<PAGE>
REGISTRATION NO.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
NOVASTAR MORTGAGE FUNDING CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE
(STATE OF INCORPORATION)
48-1195807
(I.R.S. EMPLOYER IDENTIFICATION NUMBER)
1900 WEST 47TH PLACE, SUITE 205
WESTWOOD, KS 66205
(913) 362-1090
(ADDRESS AND TELEPHONE NUMBER OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
SCOTT F. HARTMAN
NOVASTAR MORTGAGE FUNDING CORPORATION
1900 WEST 47TH PLACE, SUITE 205
WESTWOOD, KS 66205
(913) 362-1090
(NAME, ADDRESS AND TELEPHONE NUMBER OF AGENT FOR SERVICE)
---------------
COPIES TO:
DAVID J. LEE MICHAEL W. LOCHMANN, PAUL D. TVETENSTRAND,
NOVASTAR MORTGAGE FUNDING ESQ. ESQ.
CORPORATION STINSON, MAG & THACHER, PROFFITT &
1900 WEST 47TH PLACE, SUITE FIZZELL, P.C. WOOD
205 1201 WALNUT, SUITE TWO WORLD TRADE
WESTWOOD, KS 66205 2800 CENTER
KANSAS CITY, MO 64106 NEW YORK, NY 10048
---------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From time
to time on or after the effective date of this Registration Statement, as
determined by market conditions.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the
following box. [_]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or
interest reinvestment plans, please check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
---------------
CALCULATION OF REGISTRATION FEE
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PROPOSED PROPOSED
AMOUNT MAXIMUM MAXIMUM AMOUNT OF
TITLE OF SECURITIES TO BE OFFERING PRICE AGGREGATE REGISTRATION
BEING REGISTERED REGISTERED PER UNIT (1) OFFERING PRICE FEE
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Collateralized Mortgage
Obligation Bonds,
issued in series....... $2,000,000 100% $2,000,000 $606
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(1) Estimated solely for the purpose of calculating the registration fee.
---------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
EXPLANATORY NOTE
This Registration Statement includes (i) a base prospectus and (ii) an
illustrative form of prospectus supplement for use in an offering of
Collateralized Mortgage Obligation Bonds.
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD OR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY, NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY SALE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED , 19
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED , 199 )
$
NOVASTAR MORTGAGE FUNDING TRUST SERIES ,
COLLATERALIZED MORTGAGE OBLIGATION BONDS
----------
NovaStar Mortgage Funding Trust Series (the "Issuer") will be formed
pursuant to a Trust Agreement to be dated as of , 19 between
NovaStar Mortgage Funding Corporation (the "Company") and Wilmington Trust
Company, the Owner Trustee. The Issuer will issue Collateralized Mortgage
Obligation Bonds (the "Bonds"), in the aggregate principal amount of $ .
The Bonds will be issued pursuant to an Indenture to be dated as of
, 19 , between the Issuer and , the Indenture
Trustee.
The Bonds will represent indebtedness of the Issuer and will be secured by
the trust estate (the "Trust Estate") created by the Trust Agreement. The Trust
Estate will consist primarily of fixed and adjustable rate, conventional, one-
to four-family, first lien mortgage loans (the "Initial Mortgage Loans") and
any funds on deposit in the Interest Coverage Account and Pre-Funding Account
(each as defined herein). Additional Mortgage Loans (the "Subsequent Mortgage
Loans" and, together with the Initial Mortgage Loans, the "Mortgage Loans")
having an aggregate unpaid principal balance of up to $ meeting the
criteria set forth herein are intended to be purchased by the Issuer on or
before , , with funds on deposit in an account (the "Pre-
Funding Account"), which will become part of the Trust Estate. In addition, the
Bonds will have the benefit of an irrevocable and unconditional financial
guaranty insurance policy (the "Bond Insurance Policy") to be issued by
(the "Bond Insurer") as described under
"Description of the Bonds--Bond Insurance Policy" herein.
FOR A DISCUSSION OF CERTAIN RISK FACTORS RELATING TO INVESTMENTS IN THE
BONDS, SEE "RISK FACTORS" COMMENCING ON PAGE S-15 OF THIS PROSPECTUS SUPPLEMENT
AND ON PAGE OF THE PROSPECTUS.
THE ASSETS PLEDGED TO SECURE THE BONDS AND PROCEEDS FROM THE BOND INSURANCE
POLICY ARE THE SOLE SOURCE OF PAYMENTS ON THE BONDS. THE BONDS WILL REPRESENT
OBLIGATIONS SOLELY OF THE ISSUER AND WILL NOT REPRESENT AN INTEREST IN OR
OBLIGATION OF THE COMPANY, THE SERVICER, THE OWNER TRUSTEE, THE INDENTURE
TRUSTEE OR ANY OF THEIR AFFILIATES, OTHER THAN THE ISSUER. NEITHER THE
BONDS NOR THE UNDERLYING MORTGAGE LOANS ARE INSURED OR GUARANTEED BY ANY
GOVERNMENTAL AGENCY OR INSTRUMENTALITY.
----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED
THE MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS
UNLAWFUL.
----------
There is currently no secondary market for the Bonds.
(the "Underwriter") intends to make a secondary market in the Bonds, but is not
obligated to do so. There can be no assurance that a secondary market for the
Bonds will develop or, if it does develop, that it will continue or provide
Bondholders with sufficient liquidity of investment. The Bonds will not be
listed on any securities exchange.
The Bonds will be purchased by the Underwriter from the Issuer and will be
offered by the Underwriter from time to time to the public in negotiated
transactions or otherwise at varying prices to be determined at the time of
sale. Proceeds to the Issuer from the sale of the Bonds are expected to be
approximately % of the aggregate principal amount of the Bonds plus
accrued interest, before deducting issuance expenses payable by the Issuer.
The Bonds are offered by the Underwriter, subject to prior sale, when, as and
if delivered to and accepted by the Underwriter and subject to its right to
reject orders in whole or in part. It is expected that delivery of the Bonds
will be made in book-entry form only through the facilities of The Depository
Trust Company on or about , 199 .
Upon receipt of a request by an investor for an electronic Prospectus
Supplement from the Underwriter or a request by such investor's representative
within the period during which there is an obligation to deliver a Prospectus
Supplement, the Underwriter will promptly deliver, or cause to be delivered, in
addition to such electronic Prospectus Supplement, without charge, a paper copy
of the Prospectus Supplement.
[UNDERWRITER NAME]
The date of this Prospectus Supplement is , 19 .
<PAGE>
The Bonds will be issued by NovaStar Mortgage Funding Trust Series
(the "Issuer"), a Delaware business trust established by NovaStar Mortgage
Funding Corporation (the "Company"), a wholly owned subsidiary of NovaStar
Financial, Inc., a Maryland corporation (the "Seller"). The Bonds will
represent indebtedness of the Trust Estate (the "Trust Estate") created by the
Trust Agreement. In addition, the Bonds will have the benefit of an
irrevocable and unconditional financial guaranty insurance policy (the "Bond
Insurance Policy") issued by (the "Bond Insurer") as
described under "Description of the Bonds--Bond Insurance Policy" herein.
Prior to their transfer to the Issuer by the Company, the Mortgage Loans (as
defined below) will be held by the Seller.
The Bonds will be collateralized by fixed and adjustable rate, conventional
mortgage loans secured by [first] liens on one- to four-family residential
properties (the "Mortgage Loans"). The Mortgage Loans have been sold to the
Company by the Seller. The interest rates on the Mortgage Loans will be fixed
or subject to semi-annual or annual adjustment commencing after the related
Initial Period (as defined herein) based on the related Index (as defined
herein) and the respective Gross Margins described herein, subject to certain
periodic and lifetime limitations as described more fully herein. Scheduled
net payments on the Mortgage Loans will be sufficient, irrespective of the
rate of prepayments on the Mortgage Loans, to make timely payments of interest
on the Bonds and to retire the Bonds not later than their Stated Maturity.
The Mortgage Loans were generally underwritten in accordance with the
underwriting standards described in "Description of the Mortgage Pool--
Underwriting". See also "Risk Factors--Underwriting Standards" herein.
[Approximately % of the Mortgage Loans, by aggregate principal balance as
of the Cut-off Date, are secured by Mortgaged Properties in California.] See
"Risk Factors--Delinquencies and Potential Delinquencies" herein.
Payments on the Bonds will be made on the [25th] day of each month or, if
such day is not a business day, then on the next business day, commencing on
, 19 (each, a "Payment Date"). As described herein,
interest will accrue on the Bonds at a floating rate (the "Bond Interest
Rate") equal, on the first Payment Date, to %, and thereafter, equal to
the lesser of (i)(a) with respect to each Payment Date up to and including the
earlier of (x) the Payment Date in , 20 and (y) the Payment
Date which occurs on or prior to the date on which the aggregate Principal
Balance of the Mortgage Loans is less than % of the sum of the aggregate
Principal Balance of the Initial Mortgage Loans as of the Cut-off Date and the
Original Pre-Funded Amount, One-Month LIBOR (as defined herein) plus %,
and (b) with respect to each Payment Date thereafter, One-Month LIBOR plus
% and (ii) % per annum (the "Maximum Interest Rate"). See
"Description of the Bonds--Interest Payments on the Bonds" herein. As
described herein, interest payable with respect to each Payment Date will
accrue on the basis of a 360-day year and the actual number of days elapsed
during the period commencing on the Payment Date immediately preceding the
month in which such Payment Date occurs and ending on the calendar day
immediately preceding such Payment Date, except with respect to the first
Payment Date, which has an accrual period from , 19 to
, 19 , and will be based on the Bond Principal Balance
thereof and the then-applicable Bond Interest Rate thereof. Payments in
respect of principal of the Bonds will be made as described herein under
"Description of the Bonds--Priority of Payment."
The Bonds may be redeemed in whole, but not in part, by the Issuer on any
Payment Date on or after the earlier of (i) the Payment Date on which the
aggregate Principal Balance (as defined herein) of the Mortgage Loans is less
than or equal to % of the sum of the aggregate Principal Balance of the
Initial Mortgage Loans as of the Cut-off Date and the Original Pre-Funded
Amount or (ii) the Payment Date occurring in , 20 . See
"Description of the Bonds--Optional Redemption" herein.
The Bonds initially will be registered in the name of Cede & Co., as nominee
of The Depository Trust Company ("DTC"), as further described herein. The
interests of beneficial owners of the Bonds will be represented by book
entries on the records of DTC and the participating members of DTC. Definitive
certificates will be available for the Bonds only under the limited
circumstances described herein. See "Description of the Bonds--Book-Entry
Bonds" herein.
S-2
<PAGE>
It is a condition of the issuance of the Bonds that they be rated "AAA" by
Standard & Poor's Ratings Services, a division of The McGraw-Hill Companies,
Inc. ("S&P") and "Aaa" by Moody's Investors Service, Inc. ("Moody's").
----------------
This Prospectus Supplement does not contain complete information about the
offering of the Bonds. Additional information is contained in the Prospectus
of the Company dated , 199 and purchasers are urged to read both this
Prospectus Supplement and the Prospectus in full. Sales of the Bonds may not
be consummated unless the purchaser has received both this Prospectus
Supplement and the Prospectus.
The Indenture Trustee will provide without charge to each person to whom
this Prospectus Supplement is delivered, on the written or oral request of
such person, a copy of any or all of the documents referred to in the
Prospectus under "Incorporation of Certain Documents by Reference" that have
been or may be incorporated by reference in the Prospectus (not including
exhibits to the information that is incorporated by reference unless such
exhibits are specifically incorporated by reference into the information that
the Prospectus incorporates). Such requests should be directed to the
Indenture Trustee at , telephone:
, facsimile number: .
THE YIELD TO MATURITY ON THE BONDS WILL DEPEND ON, AMONG OTHER THINGS, THE
RATE AND TIMING OF PRINCIPAL PAYMENTS (INCLUDING PREPAYMENTS, REPURCHASES,
DEFAULTS AND LIQUIDATIONS) ON THE MORTGAGE LOANS. THE MORTGAGE LOANS GENERALLY
MAY BE PREPAID IN FULL OR IN PART AT ANY TIME; HOWEVER, PREPAYMENT MAY SUBJECT
THE MORTGAGOR TO A PREPAYMENT CHARGE WITH RESPECT TO APPROXIMATELY
OF THE MORTGAGE LOANS. IN ADDITION, THE YIELD ON THE BONDS WILL BE SENSITIVE
TO FLUCTUATIONS IN THE LEVEL OF [ONE-MONTH LIBOR], WHICH MAY VARY
SIGNIFICANTLY OVER TIME. SEE "CERTAIN YIELD AND PREPAYMENT CONSIDERATIONS"
HEREIN AND "YIELD CONSIDERATIONS" IN THE PROSPECTUS.
THE BONDS OFFERED BY THIS PROSPECTUS SUPPLEMENT CONSTITUTE PART OF A
SEPARATE SERIES OF BONDS BEING OFFERED PURSUANT TO THE COMPANY'S PROSPECTUS
DATED , 19 , OF WHICH THIS PROSPECTUS SUPPLEMENT IS A PART
AND WHICH ACCOMPANIES THIS PROSPECTUS SUPPLEMENT. THE PROSPECTUS CONTAINS
IMPORTANT INFORMATION REGARDING THIS OFFERING WHICH IS NOT CONTAINED HEREIN,
AND PROSPECTIVE INVESTORS ARE URGED TO READ THE PROSPECTUS AND THIS PROSPECTUS
SUPPLEMENT IN FULL. SALES OF THE BONDS MAY NOT BE CONSUMMATED UNLESS THE
PURCHASER HAS RECEIVED BOTH THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS.
UNTIL 90 DAYS AFTER THE DATE OF THIS PROSPECTUS SUPPLEMENT, ALL DEALERS
EFFECTING TRANSACTIONS IN THE OFFERED BONDS, WHETHER OR NOT PARTICIPATING IN
THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS SUPPLEMENT AND
PROSPECTUS. 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.
S-3
<PAGE>
SUMMARY
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere herein and in the Prospectus.
Capitalized terms used herein and not otherwise defined herein have the
meanings assigned to them in the Prospectus.
The Bonds....................... $ NovaStar Mortgage Funding
Trust Series Collateralized
Mortgage Obligation Bonds, Series .
Only the Bonds are offered hereby. The
Bonds will be issued pursuant to an
Indenture, dated as of ,
19 , between the Issuer and the
Indenture Trustee.
Issuer.......................... The Bonds will be issued by NovaStar
Mortgage Funding Trust (the
"Issuer"), a Delaware business trust
established pursuant to the Trust
Agreement, dated as of , 19
(the "Trust Agreement"), between the
Company and the Owner Trustee. The Bonds
will represent obligations solely of the
Issuer, and the proceeds of the assets of
the Issuer (such assets, the "Trust
Estate") and [the Bond Insurance Policy]
will be the sole source of payments on
the Bonds. The Issuer is not expected to
have any significant assets other than
those pledged as collateral to secure the
Bonds.
Company......................... NovaStar Mortgage Funding Corporation
(the "Company"). See "--The Company" in
the Prospectus.
Seller.......................... NovaStar Financial, Inc. (the "Seller").
See "Description of the Mortgage Pool--
General" herein.
Servicer........................ NovaStar Mortgage, Inc. (the "Servicer").
See "Description of the Servicing
Agreement--The Servicer" herein.
Owner Trustee................... Wilmington Trust Company, a Delaware
trust company.
Indenture Trustee............... , a national
banking association.
Cut-off Date.................... , 19 .
Closing Date.................... On or about , 19 .
Payment Date.................... The [25th] day of each month (or, if such
day is not a business day, the next
business day), beginning on ,
19 (each, a "Payment Date").
Denominations and Registration.. The Bonds will be issued, maintained and
transferred on the book-entry records of
DTC and its Participants (as defined in
the Prospectus). The Bonds will be
offered in registered form, in minimum
denominations of $25,000 and integral
multiples of $1 in excess thereof. The
Bonds will be represented by one or more
Bonds registered in the name of Cede &
Co., as nominee of DTC. No Beneficial
Owner will be entitled to receive a Bond
in fully registered, certificated form (a
"Definitive Bond Definitive Bond"),
except under the limited circumstances
described herein. See "Description of the
Bonds--Book-Entry Bonds" herein.
S-4
<PAGE>
The Mortgage Pool............... The Mortgage Loans are secured by first
liens on one- to four-family real
properties (each, a "Mortgaged
Property"). The Initial Mortgage Loans
have individual principal balances at
origination of at least $ but
not more than $ with an
average principal balance at origination
of approximately $ . The Initial
Mortgage Loans generally have terms to
maturity of up to [30] years from the
date of origination and a weighted
average remaining term to stated maturity
of approximately months as of the
Cut-off Date. % of the Initial
Mortgage Loans (by aggregate principal
balance as of the Cut-off Date) require
monthly payments of principal based on
30-year amortization schedules but have
scheduled maturity dates of years from
the due date of the first monthly payment
(each such Mortgage Loan, a "Balloon
Loan"), in each case leaving a
substantial portion of the original
principal amount due and payable on the
respective scheduled maturity date.
With respect to approximately % of
the Initial Mortgage Loans (by aggregate
principal balance as of the Cut-off Date)
the related Mortgage Rate on such Initial
Mortgage Loans (the "Adjustable Rate
Mortgage Loans") will be subject to semi-
annual or annual adjustment, commencing
after an initial period from origination
of six months, one year, two years or
three years (such period, the "Initial
Period"), on its Adjustment Date (as
defined herein), to equal the sum
(rounded as described herein) of the
related Index described below and a fixed
percentage set forth in the related
Mortgage Note (the "Gross Margin").
However, (i) on any Adjustment Date such
Mortgage Rate may not increase or
decrease by more than the Periodic Rate
Cap (as defined herein), except as
described herein, (ii) over the life of
such Adjustable Rate Mortgage Loan, such
Mortgage Rate may not exceed the related
maximum Mortgage Rate (the "Maximum
Mortgage Rate"), which Maximum Mortgage
Rates will range from % to %
and (iii) over the life of such
Adjustable Rate Mortgage Loan, such
Mortgage Rate may not be lower than a
specified minimum Mortgage Rate (the
"Minimum Mortgage Rate"), which Minimum
Mortgage Rates will range from % to
% per annum. The Adjustable Rate
Mortgage Loans will have Gross Margins
ranging from % to % with a
weighted average of % as of the Cut-
off Date.
With respect to approximately % of
the Initial Mortgage Loans (by aggregate
principal balance as of the Cut-off Date)
the related Mortgage Rate on such
Mortgage Loans (the "Fixed Rate Mortgage
Loans") is fixed. Approximately % of
the Initial Mortgage Loans (by aggregate
principal balance as of the Cut-off Date)
provide for negative amortization.
S-5
<PAGE>
As of the Cut-off Date, the Initial
Mortgage Loans in the aggregate will have
Mortgage Rates of at least % per
annum but not more than % per annum,
with a weighted average of %.
Approximately % of the Initial
Mortgage Loans (by aggregate principal
balance as of the Cut-off Date) were
thirty days or more but less than sixty
days delinquent in their Monthly Payments
as of the Cut-off Date. Approximately
% of the Initial Mortgage Loans (by
aggregate principal balance as of the
Cut-off Date) were sixty days or more but
less than ninety days delinquent as of
the Cut-off Date. [Approximately % of
the Initial Mortgage Loans were ninety
days or more delinquent in their Monthly
Payments as of the Cut-off Date.]
For a further description of the Mortgage
Loans, see "Description of the Mortgage
Pool" herein.
Pre-Funding Account............. On the Closing Date, approximately
$ (the "Original Pre-Funded
Amount") will be deposited in an account
(the "Pre-Funding Account"), which
account is in the name of the Indenture
Trustee and is part of the Trust Estate
and will be used to acquire Subsequent
Mortgage Loans. During the Funding Period
(as defined below), the Original Pre-
Funded Amount will be reduced by the
amount thereof used to purchase
Subsequent Mortgage Loans. The "Funding
Period Funding Period" is the period
commencing on the Closing Date and ending
generally on the earlier to occur of (i)
the date on which the amount on deposit
in the Pre-Funding Account is less than
$10,000 and (ii) . See
"Description of the Mortgage Pool--
Conveyance of Subsequent Mortgage Loans
and the Pre-Funding Account" herein.
Interest Coverage Account....... On the Closing Date, a portion of the
sales proceeds of the Bonds will be
deposited in an account (the "Interest
Coverage Account") for application by the
Indenture Trustee to cover shortfalls in
the Interest Payment Amount (as defined
herein) attributable to the pre-funding
feature during the Funding Period. See
"Description of the Bonds--Interest
Coverage Account" herein.
The Indices..................... As of any Adjustment Date with respect to
any Adjustable Rate Mortgage Loan, the
Index applicable to the determination of
the related Mortgage Rate will be one of
the following: (i) the average of the
interbank offered rates for six month
U.S. dollar deposits in the London market
based on quotations of major banks as
most recently available generally 30 days
prior to the Adjustment Date ("Six-Month
LIBOR"); or (ii) the weekly average yield
on U.S. Treasury securities adjusted to a
constant maturity of one year ("One-Year
CMT") as
S-6
<PAGE>
published by the Federal Reserve Board in
Statistical Release H.15(519) and most
recently available as of the first
business day generally 45 days prior to
the Adjustment Date.
Interest Payments............... Interest on the Bonds will be paid
monthly on each Payment Date, commencing
in 19 , in an amount (the
"Interest Payment Amount") equal to the
lesser of (i) interest accrued on the
Bond Principal Balance thereof
immediately prior to such Payment Date at
the Bond Interest Rate for the related
Interest Period (as defined below) and
(ii) the Guaranteed Interest Payment
Amount (as defined below). The "Bond
Interest Rate" on each Payment Date after
the first Payment Date will be a floating
rate equal to the lesser of (i)(a) with
respect to each Payment Date up to and
including the earlier of (x) the Payment
Date in 20 and (y) the Payment
Date which occurs on or prior to the date
on which the aggregate Principal Balance
of the Mortgage Loans is less than [25]%
of the sum of the aggregate Principal
Balance of the Initial Mortgage Loans as
of the Cut-off Date and the Original Pre-
Funded Amount, One-Month LIBOR (as
defined herein) plus [.25]%, and (b) with
respect to each Payment Date thereafter,
One-Month LIBOR plus [.50]% and (ii)
% per annum (the "Maximum Interest
Rate"). The Bond Interest Rate for the
first Payment Date will equal % per
annum. Interest on the Bonds in respect
of any Payment Date will accrue from the
preceding Payment Date (or in the case of
the first Payment Date, from the Closing
Date) through the day preceding such
Payment Date (each such period, an
"Interest Period") on the basis of the
actual number of days in the Interest
Period and a 360-day year.
As further described herein, with respect
to the Bonds and any Payment Date, to the
extent that the amount calculated
pursuant to clause (i) of the definition
of Interest Payment Amount exceeds the
Guaranteed Interest Payment Amount (such
excess, the "Carry-Forward Amount"), the
holders of the Bonds will be paid the
amount of such Carry-Forward Amount with
interest thereon at the Bond Interest
Rate for the Bonds applicable from time
to time after certain payments to the
holders of the Bonds and the Bond Insurer
to the extent of available funds. The
"Guaranteed Interest Payment Amount" for
any Payment Date is equal to the amount
of interest that accrued on the aggregate
outstanding Principal Balance of the
Mortgage Loans payable on the related Due
Date minus the aggregate amount of the
related Servicing Fee, the Indenture
Trustee Fee, the Owner Trustee Fee, the
Bond Insurance Premium and the Minimum
Spread (each as defined below). With
respect to each Mortgage Loan and each
Payment Date, the Servicer will be
entitled to a fee (the "Servicing Fee")
equal to 1/12 of the Servicing Fee Rate
times the Principal Balance of such
Mortgage Loan as of such date. With
respect
S-7
<PAGE>
to each Mortgage Loan and each Payment
Date, the Indenture Trustee will be
entitled to a fee (the "Indenture Trustee
Fee") equal to 1/12 of the Indenture
Trustee Fee Rate times the Principal
Balance of such Mortgage Loan as of such
date. For any Payment Date, the
"Servicing Fee Rate" is equal to [0.50%]
per annum, the "Indenture Trustee Fee
Rate" is equal to [0.0125%] per annum,
the "Owner Trustee Fee" is [$4,000] per
annum (payable on the Payment Date in
December of each year) and the "Bond
Insurance Premium" is equal to 1/12 of
the per annum rate specified in the
Insurance Agreement times the Bond
Principal Balance (the Bond Insurance
Premium together with the Owner Trustee
Fee, the "Administrative Fee"). With
respect to each Mortgage Loan and each
Payment Date, the "Minimum Spread" is
equal to 1/12 of [0.50%] per annum times
the Principal Balance of such Mortgage
Loan as of such date. The Bond Insurance
Policy does not cover any Prepayment
Interest Shortfalls, any Relief Act
Shortfalls (each as defined herein) or
the Carry-Forward Amount, nor do the
ratings assigned to the Bonds address the
payment of any Prepayment Interest
Shortfalls, any Relief Act Shortfalls or
the Carry-Forward Amount.
Principal Payments.............. Principal payments will be payable on the
Bonds on each Payment Date in an
aggregate amount equal to the Principal
Payment Amount for such Payment Date. The
Principal Payment Amount will include, to
the extent of Available Funds (as defined
herein) and except as otherwise described
herein, the principal portion of all
scheduled monthly payments (to the extent
received or advanced) due from Mortgagors
on the related Due Date, and all
unscheduled amounts received during the
preceding calendar month that are
allocable to principal (including
proceeds of repurchases, principal and
adjustments in the case of substitutions,
prepayments, liquidations and insurance
(excluding proceeds paid in respect of
the Bond Insurance Policy)) and may be
reduced as a result of
overcollateralization in excess of the
required level, as described herein. In
addition, on any Payment Date, to the
extent of funds available therefor,
Bondholders will also be entitled to
receive payments generally equal to the
amount, if any, necessary to bring the
Subordination Amount up to the Required
Subordination Amount (such amount, the
"Subordination Increase Amount") and with
respect to the Payment Date immediately
following the end of the Funding Period,
any amounts in the Pre-Funding Account
after giving effect to any purchase of
Subsequent Mortgage Loans. On the Payment
Date in 20 , principal will be
payable on the Bonds in an amount equal
to the Bond Principal Balance on such
Payment Date.
The "Bond Principal Balance" of the Bonds
on any date of determination is the
initial principal balance thereof as of
the
S-8
<PAGE>
Closing Date, reduced by all payments of
principal thereon prior to such date of
determination.
Bond Insurer.................... (the "Bond
Insurer"). See "The Bond Insurer" herein.
Bond Insurance Policy........... On the Closing Date, the Bond Insurer
will issue a Bond Insurance Policy in
favor of the Indenture Trustee for the
benefit of the holders of the Bonds. On
each Payment Date, a claim will be made
on the Bond Insurance Policy to cover (a)
any shortfall in amounts available to
make payments of the Interest Payment
Amount (net of any Prepayment Interest
Shortfalls, to the extent not covered by
the Servicer by Compensating Interest (as
defined herein), and any Relief Act
Shortfalls) and (b) the Subordination
Deficit (as defined herein), to the
extent described herein. The Bond
Insurance Policy will also cover any
unpaid Preference Amount (as defined
herein). In addition, the Bond Insurance
Policy will guarantee the payment of the
outstanding Bond Principal Balance of
each Bond on the Payment Date in
20 (after giving effect to all other
amounts distributable and allocable to
principal on such Payment Date, to the
extent described herein). The Bond
Insurance Policy does not insure the
payment of the Carry-Forward Amount (as
defined herein). See "Description of the
Bonds--Bond Insurance Policy" herein and
"Description of Credit Support" in the
Prospectus.
The Certificates................ Trust Certificates, Series . The
Certificates will be issued pursuant to
the Trust Agreement and will represent
the beneficial ownership interest in the
Issuer. The Certificates are not offered
hereby.
Credit Enhancement.............. The credit enhancement provided for the
benefit of the Bondholders consists
solely of (a) the Net Monthly Excess
Cashflow (as defined herein), (b) the
overcollateralization and (c) the Bond
Insurance Policy.
Overcollateralization. Initially, the sum
of the aggregate Principal Balance of the
Mortgage Loans as of the Cut-off Date and
the Original Pre-Funded Amount will
exceed the aggregate Bond Principal
Balance of the Bonds as of the Closing
Date by approximately $ or
% of the sum of the aggregate
Principal Balance of the Mortgage Loans
as of the Cut-off Date and the Original
Pre-Funded Amount. This amount is the
required level of overcollateralization
(the "Required Subordination Amount") as
of the Closing Date and may increase or
decrease, subject to certain trigger
tests, in accordance with the provisions
of the Indenture. In addition, upon the
end of the Funding Period, the Bond
Insurer may adjust the Required
Subordination Amount. An increase would
result in a temporary period of
accelerated amortization of the Bonds to
increase the actual level of
overcollateralization to its
S-9
<PAGE>
required level; a decrease would result
in a temporary period of decelerated
amortization to reduce the actual level
of overcollateralization to its required
level. See "Description of the Bonds--
Overcollateralization Provisions."
The Bond Insurance Policy. The Bonds will
have the benefit of the Bond Insurance
Policy, as discussed more fully herein.
See "Description of the Bonds--Bond
Insurance Policy" herein.
Mandatory Prepayments on the The Bonds will be prepaid in part on the
Bonds........................... Payment Date immediately following the
end of the Funding Period in the event
that any amount remains on deposit in the
Pre-Funding Account on such Payment Date
after the purchase by the Issuer of the
Subsequent Mortgage Loans, if any.
Although no assurance can be given, it is
anticipated that the principal amount of
the Subsequent Mortgage Loans purchased
by the Issuer will require the
application of substantially all of the
Original Pre-Funded Amount and that there
should be no material amount of principal
prepaid to the Bonds from the Pre-Funding
Account. However, it is unlikely that the
Seller will be able to deliver Subsequent
Mortgage Loans with an aggregate
Principal Balance identical to the
Original Pre-Funded Amount. See
"Description of the Bonds--Mandatory
Prepayments on the Bonds" herein.
Advances........................ The Servicer is required to make advances
("Advances") in respect of delinquent
payments of principal and interest on the
Mortgage Loans, subject to the
limitations described herein. See
"Description of the Bonds--Advances"
herein and in the Prospectus.
Optional Redemption of the The Bonds may be redeemed in whole, but
Bonds........................... not in part, by the Issuer on any Payment
Date on or after the earlier of (i) the
Payment Date on which the aggregate
Principal Balance (as defined herein) of
the Mortgage Loans is less than or equal
to [25]% of the sum of the aggregate
Principal Balance of the Initial Mortgage
Loans as of the Cut-off Date and the
Original Pre-Funded Amount or (ii) the
Payment Date occurring in 20 .
See "Description of the Bonds--Optional
Redemption" herein and "Description of
the Agreements--Termination" and "--
Redemption" in the Prospectus.
Special Prepayment The rate and timing of principal payments
Considerations.................. on the Bonds will depend, among other
things, on the rate and timing of
principal payments (including
prepayments, defaults, liquidations and
purchases of the Mortgage Loans due to a
breach of a representation or warranty)
on the related Mortgage Loans. As is the
case with mortgage-backed securities
generally, the Bonds are subject to
substantial inherent cash-flow
uncertainties because the Mortgage Loans
may be prepaid at any time; however, a
prepayment may subject the related
S-10
<PAGE>
Mortgagor to a prepayment charge with
respect to approximately % of the
Mortgage Loans (by aggregate principal
balance as of the Cut-off Date).
Generally, when prevailing interest rates
increase, prepayment rates on mortgage
loans tend to decrease, resulting in a
slower return of principal to investors
at a time when reinvestment at such
higher prevailing rates would be
desirable. Conversely, when prevailing
interest rates decline, prepayment rates
on mortgage loans tend to increase,
resulting in a faster return of principal
to investors at a time when reinvestment
at comparable yields may not be possible.
Certain of the Mortgage Loans provide for
a prepayment charge. Typically, the
Mortgage Loans with a prepayment charge
provision provide for a prepayment charge
for partial prepayments and full
prepayments. Prepayment charges may be
payable for a period of time ranging from
one to five years from the related
origination date. Such prepayment charges
may reduce the rate of prepayment on the
Mortgage Loans.
See "Certain Yield and Prepayment
Considerations" herein, and "Yield
Considerations" in the Prospectus.
Special Yield Considerations.... The yield to maturity on the Bonds will
depend on, among other things, the rate
and timing of principal payments
(including prepayments, defaults,
liquidations and purchases of the
Mortgage Loans due to a breach of a
representation or warranty) on the
Mortgage Loans and the allocation thereof
to reduce the Bond Principal Balance
thereof. The yield to maturity on the
Bonds will also depend on the Bond
Interest Rate and the purchase price for
such Bonds.
If the Bonds are purchased at a premium
and principal payments thereon occur at a
rate faster than anticipated at the time
of purchase, the investor's actual yield
to maturity will be lower than that
assumed at the time of purchase.
Conversely, if the Bonds are purchased at
a discount and principal payments thereon
occur at a rate slower than that assumed
at the time of purchase, the investor's
actual yield to maturity will be lower
than that assumed at the time of
purchase.
The Bonds were structured assuming, among
other things, a prepayment rate and
corresponding weighted average lives as
described herein. The prepayment, yield
and other assumptions to be used for
pricing purposes for the Bonds may vary
as determined at the time of sale.
See "Certain Yield and Prepayment
Considerations" herein and "Yield
Considerations" in the Prospectus.
Federal Income Tax Upon the issuance of the Bonds, Stinson,
Consequences.................... Mag & Fizzell, P.C., counsel to the
Company, will deliver its opinion
generally to the effect that based on the
application of existing law and assuming
compliance with the Trust Agreement, for
federal
S-11
<PAGE>
income tax purposes, the Bonds will be
characterized as indebtedness and not as
representing an ownership interest in the
Trust Estate or an equity interest in the
Issuer or the Company. In addition, for
federal income tax purposes, the Issuer
will not be (i) classified as an
association taxable as a corporation for
federal income tax purposes, (ii) a
taxable mortgage pool as defined in
Section 7701(i) of the Code, or (iii) a
"publicly traded partnership" as defined
in Treasury Regulation Section 1.7704-1.
For further information regarding certain
federal income tax consequences of an
investment in the Bonds see "Federal
Income Tax Consequences" herein and
"Certain Federal Income Tax Consequences"
and "State Tax Considerations" in the
Prospectus.
ERISA Considerations............ A fiduciary of an employee benefit plan
and 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, annuities or
arrangements are invested, that is
subject to the Employee Retirement Income
Security Act of 1974, as amended
("ERISA"), or Section 4975 of the Code
(each, a "Plan") should carefully review
with its legal advisors whether the
purchase or holding of Bonds could give
rise to a transaction that is prohibited
or is not otherwise permissible either
under ERISA or Section 4975 of the Code
or cause the Mortgage Loans securing the
Bonds to be treated as plan assets for
purposes of regulations of the Department
of Labor set forth in 29 C.F.R. 2510.3-
101 (the "Plan Asset Regulations").
Although certain exceptions from the
application of the prohibited transaction
rules and the Plan Asset Regulations
exist, there can be no assurance that any
such exception will apply with respect to
the acquisition of the Bonds. Although
not entirely free from doubt, the Issuer
believes that, as of the date hereof, the
Bonds will be treated as debt obligations
without significant equity features for
purposes of the Plan Asset Regulations.
Accordingly, a Plan that acquires the
Bonds should not be treated as having
acquired a direct interest in the assets
of the Issuer. However, there can be no
complete assurance that the Bonds will be
treated as debt obligations without
significant equity features for purposes
of the Plan Asset Regulations. Investors
are advised to consult their counsel and
to review "ERISA Considerations" herein
and in the Prospectus.
Legal Investment................ The Bonds will constitute "mortgage
related securities" for purposes of SMMEA
for so long as they are rated in at least
the second highest rating category by one
or more nationally recognized statistical
rating agencies. Institutions whose
investment activities are subject to
legal investment laws and
S-12
<PAGE>
regulations or to review by certain
regulatory authorities may be subject to
restrictions on investment in the Bonds.
See "Legal Investment" herein.
Rating.......................... It is a condition to the issuance of the
Bonds that they be rated "AAA" by
Standard & Poor's Ratings Services, a
division of The McGraw-Hill Companies,
Inc. ("S&P") and "Aaa" by Moody's
Investors Service, Inc. ("Moody's"). A
security rating is not a recommendation
to buy, sell or hold securities and may
be subject to revision or withdrawal at
any time by the assigning rating
organization. A security rating does not
address the frequency of prepayments of
Mortgage Loans, or the corresponding
effect on yield to investors.
The ratings issued by S&P and Moody's on
payment of principal and interest on the
Bonds do not cover the payment of the
Available Funds Cap Carry-Forward Amount.
See "Certain Yield and Prepayment
Considerations" and "Ratings" herein.
S-13
<PAGE>
RISK FACTORS
Prospective Bondholders should consider, among other things, the items
discussed under "Risk Factors" in the Prospectus and the following factors in
connection with the purchase of the Bonds:
UNDERWRITING STANDARDS
The Mortgage Loans were underwritten generally in accordance with
underwriting standards described in "Description of the Mortgage Pool--
Underwriting" below, which are primarily intended to provide single family
mortgage loans for non-conforming credits which do not satisfy the
requirements of typical "A" credit borrowers. A "non-conforming credit" means
a mortgage loan which is ineligible for purchase by FNMA or FHLMC due to
credit characteristics that do not meet the FNMA or FHLMC underwriting
guidelines, including mortgagors whose creditworthiness and repayment ability
do not satisfy such FNMA or FHLMC underwriting guidelines and mortgagors who
may have a record of credit write-offs, outstanding judgments, prior
bankruptcies and other credit items that do not satisfy such FNMA or FHLMC
underwriting guidelines. Accordingly, Mortgage Loans underwritten under the
Originators' (as defined herein) non-conforming credit underwriting standards
or to standards that do not meet the requirements for typical "A" credit
borrowers are likely to experience rates of delinquency, foreclosure and loss
that are higher, and may be substantially higher, than mortgage loans
originated in accordance with the FNMA or FHLMC underwriting guidelines or to
typical "A" credit borrowers.
DELINQUENCIES AND POTENTIAL DELINQUENCIES
Approximately % of the Initial Mortgage Loans (by aggregate principal
balance as of the Cut-off Date) were thirty days or more but less than sixty
days delinquent in their Monthly Payments as of the Cut-off Date.
Approximately % of the Initial Mortgage Loans (by aggregate principal
balance as of the Cut-off Date) were sixty days or more but less than ninety
days delinquent as of the Cut-off Date. Approximately % of the Initial
Mortgage Loans were ninety days or more delinquent in their Monthly Payments
as of the Cut-off Date.
The Seller commenced purchasing or originating mortgage loans pursuant to
its underwriting guidelines in February 1997. Accordingly, the Seller does not
have sufficient historical delinquency, bankruptcy, foreclosure or default
experience that may be referred to for purposes of estimating the future
delinquency and loss experience of mortgage loans similar to the Mortgage
Loans.
Approximately % of the Initial Mortgage Loans (by aggregate principal
balance as of the Cut-off Date) are secured by Mortgaged Properties located in
the State of California. In the event California experiences a decline in real
estate values, losses on the Mortgage Loans may be greater than otherwise
would be the case.
Approximately % of the Initial Mortgage Loans (by aggregate principal
balance as of the Cut-off Date) will have Loan-to-Value Ratios in excess of
80%. None of such Mortgage Loans will be covered by a primary mortgage
insurance policy and consequently, such Mortgage Loans will be affected to a
greater extent than Mortgage Loans with a Loan-to-Value Ratio equal to or less
than 80% by any decline in the value of the related Mortgaged Property. No
assurance can be given that values of the Mortgaged Properties have remained
or will remain at their levels on the dates of origination of the related
Mortgage Loans. If the residential real estate market should experience an
overall decline in property values such that the outstanding balances of the
Mortgage Loans, and any secondary financing on the Mortgaged Properties,
become equal to or greater than the value of the Mortgaged Properties, the
actual rates of delinquencies, foreclosures and losses could be higher than
those now generally experienced in the mortgage lending industry.
Approximately % of the Initial Mortgage Loans (by aggregate principal
balance as of the Cut-off Date) require monthly payments of principal based on
30 year amortization schedules and have scheduled maturity
S-14
<PAGE>
dates of 15 years from the due date of the first monthly payment (each such
Mortgage Loan, a "Balloon Loan"), in each case leaving a substantial portion
of the original principal amount due and payable on the respective scheduled
maturity date (a "Balloon Payment"). The Balloon Loans entail a greater degree
of risk for prospective investors because the ability of a mortgagor to make a
Balloon Payment typically will depend upon the mortgagor's ability either to
refinance the related Balloon Loan or to sell the related Mortgaged Property.
