant). In addition to the imposition
of general fiduciary standards of investment prudence and diversification, ERISA
prohibits a broad range of transactions involving Plan assets and persons
("Parties in Interest") having certain specified relationships to a Plan and
imposes additional prohibitions where Parties in Interest are fiduciaries with
respect to such Plan.
The United States Department of Labor (the "DOL") has issued regulations
concerning the definition of what constitutes the assets of a Plan. (DOL Reg
Section 2510.3-101). Under this regulation, the underlying assets and properties
of corporations, partnerships and certain other entities in which a Plan makes
an "equity" investment could be deemed for purposes of ERISA to be assets of the
investing Plan in certain circumstances. In such case, the fiduciary making such
an investment for the Plan could be deemed to have delegated his or her asset
management responsibility, and the underlying assets and properties could be
subject to ERISA reporting and disclosure. Certain exceptions to the regulation
may apply in the case of a Plan's investment in the Certificates, but the
Depositor cannot predict in advance whether such exceptions apply due to the
factual nature of the conditions to be met. Accordingly, because the Mortgage
Loans may be deemed Plan assets of each Plan that purchases Certificates, an
investment in the Certificates by a Plan might give rise to a prohibited
transaction under ERISA Sections 406 and 407 and be subject to an excise tax
under Code Section 4975 unless a statutory or administrative exemption applies.
DOL Prohibited Transaction Exemption 83-1 ("PTE 83-1") exempts from ERISA's
prohibited transaction rules certain transactions relating to the operation of
residential mortgage investment trusts and the purchase, sale and holding of
"mortgage pool pass-through certificates" in the initial issuance of such
certificates. PTE 83-1 permits, subject to certain conditions, transactions
which might otherwise be prohibited between Plans and Parties in Interest with
respect to those Plans involving the origination, maintenance and termination of
mortgage pools consisting of mortgage loans secured by first or second mortgages
or deeds of trust on single-family residential property, and the acquisition and
holding of certain mortgage pool pass-through certificates representing an
interest in such mortgage pools by PTE.
PTE 83-1 sets forth three general conditions which must be satisfied for
any transaction to be eligible for exemption: (i) the maintenance of a system of
insurance or other protection for the pooled mortgage loans and property
securing such loans, and for indemnifying Owners against reductions in
pass-through payments due to property damage or defaults in loan payments in an
amount not less than the greater of one percent of the aggregate principal
balance of all covered pooled mortgage loans or the principal balance of the
largest covered pooled mortgage loan, (ii) the existence of a pool trustee who
is not an affiliate of the sponsor, and (iii) a limitation on the amount of the
payments retained by the pool sponsor, together with other funds inuring to its
benefit, to not more than adequate consideration for selling the mortgage loans
plus reasonable compensation for services provided by the pool sponsor.
Although the Trustee for any series of Certificates will be unaffiliated
with the Depositor, there can be no assurance that the system of insurance or
subordination will meet the general or specific conditions referred to above. In
addition, the nature of a Trust's assets or the characteristics of one or more
classes of the related series of Certificates may not be included within the
scope of PTE 83-1 or any other class exemption under ERISA. The Prospectus
Supplement will provide additional information with respect to the application
of ERISA and the Code to the related Certificates.
Several underwriters of mortgage-backed securities have applied for and
obtained ERISA prohibited transactions exemptions which are in some respects
broader than PTE 83-1. Such exemptions can only apply to mortgage-backed
securities which, among other conditions, are sold in an offering with respect
to which such underwriter serves as the sole or a managing underwriter, or as a
selling or placement agent. Several other underwriters have applied for similar
exemptions. If such an exemption might be applicable to a series of
Certificates, the related Prospectus Supplement will refer to such possibility.
Each Plan fiduciary who is responsible for making the investment decisions
whether to purchase or commit to purchase and to hold Certificates must make its
own determination as to whether the general and the specific conditions of PTE
83-1 have been satisfied or as to the availability of any other prohibited
transaction exemptions Each Plan fiduciary should also determine whether, under
the general fiduciary standards of investment prudence and diversification, an
investment in the 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.
Any Plan proposing to invest in Certificates should consult with its
counsel to confirm that such investment will not result in a prohibited
transaction and will satisfy the other requirements of ERISA and the Code.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is based upon the opinion of Stroock & Stroock & Lavan LLP,
special counsel to the Depositor with respect to the material federal income tax
consequences of the purchase, ownership and disposition of Certificates. The
discussion below does not purport to address all federal income tax consequences
that may be applicable to particular categories of investors, some of which may
be subject to special rules. The authorities on which this discussion is based
are subject to change or differing interpretations, and any such change or
interpretation could apply retroactively. This discussion reflects the
applicable provisions of the Code, as well as final regulations concerning
REMICs (the "REMIC Regulations") and final regulations under Sections 1271
through 1273 and 1275 of the Code concerning debt instruments (the "OID
Regulations"). The Depositor intends to rely on the OID Regulations for all
Certificates offered pursuant to this Prospectus; however, investors should be
aware that the OID Regulations do not adequately address certain issues relevant
to prepayable securities, such as the Certificates. Investors should consult
their own tax advisors in determining the federal, state, local and any other
tax consequences to them of the purchase, ownership and disposition of
Certificates. The Prospectus Supplement for each series of Certificates will
discuss any special tax consideration applicable to any class of Certificates of
such series, and the discussion below is qualified by any such discussion in the
related Prospectus Supplement.
For purposes of this opinion, where the applicable Prospectus Supplement
provides for a fixed retained yield with respect to the Mortgage Assets
underlying a series of Certificates, references to the Mortgage Assets will be
deemed to refer to that portion of the Mortgage Assets held by the Trust which
does not include the fixed retained yield.
FEDERAL INCOME TAX CONSEQUENCES FOR REMIC CERTIFICATES
GENERAL. With respect to a particular series of Certificates, an election
may be made to treat the Trust or one or more trusts or segregated pools of
assets therein as one or more REMICs within the meaning of Code Section 860D. A
Trust or a portion or portions thereof as to which one or more REMIC elections
will be made will be referred to as a "REMIC Pool." For purposes of this
discussion, Certificates of a series as to which one or more REMIC elections are
made are referred to as "REMIC Certificates" and will consist of one or more
classes of "Regular Certificates" and one class of "Residual Certificates" in
the case of each REMIC Pool. Qualification as a REMIC requires ongoing
compliance with certain conditions. With respect to each series of REMIC
Certificates, Stroock & Stroock & Lavan LLP, special counsel to the Depositor,
has advised the Depositor that in their opinion, assuming (i) the making of an
appropriate election, (ii) compliance with the Agreement and (iii) compliance
with any changes in the law, including any amendments to the Code or applicable
Treasury regulations thereunder, each REMIC Pool will qualify as a REMIC and
that if a Trust qualifies as a REMIC, the tax consequences to the Owners will be
as described below. In such case, the Regular Certificates will be considered to
be "regular interests" in the REMIC Pool and generally will be treated for
federal income tax purposes as if they were newly originated debt instruments,
and the Residual Certificates will be considered to be "residual interests" in
the REMIC Pool. The Prospectus Supplement for each series of Certificates will
indicate whether one or more REMIC elections with respect to the related Trust
will be made, in which event references to "REMIC" or "REMIC Pool" herein shall
be deemed to refer to each such REMIC Pool.
STATUS OF REMIC CERTIFICATES. REMIC Certificates held by a domestic
building and loan association will constitute "a regular or residual interest in
a REMIC" within the meaning of Code Section 7701(a)(19)(C) (xi) in the same
proportion that the assets of the REMIC Pool would be treated as "loans secured
by an interest in real property" within the meaning of Code Section
7701(a)(19)(C)(v) or as other assets described in Code Section 7701(a)(19)(C).
REMIC Certificates held by a real estate investment trust (a "REIT") will
constitute "real estate assets" within the meaning of Code Section 856(c)(5)(a),
and interest on the REMIC Certificates will be considered "interest on
obligations secured by mortgages on real property or on interests in real
property" within the meaning of Code Section 856(c) in the same proportion that,
for both purposes, the assets of the REMIC Pool would be so treated. If at all
times 95% or more of the assets of the REMIC Pool constitute qualifying assets
for domestic building and loan associations and REITs, the REMIC Certificates
will be treated entirely as qualifying assets for such entities. Moreover, the
REMIC Regulations provide that, for purposes of Code Sections 856(c), payments
of principal and interest on the Mortgage Assets that are reinvested pending
distribution to holders of REMIC Certificates, constitute qualifying assets for
REIT. Where two REMIC Pools are part of a tiered structure they will be treated
as one REMIC for purposes of the tests described above respecting asset
ownership of more or less than 95%. Notwithstanding the foregoing, however,
REMIC income received by a REIT owning a residual interest in a REMIC Pool could
be treated in part as non-qualifying REIT income if the REMIC Pool holds
Mortgage Assets with respect to which income is contingent on mortgagor profits
or property appreciation. In addition, if the assets of the REMIC include
buy-down Mortgage Assets, it is possible that the percentage of such assets
constituting "qualifying real property loans" or "loans secured by an interest
in real property" for purposes of Code Sections 593(d)(1) and 7701(a)(19)(C)(v),
respectively, may be required to be reduced by the amount of the related
buy-down funds. REMIC Certificates held by a regulated investment company will
not constitute "government securities" within the meaning of Code Section
851(b)(4)(a)(i). REMIC Certificates held by certain financial institutions will
constitute an "evidence of indebtedness" within the meaning of Code Section
582(c)(i). REMIC Certificates representing interests in obligations secured by
manufactured housing treated as single family residences under Code Section
25(e)(10) will be considered interests in "qualified mortgages" as defined in
Code Section 860E(a)(3).
QUALIFICATION AS A REMIC. In order for the REMIC Pool to qualify as a
REMIC, there must be ongoing compliance on the part of the REMIC Pool with the
requirements set forth in the Code. The REMIC Pool must fulfill an asset test,
which requires that no more than a DE MINIMIS amount of the assets of the REMIC
Pool, as of the close of the third calendar month beginning after the Delivery
Date (which for purposes of this discussion is the date of issuance of the REMIC
Certificates) and at all times thereafter, may consist of assets other than
"qualified mortgages" and "permitted investments." The REMIC Regulations provide
a "safe harbor" pursuant to which the DE MINIMIS requirement will be met if at
all times the aggregate adjusted basis of any nonqualified assets (I.E., assets
other than qualified mortgages and permitted investments) is less than 1% of the
aggregate adjusted basis of all the REMIC Pool's assets.
If a REMIC Pool fails to comply with one or more of the requirements of the
Code for REMIC status during any taxable year, the REMIC Pool will not be
treated as a REMIC for such year and thereafter. In this event, the
classification of the REMIC Pool for federal income tax purposes is uncertain.
The REMIC Pool could be treated as a taxable mortgage pool (a "TMP"), in which
case any residual income of the REMIC Pool (income from the Mortgage Assets
(possibly without a deduction for interest and original issue discount expense
allocable to the Regular Certificates) would be subject to corporate income tax
at the REMIC Pool level. The Code, however, authorizes the Treasury Department
to issue regulations that address situations where failure to meet one or more
of the requirements for REMIC status occurs inadvertently and in good faith, and
disqualification of the REMIC Pool would occur absent regulatory relief.
Investors should be aware, however, that the Conference Committee Report to the
Tax Reform Act of 1986 (the "1986 Act") indicates that the relief may be
accompanied by sanctions, such as the imposition of a corporate tax on all or a
portion of the REMIC Pool's income for the period of time in which the
requirements for REMIC status are not satisfied.
TAXATION OF REGULAR CERTIFICATES
GENERAL. Payments received by holders of Regular Certificates generally
should be accorded the same tax treatment under the Code as payments received on
ordinary taxable corporate debt instruments. In general, interest and original
issue discount on a Regular Certificate will be treated as ordinary income to a
holder of the Regular Certificate (the "Regular Certificateholder") as they
accrue, and principal payments on a Regular Certificate will be treated as a
return of capital to the extent of the Regular Certificateholder's basis in the
Regular Certificate allocable thereto. Regular Certificateholders must use the
accrual method of accounting with regard to Regular Certificates, regardless of
the method of accounting otherwise used by such Regular Certificateholders.