The mortgagor's ability to sell or refinance will be affected by a number of
factors, including the level of prevailing mortgage rates at the time of sale
or refinancing, the mortgagor's equity in the related Mortgaged Property, the
financial condition and credit profile of the mortgagor, applicable tax laws
and general economic conditions. None of the Company, the Servicer, the
Indenture Trustee, the Seller or any of their respective affiliates, nor any
other person, is obligated to refinance any Balloon Loan.
THE SUBSEQUENT MORTGAGE LOANS
Subsequent Mortgage Loans may have characteristics different from those of
the Initial Mortgage Loans. However, each Subsequent Mortgage Loan must
satisfy the eligibility criteria referred to herein under "Description of the
Mortgage Pool--Conveyance of Subsequent Mortgage Loans and the Pre-Funding
Account" at the time of its conveyance to the Trust Estate and must be
underwritten in accordance with the criteria set forth herein under
"Description of the Mortgage Pool--Underwriting."
MANDATORY PREPAYMENT
To the extent that amounts on deposit in the Pre-Funding Account have not
been fully applied to the purchase of Subsequent Mortgage Loans by the Issuer
by the end of the Funding Period, the Holders of the Bonds will receive, as
described herein, on the Payment Date immediately following the end of the
Funding Period, any amounts in the Pre-Funding Account after giving effect to
any purchase of Subsequent Mortgage Loans. Although no assurances can be
given, the Company intends that the principal amount of Subsequent Mortgage
Loans sold to the Trust Estate will require the application of substantially
all amounts on deposit in the Pre-Funding Account and that there will be no
material principal payment to the Bonds on such Payment Date.
RISK OF MORTGAGE LOAN YIELD REDUCING BOND INTEREST RATE ON THE BONDS
The Bond Interest Rate is based upon, among other factors as described
herein under "Description of the Bonds--Interest Payments on the Bonds," the
value of an index (One-Month LIBOR (as defined herein)) which is different
from the value of the indices applicable to the Adjustable Rate Mortgage Loans
(Six-Month LIBOR, and One-Year CMT (each as defined herein)), as described
under "Description of the Mortgage Pool" herein. The Mortgage Rate on each of
the Fixed Rate Mortgage Loans will not adjust and the Mortgage Rate on each
Adjustable Rate Mortgage Loan adjusts semi-annually or annually, commencing
after the Initial Period, based upon the related Index, whereas the Bond
Interest Rate on the Bonds adjusts monthly based upon One-Month LIBOR plus
[.25]% (or after the earlier of (x) the Payment Date in 20 and (y)
the Payment Date which occurs on or prior to the date on which the aggregate
Principal Balance of the Mortgage Loans is less than % of the sum of the
aggregate Principal Balance of the Initial Mortgage Loans as of the Cut-off
Date and the Original Pre-Funded Amount, One-Month LIBOR plus [.50]%), limited
by the Available Funds Interest Rate (as defined herein). In addition, One-
Month LIBOR and the Indices on the Adjustable Rate Mortgage Loans may respond
differently to economic and market factors, and there is not necessarily any
correlation between them. Moreover, the Adjustable Rate Mortgage Loans are
subject to Periodic Rate Caps, Maximum Mortgage Rates and Minimum Mortgage
Rates (each, as defined herein). Thus, it is possible, for example, that One-
Month LIBOR may rise during periods in which the Indices are stable or falling
or that, even if both One-Month LIBOR and the Indices rise during the same
period, One-Month LIBOR may rise much more rapidly than the Indices. See
"Description of the Bonds--Interest Payments on the Bonds."
S-15
<PAGE>
DESCRIPTION OF THE MORTGAGE POOL
GENERAL
The statistical information presented in this Prospectus Supplement
describes only the mortgage loans included in the Trust Estate as of the
Closing Date (the "Initial Mortgage Loans") and does not include mortgage
loans purchased by the Issuer and included in the Trust Estate after the
Closing Date (the "Subsequent Mortgage Loans" and, together with the Initial
Mortgage Loans, the "Mortgage Loans").
Subsequent Mortgage Loans are intended to be purchased by the Issuer from
the Seller from time to time on or before , from funds on
deposit in the Pre-Funding Account. The Subsequent Mortgage Loans, if
available, will be sold by the Seller to the Issuer for inclusion in the Trust
Estate. The Purchase Agreement (as defined below) will provide that the
Subsequent Mortgage Loans must conform to certain specified characteristics
described below under "--Conveyance of Subsequent Mortgage Loans and the Pre-
Funding Account." In the sole discretion of the Bond Insurer, Subsequent
Mortgage Loans with characteristics varying from those described herein may be
purchased by the Issuer and included in the Trust Estate; provided, however,
that the addition of such Mortgage Loans will not materially affect the
aggregate characteristics of the Mortgage Loans.
The Mortgage Pool will consist of conventional, fixed and adjustable-rate,
monthly payment, first lien mortgage loans with terms to maturity of not more
than 30 years from the date of origination or modification. As of the Cut-off
Date, the principal balance of the Initial Mortgage Loans was equal to
approximately $ . The Company will acquire the Initial Mortgage
Loans to be included in the Mortgage Pool pursuant to a mortgage loan purchase
agreement (the "Purchase Agreement") between the Company and NovaStar
Financial, Inc. (the "Seller"). The Seller acquired the Initial Mortgage Loans
from its affiliate NovaStar Mortgage, Inc. as further described herein. All of
the Mortgage Loans will be serviced by NovaStar Mortgage, Inc. (in such
capacity, the "Servicer") directly or through subservicers. The Company will
convey the Initial Mortgage Loans to the Issuer on the Closing Date pursuant
to the Trust Agreement. The Seller will make certain representations and
warranties with respect to the Mortgage Loans and, as more particularly
described in the Prospectus, will have certain repurchase or substitution
obligations in connection with a breach of any such representation or
warranty, as well as in connection with an omission or defect in respect of
certain constituent documents required to be delivered with respect to the
Mortgage Loans, in any event if such breach, omission or defect cannot be
cured and it materially and adversely affects the value of the related
Mortgage Loan or the interests of holders of the Securities or the Bond
Insurer. See "Description of the Agreements--Representations and Warranties;
Repurchases" in the Prospectus. The Mortgage Loans will have been originated
or acquired by the Originators in accordance with the underwriting criteria
described herein. See
"--Underwriting" below.
The representations and warranties made by the Seller will be pledged to the
Indenture Trustee for the benefit of the Bondholders and the Bond Insurer.
Approximately % of the Initial Mortgage Loans (by aggregate principal
balance as of the Cut-off Date), will have Loan-to-Value Ratios in excess of
80%. Such Initial Mortgage Loans will not be covered by a primary mortgage
insurance policy.
As of the Cut-off Date, the minimum and maximum Loan-to-Value Ratios at
origination for the initial Adjustable Rate Mortgage Loans were approximately
% and %, respectively, and the weighted average Loan-to-Value Ratio at
origination of the initial Adjustable Rate Mortgage Loans was approximately
%. As of the Cut-off Date, the minimum and maximum Loan-to-Value Ratios at
origination for the initial Fixed Rate Mortgage Loans were approximately %
and %, respectively, and the weighted average Loan-to-Value Ratio at
origination of the initial Fixed Rate Mortgage Loans was approximately %.
S-16
<PAGE>
The Fixed Rate Mortgage Loans will contain a customary "due-on-sale" clause
and the Adjustable Rate Mortgage Loans are generally assumable under certain
circumstances. See "Certain Yield and Prepayment Considerations" herein.
Pursuant to the terms of the Servicing Agreement, the Servicer will be
entitled to all late payment charges received on the Mortgage Loans as
additional servicing compensation and such amounts will not be available for
distribution on the Securities.
Mortgage Loans
MORTGAGE RATE ADJUSTMENT
The Mortgage Rate on each Mortgage Loan is fixed (with respect to % of
the Mortgage Loans), adjusts semi-annually (with respect to % of the
Mortgage Loans) or adjusts annually (with respect to % of the Mortgage
Loans). Adjustments to the Mortgage Rates on the Adjustable Rate Mortgage
Loans commence after an initial period after origination (the "Initial
Period") of six months, one year, two years or three years, in each case on
each applicable Adjustment Date to a rate equal to the sum, generally rounded
up to the nearest one-eighth of one percentage point (12.5 basis points), of
(i) the related Index plus (ii) a fixed percentage (the "Gross Margin"). In
addition, the Mortgage Rate on each Adjustable Rate Mortgage Loan is subject
on its first Adjustment Date following its origination to a cap (the "Initial
Periodic Rate Cap") and on each Adjustment Date thereafter to a periodic rate
cap (the "Periodic Rate Cap"). All of the Adjustable Rate Mortgage Loans are
also subject to specified maximum and minimum lifetime Mortgage Rates
("Maximum Mortgage Rates" and "Minimum Mortgage Rates," respectively). The
initial Adjustable Rate Mortgage Loans were generally originated with an
initial Mortgage Rate below the sum of the current Index and the Gross Margin.
Due to the application of the Periodic Rate Caps, Maximum Mortgage Rates and
Minimum Mortgage Rates, the Mortgage Rate on any initial Adjustable Rate
Mortgage Loan, as adjusted on any related Adjustment Date, may not equal the
sum of the related Index and the Gross Margin. The Due Date for substantially
all the Mortgage Loans is the first day of the month.
Approximately % of the Adjustable Rate Mortgage Loans will not have
reached their first Adjustment Date as of the Closing Date. The initial
Mortgage Rate is generally lower than the rate that would have been produced
if the applicable Gross Margin had been added to the related Index in effect
at origination. Adjustable Rate Mortgage Loans that have not reached their
first Adjustment Date are, therefore, subject to the Periodic Rate Cap on
their first Adjustment Date.
SIX-MONTH LIBOR INDEX
The Index applicable to the determination of the Mortgage Rate on
approximately % of the Mortgage Loans (by aggregate principal balance as
of the Cut-off Date) will be the average of the interbank offered rates for
six-month United States dollar deposits in the London market based on
quotations of major banks, as published in the Western Edition of The Wall
Street Journal ("Six-Month LIBOR") applicable on any Adjustment Date is the
most recent index figure available as of the date 30 days before such
Adjustment Date.
The table below sets forth historical average rates of Six-Month LIBOR for
the months indicated as made available from FNMA, which values may differ from
those published in the Western Edition of The Wall Street Journal. Such
average rates may fluctuate significantly from month to month as well as over
longer periods and may not increase or decrease in a constant pattern from
period to period. There can be no assurance that levels of Six-Month LIBOR
published by FNMA, or published on a different Reference Date would have been
at the same levels as those set forth below. The following does not purport to
be representative of future levels of Six-Month LIBOR (as published by FNMA).
No assurance can be given as to the level of Six-Month LIBOR on any Adjustment
Date or during the life of any Adjustable Rate Mortgage Loan based on Six-
Month LIBOR.
S-17
<PAGE>
SIX-MONTH LIBOR
<TABLE>
<CAPTION>
MONTH 1993 1994 1995 1996 1997
- ----- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
January........................................... 3.44% 3.39% 6.69% 5.34% 5.71%
February.......................................... 3.33 4.00 6.44 5.29 5.68
March............................................. 3.38 4.25 6.44 5.52 5.96
April............................................. 3.31 4.63 6.31 5.42 6.08
May............................................... 3.44 5.00 6.06 5.64 6.01
June.............................................. 3.56 5.25 5.88 5.84 5.94
July.............................................. 3.56 5.33 5.88 5.92 5.83
August............................................ 3.44 5.33 5.94 5.74 5.86
September......................................... 3.38 5.69 5.99 5.75 5.85
October........................................... 3.50 6.00 5.95 5.58 5.80
November.......................................... 3.52 6.44 5.74 5.55
December.......................................... 3.50 7.00 5.56 5.62
</TABLE>
ONE-YEAR CMT INDEX
The Index applicable to the determination of the Mortgage Rate on
approximately % of the Mortgage Loans (by aggregate principal balance as
of the Cut-off Date) will be the weekly average yield on U.S. Treasury
securities adjusted to a constant maturity of one year as published by the
Federal Reserve Board in Statistical Release H.15(519) and most recently
available as of the first business day generally 30 days prior to the
Adjustment Date ("One-Year CMT").
The table below sets forth historical average rates of One-Year CMT for the
months indicated as made available from Telerate Page 7052. Such average rates
may fluctuate significantly from month to month as well as over longer periods
and may not increase or decrease in a constant pattern from period to period.
There can be no assurance that levels of One-Year CMT published by Telerate
Page 7052, or published on a different Reference Date would have been at the
same levels as those set forth below. The following does not purport to be
representative of future levels of One-Year CMT (as published by Telerate Page
7052). No assurance can be given as to the level of One-Year CMT on any
Adjustment Date or during the life of any Adjustable Rate Mortgage Loan based
on One-Year CMT.
ONE-YEAR CMT
<TABLE>
<CAPTION>
MONTH 1993 1994 1995 1996 1997
- ----- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
January........................................... 3.50% 3.54% 7.08% 5.11% 5.60%
February.......................................... 3.38 3.85 6.73 4.94 5.52
March............................................. 3.33 4.28 6.43 5.31 5.79
April............................................. 3.25 4.74 6.27 5.53 5.99
May............................................... 3.36 5.31 6.02 5.64 5.87
June.............................................. 3.55 5.24 5.66 5.81 5.69
July.............................................. 3.45 5.47 5.59 5.84 5.54
August............................................ 3.47 5.56 5.72 5.69 5.56
September......................................... 3.36 5.74 5.64 5.84 5.46
October........................................... 3.38 6.11 5.60 5.57 5.52
November.......................................... 3.58 6.48 5.45 5.43
December.......................................... 3.61 7.10 5.32 5.47
</TABLE>
MORTGAGE LOAN CHARACTERISTICS
All percentages of the Initial Mortgage Loans described herein are
approximate percentages (except as otherwise indicated) by aggregate principal
balance as of the Cut-off Date.
S-18
<PAGE>
Except with respect to Balloon Loans, the Initial Mortgage Loans generally
have original terms to stated maturity of approximately 30 years.
Effective with the first payment due on an Adjustable Rate Mortgage Loan
after each related Adjustment Date, the Monthly Payment will be adjusted to an
amount that will fully amortize the outstanding principal balance of the
Mortgage Loan over its remaining term. The weighted average number of months
from the Cut-off Date to the next Adjustment Date for the Adjustable Rate
Mortgage Loans is months.
As of the Cut-off Date, each Initial Mortgage Loan will have an unpaid
principal balance of not less than $ or more than $ and the
average unpaid principal balance of the Initial Mortgage Loans will be
approximately $ . The latest stated maturity date of any of the Initial
Mortgage Loans will be 20 ; however, the actual date on which any
Initial Mortgage Loan is paid in full may be earlier than the stated maturity
date due to unscheduled payments of principal.
The weighted average remaining term to stated maturity of the Initial
Mortgage Loans will be approximately months. The weighted average
original term to maturity of the Initial Mortgage Loans will be approximately
months.
The earliest year of origination of any Initial Mortgage Loan is 19 and
the latest month and year of origination will be 19 .
Certain of the Mortgage Loans provide for payment of a prepayment charge. As
to each such Mortgage Loan, the prepayment charge provisions typically provide
for payment of a prepayment charge for partial prepayments and full
prepayments. Prepayments may be payable for a period of time ranging from one
to five years from the related origination date. Prepayment charges received
on the Mortgage Loans will be available for distribution on the Bonds.
[None of the Initial Mortgage Loans are Buydown Mortgage Loans.]
Set forth below is a description of certain additional characteristics of
the Initial Mortgage Loans as of the Cut-off Date (except as otherwise
indicated). Dollar amounts and percentages may not add up to totals due to
rounding.
GEOGRAPHIC DISTRIBUTION OF MORTGAGED PROPERTIES
<TABLE>
<CAPTION>
PERCENTAGE OF
NUMBER OF CUT-OFF DATE
INITIAL AGGREGATE UNPAID AGGREGATE
STATE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----- -------------- ----------------- -----------------
<S> <C> <C> <C>
Alabama......................
Alaska.......................
Arkansas.....................
Arizona......................
California...................
Colorado.....................
Connecticut..................
District of Columbia.........
Delaware.....................
Florida......................
Georgia......................
Hawaii.......................
Iowa.........................
Idaho........................
</TABLE>
S-19
<PAGE>
<TABLE>
<CAPTION>
PERCENTAGE OF
NUMBER OF CUT-OFF DATE
INITIAL AGGREGATE UNPAID AGGREGATE
STATE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----- -------------- ----------------- -----------------
<S> <C> <C> <C>
Illinois.....................
Indiana......................
Kansas.......................
Kentucky.....................
Louisiana....................
Massachusetts................
Maryland.....................
Maine........................
Michigan.....................
Minnesota....................
Missouri.....................
Mississippi..................
Montana......................
North Carolina...............
North Dakota.................
Nebraska.....................
New Hampshire................
New Jersey...................
New Mexico...................
Nevada.......................
New York.....................
Ohio.........................
Oklahoma.....................
Oregon.......................
Pennsylvania.................
Rhode Island.................
South Carolina...............
South Dakota.................
Tennessee....................
Texas........................
Utah.........................
Vermont......................
Virginia.....................
Washington...................
Wisconsin....................
West Virginia................
Wyoming......................
Total.................... $ 100%
======== ======== ===
</TABLE>
No more than approximately % of the Initial Mortgage Loans will be
secured by Mortgaged Properties located in any one zip code.
S-20
<PAGE>
INITIAL MORTGAGE LOAN TYPE
<TABLE>
<CAPTION>
PERCENTAGE OF
CUT-OFF DATE
NUMBER OF INITIAL AGGREGATE UNPAID AGGREGATE
LOAN TYPE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- --------- ----------------- ----------------- -----------------
<S> <C> <C> <C>
One-Year CMT.............
2/13 Six-Month LIBOR.....
2/28 Six-Month LIBOR.....
3/27 Six-Month LIBOR.....
3/27 One-Year CMT........
Six-Month LIBOR..........
Fixed Rate...............
Fixed Rate Balloon.......
Total................ $ 100.00%
======= ======== ======
</TABLE>
PRINCIPAL BALANCES OF THE INITIAL MORTGAGE LOANS AT ORIGINATION
<TABLE>
<CAPTION>
ORIGINAL PERCENTAGE OF
MORTGAGE LOAN CUT-OFF
PRINCIPAL NUMBER OF INITIAL AGGREGATE UNPAID DATE AGGREGATE
BALANCE($) MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------- ----------------- ----------------- -----------------
<S> <C> <C> <C>
0.01-
25,000.00............
25,000.01-
50,000.00............
50,000.01-
75,000.00............
75,000.01-
100,000.00............
100,000.01-
125,000.00............
125,000.01-
150,000.00............
150,000.01-
175,000.00............
175,000.01-
200,000.00............
200,000.01-
225,000.00............
225,000.01-
250,000.00............
250,000.01-
275,000.00............
275,000.01-
300,000.00............
300,000.01-
325,000.00............
325,000.01-
350,000.00............
350,000.01-
400,000.00............
400,000.01-
450,000.00............
450,000.01-
500,000.00............
500,000.01-
550,000.00............
550,000.01-
600,000.00............
600,000.01-
650,000.00............
650,000.01-
700,000.00............
700,000.01-
750,000.00............
750,000.01-
800,000.00............
800,000.01-
850,000.00............
900,000.01-
950,000.00............
950,000.01-
1,000,000.00............
1,000,000.01-
1,050,000.00............
1,250,000.01-
1,300,000.00............
1,350,000.01-
1,400,000.00............
Total................ 100.00%
====== ======= =======
</TABLE>
The average original principal balance of the Initial Mortgage Loans will be
approximately $ .
S-21
<PAGE>
CURRENT BALANCES OF THE INITIAL MORTGAGE LOANS AT THE CUT-OFF DATE
<TABLE>
<CAPTION>
CURRENT PERCENTAGE OF
MORTGAGE LOAN CUT-OFF
PRINCIPAL NUMBER OF INITIAL AGGREGATE UNPAID DATE AGGREGATE
BALANCE($) MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------- ----------------- ----------------- -----------------
<S> <C> <C> <C>
0.01-
25,000.00............
25,000.01-
50,000.00............
50,000.01-
75,000.00............
75,000.01-
100,000.00............
100,000.01-
125,000.00............
125,000.01-
150,000.00............
150,000.01-
175,000.00............
175,000.01-
200,000.00............
200,000.01-
225,000.00............
225,000.01-
250,000.00............
250,000.01-
275,000.00............
275,000.01-
300,000.00............
300,000.01-
325,000.00............
325,000.01-
350,000.00............
350,000.01-
400,000.00............
400,000.01-
450,000.00............
450,000.01-
500,000.00............
500,000.01-
550,000.00............
550,000.01-
600,000.00............
600,000.01-
650,000.00............
650,000.01-
700,000.00............
700,000.01-
750,000.00............
750,000.01-
800,000.00............
800,000.01-
850,000.00............
900,000.01-
950,000.00............
950,000.01-
1,000,000.00............
1,000,000.01-
1,050,000.00............
1,250,000.01-
1,300,000.00............
1,350,000.01-
1,400,000.00............
Total................ 100.00%
======= ======= ======
</TABLE>
The average current principal balance of the Initial Mortgage Loans will be
approximately $ .
ORIGINAL TERM TO MATURITY
<TABLE>
<CAPTION>
PERCENTAGE OF
AGGREGATE CUT-OFF
NUMBER OF INITIAL UNPAID DATE AGGREGATE
ORIGINAL TERM MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------- ----------------- ----------------- -----------------
<S> <C> <C> <C>
120....................
180....................
240....................
360....................
Total.............. $ 100.00%
======= ======== ======
</TABLE>
S-22
<PAGE>
The weighted average Original Term to Maturity at origination of the Initial
Mortgage Loans will be approximately months.
ORIGINAL AMORTIZATION TERM TO MATURITY
<TABLE>
<CAPTION>
PERCENTAGE OF
AGGREGATE CUT-OFF
NUMBER OF INITIAL UNPAID DATE AGGREGATE
ORIGINAL AMORTIZATION TERM MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- -------------------------- ----------------- ----------------- -----------------
<S> <C> <C> <C>
120....................
180....................
240....................
360....................
Total.............. $ 100.00%
======= ======== ======
</TABLE>
The weighted average Original Amortization Term to Maturity of the Initial
Mortgage Loans will be approximately months.
REMAINING TERM TO MATURITY
<TABLE>
<CAPTION>
PERCENTAGE OF
AGGREGATE CUT-OFF
NUMBER OF INITIAL UNPAID DATE AGGREGATE
REMAINING TERM MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- -------------- ----------------- ----------------- -----------------
<S> <C> <C> <C>
1-120...................
121-180.................
181-240.................
301-360.................
Total............... $ 100.00%
======= ======== ======
</TABLE>
The weighted average Remaining Term to Maturity of the Initial Mortgage
Loans will be approximately months.
DOCUMENTATION TYPE
<TABLE>
<CAPTION>
PERCENTAGE OF
AGGREGATE CUT-OFF
NUMBER OF INITIAL UNPAID DATE AGGREGATE
DOCUMENTATION TYPE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------ ----------------- ----------------- -----------------
<S> <C> <C> <C>
Full...................
Limited................
Stated.................
Total.............. $ 100.00%
======= ======== ======
</TABLE>
OCCUPANCY TYPES
<TABLE>
<CAPTION>
PERCENTAGE OF
AGGREGATE CUT-OFF
OCCUPANCY NUMBER OF INITIAL UNPAID DATE AGGREGATE
(AS INDICATED BY BORROWER) MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
-------------------------- ----------------- ----------------- -----------------
<S> <C> <C> <C>
Investment Non-Owner-
Occupied..................
Investment Owner-Occupied..
Primary....................
Secondary..................
Total.................. $ 100.00%
======= ======== ======
</TABLE>
S-23
<PAGE>
RISK CATEGORIES OF MORTGAGE LOANS
<TABLE>
<CAPTION>
PERCENTAGE OF
AGGREGATE CUT-OFF
NUMBER OF INITIAL UNPAID DATE AGGREGATE
RISK GRADE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ---------- ----------------- ----------------- -----------------
<S> <C> <C> <C>
A.......................
A-......................
B.......................
C.......................
D.......................
Total............... $ 100.00%
======= ======== ======
</TABLE>
See "--Underwriting" below for a description of the risk categories of the
Mortgage Loans.
PROPERTY TYPES
<TABLE>
<CAPTION>
PERCENTAGE OF
AGGREGATE CUT-OFF
NUMBER OF INITIAL UNPAID DATE AGGREGATE
PROPERTY TYPE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------- ----------------- ----------------- -----------------
<S> <C> <C> <C>
Single-family............
Planned Unit Development.
Two- to Four-Family......
Multi-Family.............
Attached Housing.........
Condominium..............
Manufactured Housing.....
Total................ $ 100.00%
======= ======== ======
</TABLE>
PURPOSES OF INITIAL MORTGAGE LOANS
<TABLE>
<CAPTION>
PERCENTAGE OF
AGGREGATE CUT-OFF
NUMBER OF INITIAL UNPAID DATE AGGREGATE
PURPOSE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------- ----------------- ----------------- -----------------
<S> <C> <C> <C>
Const--Perm No Cash Out..
Equity--Cash Out.........
Other--Cash Out..........
Purchase--Cash Out.......
Purchase--No Cash Out....
Refinance--Cash Out......
Refinance--No Cash Out...
Total................ $ 100.00%
======= ======== ======
</TABLE>
In general, in the case of a Mortgage Loan made for "no equity take-out"
refinance purposes, substantially all of the proceeds are used to pay in full
the principal balance of a previous mortgage loan of the mortgagor with
respect to a Mortgaged Property and to pay origination and closing costs
associated with such refinancing. Mortgage Loans made for "equity take-out"
refinance purposes may involve the use of the proceeds to pay in full the
principal balance of a previous mortgage loan and related costs except that a
portion of the proceeds are generally retained by the mortgagor for uses
unrelated to the Mortgaged Property. The amount of such proceeds retained by
the mortgagor may be substantial.
S-24
<PAGE>
ORIGINAL LOAN-TO-VALUE RATIOS
<TABLE>
<CAPTION>
PERCENTAGE OF
AGGREGATE UNPAID CUT-OFF
ORIGINAL LOAN-TO-VALUE NUMBER OF INITIAL PRINCIPAL DATE AGGREGATE
RATIOS MORTGAGE LOANS BALANCE PRINCIPAL BALANCE
- ---------------------- ----------------- ---------------- -----------------
<S> <C> <C> <C>
5.01%-10.00%............
10.01%-15.00%............
15.01%-20.00%............
20.01%-25.00%............
25.01%-30.00%............
30.01%-35.00%............
35.01%-40.00%............
40.01%-45.00%............
45.01%-50.00%............
50.01%-55.00%............
55.01%-60.00%............
60.01%-65.00%............
65.01%-70.00%............
70.01%-75.00%............
75.01%-80.00%............
80.01%-85.00%............
85.01%-90.00%............
90.01%-95.00%............
Total................ $ 100.00%
===== ========== ======
</TABLE>
The minimum and maximum Loan-to-Value Ratios at origination of the Initial
Mortgage Loans were approximately % and %, respectively, and the
weighted average Loan-to-Value Ratio at origination of the Initial Mortgage
Loans was approximately %. As of the Cut-off Date, the minimum and
maximum Loan-to-Value Ratios at origination for the initial Adjustable Rate
Mortgage Loans were approximately % and %, respectively, and the
weighted average Loan-to-Value Ratio at origination of the initial Adjustable
Rate Mortgage Loans was approximately %. As of the Cut-off Date, the
minimum and maximum Loan-to-Value Ratios at origination for the initial Fixed
Rate Mortgage Loans were approximately % and %, respectively, and
the weighted average Loan-to-Value Ratio at origination of the initial Fixed
Rate Mortgage Loans was approximately %.
MORTGAGE RATES FOR FIXED RATE INITIAL MORTGAGE LOANS
<TABLE>
<CAPTION>
PERCENTAGE OF CUT-OFF
DATE AGGREGATE PRINCIPAL
NUMBER OF INITIAL AGGREGATE UNPAID BALANCE OF THE FIXED RATE
MORTGAGE RATES(%) MORTGAGE LOANS PRINCIPAL BALANCE INITIAL MORTGAGE LOANS
- ----------------- ----------------- ----------------- -------------------------
<S> <C> <C> <C>
7.51- 8.00......
8.01- 8.50......
8.51- 9.00......
9.01- 9.50......
9.51-10.00......
10.01-10.50......
10.51-11.00......
11.01-11.50......
11.51-12.00......
12.01-12.50......
12.51-13.00......
13.01-13.50......
13.51-14.00......
14.00-14.50......
14.51-15.00......
Total........ $ 100.00%
======= ======== ======
</TABLE>
The weighted average Mortgage Rate of the Fixed Rate Initial Mortgage Loans
will be approximately % per annum.
S-25
<PAGE>
MORTGAGE RATES AT ORIGINATION
FOR SIX-MONTH LIBOR INDEXED RATE INITIAL MORTGAGE LOANS
<TABLE>
<CAPTION>
PERCENTAGE OF
CUT-OFF
DATE AGGREGATE
PRINCIPAL BALANCE OF
AGGREGATE UNPAID SIX-MONTH LIBOR
NUMBER OF INITIAL PRINCIPAL INDEXED RATE
MORTGAGE RATES(%) MORTGAGE LOANS BALANCE INITIAL MORTGAGE LOANS
- ----------------- ----------------- ---------------- ----------------------
<S> <C> <C> <C>
6.51- 7.00..........
7.01- 7.50..........
7.51- 8.00..........
8.01- 8.50..........
8.51- 9.00..........
9.01- 9.50..........
9.51-10.00..........
10.01-10.50..........
10.51-11.00..........
11.01-11.50..........
11.51-12.00..........
12.01-12.50..........
12.51-13.00..........
13.01-13.50..........
13.51-14.00..........
Total............ $ 100.00%
====== ======= ======
</TABLE>
The weighted average Mortgage Rate of the Six-Month LIBOR Indexed Rate
Initial Mortgage Loans at origination will be approximately % per annum.
MORTGAGE RATES AT ORIGINATION
FOR ONE-YEAR CMT INDEXED RATE INITIAL MORTGAGE LOANS
<TABLE>
<CAPTION>
PERCENTAGE OF
CUT-OFF DATE
AGGREGATE PRINCIPAL
BALANCE OF THE
AGGREGATE UNPAID ONE-YEAR CMT
NUMBER OF INITIAL PRINCIPAL INDEXED RATE
MORTGAGE RATES(%) MORTGAGE LOANS BALANCE INITIAL MORTGAGE LOANS
- ----------------- ----------------- ---------------- ----------------------
<S> <C> <C> <C>
7.51- 8.00..........
8.01- 8.50..........
8.51- 9.00..........
9.01- 9.50..........
9.51-10.00..........
10.01-10.50..........
10.51-11.00..........
11.01-11.50..........
11.51-12.00..........
Total............ $ 100.00%
====== ======= ======
</TABLE>
S-26
<PAGE>
The weighted average Mortgage Rate of the One-Year CMT Indexed Rate Initial
Mortgage Loans at origination will be approximately % per annum.
MINIMUM MORTGAGE RATES AT CUT-OFF DATE
FOR SIX-MONTH LIBOR INDEXED RATE INITIAL MORTGAGE LOANS
<TABLE>
<CAPTION>
PERCENTAGE OF
CUT-OFF DATE
AGGREGATE PRINCIPAL
NUMBER AGGREGATE UNPAID BALANCE OF THE SIX MONTH
MINIMUM OF INITIAL PRINCIPAL LIBOR INDEXED RATE
MORTGAGE RATES (%) MORTGAGE LOANS BALANCE INITIAL MORTGAGE LOANS
------------------ -------------- ---------------- ------------------------
<S> <C> <C> <C>
5.01- 5.50...........
5.51- 6.00...........
6.01- 6.50...........
6.51- 7.00...........
7.01- 7.50...........
7.51- 8.00...........
8.01- 8.50...........
8.51- 9.00...........
9.01- 9.50...........
9.51-10.00...........
10.01-10.50...........
10.51-11.00...........
11.01-11.50...........
11.51-12.00...........
12.01-12.50...........
12.51-13.00...........
13.01-13.50...........
13.51-14.00...........
Total............. $ 100.00%
======= ======== ======
</TABLE>
The weighted average Mortgage Rate of the Six-Month LIBOR Indexed Rate
Initial Mortgage Loans as of the Cut-off Date will be approximately % per
annum.
MINIMUM MORTGAGE RATES AT CUT-OFF DATE
FOR ONE-YEAR CMT INDEXED RATE INITIAL MORTGAGE LOANS
<TABLE>
<CAPTION>
PERCENTAGE OF CUT-OFF
DATE AGGREGATE
PRINCIPAL BALANCE OF THE
ONE-YEAR CMT
MINIMUM NUMBER OF INITIAL AGGREGATE UNPAID INDEXED RATE
MORTGAGE RATES (%) MORTGAGE LOANS PRINCIPAL BALANCE INITIAL MORTGAGE LOANS
- ------------------ ----------------- ----------------- ------------------------
<S> <C> <C> <C>
7.51- 8.00.......
8.01- 8.50.......
8.51- 9.00.......
9.01- 9.50.......
9.51-10.00.......
10.01-10.50.......
10.51-11.00.......
11.01-11.50.......
Total......... $ 100.00%
======= ======== ======
</TABLE>
The weighted average Mortgage Rate of the One-Year CMT Indexed Rate Initial
Mortgage Loans as of the Cut-off Date will be approximately % per annum.
S-27
<PAGE>
NEXT ADJUSTMENT DATE
FOR SIX-MONTH LIBOR INDEXED RATE INITIAL MORTGAGE LOANS
<TABLE>
<CAPTION>
PERCENTAGE OF
CUT-OFF DATE AGGREGATE
PRINCIPAL BALANCE OF THE
AGGREGATE UNPAID SIX-MONTH LIBOR INDEXED
NUMBER OF INITIAL PRINCIPAL RATE
NEXT ADJUSTMENT DATE MORTGAGE LOANS BALANCE INITIAL MORTGAGE LOANS
- -------------------- ----------------- ---------------- ------------------------
<S> <C> <C> <C>
January 1, 1998.........
February 1, 1998........
March 1, 1998...........
August 1, 1998..........
September 1, 1998.......
October 1, 1998.........
November 1, 1998........
December 1, 1998........
January 1, 1999.........
February 1, 1999........
March 1, 1999...........
April 1, 1999...........
May 1, 1999.............
May 11, 1999............
June 1, 1999............
July 1, 1999............
August 1, 1999..........
December 1, 1999........
January 1, 2000.........
February 1, 2000........
March 1, 2000...........
April 1, 2000...........
May 1, 2000.............
June 1, 2000............
July 1, 2000............
August 1, 2000..........
September 1, 2000.......
October 1, 2000.........
November 1, 2000........
Total............... $ 100.00%
======= ======== ======
</TABLE>
The weighted average remaining months to the next Adjustment Date of the Six-
Month LIBOR Indexed Rate Initial Mortgage Loans will be approximately
months.
S-28
<PAGE>
NEXT ADJUSTMENT DATE
FOR ONE-YEAR CMT INDEXED RATE INITIAL MORTGAGE LOANS
<TABLE>
<CAPTION>
PERCENTAGE OF CUT-OFF
DATE AGGREGATE
PRINCIPAL BALANCE OF THE
ONE-YEAR CMT
NUMBER OF INITIAL AGGREGATE UNPAID INDEXED RATE
NEXT ADJUSTMENT DATE MORTGAGE LOANS PRINCIPAL BALANCE INITIAL MORTGAGE LOANS
- -------------------- ----------------- ----------------- ------------------------
<S> <C> <C> <C>
January 1998............
February 1998...........
April 1998..............
May 1998................
June 1998...............
July 1998...............
August 1998.............
April 1999..............
Total............... $ 100.00%
======= ======== ======
</TABLE>
The weighted average remaining months to the next Adjustment Date of the
One-Year CMT Indexed Rate Initial Mortgage Loans will be approximately
months.
GROSS MARGIN
FOR SIX-MONTH LIBOR INDEXED RATE INITIAL MORTGAGE LOANS
<TABLE>
<CAPTION>
PERCENTAGE OF
CUT-OFF DATE
AGGREGATE PRINCIPAL
AGGREGATE UNPAID BALANCE SIX-MONTH
NUMBER OF INITIAL PRINCIPAL LIBOR INDEXED RATE
GROSS MARGINS (%) MORTGAGE LOANS BALANCE INITIAL MORTGAGE LOANS
- ----------------- ----------------- ---------------- ----------------------
<S> <C> <C> <C>
2.01 - 2.50........
2.51 - 3.00........
3.01 - 3.50........
3.51 - 4.00........
4.01 - 4.50........
4.51 - 5.00........
5.01 - 5.50........
5.51 - 6.00........
6.01 - 6.50........
6.51 - 7.00........
7.01 - 7.50........
7.51 - 8.00........
8.01 - 8.50........
8.51 - 9.00........
9.01 - 9.50........
10.01 - 10.50........
Total............ $ 100.00%
======= ======== ======
</TABLE>
The weighted average Gross Margin of the Six-Month LIBOR Indexed Rate
Initial Mortgage Loans will be approximately % per annum.
S-29
<PAGE>
GROSS MARGIN
FOR ONE-YEAR CMT INDEXED RATE INITIAL MORTGAGE LOANS
<TABLE>
<CAPTION>
PERCENTAGE OF
CUT-OFF DATE AGGREGATE
PRINCIPAL BALANCE OF THE
AGGREGATE UNPAID ONE-YEAR CMT
NUMBER OF INITIAL PRINCIPAL INDEXED RATE
GROSS MARGINS (%) MORTGAGE LOANS BALANCE INITIAL MORTGAGE LOANS
- ----------------- ----------------- ---------------- ------------------------
<S> <C> <C> <C>
2.51 - 3.00........
3.01 - 3.50........
4.01 - 4.50........
4.51 - 5.00........
5.01 - 5.50........
5.51 - 6.00........
6.01 - 6.50........
6.51 - 7.00........
7.01 - 7.50........
7.51 - 8.00........
8.01 - 8.50........
Total.......... $ 100.00%
======= ======== ======
</TABLE>
The weighted average Gross Margin of the One-Year CMT Indexed Rate Initial
Mortgage Loans will be approximately % per annum.
MAXIMUM MORTGAGE RATE
FOR SIX-MONTH LIBOR INDEXED
RATE INITIAL MORTGAGE LOANS
<TABLE>
<CAPTION>
PERCENTAGE OF CUT-OFF DATE
AGGREGATE PRINCIPAL
MAXIMUM AGGREGATE UNPAID BALANCE OF THE SIX-MONTH
MORTGAGE RATE NUMBER OF INITIAL PRINCIPAL LIBOR INDEXED RATE INITIAL
(%) MORTGAGE LOANS BALANCE MORTGAGE LOANS
------------- ----------------- ---------------- --------------------------
<S> <C> <C> <C>
10.51 - 11.00...........
12.01 - 12.50...........
12.51 - 13.00...........
13.01 - 13.50...........
13.51 - 14.00...........
14.01 - 14.50...........
14.51 - 15.00...........
15.01 - 15.50...........
15.51 - 16.00...........
16.01 - 16.50...........
16.51 - 17.00...........
17.01 - 17.50...........
17.51 - 18.00...........
18.01 - 18.50...........
18.51 - 19.00...........
19.01 - 19.50...........
19.51 - 20.00...........
20.01 - 20.50...........
20.51 - 21.00...........
Total............... $ 100.00%
======= ======== ======
</TABLE>
The weighted average Maximum Mortgage Rate of the Six-Month LIBOR Indexed
Rate Initial Mortgage Loans will be approximately % per annum.
S-30
<PAGE>
MAXIMUM MORTGAGE RATE
FOR ONE-YEAR CMT INDEXED
RATE INITIAL MORTGAGE LOANS
<TABLE>
<CAPTION>
PERCENTAGE OF CUT-OFF
DATE AGGREGATE
PRINCIPAL BALANCE OF THE
ONE-YEAR CMT
MAXIMUM NUMBER OF INITIAL AGGREGATE UNPAID INDEXED RATE
MORTGAGE RATE (%) MORTGAGE LOANS PRINCIPAL BALANCE INITIAL MORTGAGE LOANS
----------------- ----------------- ----------------- ------------------------
<S> <C> <C> <C>
11.01-11.50.......
13.51-14.00.......
14.51-15.00.......
15.01-15.50.......
15.51-16.00.......
16.01-16.50.......
16.51-17.00.......
17.01-17.50.......
17.51-18.00.......
18.01-18.50.......
Total......... $ 100.00%
======= ======== ======
</TABLE>
The weighted average Maximum Mortgage Rate of the One-Year CMT Indexed Rate
Initial Mortgage Loans will be approximately % per annum.
INITIAL PERIODIC RATE CAP
FOR SIX-MONTH LIBOR INDEXED
RATE INITIAL MORTGAGE LOANS
<TABLE>
<CAPTION>
PERCENTAGE OF CUT-OFF
DATE AGGREGATE PRINCIPAL
BALANCE OF THE SIX-MONTH
INITIAL PERIODIC NUMBER OF INITIAL AGGREGATE UNPAID LIBOR INDEXED RATE
RATE CAP (%) MORTGAGE LOANS PRINCIPAL BALANCE INITIAL MORTGAGE LOANS
---------------- ----------------- ----------------- ------------------------
<S> <C> <C> <C>
1.000.............
1.500.............
2.000.............
2.500.............
3.000.............
Total......... $ 100.00%
======= ======== ======
</TABLE>
The weighted average Initial Periodic Rate Cap of the Six-Month LIBOR
Indexed Rate Initial Mortgage Loans is %.
INITIAL RATE CAP
FOR ONE-YEAR CMT INDEXED
RATE INITIAL MORTGAGE LOANS
<TABLE>
<CAPTION>
PERCENTAGE OF CUT-OFF
DATE AGGREGATE
PRINCIPAL BALANCE OF THE ONE-
NUMBER OF INITIAL AGGREGATE UNPAID YEAR CMT INDEXED RATE
INITIAL RATE CAP (%) MORTGAGE LOANS PRINCIPAL BALANCE INITIAL MORTGAGE LOANS
- -------------------- ----------------- ----------------- -----------------------------
<S> <C> <C> <C>
2.000...................
3.000...................
Total............... $ 100.00%
====== ======= ======
</TABLE>
The weighted average Initial Rate Cap of the One-Year CMT Indexed Rate
Initial Mortgage Loans is %.
S-31
<PAGE>
PERIODIC RATE CAP
FOR SIX-MONTH LIBOR INDEXED
RATE INITIAL MORTGAGE LOANS
<TABLE>
<CAPTION>
PERCENTAGE OF CUT-OFF
DATE AGGREGATE PRINCIPAL
BALANCE OF THE SIX-MONTH
NUMBER OF INITIAL AGGREGATE UNPAID LIBOR INDEXED RATE
PERIODIC RATE CAP (%) MORTGAGE LOANS PRINCIPAL BALANCE INITIAL MORTGAGE LOANS
- --------------------- ----------------- ----------------- ------------------------
<S> <C> <C> <C>
1.000...................
1.500...................
2.000...................
Total............... $ 100.00%
====== ====== ======
</TABLE>
The weighted average Periodic Rate Cap of the Six-Month LIBOR Indexed Rate
Initial Mortgage Loans is %
PERIODIC RATE CAP
FOR ONE-YEAR CMT INDEXED
RATE INITIAL MORTGAGE LOANS
<TABLE>
<CAPTION>
PERCENTAGE OF CUT-OFF
DATE AGGREGATE
PRINCIPAL BALANCE OF THE ONE-
PERIODIC NUMBER OF INITIAL AGGREGATE UNPAID YEAR CMT INDEXED RATE
RTE CAP (%)A MORTGAGE LOANS PRINCIPAL BALANCE INITIAL MORTGAGE LOANS
- ------------ ----------------- ----------------- -----------------------------
<S> <C> <C> <C>
1.000...................
2.000...................
Total............... $ 100.00%
====== ====== ======
</TABLE>
The weighted average Periodic Rate Cap of the One-Year CMT Indexed Rate
Initial Mortgage Loans is %.
NUMBER OF DAYS DELINQUENT
<TABLE>
<CAPTION>
PERCENTAGE OF
NUMBER OF AGGREGATE UNPAID CUT-OFF DATE
INITIAL PRINCIPAL AGGREGATE
NUMBER OF DAYS DELINQUENT MORTGAGE LOANS BALANCE PRINCIPAL BALANCE
- ------------------------- -------------- ---------------- -----------------
<S> <C> <C> <C>
0-29 Days....................
30-59 Days...................
60-89 Days...................
90-119 Days..................
Total Delinquencies.......... $ 100.00%
========== ========== =======
Delinquencies as a Percentage
of Total Initial Mortgage
Loans Outstanding..... %
</TABLE>
CONVEYANCE OF SUBSEQUENT MORTGAGE LOANS AND THE PRE-FUNDING ACCOUNT
Under the Purchase Agreement, following the initial issuance of the Bonds,
the Issuer will be obligated to purchase from the Seller for inclusion in the
Trust Estate during the Funding Period, subject to the availability thereof,
the Subsequent Mortgage Loans secured by first liens on fee simple interests
in one- to four-family residential real properties. Each Subsequent Mortgage
Loan will have been underwritten in accordance with the
S-32
<PAGE>
criteria set forth herein under "Description of the Mortgage Pool--
Underwriting." Subsequent Mortgage Loans will be transferred to the Issuer
pursuant to subsequent transfer instruments (the "Subsequent Transfer
Instruments") between the Seller and the Issuer. In connection with the
purchase of Subsequent Mortgage Loans on such dates of transfer (the
"Subsequent Transfer Dates"), the Issuer will be required to pay to the Seller
from amounts on deposit in the Pre-Funding Account (as defined below) a cash
purchase price of 100% of the principal balance thereof. The Issuer will
designate the Subsequent Transfer Date as the cut-off date (the "Subsequent
Cut-off Date") with respect to the Subsequent Mortgage Loans acquired on such
date. The amount paid from the Pre-Funding Account on each Subsequent Transfer
Date will not include accrued interest on the Subsequent Mortgage Loans.
Following each Subsequent Transfer Date, the aggregate Principal Balance of
the Mortgage Loans will increase by an amount equal to the aggregate Principal
Balance of the Subsequent Mortgage Loans so acquired and the amount in the
Pre-Funding Account will decrease accordingly.
On the Closing Date, approximately $ (the "Original Pre-Funded
Amount") will be deposited in an account (the "Pre-Funding Account"), which
account will be in the name of the Indenture Trustee and shall be part of the
Trust Estate and which amount will be used to acquire Subsequent Mortgage
Loans. During the Funding Period (as defined herein), the Original Pre-Funding
Amount will be reduced (on any date of determination, the related Original
Pre-Funded Amount as so reduced, the "Pre-Funded Amount") by the amount
thereof used to purchase Subsequent Mortgage Loans. The "Funding Period" is
the period commencing on the Closing Date and ending on the earlier to occur
of (i) the date on which the amount on deposit in the Funding Account is less
than $10,000 and (ii) , .
Any conveyance of Subsequent Mortgage Loans on a Subsequent Transfer Date is
subject to certain conditions including, but not limited to: (a) each such
Subsequent Mortgage Loan must satisfy the representations and warranties
specified in the related Subsequent Transfer Instrument and the Purchase
Agreement; (b) the Seller will not select such Subsequent Mortgage Loans in a
manner that it reasonably believes is adverse to the interests of the
Bondholders or the Bond Insurer; (c) the Seller will deliver certain opinions
of counsel acceptable to the Bond Insurer and the Indenture Trustee with
respect to the validity of the conveyance of such Subsequent Mortgage Loans;
and (d) as of each Subsequent Cut-off Date, each Subsequent Mortgage Loan will
satisfy the following criteria: (i) such Subsequent Mortgage Loan may not be
30 or more days contractually delinquent as of the related Subsequent Cut-off
Date; (ii) the remaining stated term to maturity of such Subsequent Mortgage
Loan will not exceed 360 months; (iii) the lien securing any such Subsequent
Mortgage Loan must be first priority; (iv) such Subsequent Mortgage Loan must
have an outstanding Principal Balance of at least $10,000 as of the Subsequent
Cut-off Date; (v) such Subsequent Mortgage Loan will be underwritten in
accordance with the criteria set forth under "Description of the Mortgage
Pool--Underwriting" herein; (vi) such Subsequent Mortgage Loan must have a
Loan-to-Value Ratio of no more than 90%; (vii) the stated maturity of such
Subsequent Mortgage Loan will be no later than , ; (viii)
such Subsequent Mortgage Loan shall not provide for negative amortization;
(ix) such Subsequent Mortgage Loan must have a fixed Mortgage Rate of at least
% or, if an adjustable rate loan, a Gross Margin of at least % and
following the purchase of such Subsequent Mortgage Loans by the Issuer, the
Mortgage Loans included in the Trust Estate must have a weighted average
interest rate, a weighted average remaining term to maturity and a weighted
average Loan-to-Value Ratio as of each respective Subsequent Cut-off Date
which will not vary materially from the Initial Mortgage Loans included
initially in the Trust Estate; and (x) any additional criteria in the
Insurance Agreement. In addition, the Indenture Trustee shall not agree to any
transfer of Subsequent Mortgage Loans without (i) a signed certification from
the Bond Insurer that the Subsequent Mortgage Loans are acceptable to the Bond
Insurer and (ii) a confirmation from the rating agencies that the acquisition
of such Subsequent Mortgage Loans will not result in a downgrade, withdrawal
or qualification of the ratings then in effect for the outstanding Bonds,
without regard to the Bond Insurance Policy. In the sole discretion of the
Bond Insurer, Subsequent Mortgage Loans with characteristics varying from
those set forth above may be purchased by Issuer and included in the Trust
Estate; provided, however, that the addition of such Mortgage Loans will not
materially affect the aggregate characteristics of the entire pool of Mortgage
Loans. Upon the end of the Funding Period, the Bond Insurer, in its sole
discretion, may adjust the Required Subordination Amount.
S-33
<PAGE>
UNDERWRITING
All of the Initial Mortgage Loans were purchased by the Seller from its
affiliate the Servicer. The Servicer originated or purchased the Mortgage
Loans in the ordinary course of business on either (i) a loan by loan basis
directly from mortgage brokers and mortgage loan originators (each, an
"Originator") or (ii) a bulk or mini-bulk purchase from mortgage banks and
other mortgage originators (each, a "HEL Collateral Seller"). No HEL
Collateral Seller sold more than % of the Initial Mortgage Loans (by
aggregate principal balance as of the Cut-off Date) to the Servicer.
The Mortgage Loans purchased from Originators' were underwritten in
accordance with the Servicer's underwriting guidelines described below.
Generally, the Mortgage Loans purchased from HEL Collateral Sellers were re-
underwritten to the underwriting guidelines of the respective HEL Collateral
Seller and assigned a NovaStar Mortgage Credit Rating outlined in the table
below. The underwriting guidelines of each HEL Collateral Seller conform
substantially to the Servicer's underwriting guidelines.
The underwriting guidelines of the Servicer are intended to evaluate the
credit history of the potential borrower, the capacity and willingness of the
borrower to repay the loan and the adequacy of the collateral securing the
loan. Each loan applicant completes an application that includes information
with respect to the applicant's income, assets, liabilities and employment
history. A credit report is also submitted by the broker along with the loan
application which provides detailed information concerning the payment history
of the borrower on all of their debts. Prior to issuing an approval on the
loan, the underwriter runs an independent credit report to verify that the
information submitted by the broker is still accurate and up to date. An
appraisal is also required on all loans and in many cases a review appraisal
or second appraisal may be required depending on the value of the property and
the underwriters comfort with the original valuation. All appraisals are
required to conform to the Uniform Standards of Professional Appraisal
Practice adopted by the Appraisal Standards Board of the Appraisal Foundation
and are generally on forms acceptable to FNMA and FHLMC. The properties
securing the mortgage loans are generally appraised by qualified independent
appraisers who are generally approved by the related originator. The mortgagor
may also include information regarding verification of deposits at financial
institutions where the mortgagor had demand or savings accounts. In the case
of investment properties, income derived from the mortgage property may have
been used for underwriting purposes.
The underwriting guidelines include three levels of applicant documentation
requirements, referred to as "Full Documentation", "Limited Documentation" and
"Stated Income". Under the Full Documentation program applicants generally are
required to submit two written forms of verification of stable income for at
least 12 months. Under the Limited Documentation program, no such verification
is required, however, bank statements for the most recent consecutive 6-month
period are required to evidence cash flow. If business bank statements are
used in lieu of personal statements, an unaudited current profit loss
statement must accompany the bank statements. Under the Stated Income program,
an applicant may be qualified based on monthly income as stated in the loan
application. Mortgage Loans originated under the "Limited Documentation" and
"Stated Income" programs require less documentation and verification than do
traditional "Full Documentation" programs. Generally, under such programs,
minimal investigation into a mortgagor's credit history and income profile
would have been undertaken by the originator and the underwriting for such
mortgage loans will place a greater emphasis on the value of the mortgaged
property. Given that the Servicer primarily lends to subprime borrowers, it
places great emphasis on the ability of collateral to protect against losses
in the event of default by borrowers.
On a case-by-case basis, exceptions to the underwriting guidelines are made
where the Servicer believes compensating factors exist. Compensating factors
may consist of factors like length of time in residence, lowering of the
borrower's monthly debt service payments, the Loan-to-Value ratio or Combined
Loan-to-Value Ratio on the loan, as applicable, or other criteria that in the
judgement of the underwriter warrants an exception. All loans in excess of
$350,000 currently require the approval of the Chief Credit Officer of the
Servicer. In addition, the President of the Servicer approves all loans in
excess of $750,000.
S-34
<PAGE>
The Servicer's categories and criteria as of , 19 , for grading the
credit history of potential borrowers and the maximum Loan-to-Value Ratios and
Combined Loan-to-Value Ratios allowed for each category are shown in the
following table.
<TABLE>
<CAPTION>
A RISK A- RISK B RISK C RISK D RISK
------ ------- ------ ------ ======
<S> <C> <C> <C> <C> <C>
Mortgage His- Maximum one Maximum two Maximum three Maximum five Maximum six 30
tory 30-day late 30-days late 30 day lates 30 day lates day lates,
and no 60-day and no 60-day and one 60 day and two 60 day three 60 day
late within late within late within lates within lates and two
last 12 last 12 the last 12 the last 12 90 day lates
months. months. months. months. within the
last 12
months. Must
be current at
time of origi-
nation.
Other Credit Limited 30 day Limited 60 day Limited 60 day Limited 90 day Discretionary.
lates within lates within lates within lates within Credit is gen-
the last 12 the last 12 the last 12 the last 12 erally ex-
months. Gener- months months months pected to be
ally accounts late pay.
paid as
agreed.
Bankruptcy Chapter 13 Chapter 13 Chapter 13 Chapter 13 no Chapter 13 no
Filings must be dis- must be dis- must be dis- seasoning re- seasoning re-
charged mini- charged mini- charged mini- quired on dis- quired on dis-
mum of 1 year mum of 1 year mum of 1 year charge. Chap- charge. Chap-
with re-estab- with re-estab- with re-estab- ter 7 minimum ter 7 minimum
lished credit. lished credit. lished credit. discharge of 2 discharge of 1
Chapter 7 must Chapter 7 must Chapter 7 must years. year.
be discharged be discharged be discharged
minimum of 2 minimum of 2 minimum of 2
years with re- years with re- years with re-
established established established
credit. credit. credit.
Debt to Serv- 45% 45% 50% 55% 60%
ice Ratio:
Maximum Loan- 90% 90% 85% 75% 65%
to-Value
Ratio:
Maximum Com- 100% 100% 100% 90% 90%
bined Loan-
to-Value Ra-
tio:
</TABLE>
Geographic Diversification. Close attention is paid to geographic
diversification in managing the Servicer's credit risk. The Servicer believes
one of the best tools for managing credit risk is to diversify the markets in
which it originates and purchases mortgage loans. The Servicer has established
a diversification policy to be followed in managing this credit risk which
states that no one market can represent a percentage of total mortgage loans
owned by the Servicer higher than twice that market's percentage of the total
national market share. While there generally is some geographic concentration
in mortgage loans originated through the bulk acquisition channel, over time
the Servicer's mortgage lending operation plans to diversify its credit risk
by selecting target markets through the wholesale channel.
Quality Control. Quality control reviews are conducted to ensure that all
mortgage loans, whether originated or purchased, meet quality standards. The
type and extent of the reviews depend on the production channel through which
the mortgage loan was obtained and the characteristics of the mortgage loan.
The Servicer reviews a high percentage of mortgage loans with (i) principal
balances in excess of $450,000, (ii) higher Loan-to-Value Ratios or Combined
Loan-to-Value Ratios (in excess of 75%), (iii) limited documentation, or (iv)
made for "cash out" refinance purposes. The Servicer also performs appraisal
reviews and compliance reviews as part of the quality control process to
ensure adherence to state and federal regulations.
S-35
<PAGE>
ADDITIONAL INFORMATION
Prior to the issuance of the Bonds, Initial Mortgage Loans may be removed
from the Trust Estate as a result of incomplete documentation or otherwise, if
the Company deems such removal necessary or appropriate. A limited number of
other mortgage loans may be included in the Mortgage Pool prior to the
issuance of the Bonds. The Company believes that the information set forth
herein will be substantially representative of the characteristics of the
Mortgage Pool as it will be constituted at the time the Bonds are issued,
although the range of Mortgage Rates and maturities and certain other
characteristics of the Mortgage Loans in the Mortgage Pool may vary, although
such variance will not be material.
THE SELLER
The information set forth in the following paragraphs has been provided by
the Seller. None of the Company, the Underwriter, the Owner Trustee, the
Indenture Trustee, the Bond Insurer, the Issuer or any of their
respective affiliates has made or will make any representation as to the
accuracy or completeness of the information provided by the Seller.
NovaStar Financial, Inc. (the "Seller") was incorporated in the State of
Maryland on September 13, 1996. The common stock of the Seller is registered
under the Securities Act of 1933 and quoted on the New York Stock Exchange.
The Seller is subject to the reporting requirements of the Securities and
Exchange Act of 1934, and in accordance therewith, files reports and other
information with the Securities and Exchange Commission (the "Commission").
Copies of such materials may be inspected and copied at prescribed rates at
the public reference facilities maintained by the Commission at its Public
Reference Section, 450 Fifth Street, N.W., Washington, D.C. 20549, or by
mailing a written request to the corporate secretary of the Seller at 1900 W.
47th Place, Suite 205, Westwood, Kansas 66205.
The Seller is a specialty finance company which (i) originates, acquires,
and services single family residential subprime mortgage loans; (ii) leverages
its assets using bank warehouse lines and repurchase agreements; (iii) issues
collateralized debt obligations through special purpose subsidiaries to
finance its subprime mortgage loans on a long-term basis; (iv) purchases high
quality mortgage securities in the secondary mortgage market; and (v) manages
the resulting combined portfolio of mortgage assets in its structure as a real
estate investment trust. The Seller originates subprime residential mortgage
loans through a nationwide network of unaffiliated wholesale loan brokers and
correspondents and purchases bulk pools of closed loans. For the
months ended , 19 , the Seller originated $ million in subprime
mortgage loans, including $ million in the month of .
The principal executive offices of the Seller are at 1900 W. 47th Place,
Suite 205, Westwood, Kansas 66205. Principal officers for the Seller's
mortgage lending operations are in Irvine, California. The Seller and its
subsidiaries have over employees located primarily in Kansas and
California. As of , 19 , the Seller had total consolidated assets of
$ million, total consolidated liabilities of $ million, and
stockholders' equity of $ million. For the months ended ,
19 , the Seller had a net consolidated loss of $ .
No person other than the Seller is obligated with respect to the
representations and warranties respecting the Mortgage Loans and the remedies
for any breach thereof that are assigned to the Indenture Trustee for the
benefit of the Bondholders and the Bond Insurer. Moreover, as discussed above,
the Seller has only limited assets available to perform its repurchase
obligations in respect of any breach of such representations and warranties,
relative to the potential amount of repurchase liability, and the total
potential amount of repurchase liability is expected to increase over time as
the Seller continues to originate, acquire and sell mortgage loans. There can
be no assurance that the Seller will continue to generate operating earnings,
or that it will be successful under its current business plan. Therefore,
prospective investors in the Bonds should consider the possibility that the
Seller
S-36
<PAGE>
will not have sufficient assets with which to satisfy its repurchase
obligations in the event that a substantial amount of Mortgage Loans are
required to be repurchased due to breaches of representations and warranties.
THE ISSUER
NovaStar Mortgage Funding Trust Series is a business trust formed under
the laws of the State of Delaware pursuant to the Trust Agreement, dated as of
, 19 , between the Company and Wilmington Trust Company as the
Owner Trustee for the transactions described in this Prospectus Supplement.
The Trust Agreement constitutes the "governing instrument" under the laws of
the State of Delaware relating to business trusts. After its formation, the
Issuer will not engage in any activity other than (i) acquiring and holding
the Mortgage Loans and the other assets of the Issuer and proceeds therefrom,
(ii) issuing the Bonds and the Certificates, (iii) making payments on the
Bonds and the Certificates and (iv) engaging in other activities that are
necessary, suitable or convenient to accomplish the foregoing or are
incidental thereto or connected therewith. The Issuer is not expected to have
any significant assets other than those pledged as collateral to secure the
Bonds.
The assets of the Issuer will consist of the Mortgage Loans and certain
related assets pledged to secure the Bonds.
The Issuer's principal offices are in Wilmington, Delaware, in care of
Wilmington Trust Company, as Owner Trustee.
THE OWNER TRUSTEE
Wilmington Trust Company is the Owner Trustee under the Trust Agreement. The
Owner Trustee is a Delaware banking corporation and its principal offices are
located in Wilmington, Delaware.
Neither the Owner Trustee nor any director, officer or employee of the Owner
Trustee will be under any liability to the Issuer or the Bondholders under the
Trust Agreement under any circumstances, except for the Owner Trustee's own
misconduct, gross negligence, bad faith or grossly negligent failure to act or
in the case of the inaccuracy of certain representations made by the Owner
Trustee in the Trust Agreement. All persons into which the Owner Trustee may
be merged or with which it may be consolidated or any person resulting from
such merger or consolidation shall be the successor of the Owner Trustee under
the Trust Agreement.
THE INDENTURE TRUSTEE
, a national banking
association, will act as Indenture Trustee. A copy of the Indenture will be
provided by the Issuer without charge upon written request. Requests should be
addressed to the Indenture Trustee at
, ,
, Attention: NovaStar Mortgage Funding Trust Series
.
THE BOND INSURER
The following information has been supplied by (the
"Bond Insurer") for inclusion in this Prospectus Supplement.
[The Bond Insurer is the principal operating subsidiary of , a New
York Stock Exchange listed company. is not obligated to pay the
debts of or claims against the Bond Insurer. The Bond Insurer is domiciled in
the State of New York and licensed to do business in and is subject to
regulation under the laws
S-37
<PAGE>
of all 50 states, the District of Columbia, the Commonwealth of Puerto Rico,
the Commonwealth of Northern Mariana Islands, the Virgin Islands of the United
States and the Territory of Guam. The Bond 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 Bond
Insurer, changes in control and transactions among affiliates. Additionally,
the Bond Insurer is required to maintain contingency reserves on its
liabilities in certain amounts and for certain periods of time.
The consolidated financial statements of the Bond Insurer, a wholly owned
subsidiary of , and its subsidiaries as of December 31, 1996 and
December 31, 1995 and for each of the three years in the period ended December
31, 1996, prepared in accordance with generally accepted accounting
principles, included in the Annual Report on Form 10-K of for the
year ended December 31, 1996 and the consolidated financial statements of the
Bond Insurer and its subsidiaries for the six 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 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 Bond Insurer and its subsidiaries included
in document filed by pursuant to Section 13(a), 13(c), 14 or 15(d)
of the Securities Exchange Act of 1934, as amended, subsequent to the date of
this Prospectus Supplement and prior to the termination of the offering of the
Bonds 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 Insurer
determined in accordance with statutory accounting practices prescribed or
permitted by insurance regulatory authorities ("SAP") and generally accepted
accounting principles ("GAAP"):
<TABLE>
<CAPTION>
SAP
--------------------------
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
(AUDITED) (UNAUDITED)
(IN MILLIONS)
<S> <C> <C>
Admitted Assets................................
Liabilities....................................
Capital and Surplus............................
<CAPTION>
GAAP
--------------------------
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
(AUDITED) (UNAUDITED)
(IN MILLIONS)
<S> <C> <C>
Assets.........................................
Liabilities....................................
Shareholder's Equity...........................
</TABLE>
Copies of the financial statements of the Bond Insurer incorporated by
reference herein and copies of the Bond Insurer's 1996 year-end audited
financial statements prepared in accordance with statutory accounting
practices are available, without charge, from the Bond Insurer. The address of
the Bond Insurer is . The
telephone number of the Bond Insurer is .
S-38
<PAGE>
The Bond Insurer does not accept any responsibility for the accuracy or
completeness of this Prospectus Supplement or any information or disclosure
contained herein, or omitted herefrom, other than with respect to the accuracy
of the information regarding the Bond Insurance Policy and Bond Insurer set
forth under the headings "Description of the Bonds--Bond Insurance Policy" and
"The Bond Insurer." Additionally, the Insurer makes no representation
regarding the Bonds or the advisability of investing in the Bonds.]
Moody's Investors Service, Inc. rates the claims paying ability of the Bond
Insurer "Aaa."
Standard & Poor's Ratings Services, a division of The McGraw-Hill Companies,
Inc. rates the claims paying ability of the Bond Insurer "AAA."
Fitch IBCA, Inc. rates the claims paying ability of the Bond Insurer "AAA."
Each rating of the Bond Insurer should be evaluated independently. The
ratings reflect the respective rating agency's current assessment of the
creditworthiness of the Bond 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 Bonds,
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 Bonds. The Bond
Insurer does not guaranty the market price of the Bonds nor does it guaranty
that the ratings on the Bonds will not be revised or withdrawn.
DESCRIPTION OF THE BONDS
GENERAL
The Bonds will be issued pursuant to the Indenture, dated as of ,
19 , between the Issuer and , as Indenture Trustee.
The Certificates (together with the Bonds, the "Securities") will be issued
pursuant to the Trust Agreement, dated as of , 19 , between the
Company and Wilmington Trust Company, as Owner Trustee. The following
summaries describe certain provisions of the Securities, the Indenture, the
Trust Agreement and the Servicing Agreement. The summaries do not purport to
be complete and are subject to, and qualified in their entirety by reference
to, the provisions of the applicable agreement. Only the Bonds are offered
hereby.
The Bonds will be secured by the pledge by the Issuer of its assets to the
Indenture Trustee pursuant to the Indenture, which assets will consist of the
following (such assets, collectively, the "Trust Estate"): (i) the Mortgage
Loans; (ii) collections in respect of principal and interest of the Mortgage
Loans received after the Cut-off Date or Subsequent Cut-off Date, as
applicable (other than payments due on or before the Cut-off Date or the
Subsequent Cut-off Date, as applicable); (iii) the amounts on deposit in any
Collection Account (as defined in the Prospectus), including the account in
which amounts are deposited prior to payment to the Bondholders (the "Payment
Account"), including net earnings thereon; (iv) certain insurance policies
maintained by the Mortgagors or by or on behalf of the Servicer or any related
subservicer in respect of the Mortgage Loans; (v) an assignment of the
Company's rights under the Purchase Agreement; (vi) an assignment of the
Issuer's rights under the Servicing Agreement; (vii) amounts on deposit in the
Interest Coverage Account and the Pre-Funding Account; and (viii) proceeds of
the foregoing.
The Bonds will be issued in denominations of $25,000 and integral multiples
of $1 in excess thereof. See "--Book-Entry Bonds" below.
BOOK-ENTRY BONDS
General. Beneficial Owners that are not Participants or Intermediaries (as
defined in the Prospectus) but desire to purchase, sell or otherwise transfer
ownership of, or other interests in, the related Book-Entry Bonds may do so
only through Participants and Intermediaries. In addition, Beneficial Owners
will receive all payments
S-39
<PAGE>
of principal of, and interest on, the related Book-Entry Bonds from the Paying
Agent (as defined in the Prospectus) through DTC and Participants.
Accordingly, Beneficial Owners may experience delays in their receipt of
payments. Unless and until Definitive Bonds are issued for the related Book-
Entry Bonds, it is anticipated that the only registered Bondholder of such
Book-Entry Bonds will be Cede & Co., as nominee of DTC. Beneficial Owners will
not be recognized by the Indenture Trustee or the Servicer as Bondholders, as
such term is used in the Indenture, and Beneficial Owners will be permitted to
receive information furnished to Bondholders and to exercise the rights of
Bondholders only indirectly through DTC, its Participants and Intermediaries.
Under the rules, regulations and procedures creating and affecting DTC and
its operations (the "Rules"), DTC is required to make book-entry transfers of
Book-Entry Bonds among Participants and to receive and transmit payments of
principal of, and interest on, such Book-Entry Bonds. Participants and
Intermediaries with which Beneficial Owners have accounts with respect to such
Book-Entry Bonds similarly are required to make book-entry transfers and
receive and transmit such payments on behalf of their respective Beneficial
Owners. Accordingly, although Beneficial Owners will not possess physical
certificates evidencing their interests in the Book-Entry Bonds, the Rules
provide a mechanism by which Beneficial Owners, through their Participants and
Intermediaries, will receive payments and will be able to transfer their
interests in the Book-Entry Bonds.
None of the Company, the Servicer, the Bond Insurer, the Owner Trustee, the
Issuer or the Indenture Trustee will have any liability for any actions taken
by DTC or its nominee, including, without limitation, actions for any aspect
of the records relating to or payments made on account of beneficial ownership
interests in the Book-Entry Bonds held by Cede, as nominee for DTC, or for
maintaining, supervising or reviewing any records relating to such beneficial
ownership interests.
Definitive Bonds. Definitive Bonds will be issued to Beneficial Owners or
their nominees, respectively, rather than to DTC or its nominee, only under
the limited conditions set forth in the Prospectus under "Description of the
Bonds--Book-Entry Registration and Definitive Bonds."
Upon the occurrence of an event described in the Prospectus in the seventh
paragraph under "Description of the Bonds--Book-Entry Registration and
Definitive Bonds," the Indenture Trustee is required to notify, through DTC,
Participants who have ownership of Book-Entry Bonds as indicated on the
records of DTC of the availability of Definitive Bonds for their Book-Entry
Bonds. Upon surrender by DTC of the definitive certificates representing the
Book-Entry Bonds and upon receipt of instructions from DTC for re-
registration, the Indenture Trustee will reissue the Book-Entry Bonds as
Definitive Bonds issued in the respective principal amounts owned by
individual Beneficial Owners, and thereafter the Indenture Trustee will
recognize the holders of such Definitive Bonds as Bondholders under the
Indenture.
For additional information regarding DTC and the Book-Entry Bonds, see
"Description of the Bonds--Book-Entry Registration and Definitive Bonds" in
the Prospectus.
PAYMENTS
Payments on the Bonds will be made by the Indenture Trustee or the Paying
Agent on the 25th day of each month or, if such day is not a Business Day,
then the next succeeding Business Day, commencing in , 19 .
Payments on the Bonds will be made to the persons in whose names such Bonds
are registered at the close of business on the day prior to each Payment Date
or, if the Bonds are no longer Book-Entry Bonds, on the Record Date. See
"Description of the Bonds--Distributions" in the Prospectus. Payments will be
made by check or money order mailed (or upon the request, at least five
Business Days prior to the related Record Date, of a Holder owning Bonds
having denominations aggregating at least $5,000,000, by wire transfer or
otherwise) to the address of the person entitled thereto (which, in the case
of Book-Entry Bonds, will be DTC or its nominee) as it appears on the Security
Register on the related Record Date. However, the final payment in respect of
the Bonds will be made only upon presentation and surrender thereof at the
office or the agency of the
S-40
<PAGE>
Indenture Trustee specified in the notice to Holders of such final payment. A
"Business Day" is any day other than (i) a Saturday or Sunday or (ii) a day on
which banking institutions in New York City, California, Kansas or Delaware or
in the city in which the corporate trust offices of the Indenture Trustee or
the principal office of the Bond Insurer are located, are required or
authorized by law to be closed.
AVAILABLE FUNDS
The "Available Funds" for any Payment Date will equal the amount received by
the Indenture Trustee and available in the Payment Account on each Payment
Date. The Available Funds will generally be equal to the sum of (i) the
aggregate amount of scheduled payments on the related Mortgage Loans due on
the related Due Date and received on or prior to the related Determination
Date, (ii) any amounts representing interest on amounts in the Payment Account
and miscellaneous fees and collections, including assumption fees and
prepayment penalties (but excluding late fees), (iii) any unscheduled payments
and receipts, including Mortgagor prepayments on such Mortgage Loans, received
during the related Prepayment Period (as defined herein), and (iv) all
Advances made for such Payment Date in respect of such Mortgage Loans, in each
case net of amounts reimbursable therefrom to the Servicer and any subservicer
and reduced by Servicing Fees, Administrative Fees and fees of the Indenture
Trustee paid by the Servicer. In addition, on the Payment Date relating to the
Due Period in which the termination of the Pre-Funding Period occurred.
Available Funds will include the amount on deposit in the Pre-Funding Account
at such time, plus on each Payment Date on or prior to the Payment Date in
, , Available Funds will include the amount, if any,
withdrawn from the Interest Coverage Account. With respect to any Payment
Date, (i) the "Due Date" is the first day of the month in which such Payment
Date occurs, and (ii) the "Determination Date" is the 15th day of the month in
which such Payment Date occurs, or if such day is not a Business Day, the
immediately preceding Business Day.
INTEREST PAYMENTS ON THE BONDS
On each Payment Date, holders of the Bonds will be entitled to receive an
amount (the "Interest Payment Amount") equal to the lesser of (i) interest
accrued on the Bond Principal Balance thereof immediately prior to such
Payment Date at the Bond Interest Rate (as defined below) for the related
Interest Period and (ii) the Guaranteed Interest Payment Amount (as defined
below). With respect to each Payment Date, interest payable on the Bonds will
accrue during the Interest Period. Interest will be calculated on the basis of
the actual number of days in the Interest Period and on a 360-day year.
Notwithstanding the foregoing, if payments are not made as required under the
Bond Insurance Policy, additional interest shortfalls may be allocated to the
Bonds as described below. See "Description of the Bonds--Bond Insurance
Policy."
On each Payment Date after the first Payment Date, the "Bond Interest Rate"
will be a floating rate equal to the lesser of (i)(a) with respect to each
Payment Date up to and including the earlier of (x) the Payment Date in
20 and (y) the Payment Date which occurs on or prior to the date on
which the aggregate Principal Balance of the Mortgage Loans is less than [25]%
of the sum of the aggregate Principal Balance of the Initial Mortgage Loans as
of the Cut-off Date and the Original Pre-Funded Amount, One-Month LIBOR (as
defined herein) plus [.25]%, and (b) with respect to each Payment Date
thereafter, One-Month LIBOR plus [.50]% and (ii) % per annum (the
"Maximum Interest Rate"). On the first Payment Date, the Bond Interest Rate
will be equal to % per annum.
As further described herein, with respect to the Bonds and any Payment Date,
to the extent that the amount calculated pursuant to clause (i) of the
definition of Interest Payment Amount exceeds the Guaranteed Interest Payment
Amount (such excess, the "Carry-Forward Amount"), the holders of the Bonds
will be paid the amount of such Carry-Forward Amount with interest thereon at
the Bond Interest Rate for the Bonds applicable from time to time after
certain payments to the holders of the Bonds and the Bond Insurer to the
extent of available funds. The "Guaranteed Interest Payment Amount" for any
Payment Date is equal to the amount of interest that
S-41
<PAGE>
accrued on the aggregate outstanding Principal Balance of the Mortgage Loans
payable on the related Due Date minus the aggregate amount of the related
Servicing Fee, the Indenture Trustee Fee, the Owner Trustee Fee, the Bond
Insurance Premium and the Minimum Spread (each as defined below). With respect
to each Mortgage Loan and each Payment Date, the Servicer will be entitled to
a fee (the "Servicing Fee") equal to [ 1/12] of the Servicing Fee Rate times
the Principal Balance of such Mortgage Loan as of such date. With respect to
each Mortgage Loan and each Payment Date, the Indenture Trustee will be
entitled to a fee (the "Indenture Trustee Fee") equal to [ 1/12] of the
Indenture Trustee Fee Rate times the Principal Balance of such Mortgage Loan
as of such date. For any Payment Date, the "Servicing Fee Rate" is equal to
[0.50%] per annum, the "Indenture Trustee Fee Rate" is equal to [0.0125%] per
annum, the "Owner Trustee Fee" is [$4,000] per annum (payable on the Payment
Date in December of each year) and the "Bond Insurance Premium" is equal to [
1/12] of the per annum rate specified in the Insurance Agreement times the
Bond Principal Balance (the Bond Insurance Premium together with the Owner
Trustee Fee, the "Administrative Fee"). With respect to each Mortgage Loan and
each Payment Date, the "Minimum Spread" is equal to [ 1/12] of [0.50%] per
annum times the Principal Balance of such Mortgage Loan as of such date. The
Bond Insurance Policy does not cover any Prepayment Interest Shortfalls, any
Relief Act Shortfalls (each as defined herein) or the Carry-Forward Amount,
nor do the ratings assigned to the Bonds address the payment of any Prepayment
Interest Shortfalls, any Relief Act Shortfalls or the Carry-Forward Amount.
As described herein, the Interest Payment Amount allocable to the Bonds is
based on the Bond Principal Balance. The "Bond Principal Balance" of any Bond
as of any date of determination is equal to the initial principal balance
thereof as of the Closing Date, reduced by all amounts allocable to the
Principal Payment Amount and the Subordination Increase Amount previously
distributed with respect to such Bond.
The "Principal Balance" of any Mortgage Loan is, at any given time, the
Principal Balance as of the Cut-off Date or Subsequent Cut-off Date, as
applicable, of such Mortgage Loan, minus (a) the sum of all amounts paid or
advanced with respect to such Mortgage Loan with respect to principal and (b)
the principal portion of any losses with respect thereto for any previous
Payment Date.
CALCULATION OF ONE-MONTH LIBOR
On the second business day preceding each Payment Date, commencing with the
Payment Date occurring in 19 (each such date, an "Interest
Determination Date"), the Indenture Trustee will determine the London
interbank offered rate for one-month United States dollar deposits ("One-Month
LIBOR") for the next Interest Period for the Bonds on the basis of the offered
rates of the Reference Banks for one-month United States dollar deposits, as
such rates appear on the Telerate Page 3750, as of 11:00 a.m. (London time) on
such Interest Determination 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 Interest Period
(commencing on the first day of such Interest Period). The Indenture 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 The City of New
York, selected by the Indenture Trustee, 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 Interest Period (commencing on the
first day of such Interest Period).
"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 Indenture Trustee and
engaged in transactions in European deposits in the international Eurocurrency
market.
S-42
<PAGE>
The establishment of One-Month LIBOR on each Interest Determination Date by
the Indenture Trustee and the Indenture Trustee's calculation of the rate of
interest applicable to the Bonds for the related Interest Period shall (in the
absence of manifest error) be final and binding.
PRINCIPAL PAYMENTS ON THE BONDS
The "Principal Payment Amount" for (a) any Payment Date, other than the
Final Scheduled Payment Date and the first Payment Date following any
acceleration of the Bonds following an Event of Default (as defined herein),
will be equal to the lesser of (x) the sum of the Available Funds remaining
after distributions pursuant to clause (i) of "--Priority of Payment" below
and any portion of any Insured Payment (as defined herein) for such Payment
Date representing a Subordination Deficit and (y) the sum of:
(i) the principal portion of all scheduled monthly payments on the
Mortgage Loans received or Advanced (as defined herein) on the Mortgage
Loans with respect to the related Due Date;
(ii) the principal portion of all proceeds of the repurchase of a
Mortgage Loan (or, in the case of a substitution, certain amounts
representing a principal adjustment) pursuant to the Servicing Agreement or
the Purchase Agreement during the preceding calendar month;
(iii) the principal portion of all other unscheduled collections received
during the related Prepayment Period (or deemed to be received during the
related Prepayment Period) (including, without limitation, full and partial
Principal Prepayments made by the respective Mortgagors, Liquidation
Proceeds and Insurance Proceeds (excluding proceeds paid in respect of the
Bond Insurance Policy)), to the extent not distributed in the preceding
month;
(iv) any Insured Payment made with respect to any Subordination Deficit;
and
(v) with respect to the Payment Date immediately following the end of the
Funding Period, any amounts in the Pre-Funding Account after giving effect
to any purchase of Subsequent Mortgage Loans;
minus
(vi) the amount of any Subordination Reduction Amount for such Payment
Date;
and (b) with respect to the Final Scheduled Payment Date and the first
Payment Date following any acceleration of the Bonds following an Event of
Default, the amount necessary to reduce the Bond Principal Balance to zero.