ORIGINAL ISSUE DISCOUNT. Regular Certificates may be issued with "original
issue discount" within the meaning of Code Section 1273(a). Holders of any class
of Regular Certificates having original issue discount generally must include
original issue discount in ordinary income for federal income tax purposes as it
accrues, in accordance with a constant interest method that takes into account
the compounding of interest, in advance of receipt of the cash attributable to
such income. The Depositor anticipates that the amount of original issue
discount required to be included in a Regular Certificateholder's income in any
taxable year will be computed as described below.
Each Regular Certificate (except to the extent described below with respect
to a Regular Certificate on which distributions of principal are made in a
single installment or upon an earlier distribution by lot of a specified
principal amount upon the request of a Regular Certificateholder or by random
lot (a "Retail Class Certificate")) will be treated as a single installment
obligation for purposes of determining the original issue discount includible in
a Regular Certificateholder's income. The total amount of original issue
discount on a Regular Certificate is the excess of the "stated redemption price
at maturity" of the Regular Certificate over its "issue price." The issue price
of a Regular Certificate is the first price at which a substantial amount of
Regular Certificates of that class are first sold to the public. The Depositor
will determine original issue discount by including the amount paid by an
initial Regular Certificateholder for accrued interest that relates to a period
prior to the issue date of the Regular Certificate in the issue price of a
Regular Certificate and will include in the stated redemption price at maturity
any interest paid on the first Distribution Date to the extent such interest is
attributable to a period in excess of the number of days between the issue date
and such first Distribution Date. The stated redemption price at maturity of a
Regular Certificate always includes the original principal amount of the Regular
Certificate, but generally will not include distributions of stated interest if
such interest distributions constitute "qualified stated interest." Qualified
stated interest generally means stated interest that is unconditionally payable
in cash or in property (other than debt instruments of the issuer) at least
annually at (i) a single fixed rate, (ii) one or more qualified floating rates
(as described below), (iii) a fixed rate followed by one or more qualified
floating rates, (iv) a single objective rate (as described below) or (v) a fixed
rate and an objective rate that is a qualified inverse floating rate. The OID
Regulations state that interest payments are unconditionally payable only if
reasonable remedies exist to compel payment or late payment and nonpayment are
remote. Because the debt securities will generally not provide the holders with
the ability to compel payment, interest payments may be included in the debt
security's stated redemption price at maturity and taxed as OID. Any stated
interest in excess of the qualified stated interest is included in the stated
redemption price at maturity. If the amount of original issue discount is "DE
MINIMIS" as described below, the amount of original issue discount is treated as
zero, and all stated interest is treated as qualified stated interest.
Distributions of interest on Regular Certificates with respect to which deferred
interest will accrue may not constitute qualified stated interest, in which case
the stated redemption price at maturity of such Regular Certificates includes
all distributions of interest as well as principal thereon. Moreover, if the
interval between the issue date and the first Distribution Date on a Regular
Certificate is longer than the interval between subsequent Distribution Dates
(and interest paid on the first Distribution Date is less than would have been
earned if the stated interest rate were applied to outstanding principal during
each day in such interval), the stated interest distributions on such Regular
Certificate technically do not constitute qualified stated interest. In such
case a special rule, applying solely for the purpose of determining whether
original issue discount is DE MINIMIS, provides that the interest shortfall for
the long first period (I.E., the interest that would have been earned if
interest had been paid on the first Distribution Date for each day the Regular
Certificate was outstanding) is treated as made at a fixed rate if the value of
the rate on which the payment is based is adjusted in a reasonable manner to
take into account the length of the interval. There is also a special "teaser"
rule which may be available to treat OID arising from a long first accrual
period as de minimis OID. Regular Certificateholders should consult their own
tax advisors to determine the issue price and stated redemption price at
maturity of a Regular Certificate.
Under a DE MINIMIS rule, original issue discount on a Regular Certificate
will be considered to be zero if such original issue discount is less than 0.25%
of the stated redemption price at maturity of the Regular Certificate multiplied
by the weighted average maturity of the Regular Certificate. For this purpose,
the weighted maturity of the Regular Certificate is computed as the sum of the
amounts determined by multiplying the number of full years (I.E., rounding down
partial years) from the issue date until each distribution in reduction of
stated redemption price at maturity is scheduled to be made by a fraction, the
numerator of which is the amount of each distribution included in the stated
redemption price at maturity of the Regular Certificate and the denominator of
which is the stated redemption price at maturity of the Regular Certificate.
Although currently unclear, it appears that the schedule of such distributions
should be determined in accordance with the assumed rate of prepayment of the
Mortgage Assets and the anticipated reinvestment rate, if any, relating to the
Regular Certificates (the "Prepayment Assumption"). The Prepayment Assumption
with respect to a series of Regular Certificates will be set forth in the
related Prospectus Supplement. The holder of a debt instrument includes any DE
MINIMIS original issue discount in income PRO RATA as stated principal payments
are received.
Of the total amount of original issue discount on a Regular Certificate,
the Regular Certificateholder generally must include in gross income for any
taxable year the sum of the "daily portions," as defined below, of the original
issue discount on the Regular Certificate accrued during an accrual period for
each day on which he holds the Regular Certificate, including the date of
purchase but excluding the date of disposition. Although not free from doubt,
the Depositor intends to treat the monthly period ending on the day before each
Distribution Date as the accrual period, rather than the monthly period
corresponding to the prior calendar month. With respect to each Regular
Certificate, a calculation will be made of the original issue discount that
accrues during each successive full accrual period (or shorter period from the
date of original issue) that ends on the day before the related Distribution
Date on the Regular Certificate. For a Regular Certificate, original issue
discount is to be calculated initially based on a schedule of maturity dates
that takes into account the level of prepayments and an anticipated reinvestment
rate that are most likely to occur, which is expected to be based on the
Prepayment Assumption. The original issue discount accruing in a full accrual
period would be the excess, if any, of (i) the sum of (a) the present value of
all of the remaining distributions to be made on the Regular Certificate as of
the end of that accrual period that are included in the Regular Certificate's
stated redemption price at maturity and (b) the distributions made on the
Regular Certificate during the accrual period that are included in the Regular
Certificate's stated redemption price at maturity over (ii) the adjusted issue
price of the Regular Certificate at the beginning of the accrual period. The
present value of the remaining distributions referred to in the preceding
sentence is calculated based on (i) the yield to maturity of the Regular
Certificate at the issue date, (ii) events (including actual prepayments) that
have occurred prior to the end of the accrual period and (iii) the Prepayment
Assumption. For these purposes, the adjusted issue price of a Regular
Certificate at the beginning of any accrual period equals the issue price of the
Regular Certificate, increased by the aggregate amount of original issue
discount with respect to the Regular Certificate that accrued in all prior
accrual periods and reduced by the amount of distributions included in the
Regular Certificate's stated redemption price at maturity that were made on the
Regular Certificate in such prior period. The original issue discount accruing
during any accrual period (as determined in this paragraph) will then be divided
by the number of days in the period to determine the daily portion of original
issue discount for each day in the period.
Under the method described above, the daily portions of original issue
discount required to be included in income by a Regular Certificateholder
generally will increase to take into account prepayments on the Regular
Certificates as a result of prepayments on the Mortgage Assets or that exceed
the Prepayment Assumption, and generally will decrease (but not below zero for
any period) if the prepayments are slower than the Prepayment Assumption. To the
extent specified in the applicable Prospectus Supplement, an increase in
prepayments on the Mortgage Assets with respect to a series of Regular
Certificates can result in both a change in the priority of principal payments
with respect to certain classes of Regular Certificates and either an increase
or decrease in the daily portions of original issue discount with respect to
such Regular Certificates.
A purchaser of a Regular Certificate at a price greater than the issue
price also will be required to include in gross income the daily portions of the
original issue discount on the Regular Certificate. With respect to such a
purchaser, the daily portion for any day is reduced by the amount that would be
the daily portion for such day (computed in accordance with the rules set forth
above) multiplied by a fraction, the numerator of which is the amount, if any,
by which the price paid by such purchaser for the Regular Certificate exceeds
the sum of the issue price and the aggregate amount of original issue discount
that would have been includible in the gross income of an original holder of the
Regular Certificate who purchased the Regular Certificate at its issue price,
less any prior distributions included in the stated redemption price at
maturity, and the denominator of which is the sum of the daily portions for such
Regular Certificate (computed in accordance with the rules set forth above) for
all days after the date of purchase and ending on the date on which the
remaining principal amount of such Regular Certificate is expected to be reduced
to zero under the Prepayment Assumption.
A Certificateholder may elect to include in gross income all stated
interest, original issue discount, DE MINIMIS original issue discount, market
discount (as described below under "Market Discount"), DE MINIMIS market
discount and unstated interest (as adjusted for any amortizable bond premium or
acquisition premium) currently as it accrues using the constant yield to
maturity method. If this election is made, the holder is treated as satisfying
the requirements for making the elections with respect to amortization of
premium and current inclusion of market discount, each as described under
"Premium" and "Market Discount" below.
VARIABLE RATE REGULAR CERTIFICATES. Regular Certificates may provide for
interest based on a variable rate. The OID Regulations provide special rules for
variable rate instruments that meet three requirements. First, the noncontingent
principal payments may not exceed the instrument's issue price by more than a
specified amount equal to the lesser of (i) .015 multiplied by the product of
the total noncontingent payments and the weighted average maturity or (ii) 15%
of the total noncontingent principal payments. Second, the instrument must
provide for stated interest (compounded or paid at least annually) at (i) one or
more qualified floating rates, (ii) a single fixed rate followed by one or more
qualified floating rates, (iii) a single objective rate or (iv) a single fixed
rate and a single objective rate that is a qualified inverse floating rate.
Third, the instrument must provide that each qualified floating rate or
objective rate in effect during an accrual period is set at a current value of
that rate (one occurring in the interval beginning three months before and
ending one year after the rate is first in effect on the Regular Certificate). A
rate is a qualified floating rate if variations in the rate can reasonably be
expected to measure contemporaneous variations in the cost of newly borrowed
funds. Generally, neither (i) a multiple of a qualified floating rate in excess
of a fixed multiple that is greater than 0.65 but not more than 1.35 (and
increased or decreased by a fixed rate) nor (ii) a cap or floor that is likely
to cause the interest rate on a Regular Certificate to be significantly less or
more than the overall expected return on the Regular Certificate is considered a
qualified floating rate. An objective rate generally is a rate based on a single
fixed formula and on objective financial or economic information. An objective
rate is a qualified inverse floating rate if the rate is equal to a fixed rate
minus a qualified floating rate and variations in such rate can reasonably be
expected to reflect inversely contemporaneous variations in the cost of newly
borrowed funds. A rate will not be an objective rate if it is reasonably
expected that the average rate during the first half of the instrument's term
will be significantly more or less than the average rate in the final term. An
objective rate must be determined according to a single formula that is fixed
throughout the term of the Regular Certificate and is based on objective
financial information or economic information; however, an objective rate does
not include a rate based on information that is in the control of the issuer or
that is unique to the circumstances of a related party. Stated interest on a
variable rate debt instrument is qualified stated interest if the interest is
unconditionally payable in cash or property at least annually.
In general, the determination of original issue discount and qualified
stated interest on a variable rate debt instrument is made by converting the
debt instrument into a fixed rate debt instrument and then applying the general
original issue discount rules described above to the instrument. If a variable
rate debt instrument provides for stated interest at a single qualified floating
rate or objective rate, all stated interest is qualified stated interest and the
amount of original issue discount, if any, is determined by assuming the
variable rate is a fixed rate equal to (a) in the case of a qualified floating
or inverse floating rate, the value, as of the issue date, of the qualified
floating inverse floating rate or (b) in the case of an objective rate (other
than a qualified inverse floating rate), a fixed rate that reflects the yield
that is reasonably expected for the debt instrument. For all other variable rate
debt instruments, the amount of interest and original issue discount accruals
are determined using the following steps. First, a fixed rate substitute for
each variable rate under the debt instrument is determined. In general, the
fixed rate substitute is a fixed rate equal to the rate of the applicable type
of variable rate as of the issue date. Second, an equivalent fixed rate debt
instrument is constructed using the fixed rate substitute(s) in lieu of the
variable rates and keeping all other terms identical. Third, the amount of
qualified stated interest and original issue discount with respect to the
equivalent fixed rate debt instrument are determined under the rules for fixed
rate debt instruments. Finally, appropriate adjustments for actual variable
rates are made during the term by increasing or decreasing the qualified stated
interest to reflect the amount actually paid during the applicable accrual
period as compared to the interest assumed to be accrued or paid under the
equivalent fixed rate debt instrument. If there is no qualified stated interest
under the equivalent fixed rate debt instrument, the adjustment is made to the
original issue discount for the period.
The application of the OID Regulations to variable rate debt instruments is
limited and may not apply to some Regular Certificates having variable rates.
Furthermore, by their terms, the provisions of regulations issued on June 11,
1996, applicable to instruments having contingent payments, may apply to those
Regular Certificates. Prospective purchasers of variable rate Regular
Certificates are advised to consult their tax advisers concerning the tax
treatment of such Regular Certificates.
MARKET DISCOUNT. A purchaser of a Regular Certificate also may be subject
to the market discount rules of Code Sections 1276 through 1278. Under these
sections and the principles applied by the OID Regulations in the context of
original issue discount, "market discount" is the amount by which a subsequent
purchaser's initial basis in the Regular Certificate (i) is exceeded by the
stated redemption price at maturity of the Regular Certificate or (ii) in the
case of a Regular Certificate having original issue discount, is exceed by the
sum of the issue price of such Regular Certificate plus any original issue
discount that would have previously accrued thereon if held by an original
Regular Certificateholder (who purchased the Regular Certificate at its issue
price), in either case less any prior distributions included in the stated
redemption price at maturity of such Regular Certificate. Such purchaser
generally will be required to recognize accrued market discount as ordinary
income as distributions includible in the stated redemption price at maturity of
such Regular Certificate are received in an amount not exceeding any such
distribution. That recognition rule would apply regardless of whether the
purchaser is a cash-basis or accrual-basis taxpayer. Such market discount would
accrue in a manner to be provided in Treasury regulations and should take into
account the Prepayment Assumption. The Conference Committee Report to the 1986
Act provides that until such regulations are issued, such market discount would
accrue either (i) on the basis of a constant interest rate or (ii) in the ratio
of stated interest allocable to the relevant period to the sum of the interest
for such period plus the remaining interest as of the end of such period, or in
the case of a Regular Certificate issued with original issue discount, in the
ratio of original issue discount accrued for the relevant period to the sum of
the original issue discount accrued for such period plus the remaining original
issue discount as of the end of such period. Such purchaser also generally will
be required to treat a portion of any gain on a sale or exchange of the Regular
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 as partial distributions
in reduction of the stated redemption price at maturity were received. Such
purchaser will be required to defer deduction of a portion of the excess of the
interest paid or accrued on indebtedness incurred to purchase or carry a Regular
Certificate over the interest distributable thereon. The deferred portion of
such interest expense in any taxable year generally will not exceed the accrued
market discount on the Regular Certificate for such year. Any such deferred
interest expense is, in general, allowed as a deduction not later than the year
in which the related market discount income is recognized or the Regular
Certificate is disposed of. As an alternative to the inclusion of market
discount in income on the foregoing basis, the Regular Certificateholder may
elect to include market discount in income currently as it accrues in all market
discount instruments acquired by such Regular Certificateholder in that taxable
year or thereafter, in which case the interest deferral rule will not apply. In
Revenue Procedure 92-67, the Internal Revenue Service set forth procedures for
taxpayers (1) electing under Code Section 1278(b) to include market discount in
income currently, (2) electing under rules of Code Section 1276(b) to use a
constant interest rate to determine accrued market discount on a bond where the
holder of the bond is required to determine the amount of accrued market
discount at a time prior to the holder's disposition of the bond, and (3)
requesting consent to revoke an election under Code Section 1278(b).
By analogy to the OID Regulations, market discount with respect to a
Regular Certificate will be considered to be zero if such market discount is
less than 0.25% of the remaining stated redemption price at maturity of such
Regular Certificate multiplied by the weighted average maturity of the Regular
Certificate (determined as described above under "Original Issue Discount")
remaining after the date of purchase. Treasury regulations implementing the
market discount rules have not yet been issued, and therefore investors should
consult their own tax advisors regarding the application of these rules as well
as the advisability of making any of the elections with respect thereto.
PREMIUM. A Regular Certificate purchased at a cost greater than its
remaining stated redemption price at maturity generally is considered to be
purchased at a premium. If the Regular Certificateholder holds such Regular
Certificate as a "capital asset" within the meaning of Code Section 1221, the
Regular Certificateholder may elect under Code Section 171 to amortize such
premium as an offset to interest income under a constant yield method that
reflects compounding based on the interval between payments on the Regular
Certificates. This election, once made, applies to all obligations held by the
taxpayer at the beginning of the first taxable year to which such section
applies and to all taxable debt obligations thereafter acquired and is binding
on such taxpayer in all subsequent years. The Conference Committee Report to the
1986 Act indicates a Congressional intent that the same rules that apply to the
accrual of market discount on installment obligations will also apply to
amortizing bond premium under Code Section 171 on installment obligations such
as the Regular Certificates.
SALE OR EXCHANGE OF REGULAR CERTIFICATES. If a Regular Certificateholder
sells or exchanges a Regular Certificate, the Regular Certificateholder will
recognize gain or loss equal to the difference, if any, between the amount
received and his adjusted basis in the Regular Certificate. The adjusted basis
of a Regular Certificate generally will equal the cost of the Regular
Certificate to the seller, increased by any original issue discount or market
discount previously included in the seller's gross income with respect to the
Regular Certificate and reduced by amounts included in the stated redemption
price at maturity of the Regular Certificate that were previously received by
the seller and by any amortized premium.
Except as described above with respect to market discount, and except as
provided in this paragraph, any gain or loss on the sale or exchange of a
Regular Certificate realized by an investor who holds the Regular Certificate as
a capital asset will be capital gain or loss and will be long-term or short-term
depending on whether the Regular Certificate has been held for the long-term
capital gain holding period (currently more than one year). Gain from the
disposition of a Regular Certificate that might otherwise be capital gain will
be treated as ordinary income to the extent that such gain does not exceed the
excess, if any, of (i) the amount that would have been includible in the gross
income of the holder if his yield on such Regular Certificate were 110% of the
applicable Federal rate under Code Section 1274(d) as of the date of purchase
over (ii) the amount of income actually includible in the gross income of such
holder with respect to the Regular Certificate. In addition, gain or loss
recognized from the sale of a Regular Certificate by certain banks or thrift
institutions will be treated as ordinary income or loss pursuant to Code Section
582(c).
TAXATION OF RESIDUAL CERTIFICATES
TAXATION OF REMIC INCOME. Generally, the "daily portions" of REMIC taxable
income or net loss will be includible as ordinary income or loss in determining
the federal taxable income of holders of Residual Certificates ("Residual
Certificateholders") and will not be taxed separately to the REMIC Pool. The
daily portions of REMIC taxable income or net loss of a Residual
Certificateholder are determined by allocating the REMIC Pool's taxable income
or net loss for each calendar quarter ratably to each day in such quarter and by
allocating such daily portion among the Residual Certificateholders in
proportion to their respective holdings of Residual Certificates in the REMIC
Pool on such day. REMIC taxable income is generally determined in the same
manner as the taxable income of an individual using a calendar year and the
accrual method of accounting, except that (i) the limitation on deductibility of
investment interest expense and expenses for the production of income do not
apply, (ii) all bad loans will be deductible as business bad debts and (iii) the
limitation on the deductibility of interest and expenses related to tax-exempt
income will apply. REMIC taxable income generally means the REMIC Pool's gross
income, including interest, original issue discount income and market discount
income, if any, on the Mortgage Assets, plus income on reinvestment of cashflows
and reserve assets, minus deductions, including interest and original issue
discount expense on the Regular Certificates, servicing fees on the Mortgage
Assets and other administrative expenses of the REMIC Pool, amortization of
premium, if any, with respect to the Mortgage Assets, and any tax imposed on the
REMIC's income from foreclosure property. The requirement that Residual
Certificateholders report their PRO RATA share of taxable income or net loss of
the REMIC Pool will continue until there are no Certificates of any class of the
related series outstanding.
The taxable income recognized by a Residual Certificateholder in any
taxable year will be affected by, among other factors, the relationship between
the timing of recognition of interest and original issue discount or market
discount income or amortization of premium with respect to the Mortgage Assets,
on the one hand, and the timing of deductions for interest (including original
issue discount) on the Regular Certificates, on the other hand. Because of the
way REMIC taxable income is calculated, a Residual Certificateholder may
recognize "phantom" income (I.E., income recognized for tax purposes in excess
of income as determined under financial accounting or economic principles) which
will be matched in later years by a corresponding tax loss or reduction in
taxable income, but which could lower the yield to Residual Certificateholders
due to the lower present value of such future loss or reduction. For example, if
an interest in the Mortgage Assets is acquired by the REMIC Pool at a discount,
and one or more of such Mortgage Assets is prepaid, the Residual
Certificateholder may recognize taxable income without being entitled to receive
a corresponding amount of cash because (i) the prepayment may be used in whole
or in part to make distributions in reduction of principal on the Regular
Certificates and (ii) the discount income on the Mortgage Loan which is
includible in the REMIC's taxable income may exceed the discount deduction
allowed to the REMIC upon such distributions on the Regular Certificates. When
there is more than one class of Regular Certificates that distribute principal
sequentially, this mismatching of income and deductions is particularly likely
to occur in the early years following issuance of the Regular Certificates when
distributions in reduction of principal are being made in respect of earlier
maturing classes of Certificates. If taxable income attributable to such a
mismatching is realized in general, losses would be allowed in later years as
distributions on the later classes of Regular Certificates are made. Taxable
income may also be greater in earlier years than in later years as a result of
the fact that interest expense deductions, expressed as a percentage of the
outstanding principal amount of such a series of Regular Certificates, may
increase over time as distributions in reduction of principal are made on the
lower yielding classes of Regular Certificates, where interest income with
respect to any given Mortgage Loan will remain constant over time as a
percentage of the outstanding principal amount of that loan. Consequently,
Residual Certificateholders must have sufficient other sources of cash to pay
any federal, state or local income taxes due as a result of such mismatching or
unrelated deductions against which to offset such income. Prospective investors
should be aware, however, that a portion of such income may be ineligible for
offset by such investor's unrelated deductions. See the discussion of "excess
inclusions" below under "Limitations on Offset or Exemption of REMIC Income;
Excess Inclusions." The timing of such mismatching of income and deductions
described in this paragraph, if present with respect to a series of
Certificates, may have a significant adverse effect upon the Residual
Certificateholder's after-tax rate of return. In addition, a Residual
Certificateholder's taxable income during certain periods may exceed the income
reflected by such Certificateholder for such periods in accordance with
generally accepted accounting principles.
BASIS AND LOSSES. The amount of any net loss of the REMIC Pool that may be
taken into account by the Residual Certificateholder is limited to the adjusted
basis of the Residual Certificate as of the close of the quarter (or time of
disposition of the Residual Certificate if earlier), determined without taking
into account the net loss for the quarter. The initial adjusted basis of a
purchaser of a Residual Certificate is the amount paid for such Residual
Certificate. Such adjusted basis will be increased by the amount of taxable
income of the REMIC Pool reportable by the Residual Certificateholder and
decreased by the amount of loss of the REMIC Pool reportable by the Residual
Certificateholder. A cash distribution from the REMIC Pool also will reduce such
adjusted basis (but not below zero). Any loss that is disallowed on account of
this limitation may be carried over indefinitely with respect to the Residual
Certificateholder as to whom such loss was disallowed and may be used by such
Residual Certificateholder only to offset any income generated by the residual
from such REMIC Pool. Residual Certificateholders should consult their tax
advisors about other limitations on the deductibility of net losses that may
apply to them.
A Residual Certificateholder will not be permitted to amortize directly the
cost of its Residual Certificate as an offset to its share of the taxable income
of the related REMIC Pool. However, such taxable income will not include cash
received by the REMIC Pool that represents a recovery of the REMIC Pool's basis
in its assets. Such recovery of basis by the REMIC Pool will have the effect of
amortization of the issue price of the Residual Certificates over their life.
However, in view of the possible acceleration of the income of Residual
Certificateholders described above under "Taxation of REMIC Income," the period
of time over which such issue price is effectively amortized may be longer than
the economic life of the Residual Certificates.