In no event will the Principal Payment Amount with respect to any Payment
Date be (x) less than zero or (y) greater than the then outstanding Bond
Principal Balance of the Bonds.
PRIORITY OF PAYMENT
On each Payment Date, Available Funds and any Insured Payment with respect
to such Payment Date will be allocated to the Securities in the following
order of priority, in each case to the extent of Available Funds remaining:
(i) to the Bondholders, the Interest Payment Amount with respect to such
Payment Date;
(ii) to the Bondholders, the Principal Payment Amount with respect to
such Payment Date;
(iii) to the Bond Insurer, the sum of (a) all amounts previously paid by
the Bond Insurer under the Bond Insurance Policy which have not previously
been reimbursed (b) any other amounts due to the Bond Insurer pursuant to
the agreement pursuant to which the Bond Insurance Policy is issued (the
"Insurance
S-43
<PAGE>
Agreement") and (c) interest on the foregoing as set forth in the Insurance
Agreement from the date such amounts became due until paid in full (the
"Reimbursement Amount");
(iv) to the Bondholders, the Subordination Increase Amount (as defined in
"--Overcollateralization Provisions" below), in reduction of the Bond
Principal Balance thereof, until the Bond Principal Balance has been
reduced to zero;
(v) to the Bondholders, any Carry-Forward Amount for such Payment Date;
(vi) to the Indenture Trustee, for any amounts owing to the Indenture
Trustee;
(vii) to the Servicer, any amounts owing to the Servicer pursuant to the
Servicing Agreement in connection with the indemnity by the Issuer
thereunder; and
(viii) any remaining amounts to the holders of the Certificates.
OVERCOLLATERALIZATION PROVISIONS
Overcollateralization Resulting from Cash Flow Structure.
With respect to any Payment Date, the excess, if any, of (x) the sum of the
aggregate Principal Balances of the Mortgage Loans as of the close of business
on the last day of the period commencing on the second day of the month
preceding the month of such Payment Date (or, with respect to the first
Payment Date, the day following the Cut-Off Date) and ending on the related
Due Date (such period, the "Due Period") and the amount of funds in the Pre-
Funding Account as of such Payment Date over (y) the Bond Principal Balance of
the Bonds as of such Payment Date (and following the making of all payments
made on such Payment Date) is the "Subordination Amount" as of such Payment
Date. The Indenture requires that, on each Payment Date, the Net Monthly
Excess Cashflow, if any, be applied on such Payment Date as an accelerated
payment of principal on the Bonds, but only to the limited extent hereafter
described. The "Net Monthly Excess Cashflow" for any Payment Date is equal to
the amount of Available Funds remaining after application to items (i) through
(iii) under "--Priority of Payment" herein. This application has the effect of
accelerating the amortization of the Bonds relative to the amortization of the
Mortgage Loans. The Indenture requires that the Net Monthly Excess Cashflow
will be applied as an accelerated payment of principal on the Bonds until the
Subordination Amount has increased to the level equal to the Required
Subordination Amount for such Payment Date.
Any amount of Net Monthly Excess Cashflow actually applied as an accelerated
payment of principal is a "Subordination Increase Amount." The required level
of the Subordination Amount with respect to a Payment Date is the "Required
Subordination Amount" with respect to such Payment Date. Initially, the sum of
the aggregate Principal Balance of the Initial Mortgage Loans as of the Cut-
off Date and the Original Pre-Funded Amount will exceed the aggregate Bond
Principal Balance of the Bonds as of the Closing Date by approximately
$ or % of the sum of the aggregate Principal Balance of the
Initial Mortgage Loans as of the Cut-off Date and the Original Pre-Funded
Amount. This amount is the initial Required Subordination Amount. In addition,
upon the end of the Funding Period, the Bond Insurer may adjust the Required
Subordination Amount. The Indenture generally provides that the Required
Subordination Amount may, over time, decrease, or increase, subject to certain
floors, caps and triggers.
In the event that the Required Subordination Amount is permitted to decrease
or "step down" on a Payment Date in the future, the Indenture provides that a
portion of the principal payment which would otherwise be distributed to the
Holders of the Bonds on such Payment Date shall be distributed to the Holders
of the Certificates on such Payment Date. This has the effect of decelerating
the amortization of the Bonds relative to the amortization of the Mortgage
Loans, and of reducing the Subordination Amount. With respect to any Payment
Date, the difference, if any, between (a) the Subordination Amount that would
result on such Payment Date after taking into account all payments to be made
on such Payment Date (exclusive of any reductions thereto attributable to
Subordination Reduction Amounts (as described below) on such Payment Date) and
(b) the Required Subordination Amount for such Payment Date is the "Excess
Subordination Amount" with respect to such Payment Date. With respect to any
Payment Date, an amount equal to the lesser of (a) the Excess
S-44
<PAGE>
Subordination Amount and (b) the principal collections received by the
Servicer with respect to the prior Due Period is the "Subordination Reduction
Amount." In addition, a Subordination Reduction Amount may result even prior
to the occurrence of any decrease or "step down" in the Required Subordination
Amount. This is because the Holders of the Bonds will generally be entitled to
receive 100% of collected principal, even though the Bond Principal Balance of
the Bonds will represent less than 100% of the Mortgage Loans' principal
balance. In the absence of the provisions relating to the Subordination
Reduction Amount, the foregoing may otherwise increase the Subordination
Amount above the Required Subordination Amount even without the application of
any Net Monthly Excess Cashflow.
The Indenture provides that, on any Payment Date, all unscheduled
collections on account of principal (other than any such amount applied to the
payment of a Subordination Reduction Amount) with respect to Mortgage Loans
during the calendar month preceding the calendar month in which such Payment
Date occurs (the "Prepayment Period") will be distributed to the Holders of
the Bonds on such Payment Date. If any Mortgage Loan became a Liquidated
Mortgage Loan (as defined below) during such Prepayment Period, the net
Liquidation Proceeds (as defined in the Prospectus) related thereto and
allocated to principal may be less than the Principal Balance of the related
Mortgage Loan; the amount of any such insufficiency is generally defined as a
"Realized Loss." A "Liquidated Mortgage Loan" is, in general, a defaulted
Mortgage Loan as to which the Servicer has determined that all amounts that it
expects to recover on such Mortgage Loan have been recovered (exclusive of any
possibility of a deficiency judgment). The principal balance of any Mortgage
Loan after it becomes a Liquidated Mortgage Loan shall equal zero. The
Indenture does not contain any provision which requires that the amount of any
Realized Loss should be distributed to the Holders of the Bonds on the Payment
Date which immediately follows the event of loss; i.e., the Indenture does not
require the current recovery of losses. However, the occurrence of a Realized
Loss will reduce the Subordination Amount, which, to the extent that such
reduction causes the Subordination Amount to be less than the Required
Subordination Amount applicable to the related Payment Date, will require the
payment of a Subordination Increase Amount on such Payment Date (or, if
insufficient funds are available on such Payment Date, on subsequent Payment
Dates, until the Subordination Amount equals the Required Subordination
Amount). The effect of the foregoing is to allocate losses to
overcollateralization by reducing, or eliminating entirely, payments of Net
Monthly Excess Cashflow and of Subordination Reduction Amounts which the
holders of the Certificates would otherwise receive.
Overcollateralization and the Bond Insurance Policy. The Indenture defines a
"Subordination Deficit" with respect to a Payment Date to be the amount, if
any, by which (x) the aggregate Bond Principal Balance of the Bonds as of such
Payment Date, and following the making of all payments to be made on such
Payment Date (except for any payment to be made as to principal from proceeds
of the Bond Insurance Policy), exceeds (y) the sum of the aggregate Principal
Balances of the Mortgage Loans as of the close of business on the Due Date
preceding such Payment Date and the amount of funds in the Pre-Funding Account
on such Due Date. The Indenture requires the Indenture Trustee to make a claim
for an Insured Payment under the Bond Insurance Policy not later than the
second Business Day prior to any Payment Date as to which the Indenture
Trustee has determined that a Subordination Deficit will occur for the purpose
of applying the proceeds of such Insured Payment as a payment of principal to
the Holders of the Bonds on such Payment Date. Investors in the Bonds should
realize that, under extreme loss or delinquency scenarios, they may
temporarily receive no payments of principal.
BOND INSURANCE POLICY
The following information has been supplied by the Bond Insurer for
inclusion in this Prospectus Supplement.
[The Bond Insurer, in consideration of the payment of the premium and
subject to the terms of the Bond Insurance Policy, thereby unconditionally and
irrevocably guarantees to any Owner that an amount equal to each full and
complete Insured Payment will be received by the Indenture Trustee, or its
successor, as trustee for the Owners, on behalf of the Owners from the Bond
Insurer, for distribution by the Indenture Trustee to each Owner
S-45
<PAGE>
of each Owner's proportionate share of the Insured Payment. The Bond Insurer's
obligations under the Bond 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 Indenture Trustee, whether or
not such funds are properly applied by the Indenture Trustee. Insured Payments
shall be made only at the time set forth in the Bond Insurance Policy and no
accelerated Insured Payments shall be made regardless of any acceleration of
the Bonds, unless such acceleration is at the sole option of the Bond Insurer.
Notwithstanding the foregoing paragraph, the Bond Insurance Policy does not
cover shortfalls, if any, attributable to the liability of the Issuer or the
Indenture Trustee for withholding taxes, if any (including interest and
penalties in respect of any such liability). The Bond Insurance Policy does
not cover, and Insured Payments do not include, any Prepayment Interest
Shortfalls, any Relief Act Shortfalls or any Carry-Forward Amounts.
The Bond 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 Bond
Insurer that such order is final and not subject to appeal, (iii) an
assignment in such form as is reasonably required by the Bond Insurer,
irrevocably assigning to the Bond Insurer all rights and claims of the Owner
relating to or arising under the Bonds 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 Bond Insurer as
agent for such Owner in any legal proceeding related to such preference
payment, such instruments being in a form satisfactory to the Bond 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 Bonds to such receiver or trustee
in bankruptcy, in which case such payment shall be disbursed to such Owner.
The Bond Insurer will pay any other amount payable under the Bond Insurance
Policy no later than 12:00 noon New York City time on the later of the Payment
Date on which the related Deficiency Amount is due or the second 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 Bond Insurer or any successor
fiscal agent appointed by the Bond 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
claim under the Bond Insurance Policy it shall be deemed not to have been
received by the Fiscal Agent for purposes of this paragraph, and the Bond
Insurer or the Fiscal Agent, as the case may be, shall promptly so advise the
Indenture Trustee and the Indenture Trustee may submit an amended Notice.
Insured Payments due under the Bond Insurance Policy unless otherwise stated
therein will be disbursed by the Fiscal Agent to the Indenture Trustee on
behalf of the Owners by wire transfer of immediately available funds in the
amount of the Insured Payment less, in respect of Insured Payments related to
Preference Amounts, any amount held by the Indenture Trustee for the payment
of such Insured Payment and legally available therefor.
The Fiscal Agent is the agent of the Bond 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 Bond Insurer to deposit or cause to be deposited, sufficient
funds to make payments due under the Bond Insurance Policy.
Subject to the terms of the Agreement, the Bond Insurer shall be subrogated
to the rights of each Owner to receive payments under the Bonds to the extent
of any payment by the Bond Insurer under the Bond Insurance Policy.
S-46
<PAGE>
As used in the Bond Insurance Policy, the following terms shall have the
following meanings:
"Agreement" means the Indenture dated as of , 19 between the
Issuer and the Indenture Trustee, without regard to any amendment or
supplement thereto unless such amendment or supplement has been approved in
writing by the Bond Insurer.
"Business Day" means any day other than a Saturday, a Sunday or a day on
which the Bond Insurer or banking institutions in New York City or in the city
in which the corporate trust office of the Indenture Trustee under the
Agreement or the principal office of the Bond Insurer are located are
authorized or obligated by law or executive order to close.
"Deficiency Amount" means (a) with respect to each Payment Date prior to the
Final Scheduled Payment Date, an amount equal to the sum of (i) the excess, if
any, of the Interest Payment Amount (net of any Prepayment Interest
Shortfalls, to the extent not covered by the Servicer by Compensating Interest
(as defined herein), and any Relief Act Shortfalls for such Payment Date) over
the Available Funds for such Payment Date and (ii) any Subordination Deficit;
(b) with respect to the Final Scheduled Payment Date, an amount equal to the
sum of (i) the excess, if any, of the Interest Payment Amount (net of any
Prepayment Interest Shortfalls, to the extent not covered by the Servicer by
Compensating Interest, and any Relief Act Shortfalls for such Payment Date)
over the Available Funds for such Payment Date and (ii) the excess, if any, of
the Bond Principal Balance of all Outstanding Bonds due on such Final
Scheduled Payment Date over Available Funds not used to pay the Interest
Payment Amount (net of any Prepayment Interest Shortfalls, to the extent not
covered by the Servicer by Compensating Interest, and any Relief Act
Shortfalls for such Payment Date) for such Final Scheduled Payment Date; and
(c) for any date on which the acceleration of the Bonds has been directed or
consented to by the Bond Insurer pursuant to Section 5.02 of the Indenture, an
amount equal to the excess, if any, of the sum of the Bond Principal Balance
of the Bonds, together with accrued and unpaid interest thereon through the
date of payment of such accelerated Bonds, over the Available Funds for such
date of payment.
"Insured Payment" means (i) as of any Payment Date, any Deficiency Amount
and (ii) any Preference Amount.
"Notice" means the telephonic or telegraphic notice, promptly confirmed in
writing by telecopy substantially in the form of Exhibit A attached to the
Bond Insurance Policy, the original of which is subsequently delivered by
registered or certified mail, from the Indenture Trustee specifying the
Insured Payment which shall be due and owing on the applicable Payment Date.
"Owner" means each Bondholder (as defined in the Agreement) of a Bond who,
on the applicable Payment Date, is entitled under the terms of the applicable
Bonds to payment thereunder.
"Preference Amount" means any amount previously distributed to an Owner on
the Bonds 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.
"Relief Act Shortfalls" means for any Payment Date any shortfalls relating
to the Soldiers' and Sailors' Civil Relief Act of 1940, as amended for similar
legislation or regulations.
Capitalized terms used in the Bond Insurance Policy and not otherwise
defined in the Bond Insurance Policy shall have the respective meanings set
forth in the Agreement as of the date of execution of the Bond 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 Bond Insurer.
Any notice under the Bond 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 Bond Insurer shall specify in writing to the
Indenture Trustee.
S-47
<PAGE>
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 Indenture Trustee in writing.
THE BOND 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 Bond Insurance Policy is not covered by the
Property/Casualty Insurance Security Fund specified in Article 76 of the New
York Insurance Law.
The Bond Insurance Policy is not cancelable for any reason. The premium on
the Bond Insurance Policy is not refundable for any reason including payment,
or provision being made for payment, prior to maturity of the Bonds.]
ADVANCES
Prior to each Payment Date, the Servicer is required under the Servicing
Agreement to make "Advances" (out of its own funds, advances made by any
subservicer, or funds held in the Collection Account (as described in the
Prospectus) for future payment or withdrawal) with respect to any payments of
principal and interest (net of the Servicing Fee Rate) which were due on the
Mortgage Loans on the immediately preceding Due Date and which are delinquent
on the business day next preceding the related Determination Date.
Such Advances are required to be made only to the extent they are deemed by
the Servicer to be recoverable from related late collections, Insurance
Proceeds, or Liquidation Proceeds. The purpose of making such Advances is to
maintain a regular cash flow to the Bondholders, rather than to guarantee or
insure against losses. Any failure by the Servicer to make an Advance as
required under the Servicing Agreement will constitute an Event of Default
thereunder, in which case the Indenture Trustee, as successor Servicer, will
be obligated to make any such Advance, in accordance with the terms of the
Servicing Agreement.
All Advances will be reimbursable to the Servicer on a first priority basis
from late collections, Insurance Proceeds or Liquidation Proceeds from the
Mortgage Loan as to which such unreimbursed Advance was made. In addition, any
Advances previously made which are deemed by the Servicer to be nonrecoverable
from related late collections, Insurance Proceeds and Liquidation Proceeds may
be reimbursed to the Servicer out of any funds in the Collection Account prior
to payments on the Bonds.
THE PAYING AGENT
The Paying Agent shall initially be the Indenture Trustee. The Paying Agent
shall have the revocable power to withdraw funds from the Payment Account for
the purpose of making payments to the Bondholders.
OPTIONAL REDEMPTION
The Bonds may be redeemed in whole, but not in part, by the Issuer on any
Payment Date on or after the earlier of (i) the Payment Date on which the
aggregate Principal Balance of the Mortgage Loans is less than or equal to
[25]% of the sum of the aggregate Principal Balance of the Initial Mortgage
Loans as of the Cut-off Date and the Original Pre-Funded Amount or (ii) the
Payment Date occurring in , 20 . The purchase price will be equal to
100% of the aggregate outstanding Bond Principal Balance and accrued and
unpaid interest thereon (including any Carry-Forward Amount) at the Bond
Interest Rate through the date on which the Bonds are redeemed in full
together with all amounts due and owing to the Bond Insurer, the Servicer and
the Indenture Trustee. The "Final Scheduled Payment Date" is the Payment Date
occurring in , 20 .
S-48
<PAGE>
MANDATORY PREPAYMENTS ON THE BONDS
The Bonds will be partially prepaid on the Payment Date immediately
following the end of the Funding Period to the extent that any amount remains
on deposit in the Pre-Funding Account on such Payment Date. Although no
assurance can be given, it is anticipated that the principal amount of
Subsequent Mortgage Loans sold to the Issuer and included in the Trust Estate
will require the application of substantially all of the Original Pre-Funded
Amount and that there should be no material amount of principal prepaid to the
Bonds from the Pre-Funding Account. However, it is unlikely that the Seller
will be able to deliver Subsequent Mortgage Loans with an aggregate principal
balance identical to the Original Pre-Funded Amount.
INTEREST COVERAGE ACCOUNT
On the Closing Date, a portion of the sales proceeds of the Bonds will be
deposited in an account (the "Interest Coverage Account") for application by
the Indenture Trustee to cover shortfalls in the Interest Payment Amount
attributable to the pre-funding feature during the Funding Period. Such
shortfall initially will exist during the Funding Period because the aggregate
Principal Balance of the Bonds, and interest accrued thereon, during the
Funding Period will be greater than the aggregate principal balance of the
Mortgage Loans, and interest accrued thereon, during such period. On the first
business day following the first Payment Date following the termination of the
Funding Period, funds on deposit in the Interest Coverage Account will be
deposited in the Payment Account.
CERTAIN YIELD AND PREPAYMENT CONSIDERATIONS
The yield to maturity of the Bonds will depend on the price paid by the
holder for such Bond, the Bond Interest Rate and the rate and timing of
principal payments (including payments in excess of required installments,
prepayments or terminations, liquidations and repurchases) on the Mortgage
Loans and the allocation thereof. Such yield may be adversely affected by a
higher or lower than anticipated rate of principal payments on the Mortgage
Loans and the amount, if any, distributed from the Pre-Funding Account at the
end of the Funding Period. The rate of principal payments on such Mortgage
Loans will in turn be affected by the amortization schedules of the Mortgage
Loans, the rate and timing of principal prepayments thereon by the Mortgagors
and liquidations of defaulted Mortgage Loans, and purchases of Mortgage Loans
due to certain breaches of representations and warranties and optional
repurchases of delinquent loans by the Servicer. The timing of changes in the
rate of prepayments, liquidations and repurchases of the Mortgage Loans may,
and the timing of losses will, significantly affect the yield to an investor,
even if the average rate of principal payments experienced over time is
consistent with an investor's expectation. Since the rate and timing of
principal payments on the Mortgage Loans will depend on future events and on a
variety of factors (as described more fully herein and in the Prospectus under
"Yield Considerations"), no assurance can be given as to such rate or the
timing of principal payments on the Bonds.
The Mortgage Loans generally may be prepaid in full or in part at any time;
however, prepayment may subject the mortgagor to a prepayment charge. The
Adjustable Rate Mortgage Loans generally are assumable under certain
circumstances if, in the sole judgment of the Servicer, the prospective
purchaser of a Mortgaged Property is creditworthy and the security for such
Mortgage Loan is not impaired by the assumption. The Fixed Rate Mortgage Loans
contain a customary "due on sale" provision. The Servicer shall enforce any
due-on-sale clause contained in any Mortgage Note or Mortgage, to the extent
permitted under applicable law and governmental regulations; provided,
however, if the Servicer determines that it is reasonably likely that any
Mortgagor will bring, or if any Mortgagor does bring, legal action to declare
invalid or otherwise avoid enforcement of a due-on-sale clause contained in
any Mortgage Note or Mortgage, the Servicer shall not be required to enforce
the due-on-sale clause or to contest such action. The extent to which the
Mortgage Loans are assumed by purchasers of the Mortgaged Properties rather
than prepaid by the related Mortgagors in connection with the sales of the
Mortgaged Properties will affect the weighted average life of the Bonds and
may result in a prepayment experience on the Mortgage Loans that differs from
that on other conventional Mortgage Loans. See
S-49
<PAGE>
"Yield Considerations" in the Prospectus. Prepayments, liquidations and
purchases of the Mortgage Loans will result in payments to holders of the
Bonds of principal amounts which would otherwise be distributed over the
remaining terms of the Mortgage Loans. Factors affecting prepayment (including
defaults and liquidations) of Mortgage Loans include changes in mortgagors'
housing needs, job transfers, unemployment, mortgagors' net equity in the
mortgaged properties, changes in the value of the mortgaged properties,
mortgage market interest rates and servicing decisions.
The rate of defaults on the Mortgage Loans will also affect the rate and
timing of principal payments on the Mortgage Loans. In general, defaults on
Mortgage Loans are expected to occur with greater frequency in their early
years. Increases in the monthly payments of the Adjustable Rate Mortgage Loans
to an amount in excess of the monthly payment required at the time of
origination may result in a default rate higher than that on level payment
Mortgage Loans, particularly since the Mortgagor under each Adjustable Rate
Mortgage Loan was qualified on the basis of the Mortgage Rate in effect at
origination. The repayment of such Adjustable Rate Mortgage Loans will be
dependent on the ability of the Mortgagor to make larger monthly payments as
the Mortgage Rate increases. In addition, the rate of default on Mortgage
Loans which are refinance or limited documentation Mortgage Loans, and on
Mortgage Loans with high Loan-to-Value Ratios, may be higher than for other
types of Mortgage Loans. Furthermore, the rate and timing of prepayments,
defaults and liquidations on the Mortgage Loans will be affected by the
general economic condition of the region of the country in which the related
Mortgaged Properties are located. The risk of delinquencies and loss is
greater and prepayments are less likely in regions where a weak or
deteriorating economy exists, as may be evidenced by, among other factors,
increasing unemployment or falling property values. See "Yield Considerations"
in the Prospectus.
To the extent that the Original Pre-Funded Amount has not been fully applied
to the purchase of Subsequent Mortgage Loans by the Issuer by the end of the
Funding Period, the Holders of the Bonds will receive on the first Payment
Date following the termination of the Funding Period a prepayment of principal
in an amount equal to the lesser of (i) the Pre-Funded Amount remaining in the
Pre-Funding Account and (ii) the outstanding Principal Balance of the Bonds.
Although no assurance can be given, it is anticipated by the Company that the
principal amount of Subsequent Mortgage Loans sold to the Issuer for inclusion
in the Trust Estate will require the application of substantially all amounts
on deposit in the Pre-Funding Account and that there will be no material
amount of principal prepaid to such Bondholders. However, it is unlikely that
the Seller will be able to deliver Subsequent Mortgage Loans with an aggregate
principal balance identical to the Pre-Funded Amount.
In addition, the yield to maturity of the Bonds will depend on, among other
things, the price paid by the holders of the Bonds and the then applicable
Bond Interest Rate. The extent to which the yield to maturity of a Bond is
sensitive to prepayments will depend, in part, upon the degree to which it is
purchased at a discount or premium. In general, if a Bond is purchased at a
premium and principal payments thereon occur at a rate faster than anticipated
at the time of purchase, the investor's actual yield to maturity will be lower
than that assumed at the time of purchase. Conversely, if a Bond is purchased
at a discount and principal payments thereon occur at a rate slower than that
assumed at the time of purchase, the investor's actual yield to maturity will
be lower than that assumed at the time of purchase. For additional
considerations relating to the yield on the Bonds, see "Yield Considerations"
in the Prospectus.
Furthermore, the yield to maturity on the Bonds may be affected by
shortfalls with respect to interest in the event that the interest accrued on
the Bonds at the Bond Interest Rate is greater than the amount of interest
accrued on the Mortgage Loans at the related Mortgage Rates less the sum of
the Servicing Fee, the Indenture Trustee Fee and the Administrative Fee. In
such event, the resulting shortfall, if not paid under the Bond Insurance
Policy, will only be payable to the extent that on any future Payment Date
interest accrued on the Mortgage Loans at the related Mortgage Rates less such
rates is greater than the interest accrued on the Bonds, and only to the
extent of Available Funds following distributions to the Bondholders pursuant
to clauses (i) through (iv) under "Description of the Bonds--Priority of
Payment."
The Bond Interest Rate is based upon, among other factors as described
herein under "Description of the Bonds--Interest Payments on the Bonds," the
value of an index (One-Month LIBOR (as defined herein) which
S-50
<PAGE>
is different from the value of the indices applicable to the Mortgage Loans,
Six-Month LIBOR and One-Year CMT). The Mortgage Rate for each Fixed Rate
Mortgage Loan is fixed and the Mortgage Rate for each Adjustable Rate Mortgage
Loan adjusts semi-annually or annually, commencing after the Initial Period,
based upon the related Index, whereas the Bond Interest Rate on the Bonds
adjusts monthly based upon One-Month LIBOR plus % (or after the earlier of
(x) the Payment Date in 20 and (y) the Payment Date which occurs on
or prior to the date on which the aggregate Principal Balance of the Mortgage
Loans is less than [25]% of the sum of the aggregate Principal Balance of the
Initial Mortgage Loans as of the Cut-off Date and the Original Pre-Funded
Amount, One-Month LIBOR plus %), limited by the Maximum Interest Rate (as
defined herein). In addition, One-Month LIBOR and the Indices on the
Adjustable Rate Mortgage Loans may respond differently to economic and market
factors, and there is not necessarily any correlation between them. Moreover,
the Adjustable Rate Mortgage Loans are subject to Periodic Rate Caps, Maximum
Mortgage Rates and Minimum Mortgage Rates (each, as defined herein). Thus, it
is possible, for example, that One-Month LIBOR may rise during periods in
which the Indices are stable or falling or that, even if both One-Month LIBOR
and the Indices rise during the same period, One-Month LIBOR may rise much
more rapidly than the Indices.
Although the Mortgage Rates on the Adjustable Rate Mortgage Loans will
adjust semi-annually or annually, such increases and decreases may be limited
by the Periodic Rate Cap, the Maximum Mortgage Rate and the Minimum Mortgage
Rate, if applicable, on each such Adjustable Rate Mortgage Loan, and will be
based on the applicable Index (which may not rise and fall consistently with
prevailing mortgage rates) plus the related Gross Margin (which may be
different from the prevailing margins on other Mortgage Loans). As a result,
the Mortgage Rates on the Adjustable Rate Mortgage Loans at any time may not
equal the prevailing rates for other adjustable-rate loans and accordingly,
the rate of prepayment may be lower or higher than would otherwise be
anticipated. In addition, because all of the Adjustable Rate Mortgage Loans
have Maximum Mortgage Rates, if prevailing mortgage rates were to increase
above the Maximum Mortgage Rates, the rate of prepayment on the Adjustable
Rate Mortgage Loans may be slower than would otherwise be the case. In
general, if prevailing mortgage rates fall significantly below the Mortgage
Rates on the Adjustable Rate Mortgage Loans, the rate of prepayments
(including refinancings) will be expected to increase. Conversely, if
prevailing mortgage rates rise significantly above the Mortgage Rates on the
Adjustable Rate Mortgage Loans, the rate of prepayment on the Adjustable Rate
Mortgage Loans will be expected to decrease.
Weighted average life refers to the average amount of time that will elapse
from the date of issuance of a security to the date of payment to the investor
of each dollar distributed in reduction of principal of such security
(assuming no losses). The weighted average life of the Bonds will be
influenced by, among other things, the rate at which principal of the Mortgage
Loans is paid, which may be in the form of scheduled amortization, prepayments
or liquidations. Because the amortization schedule of each Adjustable Rate
Mortgage Loan will be recalculated semi-annually or annually after the initial
Adjustment Date for such Adjustable Rate Mortgage Loan, any partial
prepayments thereof will not reduce the term to maturity of such Adjustable
Rate Mortgage Loan. In addition, an increase in the Mortgage Rate on an
Adjustable Rate Mortgage Loan will result in a larger monthly payment and in a
larger percentage of such monthly payment being allocated to interest and a
smaller percentage being allocated to principal, and conversely, a decrease in
the Mortgage Rate on the Adjustable Rate Mortgage Loan will result in a lower
monthly payment and in a larger percentage of each monthly payment being
allocated to principal and a smaller percentage being allocated to interest.
Prepayments on Mortgage Loans are commonly measured relative to a prepayment
standard or model. The model used in this Prospectus Supplement, the Constant
Prepayment Rate model ("CPR"), assumes that the outstanding principal balance
of a pool of Mortgage Loans prepays each month at a specified annual rate or
CPR. In generating monthly cash flows, this annual rate is converted to an
equivalent monthly rate. With respect to the Adjustable Rate Mortgage Loans,
the prepayment model assumes a constant CPR of 30%. With respect to the Fixed
Rate Mortgage Loans, the prepayment model assumes a CPR of 2% in the first
month of the life of the Fixed Rate Mortgage Loans and an additional 1.63636%
per annum in each month thereafter until the twelfth month; beginning in the
twelfth month and in each month thereafter, the prepayment model assumes a CPR
of 20% (such model, the "Prepayment Assumption"). The levels of CPR used above
in defining the Prepayment
S-51
<PAGE>
Assumption represent 100% of the Prepayment Assumption. To assume a CPR
percentage in either prepayment model is to assume that the stated percentage
of the outstanding principal balance of the pool would be prepaid over the
course of a year. No representation is made that the Mortgage Loans will
prepay at the percentages of CPR specified in either prepayment model.
The table set forth below has been prepared on the basis of certain
assumptions as described below regarding the weighted average characteristics
of the Mortgage Loans that are expected to be included in the Trust Estate as
described under "Description of the Mortgage Pool" herein and the performance
thereof. The table assumes, among other things, that: (i) the Mortgage Pool
consists of Mortgage Loans with the following characteristics:
<TABLE>
<CAPTION>
REMAINING
ORIGINAL TERM MONTHS TO TERM TO MINIMUM INITIAL
PRINCIPAL MORTGAGE TO MATURITY NEXT RATE MATURITY GROSS MAXIMUM MORTGAGE PERIODIC PERIODIC
BALANCE RATE (IN MONTHS) ADJUSTMENT DATE (IN MONTHS) MARGIN MORTGAGE RATE RATE CAP CAP
- --------- -------- ------------- --------------- ----------- ------ ------------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
One-Year CMT
Two-Year Fixed Six-Month LIBOR
Three-Year Fixed Six-Month LIBOR
Six-Month LIBOR
Fixed
Fixed Balloon
</TABLE>
(ii) One-Month LIBOR, Six-Month LIBOR and One-Year CMT remain constant at
%, % and %, respectively; (iii) payments on the Bonds are
based upon the actual number of days in the month and a 360-day year and are
received, in cash, on the 25th day of each month, commencing in 19 ;
(iv) there are no delinquencies or losses on the Mortgage Loans, and principal
payments on the Mortgage Loans are timely received together with prepayments,
if any, at the respective constant percentages of CPR or Prepayment Assumption
set forth in the following table; (v) there are no repurchases of the Mortgage
Loans; (vi) the scheduled monthly payment for each Mortgage Loan is calculated
based on its principal balance, Mortgage Rate and remaining term to maturity
such that such Mortgage Loan will amortize in amounts sufficient to repay the
remaining principal balance of such Mortgage Loan by its remaining term to
maturity, (vii) the Indices remain constant at the rates listed above and the
Mortgage Rate on each Adjustable Rate Mortgage Loan is adjusted on the next
Adjustment Date (and on subsequent Adjustment Dates, as necessary) to equal
the related Index plus the applicable Gross Margin, subject to the Maximum
Mortgage Rate listed below and the related Periodic Rate Cap; (viii) with
respect to each Mortgage Loan (other than the Fixed Rate Mortgage Loans), the
monthly payment on the Mortgage Loan is adjusted on the Due Date immediately
following the next related Adjustment Date (and on subsequent Adjustment
Dates, as necessary) to equal a fully amortizing payment as described in
clause (vi) above; (ix) payments on the Mortgage Loans earn no reinvestment
return; (x) the Bond Insurance Premium is the rate set forth in the Insurance
Agreement, the Indenture Trustee Fee Rate is % per annum and the
Servicing Fee Rate is % per annum; (xi) there are no additional ongoing
Trust Estate expenses payable out of the Trust Estate; (xii) the Mortgage
Loans experience no prepayment charges; (xiii) there are no investment
earnings on amounts in any Collection Account, including the Payment Account,
and no other miscellaneous servicing fees are passed through to the
Bondholders; (xiv) the Subsequent Mortgage Loans are acquired on
, , resulting in no mandatory prepayment of the Bonds on
the , Payment Date; and (xv) the Bonds will be purchased on
, 19 .
S-52
<PAGE>
The actual characteristics and performance of the Mortgage Loans will differ
from the assumptions used in constructing the table set forth below, which is
hypothetical in nature and is provided only to give a general sense of how the
principal cash flows might behave under varying prepayment scenarios. For
example, it is very unlikely that the Mortgage Loans will prepay at a constant
level of CPR until maturity or that all of the Mortgage Loans will prepay at
the same level of CPR or Prepayment Assumption. Moreover, the diverse
remaining terms to stated maturity of the Mortgage Loans could produce slower
or faster principal payments than indicated in the table at the various
constant percentages of CPR specified, even if the weighted average remaining
term to stated maturity of the Mortgage Loans is as assumed. Any difference
between such assumptions and the actual characteristics and performance of the
Mortgage Loans, or actual prepayment experience, will affect the percentages
of initial Bond Principal Balance outstanding over time and the weighted
average life of the Bonds. Subject to the foregoing discussion and
assumptions, the following table indicates the weighted average life of the
Bonds, and sets forth the percentages of the initial Bond Principal Balance of
the Bonds that would be outstanding after each of the dates shown at various
percentages of CPR.
PERCENT OF INITIAL BOND PRINCIPAL BALANCE OUTSTANDING AT THE SPECIFIED
PERCENTAGES OF CPR
OR THE PREPAYMENT ASSUMPTION
<TABLE>
<CAPTION>
SCENARIO(1) (5)
-----------------------------
<S> <C> <C> <C> <C> <C> <C>
Fixed Rate Mortgage Loans(2) 0% 50% 75% 100% 125% 150%
Adjustable Rate Mortgage Loans(3) 0% 10% 20% 30% 40% 50%
---- ---- ---- ---- ---- ----
<CAPTION>
PAYMENT DATE
- ------------
<S> <C> <C> <C> <C> <C> <C>
Initial Percentage................................ 100% 100% 100% 100% 100% 100%
25, 19 ................................
25, 19 ................................
25, 20 ................................
25, 20 ................................
25, 20 ................................
25, 20 ................................
25, 20 ................................
25, 20 ................................
25, 20 ................................
Weighted Average Life in Years(4)(5)..............
Weighted Average Life in Years(4)(6)..............
</TABLE>
- --------
(1) Rounded to the nearest whole percentage.
(2) As a percentage of the Prepayment Assumption.
(3) As conditional prepayment rate (CPR) percentage.
(4) The weighted average life of a Bond is determined by (i) multiplying the
amount of each distribution of principal on a Bond by the number of years
from the date of issuance of the Bond to the related Payment Date, (ii)
adding the results, and (iii) dividing the sum by the Initial Bond
Principal Balance of the Bond.
(5) Assumes the Issuer exercises its option to redeem the Bonds at the earlier
of: (a) when the aggregate principal balance of the Mortgage Loans
remaining is less than [25%] of the sum of the aggregate Principal Balance
of the Initial Mortgage Loans as of the Cut-off Date and the Original Pre-
Funded Amount and (b) the 20 Payment Date. See "Description of
the Bonds--Optional Redemption" herein.
(6) Assumes that the Bonds remain outstanding to their maturity date.
THIS TABLE HAS BEEN PREPARED BASED ON THE ASSUMPTIONS DESCRIBED IN THE
SECOND PARAGRAPH PRECEDING THIS TABLE (INCLUDING THE ASSUMPTIONS REGARDING THE
CHARACTERISTICS AND PERFORMANCE OF THE MORTGAGE LOANS WHICH DIFFER FROM THE
ACTUAL CHARACTERISTICS AND PERFORMANCE THEREOF) AND SHOULD BE READ IN
CONJUNCTION THEREWITH.
S-53
<PAGE>
DESCRIPTION OF THE SERVICING AGREEMENT
The following summary describes certain terms of the Servicing Agreement,
dated as of , 19 , between the Issuer, the Indenture Trustee and
the Servicer (the "Servicing Agreement"). The summary does not purport to be
complete and is subject to, and qualified in its entirety by reference to, the
provisions of the Servicing Agreement. Whenever particular sections or defined
terms of the Servicing Agreement are referred to, such sections or defined
terms are thereby incorporated herein by reference.
THE SERVICER
NovaStar Mortgage, Inc. (the "Servicer") will act as Servicer for the
Mortgage Loans pursuant to the Servicing Agreement. The Servicer was
incorporated in the State of Virginia on May 16, 1996 and is a wholly-owned
subsidiary of NFI Holding Corporation, Inc., a Delaware corporation
("Holding"). The Seller owns one hundred percent of the preferred stock of
Holding. The Servicer serves as a loan servicer and a vehicle for loan
origination--a primary source of mortgage assets for the Seller. The Servicer
is an approved HUD lender.
The Servicer originates subprime residential mortgage loans through a
network of unaffiliated wholesale loan brokers, and the mortgage loans it
originates are generally sold to the Seller on a servicing-retained basis. The
Servicer utilizes a network of approximately 200 wholesale loan brokers in 27
different states. In addition, the Servicer services loans nationwide, and is
qualified to do business as a foreign corporation in more than [47] states.
The Servicer's servicing portfolio currently includes only subprime
residential mortgage loans. The Servicer's principal executive offices are
located at 1900 W. 47th Place, Suite 205, Westwood, Kansas 66205. The
principal office for the Servicer's mortgage lending operations are in Irvine,
California.
FORECLOSURE AND DELINQUENCY EXPERIENCE
The following table summarizes the delinquency and foreclosure experience,
respectively, as of the date indicated, of mortgage loans serviced by the
Servicer. Since the Servicer only began servicing Mortgage Loans in July 1997,
the delinquency and foreclosure percentages may be affected by the size and
relative lack of seasoning of the servicing portfolio because many of such
loans were not outstanding long enough to give rise to some or all of the
periods of delinquency indicated in the chart below. Accordingly, the
information should not be considered as a basis for assessing the likelihood,
amount or severity of delinquencies or foreclosures on the Mortgage Loans and
no assurances can be given that the foreclosure and delinquency experience
presented in the table below will be indicative of such experience on the
Mortgage Loans:
DELINQUENCY AND FORECLOSURE
<TABLE>
<CAPTION>
AS OF ,
-----------------------
PRINCIPAL
BALANCE PERCENTAGE
------------ ----------
<S> <C> <C>
Portfolio......................................... $
------------
Delinquency Percentage (1)
30-59........................................... %
------------ -----
60-89........................................... %
------------ -----
90+ Days........................................ %
------------ -----
Total(2)...................................... $ %
============ =====
Foreclosure Rate(3)............................... $ %
------------ -----
</TABLE>
- --------
(1) The period of delinquency is based on the number of days payments are
contractually past due.
(2) The total percentages and dollar amounts includes the dollar amounts and
percentages indicated in Foreclosure Rate.
S-54
<PAGE>
(3) "Foreclosure Rate" is the dollar amount of the mortgage loans in
foreclosure as a percentage of the total principal balance of the mortgage
loans outstanding as of the date indicated, this amount is also included
in Total.