If a Residual Certificate has a negative value, it is not clear whether its
issue price would be considered to be zero or such negative amount for purposes
of determining the REMIC Pool's basis in its assets. The REMIC Regulations do
not address whether residual interests could have a negative basis and a
negative issue price. The Depositor does not intend to treat a class of Residual
Certificates as having a value of less than zero for purposes of determining the
bases of the related REMIC Pool in its assets.
Further, to the extent that the initial adjusted basis of a Residual
Certificateholder (other than an original holder) in the Residual Certificate is
greater than the corresponding portion of the REMIC Pool's basis in the Mortgage
Assets, the Residual Certificateholder will not recover a portion of such basis
until termination of the REMIC Pool unless Treasury regulations yet to be issued
provide for periodic adjustments to the REMIC income otherwise reportable by
such holder. The REMIC Regulations do not so provide. See "Treatment of Certain
Items of REMIC Income and Expense - Market Discount" below regarding the basis
of Mortgage Assets to the REMIC Pool and "Sale or Exchange of Residual
Certificates" below regarding possible treatment of a loss upon termination of
the REMIC Pool as a capital loss.
MARK TO MARKET RULES
Prospective purchasers of a Residual Certificate should be aware that on
December 24, 1996, the Internal Revenue Service issued 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 of a dealer, except to the extent that the
dealer has specifically identified a security as held for investment. The Mark
to Market Regulations provide that for purposes of this mark-to-market
requirement, a Residual Certificate acquired after January 4, 1995, is not
treated as a security and thus may not be marked to market.
TREATMENT OF CERTAIN ITEMS OF REMIC INCOME AND EXPENSE
ORIGINAL ISSUE DISCOUNT. Generally, the REMIC Pool's deductions for
original issue discount will be determined in the same manner as original issue
discount income on Regular Certificates as described above under "Taxation of
Regular Certificates - Original Issue Discount" and "Variable Rate Regular
Certificates," without regard to the DE MINIMIS rule described therein.
MARKET DISCOUNT. The REMIC Pool will have market discount income in respect
of Mortgage Assets if, in general, the basis of the REMIC Pool in such Mortgage
Assets is exceeded by their unpaid principal balances. The REMIC Pool's basis in
such Mortgage Assets is generally the fair market value of the Mortgage Assets
immediately after the transfer thereof to the REMIC Pool. The REMIC Regulations
provide that such basis is equal in the aggregate to the issue prices of all
regular and residual interests in the REMIC Pool. In respect of Mortgage Assets
that have market discount to which Code Section 1276 applies, the accrued
portion of such market discount would be recognized currently by the REMIC as an
item of ordinary income. Market discount income generally should accrue in the
manner described above under "Taxation of Regular Certificates - Market
Discount."
PREMIUM. Generally, if the basis of the REMIC Pool in the Mortgage Assets
exceeds the unpaid principal balances thereof, the REMIC Pool will be considered
to have acquired such Mortgage Assets at a premium equal to the amount of such
excess. As stated above, the REMIC Pool's basis in the Mortgage Assets is the
fair market value of the Mortgage Assets, based on the aggregate of the issue
prices of the regular and residual interests in the REMIC Pool immediately after
the transfer thereof to the REMIC Pool. In a manner analogous to the discussion
above under "Taxation of Regular Certificates - Premium," a person that holds a
Mortgage Loan as a capital asset under Code Section 1221 may elect under Code
Section 171 to amortize premium on Mortgage Assets originated after September
27, 1985 under a constant yield method. Amortizable bond premium will be treated
as an offset to interest income on the Mortgage Assets, rather than as a
separate deduction item. Premium on Mortgage Assets may be deductible in
accordance with a reasonable method regularly employed by the holder thereof.
The allocation of such premium PRO RATA among principal payments should be
considered a reasonable method; however, the Internal Revenue Service may argue
that such premium should be allocated in a different manner, such as allocating
such premium entirely to the final payment of principal.
LIMITATIONS ON OFFSET OR EXEMPTION OF REMIC INCOME; EXCESS INCLUSIONS. A
portion of the income allocable to a Residual Certificate (referred to in the
Code as an "excess inclusion") for any calendar quarter, with will be subject to
federal income tax in all events. Thus, for example, an excess inclusion (i)
cannot, except as described below, be offset by any unrelated losses or loss
carryovers of a Residual Certificateholder, (ii) will be treated as "unrelated
business taxable income" within the meaning of Code Section 512 if the Residual
Certificateholder is a pension fund or any other organization that is subject to
tax only on its unrelated business taxable income and (iii) is not eligible for
any reduction in the rate of withholding tax in the case of a Residual
Certificateholder that is a foreign investor, as further discussed in "Taxation
of Certain Foreign Investors - Residual Certificates" below. Members of an
affiliated group are treated as one corporation for purposes of applying the
limitation on offset of excess inclusion income. The Small Business Protection
Act of 1996 (the "1996 Act") eliminated a special rule that permitted thrift
institutions to use net operating losses and other allowable deductions to
offset their excess inclusion income from Residual Certificates with significant
value for taxable years beginning after December 31, 1995 (subject to exceptions
for certain certificates held continuously since November 1, 1995). The 1996 Act
also provides new rules affecting the determination of alternative maximum
taxable income ("AMTI") of a Residual Certificateholder. First, AMTI is
calculated without regard to the special rule that taxable income cannot be less
than excess inclusion income for the year. Second, AMTI cannot be less than
excess inclusion income for the year. Finally, any AMTI net operating loss
deduction is computed without regard to excess inclusion income. These new rules
are effective for tax years beginning after December 31, 1986, unless a Residual
Certificateholder elects to have the rules apply only to tax years ending after
August 20, 1996.
Except as discussed in the following paragraph, with respect to excess
inclusions from Residual Certificates without "significant value," for any
Residual Certificateholder, the excess inclusion for any calendar quarter is the
excess, if any, of (i) the income of such Residual Certificateholder for that
calendar quarter from its Residual Certificate over (ii) the sum of the "daily
accruals" (as defined below) for all days during the calendar quarter on which
the Residual Certificateholder holds such Residual Certificate. For this
purpose, the daily accruals with respect to a Residual Certificate are
determined by allocating to each day in the calendar quarter its ratable portion
of the product of the "adjusted issue price" (as defined below) of the Residual
Certificate at the beginning of the calendar quarter and 120 percent of the
"Federal long-term rate" in effect at the time the Residual Certificate is
issued. For this purposes the "adjusted issue price" of a Residual Certificate
at the beginning of any calendar quarter equals the issue price of the Residual
Certificate (adjusted for contributions), increased by the amount of daily
accruals for all prior quarters, and decreased (but not below zero) by the
aggregate amount of payments made on the Residual Certificate before the
beginning of such quarter. The Federal long-term 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.
The Code provides that to the extent provided in regulations, as an
exception to the general rule described above, the entire amount of income
accruing on a Residual Certificate will be treated as an excess inclusion if the
Residual Certificates in the aggregate are considered not to have "significant
value." The Treasury Department has not yet provided regulations in this respect
and the REMIC Regulations did not adopt this rule.
Under Treasury regulations to be promulgated, a portion of the dividends
paid by a REIT which owns a Residual Certificate are to be designated as excess
inclusions in an amount corresponding to the Residual Certificate's allocable
share of the excess inclusions. Similar rules apply in the case of regulated
investment companies, common trust funds and cooperatives. Thus, investors in
such entities which own a Residual Certificate will be subject to the
limitations on excess inclusions described above. The REMIC Regulations do not
provide guidance on this issue.
TAX-RELATED RESTRICTIONS ON TRANSFER OF RESIDUAL CERTIFICATES
DISQUALIFIED ORGANIZATIONS. If legal title or beneficial interest in a
Residual Certificate is transferred to a Disqualified Organization (as defined
below), a tax would be imposed in an amount equal to the product of (i) the
present value of the total anticipated excess inclusions with respect to such
Residual Certificate for periods after the transfer and (ii) the highest
marginal federal corporate income tax rate. The REMIC Regulations provide that
the anticipated excess inclusion are based on actual prepayment experience to
the date of the transfer and projected payments based on the Prepayment
Assumption. The present value discount rate equals the applicable Federal rate
under Code Section 1274(d) that would apply to a debt instrument that was issued
on the date the Disqualified Organization acquired the Residual Certificate and
whose term ended on the close of the last quarter in which excess inclusion was
expected to accrue with respect to the Residual Certificate. Such a tax
generally would be imposed on the transferor of the Residual Certificate, except
that where such transfer is through an agent (including a broker, nominee, or
other middleman) for a Disqualified Organization, the tax would instead be
imposed on such agent. However, a transferor of a Residual 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. The tax also may be
waived by the Treasury Department if the Disqualified Organization promptly
disposes of the Residual Certificate and the transferor pays income tax at the
highest corporate rate on the excess inclusion for the period the Residual
Certificate is actually held by the Disqualified Organization.
In addition, if a "Pass-Through Entity" (as defined below) has excess
inclusion income with respect to a Residual Certificate during a taxable year
and a Disqualified Organization is the record holder of an equity interest in
such entity, then a tax is imposed on such entity equal to the product of (i)
the amount of excess inclusions that are allocable to the interest in the
Pass-Through Entity during the period such interest is held by such Disqualified
Organization and (ii) the highest marginal federal corporate income tax rate.
Such tax would be deductible from the ordinary gross income of the Pass-Through
Entity for the taxable year. The Pass-Through Entity would not be liable for
such tax if it has received an affidavit from such record holder that (i) states
under penalty of perjury that it is not a Disqualified Organization or (ii)
furnishes a social security number and states under penalties of perjury that
the social security number is that of the transferee, provided that during the
period such person is the record holder of the Residual Certificate, the
Pass-Through Entity does not have actual knowledge that such affidavit is false.
Excess inclusion income of a Residual Certificate held by an electing large
partnership (as defined in Code section 775) is subject to tax in the hands of
the partnership.
For these purposes, (i) "Disqualified Organization" means the United
States, any state or political subdivision thereof, any foreign government, any
international organization, any agency or instrumentality of any of the
foregoing (provided, that such term does not include an instrumentality if all
its activities are subject to tax and a majority of its board of directors is
not selected by any such governmental entity), any cooperative organization
furnishing electric energy or providing telephone service to persons in rural
areas as described in Code Section 1381(a)(2)(C), and any organization (other
than a farmers' cooperative described in Code Section 521) that is exempt from
taxation under the Code unless such organization is subject to the tax on
unrelated business income imposed by Code Section 511 and (ii) "Pass-Through
Entity" means any regulated investment company, real estate investment trust,
common trust fund, partnership, trust or estate and certain corporations
operating on a cooperative basis. Except as may be provided in Treasury
regulations yet to be issued, any person holding an interest in a Pass- Through
Entity as a nominee for another will, with respect to such interest, be treated
as a Pass-Through Entity.
The Agreement with respect to a series of Certificates will provide that
neither legal title nor beneficial interest in a Residual Certificate may be
transferred or registered unless (i) the proposed transferee provides to the
Depositor and the Trustee an affidavit to the effect that such transferee is not
a Disqualified Organization, is not purchasing such Residual Certificates on
behalf of a Disqualified Organization (I.E., as a broker, nominee or middleman
thereof) and is not an entity that holds REMIC residual securities as nominee to
facilitate the clearance and settlement of such securities through electronic
book-entry changes in accounts of participating organizations and (ii) the
transferor provides a statement in writing to the Depositor and the Trustee that
it has no actual knowledge that such affidavit is false. Moreover, the Agreement
will provide that any attempted or purported transfer in violation of these
transfer restrictions will be null and void and will vest no rights in any
purported transferee. Each Residual Certificate with respect to a series will
have a legend referring to such restrictions on transfer, and each Residual
Certificateholder will be deemed to have agreed, as a condition of ownership
thereof, to any amendments to the related Agreement required under the Code or
applicable Treasury regulations to effectuate the foregoing restrictions.
Information necessary to compute an applicable excise tax must be furnished to
the Internal Revenue Service and to the requesting party within 60 days of the
request, and the Depositor or the Trustee may charge a fee for computing and
providing such information.