There can be no assurance that the delinquency and foreclosure experience of
the Mortgage Loans will correspond to the delinquency and foreclosure
experience of the servicing portfolio of the Servicer set forth in the
foregoing table. The statistics shown above represent the respective
delinquency and foreclosure experiences only at the date presented, whereas
the aggregate delinquency and foreclosure experience on the Mortgage Loans
will depend on the results obtained over the life of the Trust Estate. The
Servicer's servicing portfolio includes mortgage loans underwritten pursuant
to guidelines not necessarily representative of those applicable to the
Mortgage Loans. It should be noted that if the residential real estate market
should experience an overall decline in property values, the actual rates of
delinquencies and foreclosures could be higher than those previously
experienced by the Servicer. In addition, adverse economic conditions may
affect the timely payment by mortgagors of scheduled payments of principal and
interest on the Mortgage Loans and, accordingly, the actual rates of
delinquencies and foreclosures with respect to the Mortgage Loans.
SERVICING AND OTHER COMPENSATION
The Servicing Fee for each Mortgage Loan is payable out of the interest
payments on such Mortgage Loan. The Servicing Fee Rate in respect of each
Mortgage Loan will be equal to % per annum of the outstanding principal
balance of such Mortgage Loan. The Servicer will not be entitled to any
additional servicing compensation (other than late payment charges) such as
prepayment penalties and any such amount to the extent received by the
Servicer, will be included in Available Funds.
With respect to any Payment Date, any Prepayment Interest Shortfalls during
the preceding calendar month will be covered by the Servicer, but only to the
extent such Prepayment Interest Shortfalls do not exceed an amount equal to
the total servicing fee payable to the Servicer and any subservicer with
respect to such Payment Date (any such payments, "Compensating Interest"). The
"Prepayment Interest Shortfall" for any Payment Date is equal to the aggregate
shortfall, if any, in collections of interest resulting from Mortgagor
prepayments in full or in part on the Mortgage Loans during the preceding
calendar month. Such shortfalls will result because interest on prepayments in
full is distributed only to the date of prepayment, and because no interest is
distributed on prepayments in part, as such prepayments in part are applied to
reduce the outstanding principal balance of the related Mortgage Loans as of
the Due Date in the month of prepayment. No assurance can be given that
Compensating Interest will be sufficient to cover Prepayment Interest
Shortfalls for any Payment Date.
THE INDENTURE
The following summary describes certain terms of the Indenture. The summary
does not purport to be complete and is subject to, and qualified in its
entirety by reference to, the provisions of the Trust Agreement and Indenture.
Whenever particular defined terms of the Indenture are referred to, such
defined terms are thereby incorporated herein by reference. See "Description
of the Agreements" in the Prospectus.
CONTROL BY BOND INSURER
Pursuant to the Indenture, unless a Bond Insurer Default exists (i) the Bond
Insurer shall have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the Indenture Trustee or
exercising any trust or power conferred on the Indenture Trustee, subject to
certain limitations, and (ii) the Indenture Trustee may take actions which
would otherwise be at its option or within its discretion, including the
actions referred to under "--Events of Default" and "--Rights Upon Event of
Default," only at the direction of the Bond Insurer and (iii) the [Bond]
Issuer shall be deemed to be the holder of the Bonds for certain purposes
(other than with respect to payment on the Bonds), and will be entitled to
exercise all rights of the Bondholders thereunder, without the consent of such
Bondholders, and the Bondholders may exercise such rights only with
S-55
<PAGE>
the prior written consent of the [Bond] Issuer. A "Bond Insurer Default" means
the existence and continuation of (i) a failure of the Bond Insurer to make a
payment under the Bond Insurance Policy in accordance with its terms or (ii)
certain bankruptcy or insolvency actions by or against the Bond Insurer.
EVENTS OF DEFAULT
An "Event of Default" with respect to the Bonds is defined in the Indenture
as follows: (a) the failure of the Issuer to pay (i) the Interest Payment
Amount or the Principal Payment Amount with respect to a Payment Date on such
Payment Date (provided that for purposes of this clause, payment by the
Indenture Trustee from proceeds of the Bond Insurance Policy shall not be
considered payment by the Issuer with respect to the Bonds), or (ii) any
Subordination Increase Amount or Available Funds Carry-Forward Amount, but
only to the extent funds are available to make such payment as described under
"Description of the Bonds--Priority of Payment" (provided that for purposes of
this clause, payment by the Indenture Trustee from proceeds of the Bond
Insurance Policy shall not be considered payment by the Issuer with respect to
the Bonds); (b) the failure by the Issuer on the Final Scheduled Payment Date
to reduce the Bond Principal Balance to zero; (c) a default in the observance
or performance of any covenant or agreement of the Issuer in the Indenture,
and the continuation of any such default for a period of thirty days after
notice to the Issuer by the Indenture Trustee or to the Issuer and the
Indenture Trustee by the Bond Insurer, or if a Bond Insurer Default exists, by
the Holders of at least 25% of the Bond Principal Balance of the Bonds; (d)
any representation or warranty made by the Issuer in the Indenture or in any
certificate or other writing delivered pursuant thereto having been incorrect
in a material respect as of the time made, and the circumstance in respect of
which such representation or warranty is incorrect not having been cured
within thirty days after notice thereof is given to the Issuer by the
Indenture Trustee or to the Issuer and the Indenture Trustee by the Bond
Insurer, or, if a Bond Insurer Default exists, by Bondholders representing at
least 25% of the Bond Principal Balance of the Bonds; or (e) certain events of
bankruptcy, insolvency, receivership or reorganization of the Issuer.
RIGHTS UPON EVENT OF DEFAULT
In case an Event of Default should occur and be continuing with respect to
the Bonds, the Indenture Trustee may (with the prior written consent of the
[Bond] Issuer) and, upon the written direction of the Bond Insurer or, if a
[Bond] Issuer Default exists, Bondholders representing more than 50% of the
Bond Principal Balance of the Bonds shall, declare the principal of such Bonds
to be immediately due and payable. Such declaration may under certain
circumstances be rescinded by the Bond Insurer, or if a Bond Insurer Default
exists, Bondholders representing more than 50% of the Bond Principal Balance
of the Bonds.
If, following an Event of Default, the Bonds have been declared to be due
and payable, the Indenture Trustee may, in its discretion (provided that the
Bond Insurer or Bondholders representing more than 50% of the Bond Principal
Balance of the Bonds have not directed the Indenture Trustee to sell the
assets included in the Trust Estate), refrain from selling such assets and
continue to apply all amounts received on such assets to payments due on the
Bonds in accordance with their terms, notwithstanding the acceleration of the
maturity of such Bonds. In addition, upon an Event of Default the Indenture
Trustee may, with the consent of the Bond Insurer, sell all or part of the
assets included in the Trust Estate, in which event the collections on, or the
proceeds from the sale of, such assets will be applied as provided below;
provided, however, that any proceeds of a claim under the Bond Insurance
Policy shall be used only to pay interest and principal on the Bonds as
provided in clauses (iii) and (iv): (i) to the payment of the fees of the
Indenture Trustee which have not been previously paid; (ii) to the Bond
Insurer, any premium then due, provided no Bond Insurer Default exists; (iii)
to the Bondholders, the amount of interest then due and unpaid on the Bonds
(but not including any Available Funds Cap Carry-Forward Amount), without
preference or priority of any kind; (iv) to the Bondholders, the amount of
principal then due and unpaid on the Bonds, without preference or priority of
any kind; (v) to the payment of the amounts due and owing to the Bond Insurer,
to the extent not previously reimbursed; (vi) to the Bondholders, the amount
of any Available Funds Cap Carry-Forward Amount not previously paid; and (vii)
to the holder of the Certificates.
S-56
<PAGE>
Subject to the provisions of the Indenture relating to the duties of the
Indenture Trustee, in case an Event of Default shall occur and be continuing,
the Indenture Trustee shall be under no obligation to exercise any of the
rights and powers under the Indenture at the request or direction of any of
the Bondholders, unless such Bondholders shall have offered to the Indenture
Trustee reasonable security or indemnity satisfactory to it against the costs,
expenses and liabilities which might be incurred by it in compliance with such
request or direction. Subject to such provisions for indemnification and
certain limitations contained in the Indenture, the [Bond] Issuer, or if a
[Bond] Issuer Default exists, Bondholders representing more than 50% of the
Bond Principal Balance of the Bonds shall have the right to direct the time,
method, and place of conducting any proceeding or any remedy available to the
Indenture Trustee or exercising any trust or power conferred on the Indenture
Trustee with respect to the Bonds; and the [Bond] Issuer, or if a [Bond]
Issuer Default exists, Bondholders representing more than 50% of the Bond
Principal Balance of the Bonds may, in certain cases, waive any default with
respect thereto, except a default in the payment of principal or interest or a
default in respect of a covenant or provision of the Indenture that cannot be
modified without the waiver or consent of the holder of each outstanding Bond
affected thereby.
LIMITATION ON SUITS
No Bondholder will have any right to institute any proceedings with respect
to the Indenture unless (1) such Bondholder has previously given written
notice to the Indenture Trustee of a continuing Event of Default; (2)
Bondholders representing not less than 25% of the Bond Principal Balance of
the Bonds have made written request to the Indenture Trustee to institute
proceedings in respect of such Event of Default in its own name as Indenture
Trustee; (3) such Bondholders have offered to the Indenture Trustee reasonable
indemnity satisfactory to it against the costs, expenses and liabilities to be
incurred in compliance with such request; (4) for 60 days after its receipt of
such notice of, request and offer of indemnity the Indenture Trustee has
failed to institute any such proceedings; (5) no direction inconsistent with
such written request has been given to the Indenture Trustee during such 60-
day period by the Bondholders representing more than 50% of the Bond Principal
Balance of the Bonds; and (6) such Bondholders have the consent of the Bond
Insurer, unless a Bond Insurer Default exists.
THE INDENTURE TRUSTEE
The Indenture Trustee may resign at any time, in which event the Issuer will
be obligated to appoint, with the consent of the Bond Insurer, a successor
Indenture Trustee. The Indenture Trustee also may be removed at any time by
the Bond Insurer, or if a Bond Insurer Default exists, then by Bondholders
representing more than 50% of the Bond Principal Balance of the Bonds. The
Issuer shall, with the consent of the Bond Insurer, so long as no Bond Insurer
Default exists, remove the Indenture Trustee if the Indenture Trustee ceases
to be eligible to continue as such under the Indenture or if the Indenture
Trustee becomes incapable of acting, bankrupt, insolvent or if a receiver or
public officer takes charge of the Indenture Trustee or its property. Any
resignation or removal of the Indenture Trustee and appointment of a successor
Indenture Trustee will not become effective until acceptance of the
appointment by the successor Indenture Trustee.
FEDERAL INCOME TAX CONSEQUENCES
[Upon the issuance of the Bonds, Stinson, Mag & Fizzell, P.C., counsel to
the Company, will deliver its opinion generally to the effect that based on
the application of existing law and assuming compliance with the Trust
Agreement, for federal income tax purposes, the Bonds will be characterized as
indebtedness and not as representing an ownership interest in the Trust Estate
or an equity interest in the Issuer or the Company. In addition, for federal
income tax purposes, the Issuer will not be (i) classified as an association
taxable as a corporation for federal income tax purposes, (ii) a taxable
mortgage pool as defined in Section 7701(i) of the Code, or (iii) a "publicly
traded partnership" as defined in Treasury Regulation Section 1.7704-1.
The Bonds will not be treated as having been issued with "original issue
discount" (as defined in the Prospectus). The prepayment assumption that will
be used in determining the rate of amortization of market
S-57
<PAGE>
discount and premium, if any, for federal income tax purposes will be based on
the assumption that, subsequent to the date of any determination the
Adjustable Rate Mortgage Loans will prepay at a rate equal to [30%] CPR and
the Fixed Rate Mortgage Loans will prepay at a rate equal to [2%] CPR in the
first month of the life of the Fixed Rate Mortgage Loans and an additional
[1.63636%] CPR per annum in each month thereafter until the twelfth month;
beginning in the twelfth month and in each month thereafter, the Fixed Rate
Mortgage Loans will prepay at a rate equal to [20%] CPR. No representation is
made that the Mortgage Loans will prepay at that rate or at any other rate.
See "Certain Federal Income Tax Consequences" in the Prospectus.]
The Bonds will not be treated as assets described in Section 7701(a)(19)(C)
of the Code or "real estate assets" under Section 856(c)(4)(A) of the Code. In
addition, interest on the Bonds will not be treated as "interest on
obligations secured by mortgages on real property" under Section 856(c)(3)(B)
of the Code. The Bonds will also not be treated as "qualified mortgages" under
Section 860G(a)(3)(C) of the Code.
Prospective investors in the Bonds should see "Certain Federal Income Tax
Consequences" and "State Tax Considerations" in the Prospectus for a
discussion of the application of certain federal income and state and local
tax laws to the Issuer and purchasers of the Bonds.
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in an Underwriting Agreement,
dated , 19 (the "Underwriting Agreement"), between
(the "Underwriter"), the Company and the Seller, the
Underwriter has agreed to purchase and the Company has agreed to sell to the
Underwriter the Bonds. It is expected that delivery of the Bonds will be made
only in book-entry form through the Same Day Funds Settlement System of DTC,
on or about , 19 , against payment therefor in immediately
available funds.
The Bonds will be purchased from the Company by the Underwriter and will be
offered by the Underwriter from time to time to the public in negotiated
transactions or otherwise at varying prices to be determined at the time of
sale. The proceeds to the Company from the sale of the Bonds are expected to
be approximately $ , before the deduction of expenses payable by the
Company estimated to be approximately $ . The Underwriter may effect
such transactions by selling the Bonds to or through dealers, and such dealers
may receive compensation in the form of underwriting discounts, concessions or
commissions from the Underwriter. In connection with the sale of the Bonds,
the Underwriter may be deemed to have received compensation from the Company
in the form of underwriting compensation. The Underwriter and any dealers that
participate with the Underwriter in the distribution of the Bonds may be
deemed to be underwriters and any profit on the resale of the Bonds positioned
by them may be deemed to be underwriters and any profit on the resale of the
Bonds positioned by them may be deemed to be underwriting discounts and
commissions under the Securities Act of 1933.
The Underwriting Agreement provides that the Company and the Seller will
jointly and severally indemnify the Underwriter, and that under limited
circumstances, the Underwriter will indemnify the Company, against certain
civil liabilities under the Securities Act of 1933, or contribute to payments
required to be made in respect thereof.
There can be no assurance that a secondary market for the Bonds will develop
or, if it does develop, that it will continue or provide the Bondholders with
sufficient liquidity of investment. The primary source of information
available to investors concerning the Bonds will be the monthly statements
discussed in the Prospectus under "Description of the Bonds--Reports to
Bondholders," which will include information as to the outstanding principal
balance of the Bonds. There can be no assurance that any additional
information regarding the Bonds will be available through any other source. In
addition, the Company is not aware of any source through which price
information about the Bonds will be generally available on an ongoing basis.
The limited nature of such information regarding the Bonds may adversely
affect the liquidity of the Bonds, even if a secondary market for the Bonds
becomes available.
S-58
<PAGE>
LEGAL OPINIONS
Certain legal matters relating to the Bonds will be passed upon for the
Seller, the Servicer and the Company by Stinson, Mag & Fizzell, P.C., Kansas
City, Missouri, and for the Underwriter by Thacher Proffitt & Wood, New York,
New York. Certain legal matters regarding the enforceability of the Bond
Insurance Policy will be passed upon for the Bond Insurer by ,
, .
RATINGS
It is a condition of the issuance of the Bonds that they be rated "AAA" by
Standard & Poor's Ratings Services, a division of The McGraw-Hill Companies,
Inc. ("S&P") and "Aaa" by Moody's Investors Service, Inc. ("Moody's").
S&P's ratings on mortgage pass-through certificates address the likelihood
of the receipt by Bondholders of payments required under the Indenture. S&P's
ratings take into consideration the credit quality of the mortgage pool,
structural and legal aspects associated with the Bonds, and the extent to
which the payment stream in the mortgage pool is adequate to make payments
required under the Bonds. S&P's rating on the Bonds does not, however,
constitute a statement regarding frequency of prepayments on the mortgages.
See "Certain Yield and Prepayment Considerations" herein. The ratings issued
by S&P on payment of principal and interest do not cover the payment of the
Available Funds Cap Carry-Forward Amount.
The rating process of Moody's addresses the structural and legal aspects
associated with the Bonds, including the nature of the underlying Mortgage
Loans. The ratings assigned to the Bonds do not represent any assessment of
the likelihood or rate of principal prepayments. The ratings do not address
the possibility that Bondholders might suffer a lower than anticipated yield.
The ratings do not address the likelihood that Bondholders will be paid the
Carry-Forward Amount.
The Company has not requested a rating on the Bonds by any rating agency
other than S&P and Moody's. However, there can be no assurance as to whether
any other rating agency will rate the Bonds, or, if it does, what rating would
be assigned by any such other rating agency. A rating on the Bonds by another
rating agency, if assigned at all, may be lower than the ratings assigned to
the Bonds by S&P and Moody's.
A security rating is not a recommendation to buy, sell or hold securities
and may be subject to revision or withdrawal at any time by the assigning
rating organization. Each security rating should be evaluated independently of
any other security rating. In the event that the ratings initially assigned to
the Bonds are subsequently lowered for any reason, no person or entity is
obligated to provide any additional support or credit enhancement with respect
to the Bonds.
LEGAL INVESTMENT
The Bonds will constitute "mortgage related securities" for purposes of the
Secondary Mortgage Market Enhancement Act of 1984 ("SMMEA") for so long as
they are rated in at least the second highest rating category by one or more
nationally recognized statistical rating agencies, and, as such, are legal
investments for certain entities to the extent provided in SMMEA. SMMEA
provides, however, that states could override its provision on legal
investment and restrict or condition investment in mortgage related securities
by taking statutory action on or prior to October 3, 1991.
The Company makes no representations as to the proper characterization of
the Bonds for legal investment or other purposes, or as to the ability of
particular investors to purchase the Bonds under applicable legal investment
restrictions. These uncertainties may adversely affect the liquidity of the
Bonds. Accordingly, all institutions whose investment activities are subject
to legal investment laws and regulations, regulatory capital
S-59
<PAGE>
requirements or review by regulatory authorities should consult with their
legal advisors in determining whether and to what extent the Bonds constitute
a legal investment or are subject to investment, capital or other
restrictions.
See "Legal Investment" in the Prospectus.
ERISA CONSIDERATIONS
A fiduciary of any employee benefit plan or any other plan or arrangement
subject to the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), or Section 4975 of the Code (each, a "Plan") or any person
investing "Plan Assets" of any Plan (as defined in the Prospectus under "ERISA
Considerations") should carefully review with its legal advisors whether the
purchase, sale or holding of the Bonds will give rise to a prohibited
transaction under ERISA or Section 4975 of the Code or cause the Mortgage
Loans securing the Bonds to be treated as plan assets for purposes of
regulations of the Department of Labor set forth in 29 C.F.R. 2510.3-101 (the
"Plan Asset Regulations"). Although certain exceptions from the application of
the prohibited transaction rules and the Plan Asset Regulations exist, there
can be no assurance that any such exception will apply with respect to the
acquisition of the Bonds. Although not entirely free from doubt, the Issuer
believes that, as of the date hereof, the Bonds will be treated as debt
obligations without significant equity features for purposes of the Plan Asset
Regulations. Accordingly, a Plan that acquires the Bonds should not be treated
as having acquired a direct interest in the assets of the Issuer. However,
there can be no complete assurance that the Bonds will be treated as debt
obligations without significant equity features for purposes of the Plan Asset
Regulations. Investors are advised to consult their counsel and for further
information regarding the ERISA considerations of investing in the Bonds, see
"ERISA Considerations" in the Prospectus.
EXPERTS
The consolidated financial statements of the Bond Insurer,
, as of December 31, 19 and 19 and for each of the
years in the three-year period ended December 31, 19 , incorporated by
reference into this Prospectus Supplement have been audited by
, independent certified public accountants, as set forth in
their report thereon incorporated by reference herein in reliance upon the
authority of such firm as experts in accounting and auditing.
S-60
<PAGE>
INDEX OF PRINCIPAL DEFINITIONS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Adjustable Rate Mortgage Loans............................ S-6
Administrative Fee........................................ S-9, S-50
Advances.................................................. S-11, S-56
Available Funds........................................... S-49
Balloon Loan.............................................. S-6, S-16
Balloon Payment........................................... S-16
Bond Insurance Policy..................................... S-1, S-2
Bond Insurance Premium.................................... S-9, S-50
Bond Insurer.............................................. S-1, S-2, S-9, S-45
Bond Insurer Default...................................... S-64
Bond Interest Rate........................................ S-3, S-8, S-49
Bond Principal Balance.................................... S-9, S-50
Bonds..................................................... S-1
Business Day.............................................. S-48, S-55
Carry-Forward Amount...................................... S-8, S-49
Company................................................... S-1, S-2, S-5
Compensating Interest..................................... S-63
CPR....................................................... S-59
Definitive Bond........................................... S-6
Determination Date........................................ S-49
DTC....................................................... S-3
Due Date.................................................. S-49
Due Period................................................ S-52
ERISA..................................................... S-13, S-68
Event of Default.......................................... S-64
Excess Subordination Amount............................... S-52
Final Scheduled Payment Date.............................. S-57
Fiscal Agent.............................................. S-54
Fixed Rate Mortgage Loans................................. S-6
Foreclosure Rate.......................................... S-63
Full Documentation........................................ S-42
Funding Period............................................ S-7, S-40
GAAP...................................................... S-46
Gross Margin.............................................. S-6, S-18
Guaranteed Interest Payment Amount........................ S-8, S-49
HEL Collateral Seller..................................... S-41
Holding................................................... S-62
Indenture Trustee Fee..................................... S-8, S-49
Indenture Trustee Fee Rate................................ S-9, S-50
Initial Mortgage Loans.................................... S-1, S-17
Initial Period............................................ S-6, S-18
Initial Periodic Rate Cap................................. S-18
Insurance Agreement....................................... S-51
Interest Coverage Account................................. S-7, S-57
Interest Determination Date............................... S-50
Interest Payment Amount................................... S-8, S-49
Interest Period........................................... S-8
Issuer.................................................... S-1, S-2, S-5
Limited Documentation..................................... S-42
</TABLE>
S-61
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Liquidated Mortgage Loan................................. S-53
Maximum Interest Rate.................................... S-3, S-8, S-49
Maximum Mortgage Rate.................................... S-6, S-18
Minimum Mortgage Rate.................................... S-6, S-18
Minimum Spread........................................... S-9, S-50
Moody's.................................................. S-3, S-13, S-67
Mortgage Loans........................................... S-1, S-3, S-17
Mortgaged Property....................................... S-6
Net Monthly Excess Cashflow.............................. S-52
Non-conforming credit.................................... S-15
One-Month LIBOR.......................................... S-50
One-Year CMT............................................. S-7, S-19
Original Pre-Funded Amount............................... S-7, S-40
Originator............................................... S-41
Owner Trustee Fee........................................ S-9, S-50
Payment Account.......................................... S-47
Payment Date............................................. S-3, S-5
Periodic Rate Cap........................................ S-18
Plan..................................................... S-13, S-68
Plan Asset Regulations................................... S-13, S-68
Plan Assets.............................................. S-68
Pre-Funded Amount........................................ S-40
Pre-Funding Account...................................... S-1, S-7, S-40
Prepayment Assumption.................................... S-60
Prepayment Interest Shortfall............................ S-63
Prepayment Period........................................ S-53
Principal Balance........................................ S-50
Principal Payment Amount................................. S-51
Purchase Agreement....................................... S-17
Reference Banks.......................................... S-50
Reimbursement Amount..................................... S-51
Required Subordination Amount............................ S-10, S-52
Rules.................................................... S-48
S&P...................................................... S-3, S-13, S-67
SAP...................................................... S-46
Securities............................................... S-47
Seller................................................... S-2, S-5, S-17, S-44
Servicer................................................. S-5, S-17, S-62
Servicing Agreement...................................... S-62
Servicing Fee............................................ S-8
Servicing Fee Rate....................................... S-9, S-50
Six-Month LIBOR.......................................... S-7, S-18
SMMEA.................................................... S-68
Stated Income............................................ S-42
Subordination Amount..................................... S-52
Subordination Deficit.................................... S-53
Subordination Increase Amount............................ S-9, S-52
Subordination Reduction Amount........................... S-53
Subsequent Cut-off Date.................................. S-40
Subsequent Mortgage Loans................................ S-1, S-17
Subsequent Transfer Dates................................ S-40
</TABLE>
S-62
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Subsequent Transfer Instruments........................... S-40
Telerate Page 3750........................................ S-50
Trust Agreement........................................... S-5
Trust Estate.............................................. S-1, S-2, S-5, S-47
Underwriter............................................... S-2, S-66
Underwriting Agreement.................................... S-66
</TABLE>
S-63
<PAGE>
PROSPECTUS
NOVASTAR MORTGAGE FUNDING CORPORATION
(DEPOSITOR)
$2,000,000
(AGGREGATE AMOUNT)
COLLATERALIZED MORTGAGE OBLIGATION BONDS
(ISSUABLE IN SERIES)
---------------
NovaStar Mortgage Funding Corporation, a Delaware corporation (the "Company"
or the "Depositor"), proposes to establish one or more trusts to issue and
sell from time to time under this Prospectus and related Prospectus
Supplements one or more series of Collateralized Mortgage Obligation Bonds
(the "Bonds"). The Bonds of each series will be collateralized by one or more
segregated pools of mortgage collateral (the "Mortgage Collateral" or the
"Assets") consisting of one or more of the following: (i) fixed or variable
rate, first or junior lien mortgage loans secured by one- to four-family
residential properties, residential properties consisting of five or more
dwelling units or mixed-use properties consisting of one or more residential
dwelling units and one or more commercial units ("Mortgage Loans"), (ii)
mortgage participations, mortgage pass-through certificates or mortgage-backed
securities issued or guaranteed by the Government National Mortgage
Association ("GNMA"), the Federal National Mortgage Association ("FNMA") or
the Federal Home Loan Mortgage Corporation ("FHLMC") (collectively, "Agency
Securities"); (iii) other mortgage participations, mortgage pass-through
certificates or mortgage backed securities evidencing interests in mortgage
loans or secured thereby ("Private Mortgage-Backed Securities") (Agency
Securities and Private Mortgage-Backed Securities are collectively referred to
as "MBS"), (iv) manufactured housing installment sale contracts or installment
loan agreements ("Contracts"), (v) certain direct obligations of the United
States, agencies thereof or agencies created thereby ("Government Bonds"), or
(vi) a combination of Mortgage Loans, MBS, Contracts and Government Bonds. The
Mortgage Loans and MBS are collectively referred to herein as the "Mortgage
Assets." If so specified in the related Prospectus Supplement, a series of
Bonds may also be secured by certain cash accounts, overcollateralization,
excess spread, crosscollateralization, subordination, reserve funds, insurance
policies, surety bonds, guarantees, letters of credit or other types of credit
support, or any combination thereof (with respect to any series, collectively,
"Credit Support"), and guaranteed investment contracts or currency or interest
rate exchange agreements and other financial assets, or any combination
thereof (with respect to any series, collectively, "Cash Flow Agreements").
See "Description of Credit Support" and "Description of the Assets--Cash Flow
Agreements." Unless otherwise specified in the related Prospectus Supplement,
each series of Bonds will be issued and secured pursuant to an indenture and
will represent indebtedness of the Issuer thereof (as defined herein). Certain
capitalized terms used and not otherwise defined herein shall have the
meanings ascribed thereto elsewhere in this Prospectus. See "Index of
Principal Definitions" at the end of this Prospectus for the location of the
definitions of certain capitalized terms.
Each series of Bonds will consist of one or more classes of Bonds. Interest
on the Bonds will accrue at a fixed rate, a variable rate or a combination
thereof, as determined in the manner specified in the related Prospectus
Supplement. Principal payments on each class of Bonds of a series will be made
in the manner specified in the related Prospectus Supplement. A series of
Bonds may include one or more classes of Bonds entitled to (i) principal
distributions, with disproportionate, nominal or no interest distributions or
(ii) interest distributions, with disproportionate, nominal or no principal
distributions. In addition, a series of Bonds may include one or more classes
of Bonds that are senior in right of payment to one or more other classes of
Bonds of such series. Credit enhancement for the Bonds of a series will be as
specified in the related Prospectus Supplement.
The rate of payment of the principal of each class of Bonds will generally
depend, among other things, on the rate of payment (including prepayments) of
the Assets pledged as security therefor. Consequently, the actual maturity of
any class of Bonds could occur substantially sooner than its stated maturity.
Each series of Bonds may be redeemed under the circumstances described herein
and in the related Prospectus Supplement.
FOR A DISCUSSION OF CERTAIN RISK FACTORS RELATING TO INVESTMENTS IN THE
BONDS, SEE "RISK FACTORS" COMMENCING ON PAGE OF THIS PROSPECTUS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
<PAGE>
Each series of Bonds will be issued by a separate trust (each, an "Issuer")
established by the Company, will represent obligations solely of such Issuer
and will not be insured or guaranteed by any governmental agency or
instrumentality or by the Company, any affiliate of the Company, or, unless
otherwise specified in the related Prospectus Supplement, any other person or
entity. No Issuer of any series of Bonds is expected to have significant
assets other than those pledged as collateral for such series of Bonds. Prior
to issuance, there will have been no market for the Bonds of any series, and
there can be no assurance that a secondary market for any Bonds will develop
or, if it does develop that it will continue or provide Bondholders with a
sufficient level of liquidity of investment. This Prospectus may not be used
to consummate sales of a series of Bonds unless accompanied by a Prospectus
Supplement.
Bonds of each series will be characterized for federal income tax purposes
as debt instruments. See "Certain Federal Income Tax Consequences" herein.
Offers of the Bonds of any series may be made through one or more different
methods, including offerings through underwriters, as more fully described
under "Plan of Distribution" herein and in the related Prospectus Supplement.
UNTIL 90 DAYS AFTER THE DATE OF EACH PROSPECTUS SUPPLEMENT, ALL DEALERS
EFFECTING TRANSACTIONS IN THE SECURITIES COVERED BY SUCH PROSPECTUS
SUPPLEMENT, WHETHER OR NOT PARTICIPATING IN THE DISTRIBUTION THEREOF, MAY BE
REQUIRED TO DELIVER SUCH PROSPECTUS SUPPLEMENT AND THIS PROSPECTUS. THIS IS IN
ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS AND PROSPECTUS
SUPPLEMENT WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
PROSPECTUS SUPPLEMENT
The Prospectus Supplement relating to a series of Bonds to be offered
hereunder will, among other things, set forth with respect to such series of
Bonds, if applicable: (i) information concerning the Issuer of such series of
Bonds; (ii) the principal amount and the interest rate, or the method to be
used to determine the interest rate, of each class of such series of Bonds;
(iii) certain characteristics of the Assets securing such series of Bonds and,
if applicable, information as to any insurance policies, surety bonds,
guarantees, letters of credit, guaranteed investment contracts,
overcollateralization or excess spread reinvestment income, and the amount and
source of any Reserve Fund or other cash account for the Bonds of such series;
(iv) the circumstances, if any, under which the Bonds of such series are
subject to special redemption or optional redemption; (v) the maturity of each
class of Bonds of such series; (vi) the method used to calculate the aggregate
amount of principal required to be applied to the Bonds of such series on each
payment date and the priority in which such payments will be applied among the
classes of Bonds of such series; (vii) the principal amount of each class of
Bonds of such series that would be outstanding on specified payment dates if
the Mortgage Assets pledged as security for such Bonds, were prepaid at
various assumed rates; (viii) the payment dates and the assumed reinvestment
rate for such series of Bonds; (ix) information as to the nature and extent of
subordination with respect to any class of Bonds of such series that is
subordinate in right of payment to any other class; (x) any minimum principal
payment requirements and the terms of any related minimum principal payment
agreement with respect to such series of Bonds; (xi) additional information
with respect to the plan of distribution of the Bonds of such series; and
(xii) information as to the Master Servicer (as defined herein) and the
Indenture Trustee (as defined herein) for such series.
2
<PAGE>
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement under the Securities Act of 1933, as
amended (the "Securities Act"), with respect to the Bonds. This Prospectus,
which forms a part of the Registration Statement, and the Prospectus
Supplement relating to each series of Bonds contain summaries of the material
terms of the documents referred to herein and therein, but do not contain all
of the information set forth in the Registration Statement pursuant to the
Rules and Regulations of the Commission. For further information, reference is
made to such Registration Statement and the exhibits thereto. Such
Registration Statement and exhibits can be inspected and copied at prescribed
rates at the public reference facilities maintained by the Commission at its
Public Reference Section, 450 Fifth Street, N.W., Washington, D.C. 20549, and
at its Regional Offices located as follows: Midwest Regional Office, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661; and Northeast Regional
Office, Seven World Trade Center, New York, New York 10048. The Commission
also maintains a Web site at http://www.sec.gov from which such Registration
Statement and exhibits may be obtained.
No person has been authorized to give any information or to make any
representation other than those contained in this Prospectus and any
Prospectus Supplement with respect hereto and, if given or made, such
information or representations must not be relied upon. This Prospectus and
any Prospectus Supplement with respect hereto do not constitute an offer to
sell or a solicitation of an offer to buy any securities other than the Bonds
offered hereby and thereby nor an offer of the Bonds 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.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All documents subsequently filed by or on behalf of the Issuer referred to
in the accompanying Prospectus Supplement with the Commission pursuant to
Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), after the date of this Prospectus and prior to
the termination of any offering of the Bonds issued by such Issuer shall be
deemed to be incorporated by reference in this Prospectus and to be a part of
this Prospectus from the date of the filing of such documents. Any statement
contained in a document incorporated or deemed to be incorporated by reference
herein shall be deemed to be modified or superseded for all purposes of this
Prospectus to the extent that a statement contained herein (or in the
accompanying Prospectus Supplement) or in any other subsequently filed
document which also is or is deemed to be incorporated by reference modifies
or replaces such statement. Any such statement so modified or superseded shall
not be deemed, except as so modified or superseded, to constitute a part of
this Prospectus. None of the Company, the Master Servicer or the Indenture
Trustee for any series intends to file with the Commission periodic reports
with respect to the related Issuer following completion of the reporting
period required by Rule 15d-1 or Regulation 15D under the Exchange Act.
The Indenture Trustee or such other entity specified in the related
Prospectus Supplement on behalf of any Issuer will provide without charge to
each person to whom this Prospectus is delivered, on the written or oral
request of such person, a copy of any or all of the documents referred to
above that have been or may be incorporated by reference in this Prospectus
(not including exhibits to the information that is incorporated by reference
unless such exhibits are specifically incorporated by reference into the
information that this Prospectus incorporates). Such requests should be
directed to the corporate trust office of the Indenture Trustee or the address
of such other entity specified in the accompanying Prospectus Supplement.
Included in the accompanying Prospectus Supplement is the name, address,
telephone number and, if available, facsimile number of the office or contact
person at the Corporate Trust Office of the Indenture Trustee or such other
entity.
3
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
PROSPECTUS SUPPLEMENT....................................................... 2
AVAILABLE INFORMATION....................................................... 3
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE............................. 3
SUMMARY..................................................................... 5
RISK FACTORS................................................................ 17
Limited Assets............................................................. 17
Mortgage Loans and Mortgaged Properties In General......................... 17
Balloon Payments........................................................... 19
Junior Mortgage Loans...................................................... 19
Contracts and Manufactured Homes In General................................ 20
Security Interests and Certain Other Legal Aspects of the Contracts........ 20
Credit Support Limitations................................................. 20
Subordination of the Subordinated Bonds; Effect of Losses on the Assets.... 21
Bankruptcy and Insolvency Risks............................................ 21
Book-Entry Registration.................................................... 22
Limited Nature of Ratings.................................................. 23
Prepayment and Yield Considerations; Reinvestment Risk..................... 23
Pre-funding Accounts May Result in Reinvestment Risk....................... 24
Pre-funding Accounts May Adversely Affect Investment....................... 24
Consequences of Owning Original Issue Discount Bonds....................... 24
Tax Status of Issuer....................................................... 25
Environmental Risks........................................................ 25
Limited Liquidity of Investment............................................ 25
INTRODUCTION................................................................ 25
THE ISSUER.................................................................. 26
General.................................................................... 26
The Company................................................................ 26
USE OF PROCEEDS............................................................. 27
DESCRIPTION OF THE ASSETS................................................... 27
Assets..................................................................... 27
Mortgage Loans............................................................. 27
MBS........................................................................ 32
Contracts.................................................................. 32
Government Bonds........................................................... 33
Pre-Funding Account........................................................ 33
Accounts................................................................... 34
Credit Support............................................................. 34
Cash Flow Agreements....................................................... 34
YIELD CONSIDERATIONS........................................................ 34
General.................................................................... 34
Bond Interest Rate......................................................... 34
Timing of Payment of Interest.............................................. 35
Payments of Principal; Prepayments......................................... 35
Prepayments--Maturity and Weighted Average Life............................ 36
Other Factors Affecting Weighted Average Life.............................. 37
DESCRIPTION OF THE BONDS.................................................... 40
General.................................................................... 40
Distributions.............................................................. 40
Available Funds............................................................ 41
Distributions of Interest on the Bonds..................................... 41
Distributions of Principal of the Bonds.................................... 42
Components................................................................. 42
Distributions on the Bonds of Prepayment Premiums.......................... 42
Allocation of Losses and Shortfalls........................................ 42
Advances in Respect of Delinquencies....................................... 43
Reports to Bondholders..................................................... 43
Termination................................................................ 45
Redemption................................................................. 45
Put Option................................................................. 46
Book-Entry Registration and Definitive Bonds............................... 46
DESCRIPTION OF THE AGREEMENTS............................................... 47
Agreements Applicable to a Series.......................................... 47
Assignment of Assets; Repurchases.......................................... 47
Representations and Warranties; Repurchases................................ 49
Collection Account and Related Accounts.................................... 51
Collection and Other Servicing Procedures.................................. 53
Sub-Servicers.............................................................. 54
Realization Upon Defaulted Whole Loans..................................... 55
Hazard Insurance Policies.................................................. 56
Fidelity Bonds and Errors and Omissions Insurance.......................... 58
Due-on-Sale Provisions..................................................... 58
</TABLE>
<TABLE>
<S> <C>
Retained Interest; Servicing Compensation and Payment of Expenses.......... 58
Evidence as to Compliance.................................................. 59
Certain Matters Regarding a Master Servicer and the Company................ 59
Events of Default under the Agreement...................................... 60
Rights Upon Event of Default under the Agreement........................... 60
Amendment.................................................................. 61
The Indenture Trustee...................................................... 61
Duties of the Indenture Trustee............................................ 61
Certain Matters Regarding the Indenture Trustee............................ 61
Resignation and Removal of the Indenture Trustee........................... 62
Certain Terms of the Indenture............................................. 62
DESCRIPTION OF CREDIT SUPPORT............................................... 64
General.................................................................... 64
Overcollateralization...................................................... 65
Crosscollateralization..................................................... 65
Excess Spread.............................................................. 65
Subordination.............................................................. 65
Reserve Funds.............................................................. 66
Bond Insurance Policies, Surety Bonds and Guarantees....................... 67
Letter of Credit........................................................... 67
Credit Support with Respect to MBS......................................... 68
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS.................................... 68
General.................................................................... 68
Types of Mortgage Instruments.............................................. 68
Interest in Real Property.................................................. 69
Cooperative Loans.......................................................... 69
Tax Aspects of Cooperative Ownership....................................... 70
Foreclosure................................................................ 70
Junior Mortgages........................................................... 74
Anti-Deficiency Legislation and Other Limitations on Lenders............... 74
Environmental Legislation.................................................. 75
Due-on-Sale Clauses........................................................ 76
Prepayment Charges......................................................... 77
Subordinate Financing...................................................... 77
Applicability of Usury Laws................................................ 77
Alternative Mortgage Instruments........................................... 78
Soldiers' and Sailors' Civil Relief Act of 1940............................ 78
Forfeitures in Drug and RICO Proceedings................................... 79
CERTAIN LEGAL ASPECTS OF THE CONTRACTS...................................... 79
General.................................................................... 79
Bond Interests in the Manufactured Homes................................... 80
Enforcement of Security Interests in Manufactured Homes.................... 81
Consumer Protection Laws................................................... 83
Anti-Deficiency Legislation and Other Limitations on Lenders............... 83
Transfers of Manufactured Homes; Enforceability of "Due-on-Sale" Clauses... 84
Applicability of Usury Laws................................................ 84
Formaldehyde Litigation with Respect to Contracts.......................... 84
CERTAIN FEDERAL INCOME TAX CONSEQUENCES..................................... 85
General.................................................................... 85
Classification of the Issuer and the Bonds................................. 85
Interest and Original Issue Discount....................................... 86
Market Discount............................................................ 88
Premium.................................................................... 90
Election to Treat All Interest as Original Issue Discount.................. 90
Realized Losses............................................................ 90
Sales of Bonds............................................................. 90
Backup Withholding and Information Reporting............................... 91
Tax Treatment of Foreign Investors......................................... 91
STATE AND OTHER TAX CONSEQUENCES............................................ 92
ERISA CONSIDERATIONS........................................................ 92
LEGAL INVESTMENT............................................................ 93
RATING...................................................................... 95
PLAN OF DISTRIBUTION........................................................ 96
LEGAL MATTERS............................................................... 96
INDEX OF PRINCIPAL DEFINITIONS.............................................. 97
</TABLE>
4
<PAGE>
SUMMARY
The following summary of certain pertinent information is qualified in its
entirety by reference to the more detailed information appearing elsewhere in
this Prospectus and by reference to the information with respect to each series
of Bonds contained in the Prospectus Supplement to be prepared and delivered in
connection with the offering of such series. An Index of Principal Definitions
is included at the end of this Prospectus.
The Issuer with respect to each series of Bonds will be a trust established
by the Company, for the sole purpose of issuing such series of Bonds and
engaging in transactions relating thereto. The Company is a wholly owned,
limited purpose subsidiary of NovaStar Financial, Inc., a Maryland corporation
("NovaStar Financial"). NovaStar Financial has elected to be taxed as a real
estate investment trust under the Internal Revenue Code of 1986, as amended
(the "Code"). The common stock of NovaStar Financial is traded on the New York
Stock Exchange under the symbol "NFI."
Each trust that is formed to act as an Issuer will be created pursuant to a
trust agreement between the Company, acting as depositor and a bank, trust
company, or other fiduciary acting as owner trustee (the "Owner Trustee"). Each
trust will be established by the Company solely for the purpose of issuing one
series of Bonds and engaging in transactions relating thereto. Neither NovaStar
Financial, the Company nor any of their respective affiliates will guarantee or
otherwise be obligated to make payments on the Bonds. The Bonds will be
obligations solely of their respective Issuers. The assets of each such Issuer,
other than those pledged as collateral for the Bonds it issues, are not
expected to be significant. See "The Issuer" herein.
Master Servicer................. The master servicer or master servicers
(each, a "Master Servicer"), if any, or a
servicer (the "Servicer") for substantially
all the Mortgage Loans for a series of Bonds,
which servicer or master servicer(s) may be
affiliates of the Company, will be named in
the related Prospectus Supplement. See
"Description of the Agreements--Agreements
Applicable to a Series" and "--Collection
Account and Related Accounts."
Indenture Trustee............... The trustee (the "Indenture Trustee") for
each series of Bonds will be named in the
related Prospectus Supplement. See
"Description of the Agreements--The Indenture
Trustee."
Owner Trustee................... The Owner Trustee for each trust that is an
Issuer of a series of Bonds will be named in
the related Prospectus Supplement. See "The
Issuer--General."
Offered Bonds................... The Bonds offered hereby ("Offered Bonds")
will be secured by any of the following
assets (the Mortgage Loans, MBS, Contracts
and Government Bonds described herein may be
referred to collectively or individually as
the "Assets"):
(a) Mortgage Assets........... The Mortgage Assets with respect to a series
of Bonds will consist of a pool of single
family, multifamily and/or mixed-use loans
(collectively, the "Mortgage Loans"),
mortgage participations, mortgage pass-
through certificates or other mortgage-backed
securities evidencing interests in or secured
by mortgage loans (collectively, the "MBS")
or a combination of Mortgage Loans and MBS
("Mortgage Assets"). The Mortgage Loans will
not be guaranteed or insured by the Company
or any of its affiliates or, unless
5
<PAGE>
otherwise provided in the Prospectus
Supplement, by any governmental agency or
instrumentality or other person. The Mortgage
Loans will be secured by first and/or junior
liens on (i) one- to four-family residential
properties or security interests in shares
issued by cooperative housing corporations
("Single Family Properties"), (ii)
residential properties consisting of five or
more dwelling units ("Multifamily
Properties") and/or (iii) mixed-use
properties consisting of one or more
residential dwelling units and one or more
commercial units ("Mixed-Use Properties").
The Mortgage Loans may include closed-end
and/or revolving home equity loans or certain
balances thereof ("Home Equity Loans"). The
Mortgaged Properties may be located in any
one of the fifty states, the District of
Columbia or the Commonwealth of Puerto Rico.
The Prospectus Supplement will indicate
additional jurisdictions (which may be
outside the United States), if any, in which
the Mortgaged Properties may be located.
Unless otherwise provided in the related
Prospectus Supplement, all Mortgage Loans
will have individual principal balances at
origination of not less than $1,000 and
original terms to maturity of not more than
40 years. All Mortgage Loans will have been
originated by persons other than the Company,
and all Mortgage Assets will have been
purchased, either directly or indirectly, by
the Company. The related Prospectus
Supplement will indicate if any such persons
are affiliates of the Company.
Each Mortgage Loan may provide for accrual of
interest thereon at an interest rate (a
"Mortgage Rate") that is fixed over its term
or that adjusts from time to time, or that
may be converted from an adjustable to a
fixed Mortgage Rate, or from a fixed to an
adjustable Mortgage Rate, from time to time
at the mortgagor's election, in each case as
described in the related Prospectus
Supplement. Adjustable Mortgage Rates on the
Mortgage Loans may be based on one or more
indices. Each Mortgage Loan may provide for
scheduled payments to maturity, payments that
adjust from time to time to accommodate
changes in the Mortgage Rate or to reflect
the occurrence of certain events, and may
provide for negative amortization or
accelerated amortization, in each case as
described in the related Prospectus
Supplement. Each Mortgage Loan may be fully
amortizing or require a balloon payment due
on its stated maturity date, in each case as
described in the related Prospectus
Supplement. Each Mortgage Loan may contain
prohibitions on prepayment or require payment
of a premium or a yield maintenance penalty
in connection with a prepayment, in each case
as described in the related Prospectus
Supplement. The Mortgage Loans may provide
for payments of principal, interest or both,
on due dates that occur monthly, quarterly,
semi-annually or at such
6
<PAGE>
other interval as is specified in the related
Prospectus Supplement. See "Description of
the Assets--Assets."
(b) Agency Securities......... The Agency Securities securing a series of
Bonds will consist of (i) fully modified
pass-through mortgage-backed certificates
guaranteed as to timely payment of principal
and interest by the Government National
Mortgage Association ("GNMA Certificates"),
(ii) certificates ("Guaranteed Mortgage Pass-
Through Certificates") issued and guaranteed
as to timely payment of principal and
interest by the Federal National Mortgage
Association ("FNMA Certificates"), (iii)
mortgage participation certificates issued
and guaranteed as to timely payment of
interest and, unless otherwise specified in
the related Prospectus Supplement, ultimate
payment of principal by the Federal Home Loan
Mortgage Corporation ("FHLMC Certificates"),
(iv) stripped mortgage-backed securities
representing an undivided interest in all or
a part of either the principal distributions
(but not the interest distributions) or the
interest distributions (but not the principal
distributions) or in some specified portion
of the principal and interest distributions
(but not all of such distributions) on
certain GNMA, FNMA or FHLMC Certificates and,
unless otherwise specified in the related
Prospectus Supplement, guaranteed to the same
extent as the underlying securities, (v)
another type of pass-through certificate
issued or guaranteed by GNMA, FNMA or FHLMC
and described in the related Prospectus
Supplement or (vi) a combination of such
Agency Securities. All GNMA Certificates will
be backed by the full faith and credit of the
United States. No FHLMC or FNMA Certificates
will be backed, directly or indirectly, by
the full faith and credit of the United
States. See "Description of the Assets--
Government Bonds" herein.
(c) Private Mortgage-Backed Private Mortgage-Backed Securities may
Securities...................... include (a) mortgage pass-through
certificates representing beneficial
interests in certain mortgage loans or (b)
collateralized mortgage obligations secured
by such mortgage loans. Private Mortgage-
Backed Securities may include stripped
mortgage-backed securities representing an
undivided interest in all or a part of any of
the principal distributions (but not the
interest distributions) or the interest
distributions (but not the principal
distributions) or in some specified portion
of the principal and interest distributions
(but not all of such distributions) on
certain mortgage loans. Although individual
mortgage loans underlying a Private Mortgage-
Backed Security may be insured or guaranteed
by the United States or an agency or
instrumentality thereof, they need not be,
and the Private Mortgage-Backed Securities
themselves will not be so insured or
guaranteed. Unless otherwise specified in the
Prospectus Supplement relating to a series of
Bonds, payments on the Private Mortgage-
Backed Securities will be distributed
directly
7
<PAGE>
to the Indenture Trustee as registered owner
of such Private Mortgage-Backed Securities.
See "Description of the Assets--MBS" herein.
The related Prospectus Supplement for a
series of Bonds will specify, among other
things, the approximate aggregate principal
amount and type of any Private Mortgage-
Backed Securities to be included in the
Mortgage Collateral for such series and, as
to any such Private Mortgage-Backed
Securities comprising a significant portion
of the Mortgage Collateral, to the extent
such information is known to the Issuer, will
in general include the following: (i) certain
characteristics of the mortgage loans that
comprise the underlying assets for the
Private Mortgage-Backed Securities including
(A) the payment features of such mortgage
loans, (B) the approximate aggregate
principal amount of the underlying mortgage
loans that are insured or guaranteed by a
governmental entity, (C) the servicing fee or
range of servicing fees with respect to the
mortgage loans and (D) the minimum and
maximum stated maturities of the mortgage
loans at origination; (ii) the maximum
original term to stated maturity of the
Private Mortgage-Backed Securities; (iii) the
weighted average term to stated maturity of
the Private Mortgage-Backed Securities; (iv)
the pass-through or certificate rate or
ranges thereof for the Private Mortgage-
Backed Securities; (v) the weighted average
pass-through or certificate rate of the
Private Mortgage-Backed Securities; (vi) the
issuer of the Private Mortgage-Backed
Securities (the "PMBS Issuer"), the servicer
of the Private Mortgage-Backed Securities
(the "PMBS Servicer") and the trustee of the
Private Mortgage-Backed Securities (the "PMBS
Trustee"); (vii) certain characteristics of
credit support, if any, such as reserve
funds, insurance policies, surety bonds,
letters of credit or guaranties relating to
the mortgage loans underlying the Private
Mortgage-Backed Securities or to such Private
Mortgage-Backed Securities themselves; (viii)
the terms on which underlying mortgage loans
for such Private Mortgage-Backed Securities
may, or are required to, be repurchased prior
to stated maturity and the terms of any
redemption; and (ix) the terms on which
substitute mortgage loans may be delivered to
replace those initially deposited with the
PMBS Trustee. See "Description of the
Assets--MBS" herein.
(d) Contracts................. The Contracts with respect to a series of
Bonds will consist of manufactured housing
installment sale contracts and installment
loan agreements secured by a security
interest in a new or used manufactured home
(each, a "Manufactured Home"), and, to the
extent, if any, indicated in the related
Prospectus Supplement, by real property. The
Contracts will not be insured or guaranteed
by the Company or any of its affiliates or,
unless otherwise specified in the related
8
<PAGE>
Prospectus Supplement, by any governmental
agency or instrumentality or any other
person. The Manufactured Homes may be located
in any of the fifty states or any other
jurisdiction specified in the related
Prospectus Supplement. All Contracts will
have been originated by persons other than
the Company, and all Contracts will have been
purchased, either directly or indirectly, by
the Company on or before the date of initial
issuance of the related series of Bonds. The
related Prospectus Supplement will indicate
if any such persons are affiliates of the
Company. Each Contract may provide for an
annual percentage rate thereon (a "Contract
Rate") that is fixed over its terms or that
adjusts as described in the related
Prospectus Supplement. The manner of
determining scheduled payments due on the
Contract will be described in the Prospectus
Supplement. The Prospectus Supplement will
describe the minimum principal balance of the
Contracts at origination and the maximum
original term to maturity of the Contracts.
(e) Government Bonds.......... If so provided in the related Prospectus
Supplement, the Assets of the related Issuer
may include, in addition to Mortgage Assets,
certain direct obligations of the United
States, agencies thereof or agencies created
thereby which provide for payment of interest
and/or principal (collectively, "Government
Bonds").
(f) Collection Accounts....... Each Issuer will maintain one or more
accounts established on behalf of the
Bondholders into which the person or persons
designated in the related Prospectus
Supplement will, to the extent described
herein and in such Prospectus Supplement,
deposit all payments and collections received
or advanced with respect to the Assets and
other assets of the Issuer. Such an account
may be maintained as an interest bearing or a
non-interest bearing account, and funds held
therein may be held as cash or invested in
certain short-term, investment grade
obligations, in each case as described in the
related Prospectus Supplement. See
"Description of the Agreements--Collection
Account and Related Accounts."
(g) Credit Support............ If so provided in the related Prospectus
Supplement, partial or full protection
against certain defaults and losses on the
Assets of the related Issuer may be provided
to one or more classes of Bonds of the
related series in the form of various types
of credit support, such as a cash account,
overcollateralization, excess spread,
crosscollateralization, subordination,
reserve fund, insurance policy, surety bond,
guarantee, letter of credit or another type
of credit support, or a combination thereof
(any such coverage with respect to the Bonds
of any series, "Credit Support"). The amount
and types of coverage, the identity of the
entity providing the coverage (if applicable)
and related information with respect to each
type of Credit Support, if any,
9
<PAGE>
will be described in the Prospectus
Supplement for a series of Bonds. The
Prospectus Supplement for any series of Bonds
that includes MBS will describe any similar
forms of credit support that are provided by
or with respect to, or are included as part
of such MBS. See "Risk Factors--Credit
Support Limitations" and "Description of
Credit Support."
If so specified in the Prospectus Supplement,
a series of Bonds may consist of one or more
classes of senior Bonds (the "Senior Bonds")
and one or more classes of subordinated Bonds
(the "Subordinated Bonds"). The rights of the
holders of the Subordinated Bonds of a series
(the "Subordinated Bondholders") to receive
payments of principal and/or interest (or any
combination thereof) will be subordinated to
such rights of the holders of the Senior
Bonds of the same series (the "Senior
Bondholders") to the extent described in the
related Prospectus Supplement. This
subordination is intended to enhance the
likelihood of regular receipt by the Senior
Bondholders of the full amount of their
scheduled payments of principal and/or
interest. The protection afforded to the
Senior Bondholders of a series by means of
the subordination feature will be
accomplished by (i) the preferential right of
such holders to receive, prior to any payment
being made on the related Subordinated Bonds,
the amounts of principal and/or interest due
them on each Payment Date out of the funds
available for payment on such date and, to
the extent described in the related
Prospectus Supplement, by the right of such
holders to receive future payments that would
otherwise have been payable to the
Subordinated Bondholders; or (ii) as
otherwise described in the related Prospectus
Supplement. If so specified in the related
Prospectus Supplement, subordination may
apply only in the event of certain types of
losses not covered by other forms of credit
support, such as hazard losses not covered by
standard hazard insurance policies or losses
due to the bankruptcy or fraud of the
borrower. The related Prospectus Supplement
will set forth information concerning, among
other things, the amount of subordination of
a class or classes of Subordinated Bonds in a
series, the circumstances in which such
subordination will be applicable and the
manner, if any, in which the amount of
subordination will decrease over time. See
"Description of Credit Support--
Subordination" herein.
If so specified in the related Prospectus
Supplement, credit enhancement may consist of
overcollateralization whereby the aggregate
principal balance of the related Mortgage
Loans exceeds the aggregate principal balance
of the Bonds of the related series. Such
overcollateralization may exist on the
related closing date or may develop
thereafter. See "Description of Credit
Support--Overcollateralization" herein.
10
<PAGE>
"Excess Spread" refers to the positive spread
that may exist, to the extent specified in
the related Prospectus Supplement, between
the weighted average of the interest rates
(less servicing or other applicable fees) on
the Mortgage Loans and the weighted average
of the interest rates on the Bonds. Whether
at any time such positive spread exists will
depend on a variety of factors, including,
with respect to a series of Bonds with
respect to which both the Bonds and the
Mortgage Loans bear interest at adjustable
rates, the relationship of the movements in
the indices applicable to the Mortgage Loans
and those applicable to the Bonds, over which
no prediction can be made or assurance given.
See "Description of Credit Support--Excess
Spread" herein.
If so specified in the related Prospectus
Supplement, separate classes of such series
may be secured by separate groups of Mortgage
Collateral. In such case, credit support may
be provided by a crosscollateralization
feature which requires that payments be made
with respect to Bonds secured by one or more
groups of Mortgage Collateral prior to
payments to Bonds secured by other groups of
Mortgage Collateral within the same series of
Bonds. See "Description of Credit Support--
Crosscollateralization" herein.
If so specified in the related Prospectus
Supplement, credit enhancement may consist of
one or more reserve funds ("Reserve Funds")
into which cash or other Assets may be
deposited at the time the Bonds are issued. A
Reserve Fund may also be funded over time by
depositing therein distributions received on
the Assets, as may be specified in the
related Prospectus Supplement. See
"Description of Credit Support--Reserve
Funds" herein.
If so specified in the related Prospectus
Supplement, credit enhancement for one or
more classes of Bonds of a related series may
be provided by insurance policies or surety
bonds (each, a "Bond Insurance Policy")
issued by one or more insurance companies or
sureties (each a "Bond Insurer"). Such
insurance policy or surety bond will
guarantee timely payments of interest and/or
full payment of principal on the basis of a
schedule of principal payments set forth in
or determined in the manner specified in the
related Prospectus Supplement. If specified
in the related Prospectus Supplement, one or
more insurance policies, surety bonds or
third-party guarantees may be used to provide
coverage for the risks of default or types of
losses set forth in such Prospectus
Supplement. See "Description of Credit
Support--Bond Insurance Policies, Surety
Bonds and Guarantees" herein.
If so specified in the related Prospectus
Supplement, credit enhancement may be
provided for a series of Bonds secured by
Mortgage Loans by one or more letters of
credit. A letter of
11
<PAGE>
credit may provide limited protection against
certain losses in addition to or in lieu of
other credit enhancement, such as losses
resulting from delinquent payments on the
Mortgage Loans securing the related series of
Bonds, losses from risks not covered by
standard hazard insurance policies, losses
due to bankruptcy of a borrower and
application of certain provisions of the
federal Bankruptcy Code, and losses due to
denial of insurance coverage due to
misrepresentations made in connection with
the origination or sale of a Mortgage Loan.
The issuer of the letter of credit (the "L/C
Bank") will be obligated to honor demands
with respect to such letter or credit, to the
extent of the amount available thereunder to
provide funds under the circumstances and
subject to such conditions as are specified
in the related Prospectus Supplement. The
liability of the L/C Bank under its letter of
credit will be reduced by the amount of
unreimbursed payments thereunder. See
"Description of Credit Support--Letter of
Credit" herein.
(h) Cash Flow Agreements...... If so provided in the related Prospectus
Supplement, the Assets may include guaranteed
investment contracts pursuant to which moneys
held in the funds and accounts established
for the related series will be invested at a
specified rate. The Assets may also include
certain other agreements, such as interest
rate exchange agreements, interest rate cap
or floor agreements, currency exchange
agreements or similar agreements provided to
reduce the effects of interest rate or
currency exchange rate fluctuations on the
Assets or on one or more classes of Bonds.
(Currency exchange agreements might be
included in the Assets if some or all of the
Mortgage Assets (such as Mortgage Loans
secured by Mortgaged Properties located
outside the United States) were denominated
in a non-United States currency.) The
principal terms of any such guaranteed
investment contract or other agreement (any
such agreement, a "Cash Flow Agreement"),
including, without limitation, provisions
relating to the timing, manner and amount of
payments thereunder and provisions relating
to the termination thereof, will be described
in the Prospectus Supplement for the related
series. In addition, the related Prospectus
Supplement will provide certain information
with respect to the obligor under any such
Cash Flow Agreement. The Prospectus
Supplement for any series of Bonds that
includes MBS will describe any cash flow
agreements that are included as part of such
MBS. See "Description of the Assets--Cash
Flow Agreements."
(i) Pre-Funding Account....... To the extent provided in a Prospectus
Supplement, the Company or another seller
will be obligated (subject only to the
availability thereof) to sell at a
predetermined price, and the related Issuer
for the related series of Bonds will be
obligated to purchase (subject to the
satisfaction of certain
12
<PAGE>
conditions described in the applicable
Agreement), additional Assets (the
"Subsequent Assets") from time to time (as
frequently as daily) within the number of
months specified in the Prospectus Supplement
after the issuance of such series of Bonds
having an aggregate principal balance
approximately equal to the amount on deposit
(the "Pre-Funded Amount") in an account (the
"Pre-Funding Account") established by the
Indenture Trustee and funded on the date of
such issuance.
Description of Bonds............ The Bonds will be issued from time to time in
one or more series pursuant to Indentures (as
defined herein) between each Issuer and the
Indenture Trustee for the holders of the
Bonds of each series (the "Bondholders")
under the relevant Indenture. Each series of
Bonds will consist of one or more classes of
Bonds. Unless otherwise specified in the
related Prospectus Supplement, the Bonds
represent obligations solely of the Issuer
and are not insured or guaranteed by any
other person or entity. See "Description of
the Bonds" herein. Bonds of a class may
differ from Bonds of other classes of the
same series in the amounts allocated to and
the priority of principal payments and
interest rate or in such other manner as
specified in the related Prospectus
Supplement. A series of Bonds may include one
or more classes of Bonds entitled to (i)
principal distributions, with
disproportionate, nominal or no interest
distributions or (ii) interest distributions,
with disproportionate, nominal or no
principal distributions.
Distributions on Bonds.......... Each series of Bonds will consist of one or
more classes of Bonds that may provide for
the accrual of interest thereon based on
fixed, variable or adjustable rates and
provide for distributions of principal as
described in the related Prospectus
Supplement to the extent of available funds,
as described in the related Prospectus
Supplement. If so specified in the related
Prospectus Supplement, distributions on one
or more classes of a series of Bonds may be
limited to collections from a designated
portion of the Mortgage Loans in the related
pool (each such portion of Mortgage Loans, a
"Mortgage Loan Group"). See "Description of
the Bonds--General." Any such classes may
include classes of Offered Bonds.
The Bonds will not be guaranteed or insured
by the Company or any of its affiliates, by
any governmental agency or instrumentality or
by any other person, unless otherwise
provided in the related Prospectus
Supplement. See "Risk Factors--Limited
Assets" and "Description of the Bonds."
(a) Interest.................. Interest on each class of Offered Bonds of
each series will accrue at the applicable
interest rate on the outstanding Bond
Principal Balance thereof and will be
distributed to Bondholders as provided in the
related Prospectus Supplement. The specified
date on which distributions are to be made is
a
13
<PAGE>
"Payment Date." Distributions of interest
with respect to one or more classes of Bonds
may be reduced to the extent of certain
delinquencies, losses, and other
contingencies described herein and in the
related Prospectus Supplement. See "Yield
Considerations" and "Description of the
Bonds--Distributions of Interest on the
Bonds."
(b) Principal................. The Bonds of each series initially will have
an aggregate Bond Principal Balance no
greater than the outstanding principal
balance of the Assets as of, unless the
related Prospectus Supplement provides
otherwise, the close of business on the first
day of a specified month (the "Cut-off
Date"), after application of scheduled
payments due on or before such date, whether
or not received. With respect to any Bond,
the "Bond Principal Balance" means the
initial principal balance thereof on the
closing date minus all distributions in
respect of principal with respect to such
Bond. Unless otherwise provided in the
related Prospectus Supplement, distributions
of principal will be made on each Payment
Date to the class or classes of Bonds
entitled thereto until the Bond Principal
Balances of such Bonds have been reduced to
zero. Unless otherwise specified in the
related Prospectus Supplement, distributions
of principal of any class of Bonds will be
made on a pro rata basis among all of the
Bonds of such class or by random selection,
as described in the related Prospectus
Supplement or otherwise established by the
related Indenture Trustee. "Description of
the Bonds--Distributions of Principal of the
Bonds."
Advances........................ Unless otherwise provided in the related
Prospectus Supplement, the servicer or Master
Servicer will be obligated as part of its
servicing responsibilities to make certain
advances that in its good faith judgment it
deems recoverable with respect to delinquent
scheduled payments on the Mortgage Loans.
Neither the Company nor any of its affiliates
will have any responsibility to make such
advances, unless it is the servicer or Master
Servicer. Advances made by a servicer or
Master Servicer are reimbursable generally
from subsequent recoveries in respect of such
Mortgage Loan and otherwise to the extent
described herein and in the related
Prospectus Supplement. If and to the extent
provided in the Prospectus Supplement for any
series, the servicer or Master Servicer will
be entitled to receive interest on its
outstanding advances. The Prospectus
Supplement for any series of Bonds that is
secured by MBS will describe any
corresponding advancing obligation of any
person in connection with such MBS. See
"Description of the Bonds--Advances in
Respect of Delinquencies."
Termination..................... If so specified in the related Prospectus
Supplement, a series of Bonds may be subject
to optional early termination by the Issuer,
under the circumstances and in the manner set
forth
14
<PAGE>
therein. If so provided in the related
Prospectus Supplement, upon the reduction of
the Bond Principal Balance of a specified
class or classes of Bonds to a specified
percentage or amount or on and after a date
specified in such Prospectus Supplement, the
Bonds may be subject to optional early
termination by the related Issuer. See
"Description of the Bonds--Termination."
Registration of Bonds........... If so provided in the related Prospectus
Supplement, one or more classes of the
Offered Bonds will initially be represented
by one or more certificates or notes, as
applicable, registered in the name of Cede &
Co., as the nominee of DTC. No person
acquiring an interest in Offered Bonds so
registered will be entitled to receive a
definitive certificate or note, as
applicable, representing such person's
interest except in the event that definitive
certificates or notes, as applicable, are
issued under the limited circumstances
described herein. See "Risk Factors--Book-
Entry Registration" and "Description of the
Bonds--Book-Entry Registration and Definitive
Bonds."
Tax Status of Bonds............. Unless otherwise specified in the related
Prospectus Supplement, Bonds of a series,
when beneficially owned by someone other than
NovaStar Financial or one of its qualified
REIT subsidiaries (as defined in section
856(i) of the Code), will constitute
indebtedness for federal and state income tax
purposes and the Bondholder, in accepting the
Bond, will agree to treat the Bond as
indebtedness. See "Certain Federal Income Tax
Consequences" herein and in such Prospectus
Supplement.
Investors are advised to consult their tax
advisors as to the tax consequences of an
investment in the Bonds in light of
investors' individual circumstances and to
review "Certain Federal Income Tax
Consequences" herein and in the related
Prospectus Supplement for a more general
discussion of tax matters related to the
Bonds.
ERISA Matters................... A fiduciary of an employee benefit plan and
certain other retirement plans and
arrangements, including individual retirement
accounts, annuities, Keogh plans, and
collective investment funds and separate
accounts in which such plans, accounts,
annuities or arrangements are invested, that
is subject to the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"),
or Section 4975 of the Code should carefully
review with its legal advisors whether the
purchase or holding of Offered Bonds could
give rise to a transaction that is prohibited
or is not otherwise permissible either under
ERISA or Section 4975 of the Code. See "ERISA
Considerations" herein and in the related
Prospectus Supplement. See "Description of
the Bonds--General" and "ERISA
Considerations."
15
<PAGE>
Legal Investment................ Each Prospectus Supplement will specify which
class or classes of Offered Bonds, if any,
will constitute "mortgage-related securities"
for purposes of the Secondary Mortgage Market
Enhancement Act of 1984 ("SMMEA").
Institutions whose investment activities are
subject to legal investment laws and
regulations or review by certain regulatory
authorities may be subject to restrictions on
investment in certain classes of the Offered
Bonds. See "Legal Investment" herein and in
the related Prospectus Supplement.
Rating.......................... It is a condition to the issuance of each
series of Bonds that the Bonds of such series
to be offered hereunder be rated in one of
the four highest rating categories by at
least one nationally recognized statistical
rating organization (each a "Rating Agency").
A rating is not a recommendation to purchase,
hold or sell Bonds inasmuch as such rating
does not comment as to market price or
suitability for a particular investor.
Ratings of Bonds will address the likelihood
of the payment of principal and interest
thereon pursuant to their terms. There can be
no assurance that a rating will remain for a
given period of time or that a rating will
not be lowered or withdrawn entirely by a
rating agency if in its judgment
circumstances in the future so warrant. See
"Rating" herein and in the related Prospectus
Supplement.
Risk Factors.................... For a discussion of certain risks associated
with an investment in the Bonds, see "Risk
Factors" commencing on page herein
and in the related Prospectus Supplement.
16
<PAGE>
RISK FACTORS
Investors should consider, in connection with an investment in the Bonds,
among other things, the following factors.
LIMITED ASSETS
The Bonds will not represent an interest in or obligation of the Company,
the Master Servicer or any of their affiliates. The only obligations with
respect to the Bonds or the Assets will be the obligations (if any) of the
Warranting Party (as defined herein) pursuant to certain limited
representations and warranties made with respect to the Mortgage Loans or
Contracts, the Master Servicer's and any Sub-Servicer's servicing obligations
under the related Agreement (including the limited obligation to make certain
advances in the event of delinquencies on the Mortgage Loans or Contracts, but
only to the extent deemed recoverable) and, if and to the extent expressly
described in the related Prospectus Supplement, certain limited obligations of
the Master Servicer in connection with an agreement to purchase or act as
remarketing agent with respect to a convertible ARM Loan (as defined herein)
upon conversion to a fixed rate or a different index. Since certain
representations and warranties with respect to the Mortgage Loans or Contracts
may have been made and/or assigned in connection with transfers of such
Mortgage Loans or Contracts prior to the closing date, the rights of the
Indenture Trustee and the Bondholders with respect to such representations or
warranties will be limited to their rights as an assignee thereof. Unless
otherwise specified in the related Prospectus Supplement, none of the Company,
the Master Servicer or any affiliate thereof will have any obligation with
respect to representations or warranties made by any other entity. Unless
otherwise specified in the related Prospectus Supplement, neither the Bonds
nor the underlying Assets will be guaranteed or insured by any governmental
agency or instrumentality, or by the Company, the Master Servicer, any Sub-
Servicer or any of their affiliates. Proceeds of the assets of the related
Issuer for each series of Bonds (including the Assets and any form of credit
enhancement) will be the sole source of payments on the Bonds, and there will
be no recourse to the Company or any other entity in the event that such
proceeds are insufficient or otherwise unavailable to make all payments
provided for under the Bonds.
Unless otherwise specified in the related Prospectus Supplement, a series of
Bonds will not have any claim against or security interest in the Issuer for
any other series. If the related Issuer has insufficient funds to make
payments on such Bonds, no other assets will be available for payment of the
deficiency. Additionally, certain amounts remaining in certain funds or
accounts, including the Collection Account and any accounts maintained as
Credit Support, may be withdrawn under certain conditions, as described in the
related Prospectus Supplement. In the event of such withdrawal, such amounts
will not be available for future payment of principal of or interest on the
Bonds. If so provided in the Prospectus Supplement for a series of Bonds
consisting of one or more classes of Subordinate Bonds, on any Payment Date in
respect of which losses or shortfalls in collections on the Assets have been
incurred, the amount of such losses or shortfalls will be borne first by one
or more classes of the Subordinate Bonds, and, thereafter, by the remaining
classes of Bonds in the priority and manner and subject to the limitations
specified in such Prospectus Supplement. If so provided in the Prospectus
Supplement for a series of Bonds consisting of one or more classes of
Subordinate Bonds, on any Payment Date in respect of which losses or
shortfalls in collections on the Assets have been incurred, the amount of such
losses or shortfalls will be borne first by one or more classes of the
Subordinate Bonds, and thereafter, by the remaining classes of Bonds in the
priority and manner and subject to the limitations specified in such
Prospectus Supplement.
MORTGAGE LOANS AND MORTGAGED PROPERTIES IN GENERAL
An investment in securities such as the Bonds which generally represent
interests in Mortgage Loans may be affected by, among other things, a decline
in real estate values and changes in the mortgagors' financial condition. No
assurance can be given that values of the real property constituting security
for repayment of a Mortgage Loan (the "Mortgaged Properties") have remained or
will remain at their levels on the dates of origination of the related
Mortgage Loans. If the residential real estate market should experience an
overall
17
<PAGE>
decline in property values such that the outstanding balances of the Mortgage
Loans, and any secondary financing on the Mortgaged Properties, become equal
to or greater than the value of the Mortgaged Properties, the actual rates of
delinquencies, foreclosures and losses could be higher than those now
generally experienced in the mortgage lending industry. In addition, in the
case of Mortgage Loans that are subject to negative amortization, due to the
addition to principal balance of deferred interest, the principal balances of
such Mortgage Loans could be increased to an amount equal to or in excess of
the value of the underlying Mortgaged Properties, thereby increasing the
likelihood of default. To the extent that such losses are not covered by the
applicable Credit Support, if any, holders of Bonds of the series evidencing
interests in the related Mortgage Loans will bear all risk of loss resulting
from default by mortgagors and will have to look primarily to the value of the
Mortgaged Properties for recovery of the outstanding principal and unpaid
interest on the defaulted Mortgage Loans. Certain of the types of Mortgage
Loans may involve additional uncertainties not present in traditional types of
loans. For example, certain of the Mortgage Loans provide for escalating or
variable payments by the mortgagor under the Mortgage Loan, as to which the
mortgagor is generally qualified on the basis of the initial payment amount.
In some instances the mortgagors' income may not be sufficient to enable them
to continue to make their loan payments as such payments increase and thus the
likelihood of default will increase. In addition to the foregoing, certain
geographic regions of the United States from time to time will experience
weaker regional economic conditions and housing markets, and, consequently,
will experience higher rates of loss and delinquency than will be experienced
on mortgage loans generally. The Mortgage Loans underlying certain series of
Bonds may be concentrated in these regions, and such concentration may present
risk considerations in addition to those generally present for similar
mortgage-backed securities without such concentration. Furthermore, the rate
of default on Mortgage Loans that are refinance or limited and stated
documentation mortgage loans, and on Mortgage Loans with high Loan-to-Value
Ratios, may be higher than for other types of Mortgage Loans. Additionally, a
decline in the value of the Mortgaged Properties will increase the risk of
loss particularly with respect to any related junior Mortgage Loans. See "--
Junior Mortgage Loans."
Mortgage Loans secured by Multifamily Properties may entail risks of
delinquency and foreclosure, and risks of loss in the event thereof, that are
greater than similar risks associated with loans secured by Single Family
Properties. The ability of a borrower to repay a loan secured by an income-
producing property typically is dependent primarily upon the successful
operation of such property rather than upon the existence of independent
income or assets of the borrower; thus, the value of an income-producing
property typically is directly related to the net operating income derived
from such property. If the net operating income of the property is reduced
(for example, if rental or occupancy rates decline or real estate tax rates or
other operating expenses increase), the borrower's ability to repay the loan
may be impaired. In addition, the concentration of default, foreclosure and
loss risk for a pool of Mortgage Loans secured by Multifamily Properties may
be greater than for a pool of Mortgage Loans secured by Single Family
Properties of comparable aggregate unpaid principal balance because the pool
of Mortgage Loans secured by Multifamily Properties is likely to consist of a
smaller number of higher balance loans.
Some or all of the Mortgage Loans may be High LTV Loans. High LTV Loans with
Loan-to-Value Ratios or Combined Loan-to-Value Ratios in excess of 100% may
have been originated with a limited expectation of recovering any amounts from
the foreclosure of the related Mortgaged Property and are underwritten with an
emphasis on the creditworthiness of the related borrower. If such Mortgage
Loans go into foreclosure and are liquidated, there may be no amounts
recovered from the related Mortgaged Property unless the value of the property
increases or the principal amount of the related senior liens have been
reduced such as to reduce the current Loan-to-Value Ratio or Combined Loan-to-
Value Ratio of the related Mortgage Loan to below 100%. Any such losses, to
the extent not covered by credit enhancement, may affect the yield to maturity
of the Bonds.
Even assuming that the Mortgaged Properties provide adequate security for
the Mortgage Loans, substantial delays could be encountered in connection with
the liquidation of defaulted Mortgage Loans and corresponding delays in the
receipt of related proceeds by Bondholders could occur. An action to foreclose
on a Mortgaged Property securing a Mortgage Loan is regulated by state
statutes and rules and is subject to many of the delays and expenses of other
lawsuits if defenses or counterclaims are interposed, sometimes requiring
several years to
18
<PAGE>
complete. Furthermore, in some states an action to obtain a deficiency
judgment is not permitted following a nonjudicial sale of a Mortgaged
Property. In the event of a default by a borrower, these restrictions, among
other things, may impede the ability of the Master Servicer to foreclose on or
sell the Mortgaged Property or to obtain liquidation proceeds sufficient to
repay all amounts due on the related Mortgage Loan. In addition, the Master
Servicer will be entitled to deduct from related liquidation proceeds all
expenses reasonably incurred in attempting to recover amounts due on defaulted
Mortgage Loans and not yet repaid, including legal fees and costs of legal
action, real estate taxes and maintenance and preservation expenses.
Liquidation expenses with respect to defaulted loans do not vary directly
with the outstanding principal balance of the loan at the time of default.
Therefore, assuming that a servicer took the same steps in realizing upon a
defaulted loan having a small remaining principal balance as it would in the
case of a defaulted loan having a large remaining principal balance, the
amount realized after expenses of liquidation would be smaller as a percentage
of the outstanding principal balance of the small loan than would be the case
with the defaulted loan having a large remaining principal balance.
If applicable, certain legal aspects of the Mortgage Loans for a series of
Bonds may be described in the related Prospectus Supplement. See also "Certain
Legal Aspects of Mortgage Loans" herein.
BALLOON PAYMENTS
Certain of the Mortgage Loans (the "Balloon Mortgage Loans") as of the Cut-
off Date may not be fully amortizing over their terms to maturity and, thus,
will require substantial principal payments (i.e., balloon payments) at their
stated maturity. Mortgage Loans with balloon payments involve a greater degree
of risk because the ability of a mortgagor to make a balloon payment typically
will depend upon its ability either to timely refinance the loan or to timely
sell the related Mortgaged Property. The ability of a mortgagor to accomplish
either of these goals will be affected by a number of factors, including the
level of available mortgage interest rates at the time of sale or refinancing,
the mortgagor's equity in the related Mortgaged Property, the financial
condition of the mortgagor, the value of the Mortgaged Property, tax laws,
prevailing general economic conditions and the availability of credit for
single family or multifamily real properties generally.
JUNIOR MORTGAGE LOANS
Certain of the Mortgage Loans may be secured by junior liens and the related
first and other Senior Liens, if any (collectively, the "Senior Lien"), may
not be included in the Assets. The primary risk to holders of Mortgage Loans
secured by junior liens is the possibility that adequate funds will not be
received in connection with a foreclosure of the related Senior Lien to
satisfy fully both the Senior Lien and the Mortgage Loan. In the event that a
holder of the Senior Lien forecloses on a Mortgaged Property, the proceeds of
the foreclosure or similar sale will be applied first to the payment of court
costs and fees in connection with the foreclosure, second to real estate
taxes, third in satisfaction of all principal, interest, prepayment or
acceleration penalties, if any, and any other sums due and owing to the holder
of the Senior Lien. The claims of the holder of the Senior Lien will be
satisfied in full out of proceeds of the liquidation of the Mortgage Loan, if
such proceeds are sufficient, before the Issuer as holder of the junior lien
receives any payments in respect of the Mortgage Loan. If the Master Servicer
were to foreclose on any Mortgage Loan, it would do so subject to any related
Senior Lien. In order for the debt related to the Mortgage Loan to be paid in
full at such sale, a bidder at the foreclosure sale of such Mortgage Loan
would have to bid an amount sufficient to pay off all sums due under the
Mortgage Loan and the Senior Lien or purchase the Mortgaged Property subject
to the Senior Lien. In the event that such proceeds from a foreclosure or
similar sale of the related Mortgaged Property were insufficient to satisfy
both loans in the aggregate, the Issuer, as the holder of the junior lien,
would bear the risk of delay in distributions while a deficiency judgment
against the borrower was being obtained and the risk of loss if the deficiency
judgment were not realized upon. Moreover, deficiency judgments may not be
available in certain jurisdictions. In addition, a junior mortgagee may not
foreclose on the property securing a junior mortgage unless it forecloses
subject to the senior mortgage.