NONECONOMIC RESIDUAL INTERESTS. Under the REMIC Regulations certain
transfers of Residual Certificates are disregarded, in which case the transferor
continues to be treated as the owner of the Residual Certificates and thus
continues to be subject to tax on its allocable portion of the net income of the
REMIC Pool. Under the Final REMIC Regulations, a transfer of a Noneconomic
Residual Interest (defined below) to a Residual Certificateholder (other than a
Residual Certificateholder who is not a U.S. Person, as defined below under
"Foreign Investors") is disregarded for all federal income tax purposes unless
no significant purpose of the transfer is to impede the assessment or collection
of tax. A residual interest in a REMIC (including a residual interest with a
positive value at issuance) is a "Noneconomic Residual Interest" unless, at the
time of the transfer, (i) the present value of the expected future distributions
on the residual interest at least equals the product of the present value of the
anticipated excess inclusions and the highest federal corporate income tax rate
in effect for the year in which the transfer occurs, and (ii) the transferor
reasonably expects that the transferee will receive distributions from the REMIC
at or after the time at which taxes accrue on the anticipated excess inclusions
in an amount sufficient to satisfy the accrued taxes. The anticipated excess
inclusions and the present value rate are determined in the same manner as set
forth above under "Disqualified Organizations." A significant purpose to impede
the assessment or collection of tax exists if the transferor, at the time of the
transfer, either knew or should have known (had "improper knowledge") that the
transferor would be unwilling or unable to pay taxes due on its share of the
taxable income of the REMIC. Under the REMIC Regulations, a transferor is
presumed not to have improper knowledge if (i) the transferor conducted, at the
time of the transfer, a reasonable investigation of the financial condition of
the transferee and, as a result of the investigation, the transferor found that
the transferee had historically paid its debts as they came due and found no
significant evidence to indicate that the transferor will not continue to pay
its debts as they come due in the future; and (ii) the transferee represents to
the transferor that it understands that, as the holder of the Noneconomic
Residual Interest, the transferee may incur tax liabilities in excess of any
cash flows generated by the residual interest and that the transferee intends to
pay taxes associated with holding of residual interest as they become due. The
Agreement will require the transferee of a Residual Certificate to state as part
of the affidavit described above under the heading "Disqualified Organizations"
that such transferee (i) has historically paid its debts as they come due, (ii)
intends to continue to pay its debts as they come due in the future, (iii)
understands that, as the holder of a Noneconomic Residual Interest, it may incur
tax liabilities in excess of any cash flows generated by the Residual
Certificate, and (iv) intends to pay any and all taxes associated with holding
the Residual Certificate as they become due. The transferor must have no reason
to believe that such statement is untrue.
FOREIGN INVESTORS. The REMIC Regulations provide that the transfer of a
Residual Certificate that has "tax avoidance potential" to a "foreign person"
will be disregarded for all federal tax purposes. A Residual Certificate is
deemed to have tax avoidance potential unless, at the time of the transfer, the
transferor reasonably expects that, for each excess inclusion, (i) the REMIC
Pool will distribute to the transferee residual interest holder an amount that
will equal at least 30% of the excess inclusions and (ii) that each such amount
will be distributed at or after the time at which the excess inclusion accrues
and not later than the close of the calendar year following the calendar year of
accrual. If the non-U.S. Person transfers the Residual Certificate back to a
U.S. Person, the transfer will be disregarded and the foreign transferor will
continue to be treated as the owner unless arrangements are made so that the
transfer does not have the effect of allowing the transferor to avoid tax on
accrued excess inclusions.
The Prospectus Supplement relating to a series of Certificates may provide
that a Residual Certificate may not be purchased by or transferred to any person
that is not a U.S. Person or may describe the circumstances and restrictions
pursuant to which such a transfer may be made. The term "U.S. Person" means a
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, an estate that is subject to U.S. federal income
tax regardless of the source of its income or a trust described in Code section
7701(a)(30).
SALE OR EXCHANGE OF A RESIDUAL CERTIFICATE
Upon the sale or exchange of a Residual Certificate, the Residual
Certificateholder will recognize gain or loss equal to the excess, if any, of
the amount realized over the adjusted basis (as described above under "Taxation
of Residual Certificates - Basis and Losses") of such Residual Certificateholder
in such Residual Certificate at the time of the sale or exchange. In addition to
reporting the taxable income of the REMIC Pool, a Residual Certificateholder
will have taxable income to the extent that any cash distribution to him from
the REMIC Pool exceeds such adjusted basis on that Distribution Date. Such
income will be treated as gain from the sale or exchange of the Residual
Certificate. It is possible that the termination of the REMIC Pool may be
treated as a sale or exchange of a Residual Certificateholder's Residual
Certificate, in which case, if the Residual Certificateholder has an adjusted
basis in his Residual Certificate remaining when his interest in the REMIC Pool
terminates, and if he holds such Residual Certificate as a capital asset under
Code Section 1221, then he will recognize a capital loss at that time in the
amount of such remaining adjusted basis.
Losses on dispositions of Residual Certificates will be disallowed where
the seller of the Residual Certificate, during the period beginning six months
before the sale or disposition of the Residual Certificate and ending six months
after such sale or disposition, acquires (or enters into any other transaction
that results in the application of Code Section 1091) any residual interest in
any REMIC or any interest in a "taxable mortgage pool" (such as certain
non-REMIC owner trusts) that is economically comparable to a Residual
Certificate.
TAXES THAT MAY BE IMPOSED ON THE REMIC POOL
PROHIBITED TRANSACTIONS. Net income from certain transactions by the REMIC
Pool, called prohibited transactions, will not be part of the calculation of
income or loss includible in the federal income tax returns of Residual
Certificateholders, but rather will be taxed directly to the REMIC Pool at a
100% rate. Prohibited transactions generally include (i) the disposition of a
qualified mortgage other than for (a) substitution within two years of the
Startup Day for a defective (including a defaulted) obligation (or repurchase in
lieu of substitution of a defective (including a defaulted) obligation at any
time) or for any qualified mortgage within three months of the Startup Day, (b)
foreclosure, default or imminent default of a qualified mortgage, (c) bankruptcy
or insolvency of the REMIC Pool or (d) a qualified (complete) liquidation, (ii)
the receipt of income from assets that are not the type of mortgages or
investments that the REMIC Pool is permitted to hold, (iii) the receipt of
compensation for services or (iv) the receipt of gain from disposition of cash
flow investments other than pursuant to a qualified liquidation. Notwithstanding
(i) and (iv), it is not a prohibited transaction to sell REMIC Pool property to
prevent a default on Regular Certificates as a result of a default on qualified
mortgages or to facilitate a clean-up call (generally, an optional termination
to save administrative costs when no more than a small percentage of the
Certificates is outstanding). The REMIC Regulations indicate that the
modification of a Mortgage Loan generally will not be treated as a disposition
if it is occasioned by a default or reasonably foreseeable default, an
assumption of the Mortgage Loan, the waiver of a due-on-sale or encumbrance
clause or the conversion of an interest rate by a mortgagor pursuant to the
terms of a convertible adjustable rate Mortgage Loan. The REMIC Regulations also
provide that the modification of mortgage loans underlying Mortgage-Backed
Securities will not be treated as a modification of the Mortgage-Backed
Securities, provided that the trust issuing the Mortgage-Backed Securities was
not created to avoid prohibited transaction rules.
CONTRIBUTIONS TO THE REMIC POOL AFTER THE STARTUP DAY. In general, the
REMIC Pool will be subject to a tax at a 100% rate on the value of any property
contributed to the REMIC Pool after the Startup Day. Exceptions are provided for
cash contributions to the REMIC Pool (i) during the three months following the
Startup Day, (ii) made to a qualified reserve fund by a Residual
Certificateholder, (iii) in the nature of a guarantee, (iv) made to facilitate a
qualified liquidation or clean-up call and (v) as otherwise permitted in
Treasury regulations yet to be issued.
NET INCOME FROM FORECLOSURE PROPERTY. The REMIC Pool will be subject to
federal income tax at the highest corporate rate on "net income from foreclosure
property," determined by reference to the rules applicable to real estate
investment trusts. Generally, property acquired by the REMIC Pool through
foreclosure or deed in lieu of foreclosure would be treated as "foreclosure
property" for a period of three years, with possible extensions. Net income from
foreclosure property generally means (i) gain from the sale of a foreclosure
property that is inventory property and (ii) gross income from foreclosure
property other than qualifying rents and other qualifying income for a real
estate investment trust.
LIQUIDATION OF THE REMIC POOL
If a REMIC Pool and the Trustee adopt a plan of complete liquidation,
within the meaning of Code Section 860F(a)(4)(A)(i) and sell all of the REMIC
Pool's assets (other than cash) within a 90-day period beginning on the date of
the adoption of the plan of liquidation, the REMIC Pool will recognize no gain
or loss on the sale of its assets, provided that the REMIC Pool credits or
distributes in liquidation all of the sale proceeds plus its cash (other than
amounts retained to meet claims against the REMIC Pool) to holders of Regular
Certificates and Residual Certificateholders within the 90-day period.
ADMINISTRATIVE MATTERS
The REMIC Pool will be required to maintain its books on a calendar year
basis and to file federal income tax returns for federal income tax purposes in
a manner similar to a partnership. The form for such income tax return is Form
1066, U.S. Real Estate Mortgage Investment Conduit Income Tax Return. The
Trustee will be required to sign the REMIC Pool's returns. Treasury regulations
provide that, except where there is a single Residual Certificateholder for an
entire taxable year, the REMIC Pool generally will be subject to the procedural
and administrative rules of the Code applicable to partnerships, including the
determination by the Internal Revenue Service of any adjustments to, among other
things, items of REMIC income, gain, loss, deduction or credit in a unified
administrative proceeding. The Depositor or a designated Residual
Certificateholders will be obligated to act as "tax matters person," as defined
in applicable Treasury regulations, with respect to the REMIC Pool. If the Code
or applicable Treasury regulations do not permit the Depositor to act as tax
matters person in its capacity as agent of the Residual Certificateholders, the
Residual Certificateholder chosen by the Residual Certificateholders or such
other person specified pursuant to Treasury regulations will be required to act
as tax matters person.
Treasury regulations provide that a holder of a Residual Certificate is not
required to treat items on its return consistently with their treatment on the
REMIC Pool's return if a holder owns 100% of the Residual Certificates for the
entire calendar year. Otherwise, each holder of a Residual Certificate is
required to treat items on its return consistently with their treatment on the
REMIC Pool's return, unless the holder of a Residual Certificate either files a
statement identifying the inconsistency or establishes that the inconsistency
resulted from incorrect information received from the REMIC Pool. The Service
may assess a deficiency resulting from a failure to comply with the consistency
requirement without instituting an administrative proceeding at the REMIC Pool
level.
LIMITATIONS ON DEDUCTION OF CERTAIN EXPENSES
An investor who is an individual, estate or trust will be subject to
limitation with respect to certain itemized deductions described in Code Section
67, to the extent that such itemized deductions, in the aggregate, do not exceed
2% of the investor's adjusted gross income. In addition, Code Section 68
provides that itemized deductions otherwise allowable for a taxable year of an
individual taxpayer will be reduced by the lesser of (i) 3% of the excess, if
any, of adjusted gross income over $100,000, adjusted yearly for inflation
($50,000, adjusted yearly for inflation, in the case of a married individual
filing a separate return), or (ii) 80% of the amount of itemized deductions
otherwise allowable for such year. In the case of a REMIC Pool, such deductions
may include deductions under Code Section 212 for servicing fees and all
administrative and other expenses relating to the REMIC Pool or any similar
expenses allocated to the REMIC Pool with respect to a regular interest it holds
in another REMIC. Such investors who hold REMIC Certificates either directly or
indirectly through certain pass-through entities may have their PRO RATA share
of such expenses allocated to them as additional gross income, but may be
subject to such limitation on deductions. In addition, such expenses are not
deductible at all for purposes of computing the alternative minimum tax, and may
cause such investors to be subject to significant additional tax liability.
Treasury regulations provide that the additional gross income and corresponding
amount of expenses generally are to be allocated entirely to the holders of
Residual Certificates in the case of a REMIC Pool that would not qualify as a
fixed investment trust in the absence of a REMIC election. However, such
additional gross income and limitation on deductions will apply to the allocable
portion of such expenses to holders of Regular Certificates, as well as holders
of Residual Certificates, where such Regular Certificates are issued in a manner
that is similar to pass-through certificates in a fixed investment trust. In
general, such allocable portion will be determined based on the ratio that a
REMIC Certificateholder's income, determined on a daily basis, bears to the
income of all holders of Regular Certificates and Residual Certificates with
respect to a REMIC Pool. As a result, individuals, estates or trusts holding
REMIC Certificates (either directly or indirectly through a grantor trust,
partnership, S corporation, REMIC, or certain other pass-through entities
described in the foregoing Treasury regulations) may have taxable income in
excess of the interest income at the pass-through rate on Regular Certificates
that are issued in a single class or otherwise consistently with fixed
investment trust status or in excess of cash distributions for the related
period on Residual Certificates.