19
<PAGE>
CONTRACTS AND MANUFACTURED HOMES IN GENERAL
An investment in Bonds secured by Assets including Contracts may be affected
by, among other things, a downturn in national, regional or local economic
conditions. The geographic location of the Manufactured Homes in any pool at
origination of the related Contract will be set forth in the related
Prospectus Supplement. Regional and local economic conditions are often
volatile and, historically, regional and local economic conditions, as well as
national economic conditions, have affected the delinquency, loan loss and
repossession experience of manufactured housing installment sales contracts
and/or installment loan contracts. Moreover, regardless of its location,
manufactured housing generally depreciates in value. Thus, such Bondholders
should expect that, as a general matter, the market value of any Manufactured
Home will be lower than the outstanding principal balance of the related
Contract. Sufficiently high delinquencies and liquidation losses on the
Contracts will have the effect of reducing, and could eliminate, the
protection against loss afforded by any credit enhancement supporting any
class of the related Bonds. If such protection is eliminated with respect to a
class of Bonds, the holders of such Bonds will bear all risk of loss on the
related Contracts and will have to rely on the value of the related
Manufactured Homes for recovery of the outstanding principal of and unpaid
interest on any defaulted Contracts. See "Description of Credit Support."
SECURITY INTERESTS AND CERTAIN OTHER LEGAL ASPECTS OF THE CONTRACTS
The Asset Seller in respect of a Contract will represent that such Contract
is 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, the Master Servicer will not amend any
certificates of title to change the lienholder specified therein from the
Asset Seller to the Indenture Trustee and will not deliver any certificate of
title to the Indenture Trustee or note thereon the Indenture Trustee's
interest. Consequently, in some states, in the absence of such an amendment,
the assignment to the Indenture 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 Indenture
Trustee, the assignment of the security interest in the Manufactured Home may
not be effective against creditors of the Asset Seller or a trustee in
bankruptcy of the Asset Seller. In addition, numerous federal and state
consumer protection laws impose requirements on lending under installment
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 result of
such lender's or seller's noncompliance. These laws would apply to the
Indenture Trustee as assignee of the Contracts. The Asset Seller of the
Contracts to the Company will warrant that each Contract 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
Asset Seller to repurchase such Contract unless such breach is cured. If the
Credit Support 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
Bondholders to realize upon the Manufactured Home or may limit the amount
realized to less than the amount due. See "Certain Legal Aspects of the
Contracts."
CREDIT SUPPORT LIMITATIONS
The Prospectus Supplement for a series of Bonds will describe any Credit
Support of the related Issuer, which may include letters of credit, insurance
policies, surety bonds, guarantees, reserve funds or other types of credit
support, or combinations thereof. Use of Credit Support will be subject to the
conditions and limitations described herein and in the related Prospectus
Supplement. Moreover, such Credit Support may not cover all potential losses
or risks; for example, Credit Support may or may not cover fraud or negligence
by a mortgage loan or contract originator or other parties.
20
<PAGE>
The amount of any applicable Credit Support supporting one or more classes
of Offered Bonds, including the subordination of one or more classes of Bonds,
will be determined on the basis of criteria established by each Rating Agency
rating such classes of Bonds based on an assumed level of defaults,
delinquencies, other losses or other factors. There can, however, be no
assurance that the loss experience on the related Assets will not exceed such
assumed levels. See "--Limited Nature of Ratings," "Description of the Bonds"
and "Description of Credit Support."
If so specified in the related Prospectus Supplement, the rights of the
holders of one or more classes of Subordinated Bonds will be subordinate to
the rights of one or more classes of Senior Bonds of such series to payments
of principal and/or interest (or any combination thereof) to the extent
specified in the related Prospectus Supplement. Although subordination is
intended to reduce the risk to holders of Senior Bonds of delinquent payments
or ultimate losses, the amount of subordination will be limited. In addition,
if principal payments on one or more classes of Bonds of a series are made in
a specified order of priority, any limits with respect to the aggregate amount
of claims under any related credit enhancement may be exhausted before the
principal of the lower priority classes of Bonds of such series has been
repaid. As a result, the impact of significant losses on the Mortgage
Collateral may be borne first by any class of Subordinated Bonds of a series
and thereafter by the classes of Senior Bonds of such series, in each case to
the extent described in the related Prospectus Supplement.
Regardless of the form of credit enhancement provided, the amount of
coverage will be limited in amount and in most cases will be subject to
periodic reduction in accordance with a schedule or formula. The Master
Servicer will generally be permitted to reduce, terminate or substitute all or
a portion of the credit enhancement for any series of Bonds, if the applicable
Rating Agency indicates that the then-current rating thereof will not be
adversely affected. The rating of any series of Bonds by any applicable Rating
Agency may be lowered following the initial issuance thereof as a result of
the downgrading of the obligations of any applicable Credit Support provider,
or as a result of losses on the related Assets substantially in excess of the
levels contemplated by such Rating Agency at the time of its initial rating
analysis. None of the Company, the Master Servicer or any of their affiliates
will have any obligation to replace or supplement any Credit Support or to
take any other action to maintain any rating of any series of Bonds.
SUBORDINATION OF THE SUBORDINATED BONDS; EFFECT OF LOSSES ON THE ASSETS
The rights of Subordinated Bondholders to receive distributions to which
they would otherwise be entitled with respect to the Assets will be
subordinate to the rights of the Master Servicer (to the extent that the
Master Servicer is paid its servicing fee, including any unpaid servicing fees
with respect to one or more prior Due Periods, and is reimbursed for certain
unreimbursed advances and unreimbursed liquidation expenses) and the Senior
Bondholders to the extent described in the related Prospectus Supplement. As a
result of the foregoing, investors must be prepared to bear the risk that they
may be subject to delays in payment and may not recover their initial
investments in the Subordinated Bonds. See "Description of the Bonds--General"
and "--Allocation of Losses and Shortfalls."
The yields on the Subordinated Bonds may be extremely sensitive to the loss
experience of the Assets and the timing of any such losses. If the actual rate
and amount of losses experienced by the Assets exceed the rate and amount of
such losses assumed by an investor, the yields to maturity on the Subordinated
Bonds may be lower than anticipated.
BANKRUPTCY AND INSOLVENCY RISKS
Effects of Bankruptcy of NovaStar Financial or the Company. Unless otherwise
specified in the related Prospectus Supplement, NovaStar Financial and the
Company will treat the transfer of the Assets by NovaStar Financial to the
Company as a secured financing for federal income tax and generally accepted
accounting principles ("GAAP") accounting purposes, but as a sale for
bankruptcy law purposes. Unless otherwise specified in the related Prospectus
Supplement, the Company will treat the transfer of Mortgage Assets from the
Company
21
<PAGE>
to such Issuer as a secured financing for federal income tax and GAAP
accounting purposes, but as a sale for bankruptcy law purposes. As a sale of
the Mortgage Assets by NovaStar Financial to the Company, the Mortgage Assets
would not be part of NovaStar Financial's bankruptcy estate and would not be
available to NovaStar Financial's creditors. However, in the event of the
insolvency of NovaStar Financial, it is possible that the bankruptcy trustee
or a creditor of NovaStar Financial may attempt to recharacterize the sale of
the Mortgage Assets as a borrowing by NovaStar Financial, secured by a pledge
of the Mortgage Assets. Similarly, as a sale of the Mortgage Assets by the
Company to an Issuer, the Mortgage Assets would not be part of the Company's
bankruptcy estate and would not be available to the Company's creditors.
However, in the event of the insolvency of the Company, it is possible that
the bankruptcy trustee or a creditor of the Company may attempt to
recharacterize the sale of the Mortgage Assets as a borrowing by the Company,
secured by a pledge of the Mortgage Assets. In either case, in the event the
transfer is recharacterized as a pledge, unless otherwise provided in the
related Prospectus Supplement, the Company or the Issuer, as the case may be,
will have a perfected security interest in the related Mortgage Assets.
Nonetheless, a court could prevent timely payments of amounts due on the Bonds
and result in a reduction of payments due on the Bonds.
Effects of Bankruptcy of the Master Servicer. In the event of a bankruptcy
or insolvency of the Master Servicer, the bankruptcy trustee or receiver may
have the power to prevent the Indenture Trustee or the Bondholders from
appointing a successor Master Servicer. The time period during which cash
collections may be commingled with the Master Servicer's own funds prior to
each Payment Date will be specified in the related Prospectus Supplement. In
the event of the insolvency of the Master Servicer and if such cash
collections are commingled with the Master Servicer's own funds for at least
ten days, the Indenture Trustee will likely not have a perfected interest in
such collections since such collections would not have been deposited in a
segregated account within ten days after the collection thereof, and the
inclusion thereof in the bankruptcy estate of the Master Servicer may result
in delays in payment and failure to pay amounts due on the Bonds of the
related series.
Effects of Bankruptcy of Obligors on the Mortgage Assets. In addition,
federal and state statutory provisions, including the federal bankruptcy laws
and state laws affording relief to debtors, may interfere with or affect the
ability of the secured mortgage lender to realize upon its security. For
example, in a proceeding under the federal Bankruptcy Code, a lender may not
foreclose on a mortgaged property without the permission of the bankruptcy
court. The rehabilitation plan proposed by the debtor may reduce the secured
indebtedness to the value of the mortgaged property as of the date of the
commencement of the bankruptcy, rendering the lender a general unsecured
creditor for the difference, and also may reduce the monthly payments due
under such mortgage loan, change the rate of interest and alter the mortgage
loan repayment schedule. The effect of any such proceedings under the federal
Bankruptcy Code, including but not limited to any automatic stay, could result
in delays in receiving payments on the Mortgage Collateral securing a series
of Bonds and possible reductions in the aggregate amount of such payments.
BOOK-ENTRY REGISTRATION
If so provided in the Prospectus Supplement, one or more classes of the
Bonds will be initially represented by one or more certificates registered in
the name of Cede, the nominee for DTC, and will not be registered in the names
of the Bondholders or their nominees. Because of this, unless and until
Definitive Bonds are issued, Bondholders will not be recognized by the
Indenture Trustee as "Bondholders" (as that term is to be used in the related
Agreement). Hence, until such time, Bondholders will be able to exercise the
rights of Bondholders only indirectly through DTC and its participating
organizations. In addition, Bond Owners may experience some delay in their
receipt of distributions of interest and principal on book-entry Bonds since
distributions are required to be forwarded by the Indenture Trustee to DTC and
DTC will then be required to credit such distributions to the accounts of
depository participants which thereafter will be required to credit them to
the account of Bond Owners either directly or indirectly. See "Description of
Bonds--Book-Entry Registration and Definitive Bonds."
22
<PAGE>
LIMITED NATURE OF RATINGS
Ratings Not a Recommendation. It will be a condition to the issuance of a
class of Bonds offered hereby that they be rated in one of the four highest
rating categories by each Rating Agency identified as rating such class in the
related Prospectus Supplement. Any such rating would be based on, among other
things, the adequacy of the value of the related Mortgage Assets and any
credit enhancement with respect to such class and will represent such Rating
Agency's assessment solely of the likelihood that holders of such class of
Bonds will receive payments to which such Bondholders are entitled under the
Indenture. Such rating will not constitute an assessment of the likelihood
that principal prepayments on mortgages underlying the related Mortgage Assets
will be made, the degree to which the rate of such prepayments might differ
from that originally anticipated or the likelihood of early optional
termination of the series of Bonds. Such rating shall not be deemed a
recommendation to purchase, hold or sell Bonds, inasmuch as it does not
address market price or suitability for a particular investor. Such rating
will not address the possibility that prepayment at higher or lower rates than
anticipated by an investor may cause such investor to experience a lower than
anticipated yield or that an investor purchasing a Bond at a significant
premium might fail to recoup its initial investment under certain prepayment
scenarios. Each Prospectus Supplement will identify any payment to which
holders of Bonds of the related series are entitled that is not covered by the
applicable rating.
Ratings May Be Lowered or Withdrawn. There is also no assurance that any
such rating will remain in effect for any given period of time or may not be
lowered or withdrawn entirely by the applicable Rating Agency in the future if
in its judgment circumstances so warrant. In addition to being lowered or
withdrawn due to any erosion in the adequacy of the value of the assets of the
Issuer or any credit enhancement with respect to a series of Bonds, such
rating might also be lowered or withdrawn because of, among other reasons, an
adverse change in the financial or other condition of a credit enhancement
provider or a change in the rating of such credit enhancement provider's long
term debt.
Limitations of Analysis Performed by Rating Agencies. The amount, type and
nature of credit enhancement, if any, established with respect to a class of
Bonds of a series will be determined on the basis of criteria established by
each Rating Agency. Such criteria are sometimes based upon an actuarial
analysis of the behavior of similar loans in a larger group. Such analysis is
often the basis upon which each Rating Agency determines the amount of credit
enhancement required with respect to each such class. There can be no
assurance that the historical data supporting any such actuarial analysis will
accurately reflect future experience nor any assurance that the data derived
from a large pool of similar loans accurately predicts the delinquency,
foreclosure or loss experience of any particular pool of mortgages underlying
the Mortgage Assets.
PREPAYMENT AND YIELD CONSIDERATIONS; REINVESTMENT RISK
The rate of payments of principal, including prepayments (including for this
purpose prepayments resulting from refinancing or liquidations of the Mortgage
Loans or the mortgage loans underlying the MBS, as the case may be, due to
defaults, casualties, condemnations and repurchases by the Seller, or
purchases by the Master Servicer), on the Mortgage Loans securing a series of
Bonds will directly affect the weighted average life of such series of Bonds.
The "weighted average life" of a security refers to the average length of
time, weighted by principal, that will elapse from the date of issuance to the
date each dollar of principal is repaid to the investor. The yields to
maturity and weighted average lives of the Bonds will be affected primarily by
the amount and timing of principal payments received on or in respect of the
Mortgage Loans securing the related series of Bonds. The "yield to maturity"
of a security refers to the investment rate of return on such security if held
to maturity.
The rate of prepayments with respect to conventional mortgage loans has
fluctuated significantly in recent years. The rate of payment of principal,
including prepayments, on the Mortgage Loans or the mortgage loans underlying
the MBS, as the case may be, may be influenced by a variety of economic,
geographic, social, tax, legal and other factors. In general, if prevailing
interest rates fall significantly below the Mortgage Rates borne by the
Mortgage Loans, such Mortgage Loans are likely to be subject to higher
prepayment rates than if
23
<PAGE>
prevailing interest rates remain at or above such Mortgage Rates. Conversely,
if prevailing interest rates rise appreciably above the Mortgage Rates borne
by the Mortgage Loans, such Mortgage Loans are likely to experience a lower
prepayment rate than if prevailing interest rates remain at or below such
Mortgage Rates. However, there can be no assurance that such will be the case.
In addition, the yields to maturity and weighted average lives of the Bonds of
a series will be affected by the distribution of amounts remaining in any Pre-
Funding Account following the end of the related Funding Period. In each case,
Bondholders may be unable to reinvest such payments in securities of
comparable quality having interest rates similar to those borne by such Bonds.
It is possible that yields on any such reinvestments will be lower, and may be
significantly lower, than the yields on such Bonds.
The extent to which the yields to maturity of the Bonds of a series may vary
from the anticipated yields will depend upon the degree to which such Bonds
are purchased at a discount or premium, and the degree to which the timing of
payments thereon is sensitive to the rate of payments of principal, including
prepayments, on the related Mortgage Loans. The timing of changes in the rate
of prepayments on such Mortgage Loans may significantly affect an investor's
actual yield to maturity, even if the average rate of principal payments is
consistent with an investor's expectation. The Prospectus Supplement relating
to a series of Bonds will discuss in greater detail the effect of the rate and
timing of principal payments (including prepayments), delinquencies and losses
on the yield, weighted average lives and maturities of such Bonds.
PRE-FUNDING ACCOUNTS MAY RESULT IN REINVESTMENT RISK
If so specified in the related Prospectus Supplement, on the related closing
date the Company will deposit the Pre-Funded Amount specified in such
Prospectus Supplement into the Pre-Funding Account. The Pre-Funded Amount will
be used to purchase Subsequent Assets during a period from the related closing
date to a date specified in the related Prospectus Supplement, but not more
than 90 days after such closing date (such period, the "Funding Period"), from
the Company (which, in turn, will acquire such Subsequent Assets from NovaStar
Financial). The Pre-Funding Account will be maintained with the Indenture
Trustee for the related series of Bonds and is designed solely to hold funds
to be applied by such Indenture Trustee during the Funding Period to pay to
the Company the purchase price for Subsequent Assets. Monies on deposit in the
Pre-Funding Account will not be available to cover losses on or in respect of
the related Mortgage Assets. To the extent that the entire Pre-Funded Amount
has not been applied to the purchase of Subsequent Assets by the end of the
related Funding Period, any amounts remaining in the Pre-Funding Account will
be distributed as a prepayment of principal to Bondholders on the Payment Date
immediately following the end of the Funding Period in the amounts and
pursuant to the priorities set forth in the related Prospectus Supplement. Any
reinvestment risk resulting from such prepayment will be borne entirely by the
holders of one or more classes of the related series of Bonds. See
"Description of the Assets--Pre-Funding Account" herein.
PRE-FUNDING ACCOUNTS MAY ADVERSELY AFFECT INVESTMENT
The ability of the Issuer to acquire Subsequent Assets during the Funding
Period will be dependent upon the ability of the Company to acquire Subsequent
Assets that satisfy the requirements described in the related Prospectus
Supplement. Although such Subsequent Assets must satisfy the characteristics
described in the related Prospectus Supplement, such Subsequent Assets may
have certain different characteristics, including, without limitation, a more
recent origination date than the initial Mortgage Assets. As a result, the
addition of such Subsequent Assets pursuant to the Pre-Funding Account may
adversely affect the performance of the related Bonds. See "Description of the
Assets--Pre-Funding Account" herein.
CONSEQUENCES OF OWNING ORIGINAL ISSUE DISCOUNT BONDS
Certain of the Bonds may be issued with original issue discount for federal
income tax purposes. A holder of a Bond 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 deferred
interest Bonds generally will be treated as original issue discount for this
purpose. See "Certain Federal Income Tax Consequences" herein.
24
<PAGE>
TAX STATUS OF ISSUER
A possibility exists that an Issuer may be classified as a taxable mortgage
pool ("TMP") for federal income tax purposes. If so classified, the TMP should
constitute a "qualified REIT subsidiary" of NovaStar Financial and not be
subject to a corporate income tax. If such an Issuer were to fail to be
treated for federal income tax purposes as a "qualified REIT subsidiary" by
reason of NovaStar Financial's failure to continue to qualify as a real estate
investment trust ("REIT") for federal income tax purposes, or for any other
reason, then the net income of the Issuer would be subject to corporate income
tax and the Issuer would not be permitted to be included on a consolidated
income tax return of another corporate entity. No assurance can be given with
regard to the prospective qualification of any Issuer as a "qualified REIT
subsidiary" or of NovaStar Financial as a REIT for federal income tax
purposes. See "Certain Federal Income Tax Consequences" herein.
ENVIRONMENTAL RISKS
Real property pledged as security to a lender may be subject to certain
environmental risks. Under the laws of certain states, contamination of a
property may give rise to a lien on the property to assure the costs of
cleanup. In several states, such a lien has priority over the lien of an
existing mortgage against such property. In addition, under the laws of some
states and under the federal Comprehensive Environmental Response Compensation
and Liability Act of 1980 ("CERCLA"), a lender may be liable, as an "owner" or
"operator", for costs of addressing releases or threatened releases of
hazardous substances that require remedy at a property, if agents or employees
of the lender have become sufficiently involved in the operations of the
borrower, regardless of whether the environmental damage or threat was caused
by a prior owner. Such costs could result in a loss to the holders of one or
more classes of a series of Bonds. A lender also risks such liability on
foreclosure of the related property.
LIMITED LIQUIDITY OF INVESTMENT
Prior to issuance, there will have been no market for the Bonds of any
series, and there can be no assurance that a secondary market for any Bonds
will develop or, if it does develop, that it will provide Bondholders with a
sufficient level of liquidity of investment or will continue while Bonds of
such series remain outstanding. In addition, the market value of Bonds of any
series may fluctuate with changes in prevailing rates of interest and
prepayments, spreads and other factors. Consequently, the sale of Bonds by a
Bondholder in any secondary market that may develop may be at a discount from
their purchase price. Issuance of the Bonds of a series in book-entry form may
also reduce the liquidity of such Bonds since investors may be unwilling to
purchase Bonds for which they cannot obtain physical certificates. See "--
Book-Entry Registration" herein. No Issuer is expected to apply to have the
Bonds issued by it listed on any exchange.
INTRODUCTION
NovaStar Mortgage Funding Corporation, a Delaware corporation (the
"Company"), proposes to establish one or more trusts to issue and sell Bonds
from time to time under this Prospectus and related Prospectus Supplements.
The Company is a limited purpose finance corporation whose capital stock is
wholly owned by NovaStar Financial, Inc., a Maryland corporation ("NovaStar
Financial"). NovaStar Financial has elected to be treated as a real estate
investment trust under the Internal Revenue Code of 1986, as amended (the
"Code"). The Company was formed for the sole purpose of acting as the
depositor of one or more trusts to be formed for the purpose of issuing the
Bonds offered hereby and by the related Prospectus Supplements. Each trust
that is formed to act as an Issuer will be created pursuant to an agreement
between the Company acting as depositor, and a bank, trust company or other
fiduciary, acting as owner trustee (the "Owner Trustee"). Each trust will be
established solely for the purpose of issuing one series of Bonds and engaging
in transactions relating thereto. Each series of Bonds will be separately
secured by the Mortgage Collateral described in the Prospectus Supplement
relating to such series, which collateral will constitute the only significant
assets available to make payments on the Bonds of such series. Accordingly,
the investment characteristics of a series of Bonds will be determined by the
collateral pledged to secure such series and will not be affected by the
identity of the obligor with respect to such series of Bonds. The term
"Issuer," as used herein, with respect to a series of Bonds refers to the
trust established by the Company for the sole purpose of issuing such series
of Bonds.
25
<PAGE>
Each series of Bonds will be issued pursuant to a separate Indenture (the
"Indenture") between the Issuer of such series and a bank or trust company
acting as trustee for the holders of such Bonds (the "Indenture Trustee"). A
form of the Indenture has been filed as an exhibit to the Registration
Statement of which this Prospectus forms a part. The Indenture relating to
each series of Bonds will be filed with the Securities and Exchange Commission
as soon as practicable following the issuance of such series of Bonds.
THE ISSUER
GENERAL
Any trust established to act as Issuer of a series of Bonds will be created
pursuant to a trust agreement between the Company and the Owner Trustee. Under
the terms of each trust agreement, the Company initially will retain the
entire beneficial interest in the trust created thereunder unless otherwise
specified in the related Prospectus Supplement. The Company may thereafter
sell or assign all or a portion of such beneficial ownership to another entity
or entities unless prohibited from doing so by the related trust agreement.
The beneficial owners of each Issuer will have no liability for the
obligations of the Issuer under the Bonds issued by it. Unless otherwise
specified in the related Prospectus Supplement, each Issuer will be managed by
NovaStar Financial or an affiliate thereof.
The Assets for each series of Bonds will have been sold or otherwise
transferred to the Issuer of such series by the Company which, in turn, will
have either (i) received such collateral from NovaStar Financial (or an
affiliate) as a contribution to the Company's capital or (ii) purchased such
collateral from NovaStar Financial (or an affiliate) or another entity or
entities (in such capacity, each a "Seller"), as provided in the related
Prospectus Supplement, in exchange for the net proceeds from the issuance of
such series of Bonds, and in some cases, proceeds from the sale or financing
of the beneficial interest in the Issuer issuing such series. (References
herein to NovaStar Financial in its capacity as Seller shall be deemed to
include any affiliate of NovaStar Financial acting in such capacity.) NovaStar
Financial acquires mortgage loans in the normal course of its business from
persons, including affiliates, who have originated or otherwise acquired such
loans.
Upon the issuance of each series of Bonds, the related Assets will be
deposited by the Company with the Issuer of such series and pledged by such
Issuer to the Indenture Trustee under the related Indenture to secure such
series of Bonds. The Indenture with respect to each series of Bonds will
prohibit the incurrence of further indebtedness by the Issuer of such series
of Bonds. The Indenture Trustee will hold the Assets for a series of Bonds as
security pledged only for that series, and holders of the Bonds of that series
will be entitled to the equal and proportionate benefits of such security.
Each trust agreement will provide that the related trust may not conduct any
activities other than those related to the issuance and sale of the Bonds of
the particular series issued by it and such other limited activities as may be
required in connection with reports and distributions to holders of beneficial
interests in the trust. No trust agreement will be subject to amendment
without the prior written consent of the Indenture Trustee for the related
series, which consent may not be unreasonably withheld if such amendment would
not adversely affect the interests of the Bondholders of such series. The
holders of the beneficial interest in each Issuer will not be liable for
payment of principal and interest on the Bonds.
THE COMPANY
The Company was incorporated in the State of Delaware on December , 1997 and
is a limited purpose finance subsidiary of NovaStar Financial. The Company is
a qualified REIT subsidiary. NovaStar Financial is a publicly owned REIT and
its common stock is traded on the New York Stock Exchange under the symbol
NFI. The Company's principal executive offices are located at 1900 West 47th
Place, Suite 205, Westwood, Kansas 66205. The Company's telephone number is
913-362-1090.
26
<PAGE>
NovaStar Financial has agreed with the Company that NovaStar Financial will
not file or cause to be filed any voluntary petition in bankruptcy against the
Company or any trust created by it until at least one year after the date on
which the Bonds have been paid in full, if at all.
USE OF PROCEEDS
The net proceeds to be received from the sale of the Bonds will be applied
by the Company to the purchase or acquisitions of Assets, or the payment of
the financing incurred in such purchase, and to pay for certain expenses
incurred in connection with such purchase of Assets and sale of Bonds. The
Assets pledged to secure a series of Bonds will either be contributed to the
Company's capital by NovaStar Financial (or an affiliate) or purchased from
NovaStar Financial (or an affiliate) or another seller and deposited with the
Issuer of such series by the Company. The Company expects to sell the Bonds
from time to time, but the timing and amount of offerings of Bonds will depend
on a number of factors, including the volume of Assets acquired by the
Company, prevailing interest rates, availability of funds and general market
conditions.
DESCRIPTION OF THE ASSETS
ASSETS
The primary assets of each Issuer (the "Assets") may include (i) fixed or
variable rate, first or junior lien mortgages loans secured by one- to four-
family residential properties, residential properties consisting of five or
more dwelling units or mixed-use properties consisting of one or more
residential dwelling units and one or more commercial units ("Mortgage
Loans"), (ii) mortgage participations, mortgage pass-through certificates or
mortgage-backed securities issued or guaranteed by the government National
Mortgage Association ("GNMA"), the Federal National Mortgage Association
("FNMA") or the Federal Home Loan Mortgage Corporation ("FHLMC")
(collectively, "Agency Securities"); (iii) other mortgage participations,
mortgage pass-through certificates or mortgage backed securities evidencing
interests in mortgage loans or secured thereby ("Private Mortgage-Backed
Securities") (Agency Securities and Private Mortgage-Backed Securities are
collectively referred to as "MBS"), (iv) manufactured housing installment sale
contracts or installment loan agreements ("Contracts"), (v) certain direct
obligations of the United States, agencies thereof or agencies created thereby
("Government Bonds"), or (vi) a combination of Mortgage Loans, MBS, Contracts
and Government Bonds. Mortgage loans that secure, or interests in which are
evidenced by, MBS are herein sometimes referred to as "Underlying Mortgage
Loans." Mortgage Loans that are not Underlying Mortgage Loans are sometimes
referred to as "Whole Loans." Mortgage Loans and MBS are sometimes referred to
herein as "Mortgage Assets." The Mortgage Assets will not be guaranteed or
insured by the Company or any of its affiliates or, unless otherwise provided
in the Prospectus Supplement, by any governmental agency or instrumentality or
by any other person. Each Asset will be selected by the Company for inclusion
from among those purchased, either directly or indirectly, from a prior holder
thereof (an "Asset Seller"), which may be an affiliate of the Company and,
with respect to Assets, which prior holder may or may not be the originator of
such Mortgage Loan or Contract or the issuer of such MBS.
Unless otherwise specified in the related Prospectus Supplement, the Bonds
will be entitled to payment only from the assets of the related Issuer and
will not be entitled to payments in respect of the assets of any other Issuer.
MORTGAGE LOANS
General
Unless otherwise specified in the related Prospectus Supplement, each
Mortgage Loan will be secured by (i) a lien on a Mortgaged Property consisting
of a one- to four-family residential property (a "Single Family Property" and
the related Mortgage Loan a "Single Family Mortgage Loan"), a residential
property consisting
27
<PAGE>
of five or more dwelling units in multi-story structures (a "Multifamily
Property" and the related Mortgage Loan a "Multifamily Mortgage Loan"), mixed-
use properties consisting of one or more residential dwelling units and one or
more commercial units in multi-story structures (a "Mixed-Use Property" and
the related Mortgage Loan a "Mixed-Use Mortgage Loan") or (ii) a security
interest in shares issued by private cooperative housing corporations
("Cooperatives"). If so specified in the related Prospectus Supplement, a
Mortgaged Property may include some commercial use. Mortgaged Properties will
be located, unless otherwise specified in the related Prospectus Supplement,
in any one of the fifty states, the District of Columbia or the Commonwealth
of Puerto Rico. The Prospectus Supplement will indicate additional
jurisdictions (which may be outside the United States), if any, in which the
Mortgaged Properties may be located. The Mortgage Loans may include loans to
foreign nationals who are not citizens or permanent residents of the United
States. The Mortgage Loans may be "equity refinance" Mortgage Loans, as to
which a portion of the proceeds are used to refinance an existing mortgage
loan, and the remaining proceeds may be retained by the mortgagor or used for
purposes unrelated to the Mortgaged Property. Alternatively, the Mortgage
Loans may be "rate and term refinance" Mortgage Loans, as to which
substantially all of the proceeds (net of related costs incurred by the
mortgagor) are used to refinance an existing mortgage loan or loans (which may
include a junior lien) primarily in order to change the interest rate or other
terms thereof. To the extent specified in the related Prospectus Supplement,
the Mortgage Loans will be secured by first and/or junior mortgages or deeds
of trust or other similar security instruments creating a first or junior lien
on Mortgaged Property. In addition, certain or all of the Single Family
Mortgage Loans may have Loan-to-Value Ratios in excess of 80% and as high as
125% (such Mortgage Loans, "High LTV Loans"). The Mortgaged Properties may
include apartments owned by Cooperatives. The Mortgaged Properties may include
leasehold interests in properties, the title to which is held by third party
lessors. Unless otherwise specified in the Prospectus Supplement, the term of
any such leasehold shall exceed the term of the related mortgage note by at
least five years. Each Mortgage Loan will have been originated by a person
(the "Originator") other than the Company. The related Prospectus Supplement
will indicate if any Originator is an affiliate of the Company. The Mortgage
Loans will be evidenced by promissory notes (the "Mortgage Notes") secured by
mortgages, deeds of trust or other security instruments (the "Mortgages")
creating a lien on the Mortgaged Properties.
Loan-to-Value Ratio
The "Loan-to-Value Ratio" of a Mortgage Loan at any given time is the ratio
(expressed as a percentage) of the then outstanding principal balance of the
Mortgage Loan to the Value of the related Mortgaged Property. The "Combined
Loan-to-Value Ratio" of a Mortgage Loan which is secured by a second lien on
the related Mortgaged Property at any given time generally will be the ratio,
expressed as a percentage, the numerator of which is the sum of (i) the
original principal balance of the Mortgage Loan plus (ii) the unpaid principal
balance of any first lien on the related Mortgaged property as of such date,
and the denominator of which is the Value of the Mortgage Loan. The "Value" of
a Mortgaged Property, other than with respect to Refinance Loans, is generally
the lesser of (a) the appraised value determined in an appraisal obtained by
the Originator at origination of such loan and (b) the sales price for such
property. "Refinance Loans" are loans made to refinance existing loans. Unless
otherwise set forth in the related Prospectus Supplement, the Value of the
Mortgaged Property securing a Refinance Loan is the appraised value thereof
determined in an appraisal obtained at the time of origination of the
Refinance Loan. The Value of a Mortgaged Property as of the date of initial
issuance of the related series of Bonds may be less than the value at
origination and will fluctuate from time to time based upon changes in
economic conditions and the real estate market.
Mortgage Loan Information in Prospectus Supplements
Each Prospectus Supplement will contain information, as of the dates
specified in such Prospectus Supplement and to the extent then applicable and
specifically known to the Company, with respect to the Mortgage Loans,
including (i) the aggregate outstanding principal balance and the largest,
smallest and average outstanding principal balance of the Mortgage Loans as of
the applicable Cut-off Date, (ii) the type of property securing the Mortgage
Loans, (iii) the weighted average (by principal balance) of the original and
remaining
28
<PAGE>
terms to maturity of the Mortgage Loans, (iv) the earliest and latest
origination date and maturity date of the Mortgage Loans, (v) the range of the
Loan-to-Value Ratios at origination of the Mortgage Loans, (vi) the Mortgage
Rates or range of Mortgage Rates and the weighted average Mortgage Rate borne
by the Mortgage Loans, (vii) the state or states in which most of the
Mortgaged Properties are located, (viii) information with respect to the
prepayment provisions, if any, of the Mortgage Loans, (ix) with respect to
Mortgage Loans with adjustable Mortgage Rates ("ARM Loans"), the index, the
frequency of the adjustment dates, the range of margins added to the index,
and the maximum Mortgage Rate or monthly payment variation at the time of any
adjustment thereof and over the life of the ARM Loan and (x) information
regarding the payment characteristics of the Mortgage Loans, including without
limitation balloon payment and other amortization provisions. If specific
information respecting the Mortgage Loans is not known to the Company at the
time Bonds are initially offered, more general information of the nature
described above will be provided in the Prospectus Supplement, and specific
information will be set forth in a report which will be available to
purchasers of the related Bonds at or before the initial issuance thereof and
will be filed as part of a Current Report on Form 8-K with the Securities and
Exchange Commission within fifteen days after such initial issuance.
The related Prospectus Supplement may specify whether the Mortgage Loans
include closed-end and/or revolving home equity loans or certain balances
thereof ("Closed-End Loans" and "Revolving Credit Loans" and collectively
"Home Equity Loans"), which may be secured by Mortgages primarily on Single
Family Properties that are subordinate or junior to other liens on the related
Mortgaged Property.
Unless otherwise described in the related Prospectus Supplement, the full
principal amount of a Closed-End Loan is advanced at origination of the loan
and generally is repayable in equal (or substantially equal) installments of
an amount sufficient to fully amortize such loan at its stated maturity. As
more fully described in the related Prospectus Supplement, interest on each
Closed-End Loan is calculated on the basis of the outstanding principal
balance of such loan multiplied by the Mortgage Rate thereon.
As more fully described in the related Prospectus Supplement, interest on
each Revolving Credit Loan, excluding introductory rates offered from time to
time during promotional periods, may be computed at the Mortgage Rate and
payable monthly on the average daily outstanding principal balance of such
loan. Principal amounts on the Revolving Credit Loans may be drawn down (up to
a maximum amount as set forth in the related Prospectus Supplement) or repaid
under each Revolving Credit Loan from time to time. If specified in the
related Prospectus Supplement, new draws by borrowers under the Revolving
Credit Loans will automatically become part of the Assets for a series of
Bonds. As a result, the aggregate balance of the Revolving Credit Loans will
fluctuate from day to day as new draws by borrowers are added to the Assets
and principal payments are applied to such balances and such amounts will
usually differ each day, as more specifically described in the related
Prospectus Supplement.
Payment Provisions of the Mortgage Loans
Unless otherwise specified in the related Prospectus Supplement, all of the
Mortgage Loans will (i) have individual principal balances at origination of
not less than $1,000, (ii) have original terms to maturity of not more than 40
years and (iii) provide for payments of principal, interest or both, on due
dates that occur monthly, quarterly or semi-annually or at such other interval
as is specified in the related Prospectus Supplement. Each Mortgage Loan may
provide for no accrual of interest or for accrual of interest thereon at an
interest rate (a "Mortgage Rate") that is fixed over its term or that adjusts
from time to time, or that may be converted from an adjustable to a fixed
Mortgage Rate or a different adjustable Mortgage Rate, or from a fixed to an
adjustable Mortgage Rate, from time to time pursuant to an election or as
otherwise specified on the related Mortgage Note, in each case as described in
the related Prospectus Supplement. Each Mortgage Loan may provide for
scheduled payments to maturity or payments that adjust from time to time to
accommodate changes in the Mortgage Rate or to reflect the occurrence of
certain events or that adjust on the basis of other methodologies, and may
provide for negative amortization or accelerated amortization, in each case as
described in the related Prospectus Supplement. Each Mortgage Loan may be
fully amortizing or require a balloon payment due on its stated
29
<PAGE>
maturity date, in each case as described in the related Prospectus Supplement.
Each Mortgage Loan may contain prohibitions on prepayment (a "Lock-out Period"
and, the date of expiration thereof, a "Lock-out 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. In the event that holders of any class or classes of
Offered Bonds will be entitled to all or a portion of any Prepayment Premiums
collected in respect of Mortgage Loans, the related Prospectus Supplement will
specify the method or methods by which any such amounts will be allocated.
Underwriting Standards
Mortgage Loans to be included in the Assets will generally have been
originated in accordance with underwriting standards acceptable to NovaStar
Financial (or an affiliate) or alternative underwriting criteria. The
underwriting standards for the Mortgage Loans are described herein and in the
related Prospectus Supplement. However, in some cases, particularly those
involving unaffiliated sellers, NovaStar Financial (or an affiliate) may not
be able to establish the underwriting standards used in the origination of the
related mortgage Loans. In those cases, the related Prospectus Supplement will
include a statement to such effect and will reflect what, if any, re-
underwriting of the related Mortgage Loans was done by NovaStar Financial or
any of its affiliates.
The underwriting standards to be used in originating the Mortgage Loans are
primarily intended to assess the creditworthiness of the mortgagor, the value
of the Mortgaged Property and the adequacy of such property as collateral for
the Mortgage Loan.
The primary considerations in underwriting a Single Family Mortgage Loan or
Contract are the mortgagor's employment stability and whether the mortgagor
has sufficient monthly income available (i) to meet the mortgagor's monthly
payments due in the year of origination) and other expenses related to the
home (such as property taxes and hazard insurance) and (ii) to meet monthly
housing expenses and other financial obligations and monthly living expenses.
However, the Loan-to-Value Ratio of the Mortgage Loan is another critical
factor. In addition, a mortgagor's credit history and repayment ability, as
well as the type and use of the Mortgaged Property, are also considerations.
High LTV Loans are underwritten with an emphasis on the creditworthiness of
the related mortgagor. Such Mortgage Loans are underwritten with a limited
expectation of recovering any amounts from the foreclosure of the related
Mortgaged Property.
In the case of the Multifamily Mortgage Loans and Mixed-Use Mortgage Loans,
lenders typically look to the Debt Service Coverage Ratio of a loan as an
important measure of the risk of default on such a loan. The "Debt Service
Coverage Ratio" of a Multifamily Mortgage Loan or a Mixed-Use Mortgage Loan at
any given time is generally equal to 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 Mortgage Loan and on any other loan that
is secured by a lien on the Mortgaged Property prior to the lien of the
related Mortgage. "Net Operating Income" generally means, for any given
period, the total operating revenues derived from a Multifamily Property or
Mixed-Use Property during such period, minus the total operating expenses
incurred in respect of such 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 Mortgage Loan) secured
by liens on such property. The Net Operating Income of a Multifamily Property
or Mixed-Use Property will fluctuate over time and may or may not be
sufficient to cover debt service on the related Mortgage Loan at any given
time. As the primary source of the operating revenues of a Multifamily
Property or Mixed-Use Property, rental income (and maintenance payments from
tenant-stockholders of a cooperatively owned Multifamily Property) 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 Mortgage
Loan or a Mixed-Use Mortgage Loan. Lenders also look to the Loan-to-Value
Ratio of a Multifamily Mortgage Loan or a Mixed-Use Mortgage Loan as a measure
of risk of loss if a property must be liquidated following a default.