TAXATION OF CERTAIN FOREIGN INVESTORS
REGULAR CERTIFICATES. Interest, including original issue discount,
distributable to Regular Certificateholders who are nonresident aliens, foreign
corporations, or other Non-U.S. Persons (as defined below), will be considered
"portfolio interest" and therefore, generally will not be subject to 30% United
States withholding tax, provided that such Non-U.S. Person (i) is not a
"10-percent shareholder" within the meaning of Code Section 871(h)(3)(B) or a
controlled foreign corporation described in Code Section 881(c)(3)(C) and (ii)
provides the Trustee, or the person who would otherwise be required to withhold
tax from such distributions under Code Sections 1441 or 1442, with an
appropriate statement, signed under penalties of perjury, identifying the
beneficial owner and stating, among other things, that the beneficial owner of
the Regular Certificate is a Non-U.S. Person. If such statement, or any other
required statement, is not provided, 30% withholding will apply unless reduced
or eliminated pursuant to an applicable tax treaty or unless the interest on the
Regular Certificate is effectively connected with the conduct of a trade or
business within the United States by such Non-U.S. Person. In the latter case,
such Non-U.S. Person will be subject to United States federal income tax at
regular rates. Investors who are Non-U.S. Persons should consult their own tax
advisors regarding the specific tax consequences to them of owning a Regular
Certificate. The term "Non-U.S. Person" means any person who is not a U.S.
Person.
RESIDUAL CERTIFICATES. The Conference Committee Report to the 1986 Act
indicates that amounts paid to Residual Certificateholders who are Non-U.S.
Persons are treated as interest for purposes of the 30% (or lower treaty rate)
United States withholding tax. Treasury regulations provide that amounts
distributed to Residual Certificateholders qualify as "portfolio interest,"
subject to the conditions described in "Regular Certificates" above, but only to
the extent that (i) the Mortgage Assets were issued after July 18, 1984 and (ii)
the Trust fund or segregated pool of assets therein (as to which a separate
REMIC election will be made), to which the Residual Certificate relates,
consists of obligations issued in "registered form" within the meaning of Code
Section 163(f)(1). Generally, Mortgage Assets will not be, but regular interests
in another REMIC Pool will be, considered obligations issued in registered form.
Furthermore, a Residual Certificateholder will not be entitled to any exemption
(or lower treaty rate) from the 30% withholding tax to the extent of that
portion of REMIC taxable income that constitutes an "excess inclusion." See
"Taxation of Residual Certificates - Limitations on Offset or Exemption of REMIC
Income; Excess Inclusions." If the amounts paid to Residual Certificateholders
who are Non-U.S. Persons are effectively connected with the conduct of a trade
or business within the United States by such Non-U.S. Persons, 30% (or lower
treaty rate) withholding will not apply. Instead, the amounts paid to such
Non-U.S. Persons will be subject to United States federal income tax at regular
rates. If 30% (or lower treaty rate) withholding is applicable, such amounts
generally will be taken into account for purposes of withholding only when paid
or otherwise distributed (or when the Residual Certificate is disposed of) under
rules similar to withholding upon disposition of debt instruments that have
original issue discount. See "Tax-Related Restrictions on Transfer of Residual
Certificates - Foreign Investors" above concerning the disregard of certain
transfers having "tax avoidance potential."
Recently issued Treasury regulations (the "Final Withholding Regulations"),
which are generally effective with respect to payments made after December 31,
1998, consolidate and modify the current certification requirements and means by
which a holder may claim exemption from United States federal income tax
withholding and provide certain presumptions regarding the status of holders
when payments to the holders cannot be reliably associated with appropriate
documentation provided to the payor. All holders of Offered Certificates should
consult their tax advisers regarding the application of the Final Withholding
Regulations.
BACKUP WITHHOLDING
Distributions made on the Regular Certificates, and proceeds from the sale
of the Regular Certificates to or through certain brokers, may be subject to a
"backup" withholding tax under Code Section 3406 of 31% on "reportable payments"
(including interest distributions, original issue discount, and, under certain
circumstances, principal distributions) unless the Regular Certificateholder
complies with certain reporting and/or certification procedures, including the
provision of its taxpayer identification number to the Trustee, its agent or the
broker who effected the sale of the Regular Certificate, or such
Certificateholder is otherwise an exempt recipient under applicable provisions
of the Code. Any amounts to be withheld from distribution on the Regular
Certificates would be refunded by the Internal Revenue Service or allowed as a
credit against the Regular Certificateholder's federal income tax liability.
REPORTING REQUIREMENTS
Reports of accrued interest and original issue discount will be made
annually to the Internal Revenue Service and to individuals, estates, non-exempt
and non-charitable trusts, and partnerships who are either holders of record of
Regular Certificates or beneficial owners who own Regular Certificates through a
broker or middleman as nominee. All brokers, nominees and all other non-exempt
holders of record of Regular Certificates (including corporations, non-calendar
year taxpayers, securities or commodities dealers, real estate investment
trusts, investment companies, common trust funds, thrift institutions and
charitable trusts) may request such information for any calendar quarter by
telephone or in writing by contacting the person designated in Internal Revenue
Service Publication 938 with respect to a particular series of Regular
Certificates. Holders through nominees must request such information from the
nominee. Treasury regulations provide that information necessary to compute the
accrual of any market discount on the Regular Certificates must be furnished.
The Internal Revenue Service's Form 1066 has an accompanying Schedule Q,
Quarterly Notice to Residual Interest Holders of REMIC Taxable Income or Net
Loss Allocation. Treasury regulations require that Schedule Q be furnished by
the REMIC Pool to each Residual Certificateholder with respect to each calendar
quarter.
Treasury regulations require that, in addition to the foregoing
requirements, information must be furnished quarterly to Residual
Certificateholders, furnished annually, if applicable, to holders of Regular
Certificates, and filed annually with the Internal Revenue Service concerning
Code Section 67 expenses (see "Limitations on Deduction of Certain Expenses"
above) allocable to such holders. Furthermore, under such regulations,
information must be furnished quarterly to Residual Certificateholders,
furnished annually to holders of Regular Certificates, and filed annually with
the Internal Revenue Service concerning the percentage of the REMIC Pool's
assets meeting the qualified asset tests described above under "Federal Income
Tax Consequences for REMIC Certificates" above.
FEDERAL INCOME TAX CONSEQUENCES FOR CERTIFICATES AS TO WHICH NO REMIC
ELECTION IS MADE
Stroock & Stroock & Lavan LLP, special counsel to the Depositor, is of the
opinion that if a Trust does not elect REMIC status and is not treated as a
partnership, the tax consequences to the Owners will be as described below.
STANDARD CERTIFICATES
GENERAL. If no election is made to treat a Trust (or a segregated pool of
assets therein) with respect to a series of Certificates as a REMIC, the Trust
may be classified as a grantor trust under subparagraph E, Part 1 of subchapter
J of the Code and not as a partnership or an association taxable as a
corporation. Where there is no fixed retained yield with respect to the Mortgage
Assets underlying the Certificates of a series, and where such Certificates are
not designated as Stripped Certificates, as described below under "Stripped
Certificates" or as Partnership Interests described under "Taxation of
Securities Classified as Partnership Interests," the holder of each such
"Standard Certificate" in such series will be treated as the owner of a PRO RATA
undivided interest in the ordinary income and corpus portions of the Trust
represented by his Certificate and will be considered the beneficial owner of a
PRO RATA undivided interest in each of the Mortgage Assets, subject to the
discussion below under "Recharacterization of Servicing Fees." Accordingly, the
holder of a Certificate (a "Certificateholder") of a particular series will be
required to report on its federal income tax return its PRO RATA share of the
entire income from the Mortgage Assets, original issue discount (if any),
prepayment fees, assumption fees, and late payment charges received by or on
behalf of the Trust, in accordance with such Certificateholder's method of
accounting. A Certificateholder generally will be able to deduct its share of
servicing fees and all administrative and other expenses of the Trust in
accordance with his method of accounting, provided that such amounts are
reasonable compensation for services rendered to that Trust. However, investors
who are individuals, estates or trusts who own Certificates, either directly or
indirectly through certain pass-through entities, will not be allowed to deduct
certain itemized deductions described in Code Section 67, including deductions
under Code Section 212 for servicing fees and all such administrative and other
expenses of the Trust, to the extent that such deductions, in the aggregate, do
not exceed two percent of the investor's adjusted gross income. In addition,
Code Section 68 provides that itemized deductions otherwise allowable for a
taxable year of an individual taxpayer will be reduced by the lesser of (i) 3%
of the excess, if any, of adjusted gross income over $100,000, adjusted yearly
for inflation ($50,000, adjusted yearly for inflation, in the case of a married
individual filing a separate return), or (ii) 80% of the amount of itemized
deductions otherwise allowable for such year. As a result such investors holding
Certificates, directly or indirectly through a pass-through entity, may have
aggregate taxable income in excess of the aggregate amount of cash received on
such Certificates with respect to interest at the pass-through rate on such
Certificates or discount thereon. In addition, such expenses are not deductible
at all for purposes of computing the alternative minimum tax and may cause such
investors to be subject to significant additional tax liability. Moreover, where
there is fixed retained yield with respect to the Mortgage Assets underlying a
series of Certificates or where the servicing fees are in excess of reasonable
servicing compensation, the transaction will be subject to the application of
the "stripped bond" and "stripped coupon" rules of the Code, as described below
under "Stripped Certificates" and "Premium and Discount - Recharacterization of
Servicing Fees," respectively.
TAX STATUS. Subject to the discussion below, Stroock & Stroock & Lavan LLP,
special counsel to the Depositor, is of the opinion that:
1. A Standard Certificate owned by a "domestic building and loan
association" within the meaning of Code Section 7701(a)(19) will be
considered to represent "loans . . . secured by an interest in real
property" within the meaning of Code Section 7701(a)(19)(C)(v),
provided that the real property securing the Mortgage Assets
represented by that Certificate is of the type described in such
section.
2. A Standard Certificate owned by a real estate investment trust
will be considered to represent "real estate assets" within the meaning
of Code Section 856(C) (5) (A) to the extent that the assets of the
related Trust consist of qualified assets, and interest income on such
assets will he considered "interest on obligations secured by mortgages
on real property" within the meaning of Code Section 856(c).
3. A Standard Certificate owned by a REMIC will be considered to
represent an "obligation (including any participation or certificate of
beneficial ownership therein) which is principally secured by an
interest in real property" within the meaning of Code Section
860G(a)(3)(A) to the extent that the assets of the related Trust
consist of "qualified mortgages" within the meaning of Code Section
860G(a)(3).
An issue arises as to whether buy-down Mortgage Assets may be characterized
in their entirety under the Code provisions cited in the immediately preceding
paragraph. There is indirect authority supporting treatment of an investment in
a buy-down Mortgage Loan as entirely secured by real property if the fair market
value of the real property securing the loan exceeds the principal amount of the
loan at the time of issuance or acquisition, as the case may be. There is no
assurance that the treatment described above is proper. Accordingly,
Certificateholders are urged to consult their own tax advisors concerning the
effects of such arrangements on the characterization of such Certificateholder's
investment for federal income tax purposes.
PREMIUM AND DISCOUNT
Certificateholders are advised to consult with their tax advisors as to the
federal income tax treatment of premium and discount arising either upon initial
acquisition of Certificates or thereafter.
PREMIUM. The treatment of premium incurred upon the purchase of a
Certificate will be determined generally as described above under "- Taxation of
Regular Certificates - Premium."
ORIGINAL ISSUE DISCOUNT. The Internal Revenue Service has stated in
published rulings that, in circumstances similar to those described herein, the
original issue discount rules will be applicable to a Certificateholder's
interest in those Mortgage Assets as to which the conditions for the application
of those sections are met. Rules regarding periodic inclusion of original issue
discount income are applicable to mortgages of corporations originated after May
27, 1969, mortgages of noncorporate mortgagors (other than individuals)
originated after July l, 1982, and mortgages of individuals originated after
March 2, 1984. Such original issue discount could arise by the charging of
points by the originator of the mortgages in an amount greater than a statutory
DE MINIMIS exception, to the extent that the points are not currently deductible
under applicable Code provisions or are not for services provided by the lender.
It is generally not anticipated that adjustable rate Mortgage Assets will be
treated as issued with original issue discount. However, the application of the
OID Regulations to adjustable rate mortgage loans with incentive interest rates
or annual or lifetime interest rate caps may result in original issue discount.
Original issue discount must generally be reported as ordinary gross income
as it accrues under a constant yield method that takes into account the
compounding of interest, in advance of the cash attributable to such income.
However, Code Section 1272 provide for a reduction in the amount of original
issue discount includible in the income of a holder of an obligation that
acquires the obligation at a price greater than the sum of the original issue
price and the previously accrued original issue discount, less prior payments of
principal. Accordingly, if such Mortgage Assets acquired by a Certificateholder
are purchased at a price equal to the then unpaid principal amount of such
Mortgage Assets, no original issue discount attributable to the difference
between the issue price and the original principal amount of such Mortgage
Assets (I.E., points) will be includible by such holder. Section 1272(a)(6)
provides for the use of a prepayment assumption in determining original issue
discount for any pool of debt instruments the yield on which may be affected by
reason of prepayments.
MARKET DISCOUNT. Certificateholders also will be subject to the market
discount rules to the extent that the conditions for application of those
sections are met. Market discount on the Mortgage Assets will be determined and
will be reported as ordinary income generally in the manner described above
under "- Taxation of Regular Certificates - Market Discount."
RECHARACTERIZATION OF SERVICING FEES. If the servicing fees paid to
Servicers were deemed to exceed reasonable servicing compensation, the amount of
such excess would be nondeductible under Code Section 162 or 212. In this
regard, there are no authoritative guidelines for federal income tax purposes as
to either the maximum amount of servicing compensation that may be considered
reasonable in the context of this or similar transactions or whether, in the
case of the Certificates, the reasonableness of servicing compensation should be
determined on a weighted average or loan-by-loan basis. If a loan-by-loan basis
is appropriate, the likelihood that such amount would exceed reasonable
servicing compensation as to some of the Mortgage Assets would be increased.
Recently issued Internal Revenue Service guidance indicates that a servicing fee
in excess of reasonable compensation ("excess servicing") will cause the
Mortgage Assets to be treated under the "stripped bond" rules. Such guidance
provides safe harbors for servicing deemed to be reasonable and requires
taxpayers to demonstrate that the value of servicing fees in excess of such
amounts is not greater than the value of the services provided.
Accordingly, if the Internal Revenue Service's approach is upheld, a
servicer that receives excess servicing fees would be viewed as retaining an
ownership interest in a portion of the interest payments on the Mortgage Assets.
Under the rules of Code Section 1286, the separation of the right to receive
some or all of the interest payments on an obligation from the right to receive
some or all of the principal payments on the obligation would result in
treatment of such Mortgage Assets as "stripped coupons" and "stripped bonds."
While Certificateholders would still be treated as owners of beneficial
interests in a grantor trust for federal income tax purposes, the corpus of such
trust could be viewed as excluding the portion of the Mortgage Assets the
ownership of which is attributed to a servicer, or as including such portion as
a second class of equitable interest. Applicable Treasury regulations treat such
an arrangement as a fixed investment trust, since the multiple classes of trust
interests should be treated as merely facilitating direct investments in the
trust assets and the existence of multiple classes of ownership interests is
incidental to that purpose. In general, such a recharacterization should not
have any significant effect upon the timing or amount of income reported by a
Certificateholder. See "Stripped Certificates" below for a further description
of the federal income tax treatment of stripped bonds and stripped coupons.
In the alternative, the amount, if any, by which the servicing fees paid to
the servicers are deemed to exceed reasonable compensation for servicing could
be treated as deferred payments of purchase price by the Certificateholders to
purchase an undivided interest in the Mortgage Assets. In such event, the
present value of such additional payments might be included in the
Certificateholder's basis in such undivided interests for purposes of
determining whether the Certificate was acquired at a discount, at par, or at a
premium. Under this alternative, Certificateholders may also be entitled to a
deduction for unstated interest with respect to each deferred payment. The
Internal Revenue Service may take the position that the specific statutory
provisions of Code Section 1286 described above override the alternative
described in this paragraph. Certificateholders are advised to consult their tax
advisors as to the proper treatment of the amounts paid to the servicers as set
forth herein as servicing compensation or under either of the alternatives set
forth above.
SALE OR EXCHANGE OF CERTIFICATES. Upon sale or exchange of a Certificate, a
Certificateholder will recognize gain or loss equal to the difference between
the amount realized on the sale and its aggregate adjusted basis in the Mortgage
Assets and other assets represented by the Certificate. In general, the
aggregate adjusted basis will equal the Certificateholder's cost for the
Certificate, increased by the amount of any income previously reported with
respect to the Certificate and decreased by the amount of any losses previously
reported with respect to the Certificate and the amount of any distributions
received thereon. Except as provided above with respect to market discount on
any Mortgage Assets, and except for certain financial institutions subject to
the provisions of Code Section 582(c), any such gain or loss would be capital
gain or loss if the Certificate was held as a capital asset.
STRIPPED CERTIFICATES
GENERAL. Pursuant to Code Section 1286, the separation of ownership of the
right to receive some or all of the principal payments on an obligation from
ownership of the right to receive some or all of the interest payments results
in the creation of "stripped bonds" with respect to principal payments and
"stripped coupons" with respect to interest payments. For purposes of this
discussion, Certificates that are subject to those rules will be referred to as
"Stripped Certificates." The Certificates will be subject to those rules if (i)
the Depositor or any of its affiliates retains (for its own account or for
purposes of resale), in the form of fixed retained yield or otherwise, an
ownership interest in a portion of the payments on the Mortgage Assets, (ii) the
Depositor, any of its affiliates or a servicer is treated as having an ownership
interest in the Mortgage Assets to the extent it is paid (or retains) servicing
compensation in an amount greater than reasonable consideration for servicing
the Mortgage Assets (see "Standard Certificates - Recharacterization of the
Servicing Fees" above) and (iii) Certificates are issued in two or more classes
or subclasses representing the right to non PRO RATA percentages of the interest
and principal payments on the Mortgage Assets.
In general, a holder of a Stripped Certificate (a "Stripped
Certificateholder") will be considered to own "stripped bonds" with respect to
its PRO RATA share of all or a portion of the principal payments on each
Mortgage Loan and/or "stripped coupons" with respect to its PRO RATA share of
all or a portion of the interest payments on each Mortgage Loan, including the
Stripped Certificate's allocable share of the servicing fees paid, to the extent
that such fees represent reasonable compensation for services rendered. See
discussion above under "Standard Certificates - Recharacterization of Servicing
Fees." For this purpose the Trust intends to allocate the servicing fees to the
Stripped Certificates in proportion to the respective offering price of each
class (or subclass) of Stripped Certificates. The holder of a Stripped
Certificate generally will be entitled to a deduction each year in respect of
the servicing fees, as described above under "- Federal Income Tax Consequences
for Certificates as to Which No REMIC Election is Made - Standard Certificates -
General," subject to the limitations described therein.
Code Section 1286 treats a stripped bond or a stripped coupon generally as
a new obligation issued (i) on the date that the stripped interest is purchased
and (ii) at a price equal to its purchase price or, if more than one stripped
interest is purchased, the share of the purchase price allocable to such
stripped interest. Each stripped interest generally will have original issue
discount equal to the excess of its stated redemption price at maturity (or, in
the case of a stripped coupon, the amount payable on the due date of such
coupon) over its issue price. Although the treatment of Stripped Certificates
for federal income tax purposes is not clear in certain respects at this time,
particularly where such Stripped Certificates are issued with respect to a Trust
containing variable-rate Mortgage Assets, the Depositor has been advised by
counsel that (i) the Trust will be treated as a grantor trust under subpart E,
Part 1 of subchapter J of the Code and not as an association taxable as a
corporation, and (ii) each Stripped Certificate should be treated as a single
installment obligation for purposes of calculating original issue discount and
gain or loss on disposition. This treatment is based on the interrelationship of
Code Section 1286 and the regulations thereunder, Code Sections 1272 through
1275, and the OID Regulations. While under Code Section 1286 computations with
respect to Stripped Certificates arguably should be made in one of the ways
described below, the OID Regulations state, in general, that all debt
instruments issued in connection with the same transaction must be treated as a
single debt instrument. The Trustee will make and report all computations
described below using this aggregate approach, unless substantial legal
authority requires otherwise.
Furthermore, the regulations under Code Section 1286 support the treatment
of a Stripped Certificate as a single debt instrument issued on the date it is
originated for purposes of calculating any original issue discount. The preamble
to such regulations state that such regulations are premised on the assumption
that an aggregation approach is appropriate in determining whether original
issue discount on a stripped bond or stripped coupon is DE MINIMIS. In addition,
under these regulations, a Stripped Certificate that represents a right to
payments of both interest and principal may be viewed either as issued with
original issue discount or market discount (as described below), at a DE MINIMIS
original issue discount, or presumably, at a premium. The preamble to such
regulations also provide that such regulations are premised on the assumption
that generally the interest component of such a Stripped Certificate would be
treated as stated interest under the original issue discount rules. Further, the
regulations provide that the purchaser of such a Stripped Certificate may be
required to account for any discount as market discount rather than original
issue discount if either (i) the initial discount with respect to the Strip
Certificate was treated as zero under the DE MINIMIS rule or (ii) no more than
100 basis points in excess of reasonable servicing is stripped off the related
Mortgage Assets. Any such market discount would be reportable as described above
under "Federal Income Tax Consequences for REMIC Certificates - Taxation of
Regular Certificates - Market Discount," without regard to the DE MINIMIS rule
therein.
STATUS OF STRIPPED CERTIFICATES. No specific legal authority exists as to
whether the character of the Stripped Certificates, for federal income tax
purposes, will be the same as that of the Mortgage Assets. Although the issue is
not free from doubt, counsel has advised the Depositor that Stripped
Certificates owned by applicable holders should be considered, "real estate
assets" within the meaning of Code Section 856(c)(A), "obligations(s) . . .
principally secured by an interest in real property" within the meaning of Code
Section 860G(a)(3)(A), and "loans . . . secured by an interest in real property"
within the meaning of Code Section 7701(a)(19)(C)(v), and interest (including
original issue discount) income attributable to Stripped Certificates should be
considered to represent "interest on obligations secured by mortgages on real
property" within the meaning or Code Section 856(c), provided that in each case
the Mortgage Assets and interest on such Mortgage Assets qualify for such
treatment. The application of such Code provisions to buy-down Mortgage Assets
is uncertain. See "-Federal Income Tax Consequences for Certificates as to Which
No REMIC Election is Made" and "- Standard Certificates - Tax Status" above.
ORIGINAL ISSUE DISCOUNT. Except as described above under "- General," each
Stripped Certificate will be considered to have been issued (i) on the date that
the stripped interest is purchased and (ii) at a price equal to its purchase
price or, if more than one stripped interest is purchased, the share of the
purchase price allocable to such stripped interest. Each stripped interest
generally will have original issue discount equal to the excess of its stated
redemption price at maturity (or, in the case of a stripped coupon, the amount
payable on the due date of such coupon) over its issue price. Original issue
discount with respect to a Stripped Certificate must be included in ordinary
income as it accrues, in accordance with a constant yield method that takes into
account the compounding of interest, which may be prior to the receipt of the
cash attributable to such income. Counsel has advised the Depositor that the
amount of original issue discount required to be included in the income of a
Stripped Certificateholder in any taxable year likely will be computed generally
as described above under "Federal Income Tax Consequences for REMIC Certificates
- - Taxation of Regular Certificates - Original Issue Discount" and "- Variable
Rate Regular Certificates." However, with the apparent exception of a Stripped
Certificate issued with DE MINIMIS original issue discount, as described above
under "- General," the issue price of a Stripped Certificate will be the
purchase price paid by each holder thereof, and the stated redemption price at
maturity will include the aggregate amount of the payments to be made on the
Stripped Certificate to such Stripped Certificateholder, presumably under the
Prepayment Assumption, other than amounts treated as qualified stated interest.
If the Mortgage Assets prepay at a rate either faster or slower than that
under the Prepayment Assumption, a Stripped Certificateholder's recognition of
original issue discount will be either accelerated or decelerated and the amount
of such original issue discount will be either increased or decreased depending
on the relative interests in principal and interest on each Mortgage Loan
represented by such Stripped Certificateholder's Stripped Certificate. While the
matter is not free from doubt, the holder of a Stripped Certificate should be
entitled in the year that it becomes certain (assuming no further prepayments)
that the holder will not recover a portion of its adjusted basis in such
Stripped Certificate to recognize an ordinary loss equal to such portion of
unrecoverable basis.
SALE OR EXCHANGE OF STRIPPED CERTIFICATES. Sale or exchange of a Stripped
Certificate prior to its maturity will result in gain or loss equal to the
difference, if any, between the amount received and the Stripped
Certificateholder's adjusted basis in such Stripped Certificate, as described
above under "Federal Income Tax Consequences for REMIC Certificates - Taxation
of Regular Certificates - Sale or Exchange of Regular Certificates." To the
extent that a subsequent purchaser's purchase price is exceeded by the remaining
payments on the Stripped Certificates, such subsequent purchaser will be
required for federal income tax purposes to accrue and report such excess as if
it were original issue discount (or market discount) in the manner described
above. It is not clear for this purpose whether the assumed prepayment rate that
is to be used in the case of a Stripped Certificateholder other than by original
Stripped Certificateholder should be based on the Prepayment Assumption or a new
rate based on the circumstances at the date of subsequent purchase.
PURCHASE OF MORE THAN ONE CLASS OF STRIPPED CERTIFICATES. Where an investor
purchases more than one class of Stripped Certificates, it is currently unclear
whether for federal income tax purposes such classes of Stripped Certificates
should be treated separately or aggregated for purposes of the rules described
above.
Because of these possible varying characterizations of Stripped
Certificates and the resultant differing treatment of income recognition,
Stripped Certificateholders are urged to consult their own tax advisors
regarding the proper treatment of Stripped Certificates for federal income tax
purposes.
REPORTING REQUIREMENTS AND BACKUP WITHHOLDING
The Trustee will furnish, within a reasonable time after the end of each
calendar year, to each Certificateholder or Stripped Certificateholder at any
time during such year, such information (prepared on the basis described above)
as the Trustee deems to be necessary or desirable to enable such
Certificateholders to prepare their federal income tax returns. Such information
will include the amount of original issue discount accrued on Certificates held
by persons other than Certificateholders exempted from the reporting
requirements. The amounts required to be reported by the Trustee may not be
equal to the proper amount of original issue discount required to be reported as
taxable income by a Certificateholder, other than an original Certificateholder.
The Trustee will also file such original issue discount information with the
Internal Revenue Service. If a Certificateholder fails to supply an accurate
taxpayer identification number or properly certify the number or if the
Secretary of the Treasury determines that a Certificateholder has not reported
all interest and dividend income required to be shown on his federal income tax
return, 31% backup withholding may be required in respect of any reportable
payments, as described above under "- Backup Withholding."
TAXATION OF CERTAIN FOREIGN INVESTORS
To the extent that a Certificate evidences ownership in Mortgage Assets
that are issued on or before July 18, 1984, interest or original issue discount
paid by the person required to withhold tax under Code Section 1441 or 1442,
which apply to nonresident aliens, foreign corporations, or other Non-U.S.
Persons generally will be subject to 30% United States withholding tax, or such
lower rate as may be provided for interest by an applicable tax treaty. Accrued
original issue discount recognized by the Certificateholder on the sale or
exchange of such a Certificate also will be subject to federal income tax at the
same rate.
Treasury regulations provide that interest or original issue discount paid
by the Trustee or other withholding agent to a Non-U.S. Person evidencing
ownership interest in Mortgage Assets issued after July 18, 1984 will be
"portfolio interest" and will be treated in the manner, and such persons will be
subject to the same certification requirements described above under "- Taxation
of Certain Foreign Investors - Regular Certificates."
Recently issued Treasury regulations (the "Final Withholding Regulations"),
which are generally effective with respect to payments made after December 31,
1998, consolidate and modify the current certification requirements and means by
which a holder may claim exemption from United States federal income tax
withholding and provide certain presumptions regarding the status of holders
when payments to the holders cannot be reliably associated with appropriate
documentation provided to the payor. All holders of Offered Certificates should
consult their tax advisers regarding the application of the Final Withholding
Regulations.
TAXATION OF SECURITIES CLASSIFIED AS PARTNERSHIP INTERESTS
Certain Trusts may be treated as partnerships for Federal income tax
purposes. In such event, the Trusts may issue Certificates characterized as
"Partnership Interests" as discussed in the related Prospectus Supplement. With
respect to such series of Partnership Interests, Stroock & Stroock & Lavan LLP,
special counsel to the Depositor, is of the opinion that (unless otherwise
limited in the related Prospectus Supplement, which will also cover any material
federal income tax consequences applicable to the Owners), the Trust will be
characterized as a partnership and not an association taxable as a corporation
for federal income tax purposes.
PLAN OF DISTRIBUTION
Certificates are being offered hereby in series through one or more
underwriters or groups of underwriters (the "Underwriters"). The Prospectus
Supplement will set forth the terms of offering of the series of Certificates,
including the public offering or purchase price of each class of Certificates of
such series being offered thereby or the method by which such price will be
determined and the net proceeds to the Depositor from the sale of each such
class. Such Certificates will be acquired by the Underwriters for their own
account or may be offered by the Underwriters on a best efforts basis. The
Underwriters may resell such Certificates 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. The managing Underwriter or Underwriters with respect to
the offer and sale of a particular series of Certificates 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 Certificates, Underwriters may receive
compensation from the Depositor or from purchasers of the Certificates in the
form of discounts, concessions or commissions. Underwriters and dealers
participating in the distribution of the Certificates may be deemed to be
underwriters in connection with such Certificates, and any discounts or
commissions received by them from the Depositor and any profit on the resale of
Certificates by them may be deemed to be underwriting discounts and commissions
under the Securities Act of 1933, as amended. The Prospectus Supplement will
describe any such compensation paid by the Depositor.
It is anticipated that the underwriting agreement pertaining to the sale of
any series of Certificates 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 and that the
Depositor will indemnify the Underwriters against certain civil liabilities,
including liabilities under the Securities Act of 1933, as amended.
LEGAL MATTERS
Certain legal matters relating to the validity of the issuance of the
Certificates will be passed upon for the Depositor by Stroock & Stroock & Lavan
LLP, New York, NY and by Alan L. Langus, Chief Counsel for the Depositor.
Certain legal matters relating to insolvency issues and certain federal income
tax matters concerning the Certificates will be passed upon for the Depositor by
Stroock & Stroock & Lavan LLP.
FINANCIAL INFORMATION
A Trust will be formed with respect to each series of Certificates. No
Trust will have any assets or obligations prior to the issuance of the related
series of Certificates. No Trust will engage in any activities other than those
described herein or in the Prospectus Supplement. Accordingly, no financial
statement with respect to any Trust is included in this Prospectus or will be
included in the Prospectus Supplement.
The Depositor has determined that its financial statements are not material
to the offering made hereby.
A Prospectus Supplement and the related Form 8-K (which will be
incorporated by reference to the Registration Statement) may contain financial
statements of the related Credit Enhancer, if any.
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<PAGE>
APPENDIX
INDEX TO LOCATION OF PRINCIPAL DEFINED TERMS
PAGE
1986 Act....................................................55
1996 Act....................................................63
Agreement....................................................1
AMTI........................................................63
Annual Reduction............................................49
Applicable Accounting Standards.............................33
Balloon Loans................................................6
Beneficial Owners............................................4
BIF.........................................................34
Book Entry Certificates......................................4
Certificate Account.........................................12
Certificate Interest Rate...................................11
Certificate Principal Balance...............................10
Certificate Register........................................10
Certificate Registrar.......................................10
Certificateholder...........................................70
Certificates.................................................1
Clearing Agency..............................................4
Clearing Agency Participants.................................4
Code.........................................................5
Companion Certificates......................................11
Compound Interest Certificates..............................11
Contract Loan Schedule......................................31
Contract Pool...............................................17
Contracts...................................................17
Conventional Multifamily Loans...............................1
Cooperative Loans...........................................14
Cooperatives.................................................1
Credit Enhancement...........................................4
Credit Enhancer..............................................9
Custodial Account...........................................24
Cut-Off Date................................................10
Debt Service Coverage Ratio.................................16
Defective Mortgage Loan.....................................32
Delivery Date................................................9
Deposit Date................................................32
Depositor....................................................1
Disqualified Organization...................................64
Distribution Date...........................................11
DOL.........................................................52
Due Dates...................................................16
Eligible Investments........................................34
Equity Participation........................................16
ERISA........................................................5
Events of Default...........................................35
FDIC........................................................24
FHA..........................................................1
FHA-Insured Multifamily Loans................................1
FHLMC........................................................2
Financial Guaranty Insurance Policy.........................19
Financial Guaranty Insurer..................................19
FNMA.........................................................2
Garn-St. Germain Act........................................42
GNMA.........................................................2
HUD.........................................................47
Insurance Paying Agent......................................19
Insurance Proceeds..........................................24
Insured Payment.............................................19
Interest Accrual Period.....................................12
Liquidation Proceeds........................................24
Loan-to-Value Ratio.........................................15
Lock-out Expiration Date....................................16
Lock-out Period.............................................16
Manufactured Home...........................................17
Manufactured Home Loans.....................................47
Manufacturer's Invoice Price................................17
Mark to Market Regulations..................................61
Master Servicer..............................................1
MBS..........................................................2
MBS Agreement...............................................18
MBS Issuer..................................................18
MBS Servicer................................................18
MBS Trustee.................................................18
Monthly Advance.............................................24
Mortgage Assets..............................................1
Mortgage Loan Rate..........................................16
Mortgage Loans...............................................1
Mortgage Notes..............................................14
Mortgage Pool Insurance Policy..............................20
Mortgage Rates..............................................15
Mortgage-Backed Securities...................................2
Mortgaged Properties........................................14
Mortgages...................................................14
Mortgagors..................................................23
Multifamily Loans............................................1
Multifamily Properties......................................14
NCUA........................................................24
Net Leases..................................................17
Net Operating Income........................................16
Noneconomic Residual Interest...............................65
Non-Priority Certificates...................................11
Nonrecoverable Advance......................................24
Non-U.S. Person.............................................68
Notional Principal Balance..................................12
OID Regulations.............................................53
Original Value..............................................16
OTS.........................................................43
Owners......................................................11
Partnership Interests.......................................76
Pass-Through Entity.........................................64
Pass-Through Rate............................................3
Plans.......................................................52
Policy Statement............................................51
Pool Insurer................................................21
Pre-Funding Account..........................................3
Pre-Funding Agreement........................................3
Prepayment Assumption.......................................56
Prepayment Premium..........................................16
Principal Balance...........................................15
Principal Prepayments.......................................12
Priority Certificates.......................................11
Property Improvement Loans..................................47
Proposed Premium Regulations................................59
PTE 83-1....................................................52
Record Date.................................................11
Regular Certificateholder...................................55
Regular Certificates........................................53
REIT........................................................54
Relief Act...................................................9
REMIC........................................................5
REMIC Certificates..........................................53
REMIC Pool..................................................53
REMIC Regulations...........................................53
Remittance Date.............................................24
Remittance Rate.............................................24
Reserve Fund................................................23
Residual Certificateholders.................................60
Residual Certificates.......................................53
Retail Class Certificate....................................55
SAIF........................................................34
Scheduled Amortization Certificates.........................11
Seller.......................................................1
Senior Certificates.........................................19
Servicer.....................................................1
SMMEA........................................................5
Special Allocation Certificates.............................11
Special Hazard Insurance Policy.............................21
Special Hazard Insurer......................................22
Standard Certificate........................................70
Stripped Certificateholder..................................73
Stripped Certificates.......................................73
Subordinated Certificates...................................19
Thrift Institution..........................................54
Title I Contracts...........................................47
Title I Loans...............................................47
Title I Program.............................................46
TMP.........................................................54
Trust........................................................1
Trustee......................................................1
U.S. Person.................................................66
UCC.........................................................40
Underwriters................................................76
VA ..........................................................2