30
<PAGE>
It is expected that each prospective mortgagor will complete a mortgage loan
application that includes information with respect to the applicant's
liabilities, income, credit history, employment history and personal
information. One or more credit reports on each applicant from national credit
reporting companies will generally be required. The report typically contains
information relating to such matters as credit history with local and national
merchants and lenders, installment debt payments and any record of defaults,
bankruptcies, repossessions or judgments. In the case of a Multifamily
Mortgage Loan and a Mixed-Use Mortgage Loan, the mortgagor will also be
required to provide certain information regarding the related Multifamily
Property or Mixed-Use Property, including a current rent roll and operating
income statements (which may be pro forma and unaudited). In addition, the
originator will generally also consider the location of the Multifamily
Property or Mixed-Use Property, the availability of competitive lease space
and rental income of comparable properties in the relevant market area, the
overall economy and demographic features of the geographic area and the
Mortgagor's prior experience in owning and operating properties similar to the
Multifamily Property or Mixed-Use Property.
Mortgaged Properties will generally be appraised by licensed appraisers. The
appraiser will generally address neighborhood conditions, site and zoning
status and condition and valuation of improvements. In the case of Single
Family Properties, the appraisal report will generally include a reproduction
cost analysis (when appropriate) based on the current cost of constructing a
similar home and a market value analysis based on recent sales of comparable
homes in the area. With respect to Multifamily Properties and Mixed-Use
Properties, the appraisal must specify whether an income analysis, a market
analysis or a cost analysis was used. An appraisal employing the income
approach to value analyzes a property's projected net cash flow,
capitalization and other operational information in determining the property's
value. The market approach to value analyzes the prices paid for the purchase
of similar properties in the property's area, with adjustments made for
variations between those other properties and the property being appraised.
The costs approach to value requires the appraiser to make an estimate of land
value and then determine the current cost of reproducing the improvements less
any accrued depreciation. In any case, the value of the property being
financed, as indicated by the appraisal, must be such that it currently
supports, and is anticipated to support in the future, the outstanding loan
balance. Appraisals usually conform to the Uniform Standards of Professional
Appraisal Practice and the Financial Institutions Reform, Recovery and
Enforcement Act of 1989 ("FIRREA").
Notwithstanding the foregoing, Loan-to-Value Ratios will not necessarily
constitute an accurate measure of the risk of liquidation loss in a pool of
Mortgage Loans. For example, the value of a Mortgaged Property as of the date
of initial issuance of the related series of Bonds may be less than the Value
determined at loan origination, and will likely continue to fluctuate from
time to time based upon changes in economic conditions and the real estate
market. Moreover, even when current, an appraisal is not necessarily a
reliable estimate of value for a Multifamily Property or a Mixed-Use Property.
As stated above, appraised values of Multifamily Properties and Mixed-Use
Properties are generally based on the market analysis, the cost analysis, the
income analysis, or upon a selection from or interpolation of the values
derived from such approaches. Each of these appraisal methods can present
analytical difficulties. It is often difficult to find truly comparable
properties that have recently been sold; the replacement cost of a property
may have little to do with its current market value; and income capitalization
is inherently based on inexact projections of income and expenses and the
selection of an appropriate capitalization rate. Where more than one of these
appraisal methods are used and provide significantly different results, an
accurate determination of value and, correspondingly, a reliable analysis of
default and loss risks, is even more difficult.
Mortgage Participations
Mortgage participations will evidence an undivided participation interest in
Underlying Mortgage Loans To the extent available to the Company, the related
Prospectus Supplement will contain information in respect of the Underlying
Mortgage Loans substantially similar to the information described above in
respect of Mortgage Loans. Such Prospectus Supplement will also specify the
amount of the participation and servicing agreements.
31
<PAGE>
MBS
Any MBS will have been issued pursuant to a pooling and servicing agreement,
a trust 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 Indenture Trustee"),
if any, or with the original purchaser of the interest in the underlying
Mortgage Loans or MBS evidenced by the MBS.
Distributions of any principal or interest, as applicable, will be made on
MBS on the dates specified in the related Prospectus Supplement. The MBS may
be issued in one or more classes with characteristics similar to the classes
of Bonds described in this Prospectus. Any principal or interest distributions
will be made on the MBS by the MBS Indenture Trustee or the MBS Servicer. 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.
Enhancement in the form of reserve funds, subordination or other forms of
credit support similar to that described for the Bonds under "Description of
Credit Support" may be provided with respect to the MBS. The type,
characteristics and amount of such credit support, if any, will be a function
of certain characteristics of the Underlying Mortgage Loans or underlying MBS
evidenced by or securing such MBS and other factors and generally will have
been established for the MBS on the basis of requirements of either any Rating
Agency that may have assigned a rating to the MBS or the initial purchasers of
the MBS.
The Prospectus Supplement for a series of Bonds evidencing interests in
Mortgage Assets that include MBS will specify, to the extent available to the
Company, (i) the aggregate approximate initial and outstanding principal
amount or notional amount, as applicable, and type of the MBS to be included
in the related Assets, (ii) the original and remaining term to stated maturity
of the MBS, if applicable, (iii) whether such MBS is entitled only to interest
payments, only to principal payments or to both, (iv) the pass-through or bond
rate of the MBS or formula for determining such rates, if any, (v) the
applicable payment provisions for the MBS, including, but not limited to, any
priorities, payment schedules and subordination features, (vi) the MBS Issuer,
MBS Servicer and MBS Indenture Trustee, as applicable, (vii) certain
characteristics of the credit support, if any, such as subordination, reserve
funds, insurance policies, letters of credit or guarantees relating to the
related Underlying Mortgage Loans, the underlying MBS or directly to such MBS,
(viii) the terms on which the related Underlying Mortgage Loans or underlying
MBS for such MBS or the MBS may, or are required to, be purchased prior to
their maturity, (ix) the terms on which Mortgage Loans or underlying MBS may
be substituted for those originally underlying the MBS, (x) the servicing fees
payable under the MBS Agreement, (xi) the type of information in respect of
the Underlying Mortgage Loans described under "--Mortgage Loans--Mortgage Loan
Information in Prospectus Supplements" above, and the type of information in
respect of the underlying MBS described in this paragraph, (xii) the
characteristics of any cash flow agreements that are included as part of the
trust fund evidenced or secured by the MBS and (xiii) whether the MBS is in
certificated form or held through a depository.
CONTRACTS
General
Unless otherwise specified in the related Prospectus Supplement, each
Contract will be secured by a security interest in a new or used Manufactured
Home. Such Prospectus Supplement will specify the states or other
jurisdictions in which the Manufactured Homes are located as of the related
Cut-off Date. The method of computing the "Loan-to-Value Ratio" of a Contract
will be described in the related Prospectus Supplement.
32
<PAGE>
Contract Information in Prospectus Supplements
Each Prospectus Supplement will contain certain information, as of the dates
specified in such Prospectus Supplement and to the extent then applicable and
specifically known to the Company, with respect to the Contracts, including
(i) the aggregate outstanding principal balance and the largest, smallest and
average outstanding principal balance of the Contracts as of the applicable
Cut-off Date, (ii) whether the Manufactured Homes were new or used as of the
origination of the related Contracts, (iii) the weighted average (by principal
balance) of the original and remaining terms to maturity of the Contracts,
(iv) the earliest and latest origination date and maturity date of the
Contracts, (v) the range of the Loan-to-Value Ratios at origination of the
Contracts, (vi) the Contract Rates or range of Contract Rates and the weighted
average Contract Rate borne by the Contracts, (vii) the state or states in
which most of the Manufactured Homes are located at origination, (viii)
information with respect to the prepayment provisions, if any, of the
Contracts, (ix) with respect to Contracts with adjustable Contract Rates ("ARM
Contracts"), the index, the frequency of the adjustment dates, and the maximum
Contract Rate or monthly payment variation at the time of any adjustment
thereof and over the life of the ARM Contract, and (x) information regarding
the payment characteristics of the Contracts. If specific information
respecting the Contracts is not known to the Company at the time Bonds are
initially offered, more general information of the nature described above will
be provided in the Prospectus Supplement, and specific information will be set
forth in a report which will be available to purchasers of the related Bonds
at or before the initial issuance thereof and will be filed as part of a
Current Report on Form 8-K with the Securities and Exchange Commission within
fifteen days after such initial issuance.
Payment Provisions of the Contracts
Unless otherwise specified in the related Prospectus Supplement, all of the
Contracts will (i) have individual principal balances at origination of not
less than $1,000, (ii) have original terms to maturity of not more than 40
years and (iii) provide for payments of principal, interest or both, on due
dates that occur monthly or at such other interval as is specified in the
related Prospectus Supplement. Each Contract may provide for no accrual of
interest or for accrual of interest thereon at an annual percentage rate (a
"Contract Rate") that is fixed over its term or that adjusts from time to
time, or as otherwise specified in the related Prospectus Supplement. Each
Contract may provide for scheduled payments to maturity or payments that
adjust from time to time to accommodate changes in the Contract Rate as
otherwise described in the related Prospectus Supplement.
GOVERNMENT BONDS
The Prospectus Supplement for a series of Bonds evidencing interests in
Assets of the related Issuer that include Government Bonds will specify, to
the extent available, (i) the aggregate approximate initial and outstanding
principal amounts or notional amounts, as applicable, and types of the
Government Bonds to be included, (ii) the original and remaining terms to
stated maturity of the Government Bonds, (iii) whether such Government Bonds
are entitled only to interest payments, only to principal payments or to both,
(iv) the interest rates of the Government Bonds or the formula to determine
such rates, if any, (v) the applicable payment provisions for the Government
Bonds and (vi) to what extent, if any, the obligation evidenced thereby is
backed by the full faith and credit of the United States.
PRE-FUNDING ACCOUNT
To the extent provided in a Prospectus Supplement, the Company or another
seller will be obligated (subject only to the availability thereof) to sell at
a predetermined price, and the related Issuer for the related series of Bonds
will be obligated to purchase (subject to the satisfaction of certain
conditions described in the applicable Agreement), additional Assets (the
"Subsequent Assets") from time to time (as frequently as daily) within the
number of months specified in the related Prospectus Supplement after the
issuance of such series of Bonds having an aggregate principal balance
approximately equal to the amount on deposit (the "Pre-Funded Amount") in an
account (the "Pre-Funding Account") established by the Indenture Trustee and
funded on the date of such issuance.
33
<PAGE>
ACCOUNTS
Each Issuer will maintain one or more accounts established on behalf of the
Bondholders into which the person or persons designated in the related
Prospectus Supplement will, to the extent described herein and in such
Prospectus Supplement, deposit all payments and collections received or
advanced with respect to the Assets and other assets of the Issuer. Such an
account may be maintained as an interest bearing or a non-interest bearing
account, and funds held therein may be held as cash or invested in certain
short-term, investment grade obligations, in each case as described in the
related Prospectus Supplement. See "Description of the Agreements--Collection
Account and Related Accounts."
CREDIT SUPPORT
If so provided in the related Prospectus Supplement, partial or full
protection against certain defaults and losses on the Assets of the related
Issuer may be provided to one or more classes of Bonds in the related series
in the form of subordination of one or more other classes of Bonds in such
series or by one or more other types of credit support, such as a cash
accounts, overcollateralization, excess spread, crosscollateralization,
subordination, reserve funds, insurance policies, surety bonds, guarantees,
letters of credit or another type of credit support, or a combination thereof
(any such coverage with respect to the Bonds of any series, "Credit Support").
The amount and types of coverage, the identification of the entity providing
the coverage (if applicable) and related information with respect to each type
of Credit Support, if any, will be described in the Prospectus Supplement for
a series of Bonds. See "Risk Factors--Credit Support Limitations" and
"Description of Credit Support."
CASH FLOW AGREEMENTS
If so provided in the related Prospectus Supplement, the Assets may include
guaranteed investment contracts pursuant to which moneys held in the funds and
accounts established for the related series will be invested at a specified
rate. The Assets may also include certain other agreements, such as interest
rate exchange agreements, interest rate cap or floor agreements, currency
exchange agreements or similar agreements provided to reduce the effects of
interest rate or currency exchange rate fluctuations on the Assets or on one
or more classes of Bonds. (Currency exchange agreements might be included if
some or all of the Mortgage Assets (such as Mortgage Loans secured by
Mortgaged Properties located outside the United States) were denominated in a
non-United States currency.) The principal terms of any such guaranteed
investment contract or other agreement (any such agreement, a "Cash Flow
Agreement"), including, without limitation, provisions relating to the timing,
manner and amount of payments thereunder and provisions relating to the
termination thereof, will be described in the Prospectus Supplement for the
related series. In addition, the related Prospectus Supplement will provide
certain information with respect to the obligor under any such Cash Flow
Agreement.
YIELD CONSIDERATIONS
GENERAL
The yield on any Offered Bond will depend on the price paid by the
Bondholder, the Bond Interest Rate, the receipt and timing of receipt of
distributions on the Bond and the weighted average life of the Assets of the
related Issuer (which may be affected by prepayments, defaults, liquidations
or repurchases). See "Risk Factors."
BOND INTEREST RATE
Bonds of any class within a series may have fixed, variable or adjustable
Bond Interest Rates, which may or may not be based upon the interest rates
borne by the Assets of the related Issuer. The Prospectus Supplement with
respect to any series of Bonds will specify the Bond Interest Rate for each
class of such Bonds or, in the case of a variable or adjustable Bond Interest
Rate, the method of determining the Bond Interest Rate; the effect, if any, of
the prepayment of any Asset on the Bond Interest Rate of one or more classes
of Bonds; and whether the distributions of interest on the Bonds of any class
will be dependent, in whole or in part, on the performance of any obligor
under a Cash Flow Agreement.
34
<PAGE>
If so specified in the related Prospectus Supplement, the effective yield to
maturity to each holder of Bonds entitled to payments of interest will be
below that otherwise produced by the applicable Bond Interest Rate and
purchase price of such Bond because, while interest may accrue on each Asset
during a certain period, the distribution of such interest will be made on a
day which may be several days, weeks or months following the period of
accrual.
TIMING OF PAYMENT OF INTEREST
Each payment of interest on the Bonds on a Payment Date will include
interest accrued during interest accrual period set forth in the restated
Prospectus Supplement (the "Interest Accrual Period") for such Payment Date.
As indicated above under "--Bond Interest Rate," if the Interest Accrual
Period ends on a date other than the day before a Payment Date for the related
series, the yield realized by the holders of such Bonds may be lower than the
yield that would result if the Interest Accrual Period ended on such day
before the Payment Date.
PAYMENTS OF PRINCIPAL; PREPAYMENTS
The yield to maturity on the Bonds will be affected by the rate of principal
payments on the Assets (including principal prepayments on Mortgage Loans and
Contracts resulting from both voluntary prepayments by the borrowers and
involuntary liquidations). The rate at which principal prepayments occur on
the Mortgage Loans and Contracts will be affected by a variety of factors,
including, without limitation, the terms of the Mortgage Loans and Contracts,
the level of prevailing interest rates, the availability of mortgage credit
and economic, demographic, geographic, tax, legal and other factors. In
general, however, if prevailing interest rates fall significantly below the
Mortgage Rates on the Mortgage Loans comprising or underlying the Assets of a
particular Issuer, such Mortgage Loans are likely to be the subject of higher
principal prepayments than if prevailing rates remain at or above the rates
borne by such Mortgage Loans. In this regard, it should be noted that certain
Assets may consist of Mortgage Loans with different Mortgage Rates and the
stated pass-through or pay-through interest rate of certain MBS may be a
number of percentage points higher or lower than certain of the Underlying
Mortgage Loans. The rate of principal payments on some or all of the classes
of Bonds of a series will correspond to the rate of principal payments on the
Assets of the related Issuer and is likely to be affected by the existence of
Lock-out Periods and Prepayment Premium provisions of the Mortgage Loans
underlying or comprising such Assets, and by the extent to which the servicer
of any such Mortgage Loan is able to enforce such provisions. Mortgage Loans
with a Lock-out Period or a Prepayment Premium provision, to the extent
enforceable, generally would be expected to experience a lower rate of
principal prepayments than otherwise identical Mortgage Loans without such
provisions, with shorter Lock-out Periods or with lower Prepayment Premiums.
Because of the depreciating nature of manufactured housing, which limits the
possibilities for refinancing, and because the terms and principal amounts of
manufactured housing contracts are generally shorter and smaller than the
terms and principal amounts of mortgage loans secured by site-built homes,
changes in interest rates have a correspondingly smaller effect on the amount
of the monthly payments on manufactured housing contracts than on the amount
of the monthly payments on mortgage loans secured by site-built homes.
Consequently, changes in interest rates may play a smaller role in prepayment
behavior of manufactured housing contracts than they do in the prepayment
behavior of loans secured by mortgages on site-built homes. Conversely, local
economic conditions and certain of the other factors mentioned above may play
a larger role in the prepayment behavior of manufactured housing contracts
than they do in the prepayment behavior of loans secured by mortgages on site-
built homes.
If the purchaser of a Bond offered at a discount calculates its anticipated
yield to maturity based on an assumed rate of distributions of principal that
is faster than that actually experienced on the Assets, the actual yield to
maturity will be lower than that so calculated. Conversely, if the purchaser
of a Bond offered at a premium calculates its anticipated yield to maturity
based on an assumed rate of distributions of principal that is slower than
that actually experienced on the Assets, the actual yield to maturity will be
lower than that so calculated. In either case, if so provided in the
Prospectus Supplement for a series of Bonds, the effect on yield on one or
more classes of the Bonds of such series of prepayments of the Assets of the
related Issuer may be mitigated or exacerbated by any provisions for
sequential or selective distribution of principal to such classes.
35
<PAGE>
Unless otherwise specified in the related Prospectus Supplement, when a full
prepayment is made on a Mortgage Loan or a Contract, the obligor is charged
interest on the principal amount of the Mortgage Loan or Contract so prepaid
for the number of days in the month actually elapsed up to the date of the
prepayment. Unless otherwise specified in the related Prospectus Supplement, a
partial prepayment of principal is applied so as to reduce the outstanding
principal balance of the related Mortgage Loan or Contract in the month in
which such partial prepayment is received.
The timing of changes in the rate of principal payments on the Assets may
significantly affect an investor's actual yield to maturity, even if the
average rate of distributions of principal is consistent with an investor's
expectation. In general, the earlier a principal payment is received on the
Mortgage Assets and distributed on a Bond, the greater the effect on such
investor's yield to maturity. The effect on an investor's yield of principal
payments occurring at a rate higher (or lower) than the rate anticipated by
the investor during a given period may not be offset by a subsequent like
decrease (or increase) in the rate of principal payments.
The Bondholder will bear the risk of being able to reinvest principal
received in respect of a Bond at a yield at least equal to the yield on such
Bond.
PREPAYMENTS--MATURITY AND WEIGHTED AVERAGE LIFE
The rates at which principal payments are received on the Assets of the
related Issuer and the rate at which payments are made from any Credit Support
or Cash Flow Agreement for the related series of Bonds may affect the ultimate
maturity and the weighted average life of each class of such series.
Prepayments on the Mortgage Loans or Contracts comprising or underlying the
Assets of a particular Issuer will generally accelerate the rate at which
principal is paid on some or all of the classes of the Bonds of the related
series.
If so provided in the Prospectus Supplement for a series of Bonds, one or
more classes of Bonds may have a final scheduled Payment Date, which is the
date on or prior to which the Bond Principal Balance thereof is scheduled to
be reduced to zero, calculated on the basis of the assumptions applicable to
such series set forth therein.
Weighted average life refers to the average amount of time that will elapse
from the date of issue of a security until each dollar of principal of such
security will be repaid to the investor. The weighted average life of a class
of Bonds of a series will be influenced by the rate at which principal on the
Mortgage Loans or Contracts comprising or underlying the Assets is paid to
such class, which may be in the form of scheduled amortization or prepayments
(for this purpose, the term "prepayment" includes prepayments, in whole or in
part, and liquidations due to default).
In addition, the weighted average life of the Bonds may be affected by the
varying maturities of the Mortgage Loans or Contracts comprising or underlying
the Assets of an Issuer. If any Mortgage Loans or Contracts comprising or
underlying the Assets of a particular Issuer have actual terms to maturity
less than those assumed in calculating final scheduled Payment Dates for the
classes of Bonds of the related series, one or more classes of such Bonds may
be fully paid prior to their respective final scheduled Payment Dates, even in
the absence of prepayments. Accordingly, the prepayment experience of the
Assets will, to some extent, be a function of the mix of Mortgage Rates or
Contract Rates and maturities of the Mortgage Loans or Contracts comprising or
underlying such Assets.
Prepayments on loans are also commonly measured relative to a prepayment
standard or model, such as the Constant Prepayment Rate ("CPR") prepayment
model or the Standard Prepayment Assumption ("SPA") prepayment model, each as
described below. CPR represents a constant assumed rate of prepayment each
month relative to the then outstanding principal balance of a pool of loans
for the life of such loans. SPA represents an assumed rate of prepayment each
month relative to the then outstanding principal balance of a pool of loans. A
prepayment assumption of 100% of SPA assumes prepayment rates of 0.2% per
annum of the then outstanding principal balance of such loans in the first
month of the life of the loans and an additional 0.2% per annum in each month
thereafter until the thirtieth month. Beginning in the thirtieth month and in
each month thereafter during the life of the loans, 100% of SPA assumes a
constant prepayment rate of 6% per annum each month.
36
<PAGE>
Neither CPR nor SPA nor any other prepayment model or assumption purports to
be a historical description of prepayment experience or a prediction of the
anticipated rate of prepayment of any pool of loans, including the Mortgage
Loans or Contracts underlying or comprising the Assets.
The Prospectus Supplement with respect to each series of Bonds may contain
tables, if applicable, setting forth the projected weighted average life of
each class of Offered Bonds of such series and the percentage of the initial
Bond Principal Balance of each such class that would be outstanding on
specified Payment Dates based on the assumptions stated in such Prospectus
Supplement, including assumptions that prepayments on the Mortgage Loans
comprising or underlying the related Assets are made at rates corresponding to
various percentages of CPR, SPA or such other standard specified in such
Prospectus Supplement. Such tables and assumptions are intended to illustrate
the sensitivity of the weighted average life of the Bonds to various
prepayment rates and will not be intended to predict or to provide information
that will enable investors to predict the actual weighted average life of the
Bonds. It is unlikely that prepayment of any Mortgage Loans or Contracts
comprising or underlying the Assets for any series will conform to any
particular level of CPR, SPA or any other rate specified in the related
Prospectus Supplement.
OTHER FACTORS AFFECTING WEIGHTED AVERAGE LIFE
Type of Mortgage Asset or Contract
If so specified in the related Prospectus Supplement, a number of Mortgage
Loans may have balloon payments due at maturity, and because the ability of a
mortgagor to make a balloon payment typically will depend upon its ability
either to refinance the loan or to sell the related Mortgaged Property, there
is a risk that a number of Mortgage Loans having balloon payments may default
at maturity. In the case of defaults, recovery of proceeds may be delayed by,
among other things, bankruptcy of the mortgagor or adverse conditions in the
market where the property is located. In order to minimize losses on defaulted
Mortgage Loans, the servicer may, to the extent and under the circumstances
set forth in the related Prospectus Supplement, be permitted to modify
Mortgage Loans that are in default or as to which a payment default is
imminent. Any defaulted balloon payment or modification that extends the
maturity of a Mortgage Loan will tend to extend the weighted average life of
the Bonds, thereby lengthening the period of time elapsed from the date of
issuance of a Bond until it is retired.
With respect to certain Mortgage Loans, including ARM Loans, the Mortgage
Rate at origination may be below the rate that would result if the index and
margin relating thereto were applied at origination. With respect to certain
Contracts, the Contract Rate may be "stepped up" during its term or may
otherwise vary or be adjusted. Under the applicable placement standards, the
mortgagor under each Mortgage Loan or Contract generally will be qualified on
the basis of the Mortgage Rate or Contract Rate in effect at origination. The
repayment of any such Mortgage Loan or Contract may thus be dependent on the
ability of the mortgagor or obligor to make larger level monthly payments
following the adjustment of the Mortgage Rate or Contract Rate. In addition,
certain Mortgage Loans may be subject to temporary buydown plans ("Buydown
Mortgage Loans") pursuant to which the monthly payments made by the mortgagor
during the early years of the Mortgage Loan will be less than the scheduled
monthly payments thereon (the "Buydown Period"). The periodic increase in the
amount paid by the mortgagor of a Buydown Mortgage Loan during or at the end
of the applicable Buydown Period may create a greater financial burden for the
mortgagor, who might not have otherwise qualified for a mortgage, and may
accordingly increase the risk of default with respect to the related Mortgage
Loan.
The Mortgage Rates on certain ARM Loans subject to negative amortization
generally adjust monthly and their amortization schedules adjust less
frequently. During a period of rising interest rates as well as immediately
after origination (initial Mortgage Rates are generally lower than the sum of
the applicable index at origination and the related margin over such index at
which interest accrues), the amount of interest accruing on the principal
balance of such Mortgage Loans may exceed the amount of the minimum scheduled
monthly payment thereon. As a result, a portion of the accrued interest on
negatively amortizing Mortgage Loans may be added to the principal balance
thereof and will bear interest at the applicable Mortgage Rate. The addition
of any such
37
<PAGE>
deferred interest to the principal balance of any related class or classes of
Bonds will lengthen the weighted average life thereof and may adversely affect
yield to holders thereof, depending upon the price at which such Bonds were
purchased. In addition, with respect to certain ARM Loans subject to negative
amortization, during a period of declining interest rates, it might be
expected that each minimum scheduled monthly payment on such a Mortgage Loan
would exceed the amount of scheduled principal and accrued interest on the
principal balance thereof, and since such excess will be applied to reduce the
principal balance of the related class or classes of Bonds, the weighted
average life of such Bonds will be reduced and may adversely affect yield to
holders thereof, depending upon the price at which such Bonds were purchased.
Defaults
The rate of defaults on the Mortgage Loans or Contracts will also affect the
rate, timing and amount of principal payments on the Assets and thus the yield
on the Bonds. In general, defaults on mortgage loans or contracts are expected
to occur with greater frequency in their early years. The rate of default on
Mortgage Loans which are refinance or limited documentation mortgage loans,
and on Mortgage Loans with high Loan-to-Value Ratios, may be higher than for
other types of Mortgage Loans. Furthermore, the rate and timing of
prepayments, defaults and liquidations on the Mortgage Loans and Contracts
will be affected by the general economic condition of the region of the
country in which the related Mortgage Properties or Manufactured Homes are
located. The risk of delinquencies and loss is greater and prepayments are
less likely in regions where a weak or deteriorating economy exists, as may be
evidenced by, among other factors, increasing unemployment or falling property
values.
Foreclosures
The number of foreclosures or repossessions and the principal amount of the
Mortgage Loans or Contracts comprising or underlying the Assets that are
foreclosed or repossessed in relation to the number and principal amount of
Mortgage Loans or Contracts that are repaid in accordance with their terms
will affect the weighted average life of the Mortgage Loans or Contracts
comprising or underlying the Assets and that of the related series of Bonds.
Refinancing
The Master Servicer or a Sub-Servicer may permit or solicit the refinancing
of a Mortgage Loan or Contract by applying the proceeds of a new loan secured
by a mortgage on the same property to prepay the Mortgage Loan or Contract. In
such event, the refinanced loan would not be included in the Assets. Such a
refinancing would generally result in a prepayment of principal on the Bonds.
The Master Servicer or Sub-Servicer may develop specific programs designed to
encourage such refinancing of Mortgage Loans. These programs may include,
without limitation, targeted solicitations, the offering of pre-approved
applications, modifications of the existing loan and various financial
incentives, such as reduced origination fees or closing costs. Such programs
may also encourage the refinancing of defaulted or near defaulted Mortgage
Loans or Contracts by creditworthy borrowers who assume the outstanding
indebtedness of such Mortgage Loans or Contracts.
Modifications
If set forth in the related Prospectus Supplement, the Master Servicer may
have the right under the terms of the Agreement to purchase certain Mortgage
Loans from the Issuer for purposes of effecting a modification of the terms of
such loan, including a reduction in the interest rate thereof, in lieu of a
complete refinancing of such loan. Unless otherwise set forth in the related
Prospectus Supplement, the purchase price for such a Mortgage Loan will not be
less than the outstanding principal amount of such Mortgage Loan, plus annual
interest thereon through the purchase date. In such event the modified loan
will not be a part of the Assets, but may be owned by the Master Servicer or
an affiliate thereof. This will have the same effect as a prepayment of the
Mortgage Loan and will generally result in prepayment of principal on the
Bonds. In addition, if set forth in the related
38
<PAGE>
Prospectus Supplement, the Master Servicer may have the right under the
Agreement to modify the terms, including the interest rate, of certain
Mortgage Loans included in the Assets without purchasing such loan from the
Issuer. Such modifications will be primarily focused on Mortgage Loans that
are in default or danger of default and the credit quality of which the Master
Servicer reasonably believes will be enhanced by such modification. The terms,
conditions, limitation and consents required or imposed upon the Master
Servicer in connection with the purchase of Mortgage Loans from the Issuer for
purposes of modification and modification of Mortgage Loans retained by the
Issuer as part of the Assets will be set forth in the related Prospectus
Supplement.
Conversions
The Mortgage Loans may include loans that are convertible, upon fulfillment
of certain conditions, from an adjustable rate to a fixed rate loan at the
option of the mortgagor (the "Convertible Mortgage Loans"). If interest rates
decline so that the fixed rate applicable on conversion is significantly lower
than the current variable rate, or is significantly lower than the maximum
lifetime variable rate, the mortgagor may have a significant financial
incentive to effect such a conversion. If set forth in the related Prospectus
Supplement, the Master Servicer may have the right or the obligation to
purchase such Convertible Mortgage Loans from the Issuer. Unless otherwise set
forth in the related Prospectus Supplement, the purchase price for such a
Convertible Mortgage Loan will not be less than the outstanding principal
amount of such Convertible Mortgage Loan plus accrued interest thereon through
the purchase date. The terms, conditions, limitations and consents required or
imposed upon the Master Servicer in connection with the purchase of
Convertible Mortgage Loans will be set forth in the related Prospectus
Supplement.
Due-on-Sale Clauses
Acceleration of mortgage payments as a result of certain transfers of
underlying Mortgaged Property is another factor affecting prepayment rates
that may not be reflected in the prepayment standards or models used in the
relevant Prospectus Supplement. A number of the Mortgage Loans comprising or
underlying the Assets may include "due-on-sale" clauses that allow the holder
of the Mortgage Loans to demand payment in full of the remaining principal
balance of the Mortgage Loans upon sale, transfer or conveyance of the related
Mortgaged Property. With respect to any Whole Loans, unless otherwise provided
in the related Prospectus Supplement, the Master Servicer will generally
enforce any due-on-sale clause to the extent it has knowledge of the
conveyance or proposed conveyance of the underlying Mortgaged Property and it
is entitled to do so under applicable law; provided, however, that the Master
Servicer will not take any action in relation to the enforcement of any due-
on-sale provision which would adversely affect or jeopardize coverage under
any applicable insurance policy. See "Certain Legal Aspects of Mortgage
Loans--Due-on-Sale Clauses" and "Description of the Agreements--Due-on-Sale
Provisions." Unless otherwise specified in the related Prospectus Supplement,
the Contracts, in general, prohibit the sale or transfer of the related
Manufactured Homes without the consent of the Master Servicer and permit the
acceleration of the maturity of the Contracts by the Master Servicer upon any
such sale or transfer that is not consented to. Unless otherwise specified in
the related Prospectus Supplement, it is expected that the Master Servicer
will permit most transfers of Manufactured Homes and not accelerate the
maturity of the related Contracts. In certain cases, the transfer may be made
by a delinquent obligor in order to avoid a repossession of the Manufactured
Home. In the case of a transfer of a Manufactured Home after which the Master
Servicer desires to accelerate the maturity of the related Contract, the
Master Servicer's ability to do so will depend on the enforceability under
state law of the "due-on-sale" clause. See "Certain Legal Aspects of the
Contracts--Transfers of Manufactured Homes; Enforceability of "Due-on-Sale"
Clauses."
39
<PAGE>
DESCRIPTION OF THE BONDS
GENERAL
Each series of Bonds offered hereby and by the related Prospectus Supplement
will be issued pursuant to a separate Indenture between the Issuer of such
series and the Indenture Trustee for such series. The following summaries
describe certain provisions common to each series of Bonds. The summaries are
subject to, and are qualified in their entirety by reference to, the
Prospectus Supplement and the provisions of the Indenture relating to each
series of Bonds. Summaries of particular provisions or terms used in the
Indenture incorporate by reference the actual provisions (including
definitions of terms) as part of such summaries, and are qualified in their
entirety by reference to the actual provisions of the Indenture.
Each series of Bonds will consist of one or more classes of Bonds that may
(i) provide for the accrual of interest thereon based on fixed, variable or
adjustable rates; (ii) be senior (collectively, "Senior Bonds") or subordinate
(collectively, "Subordinated Bonds") to one or more other classes of Bonds in
respects of certain distributions on the Bonds and (iii) provide for payments
of principal as described in the related Prospectus Supplement, from all or
only a portion of the Assets of such Issuer, to the extent of available funds,
in each case as described in the related Prospectus Supplement. If so
specified in the related Prospectus Supplement, the related Assets may include
(i) additional Mortgage Loans that will be transferred to the Issuer from time
to time and/or (ii) in the case of revolving Home Equity loans or certain
balances thereof, any additional balances advanced to the borrowers under the
revolving Home Equity loans during certain periods. If so specified in the
related Prospectus Supplement, distributions on one or more classes of a
series of Bonds may be limited to collections from a designated portion of the
Whole Loans in the related pool (each such portion of Whole Loans, a "Mortgage
Loan Group") or a designated portion of Contracts in the related pool (each
such portion of Contracts, a "Contract Group"). Any such classes may include
classes of Offered Bonds.
Each class of Offered Bonds of a series will be issued in minimum
denominations corresponding to the Bond Principal Balances. The transfer of
any Offered Bonds may be registered and such Bonds may be exchanged without
the payment of any service charge payable in connection with such registration
of transfer or exchange, but the Company or the Indenture Trustee or any agent
thereof may require payment of a sum sufficient to cover any tax or other
governmental charge. One or more classes of Bonds of a series may be issued in
definitive form ("Definitive Bonds") or in book-entry form ("Book-Entry
Bonds"), as provided in the related Prospectus Supplement. See "Risk Factors--
Book-Entry Registration" and "Description of the Bonds--Book-Entry
Registration and Definitive Bonds." Definitive Bonds will be exchangeable for
other Bonds of the same class and series of a like aggregate Bond Principal
Balance, notional amount or percentage interest but of different authorized
denominations. See "Risk Factors--Limited Liquidity of Investment" and "--
Limited Assets."
DISTRIBUTIONS
Distributions on the Bonds of each series will be made by or on behalf of
the Indenture Trustee on each Payment Date as specified in the related
Prospectus Supplement from the Available Funds, as hereinafter defined, for
such series and such Payment Date. Except as otherwise specified in the
related Prospectus Supplement, distributions (other than the final
distribution) will be made to the persons in whose names the Bonds are
registered at the close of business on the last business day of the month
preceding the month in which the Payment Date occurs (the "Record Date"), and
the amount of each distribution will be determined as of the close of business
on the date specified in the related Prospectus Supplement (the "Determination
Date"). All distributions with respect to each class of Bonds on each Payment
Date will be allocated pro rata among the outstanding Bonds in such class or
by random selection, as described in the related Prospectus Supplement or
otherwise established by the related Indenture Trustee. Payments will be made
either by wire transfer in immediately available funds to the account of a
Bondholder at a bank or other entity having appropriate facilities therefor,
if such Bondholder has so notified the Indenture Trustee or other person
required to make such payments no later than the date specified in the related
Prospectus Supplement (and, if so provided in the related Prospectus
Supplement, holds Bonds in the requisite amount specified therein), or by
check mailed to the address
40
<PAGE>
of the person entitled thereto as it appears on the Bond register; provided,
however, that the final distribution in retirement of the Bonds (whether
Definitive Bonds or Book-Entry Bonds) will be made only upon presentation and
surrender of the Bonds at the location specified in the notice to Bondholders
of such final distribution.
AVAILABLE FUNDS
All distributions on the Bonds of each series on each Payment Date will be
made from the Available Funds described below, in accordance with the terms
described in the related Prospectus Supplement. Unless provided otherwise in
the related Prospectus Supplement, the "Available Funds" for each Payment Date
equals the sum of the following amounts:
(i) the total amount of all cash on deposit in the related Collection
Account as of the corresponding Determination Date, exclusive of:
(a) all scheduled payments of principal and interest collected but
due on a date subsequent to the related Due Period (unless the related
Prospectus Supplement provides otherwise, a "Due Period Due Period"
with respect to any Payment Date will commence on the second day of the
month in which the immediately preceding Payment Date occurs, or the
day after the Cut-off Date in the case of the first Due Period, and
will end on the first day of the month of the related Payment Date),
(b) unless the related Prospectus Supplement provides otherwise, all
prepayments, together with related payments of the interest thereon and
related Prepayment Premiums, Liquidation Proceeds, Insurance Proceeds
and other unscheduled recoveries received subsequent to the related Due
Period, and
(c) all amounts in the Collection Account that are due or
reimbursable to the Company, the Indenture Trustee, an Asset Seller, a
Sub-Servicer, the Master Servicer or any other entity as specified in
the related Prospectus Supplement or that are payable in respect of
certain expenses of the related Issuer;
(ii) if the related Prospectus Supplement so provides, interest or
investment income on amounts on deposit in the Collection Account,
including any net amounts paid under any Cash Flow Agreements;
(iii) all advances made by a Master Servicer or any other entity as
specified in the related Prospectus Supplement with respect to such Payment
Date;
(iv) if and to the extent the related Prospectus Supplement so provides,
amounts paid by a Master Servicer or any other entity as specified in the
related Prospectus Supplement with respect to interest shortfalls resulting
from prepayments; and
(v) unless the related Prospectus Supplement provides otherwise, to the
extent not on deposit in the related Collection Account as of the
corresponding Determination Date, any amounts collected under, from or in
respect of any Credit Support with respect to such Payment Date.
As described below, the entire Available Funds will be distributed among the
related Bonds (including any Bonds not offered hereby) on each Payment Date,
and accordingly will be released and will not be available for any future
distributions.
DISTRIBUTIONS OF INTEREST ON THE BONDS
Each class of Bonds may have a different interest rate, which will be a
fixed, variable or adjustable rate at which interest will accrue on such class
of Bonds (the "Bond Interest Rate"). The related Prospectus Supplement will
specify the Bond Interest Rate for each class or, in the case of a variable or
adjustable Bond Interest Rate, the method for determining the Bond Interest
Rate. Unless otherwise specified in the related Prospectus Supplement,
interest on the Bonds will be calculated on the basis of a 360-day year
consisting of twelve 30-day months.
41
<PAGE>
Distributions of interest in respect of the Bonds of any class will be made
on each Payment Date based on the Accrued Bond Interest for such class and
such Payment Date, subject to the sufficiency of the portion of the Available
Funds allocable to such class on such Payment Date. With respect to each class
of Bonds and each Payment Date, "Accrued Bond Interest" will be equal to
interest accrued for a specified period on the outstanding Bond Principal
Balance thereof immediately prior to the Payment Date, at the applicable Bond
Interest Rate, reduced as described below. The related Prospectus Supplement
will also describe the extent to which the amount of Accrued Bond Interest
that is otherwise distributable on a class of Offered Bonds may be reduced as
a result of any other contingencies, including delinquencies, losses and
deferred interest on or in respect of the Mortgage Loans or Contracts
comprising or underlying the Assets of the related Issuer. Unless otherwise
provided in the related Prospectus Supplement, any reduction in the amount of
Accrued Bond Interest otherwise distributable on a class of Bonds by reason of
the allocation to such class of a portion of any deferred interest on the
Mortgage Loans or Contracts comprising or underlying the Assets of the related
Issuer will result in a corresponding increase in the Bond Principal Balance
of such class. See "Yield Considerations."
DISTRIBUTIONS OF PRINCIPAL OF THE BONDS
The Bonds of each series will have a principal balance (a "Bond Principal
Balance") which, at any time, will equal the initial principal balance thereof
on the closing date minus all distributions in respect of principal on the
Bonds. The outstanding Bond Principal Balance of a Bond will be reduced to the
extent of distributions of principal thereon from time to time. Unless
otherwise provided in the related Prospectus Supplement, the initial aggregate
Bond Principal Balance of all classes of Bonds of a series will not be greater
than the outstanding aggregate principal balance of the related Assets as of
the applicable Cut-off Date. The initial aggregate Bond Principal Balance of a
series and each class thereof will be specified in the related Prospectus
Supplement. Unless otherwise provided in the related Prospectus Supplement,
distributions of principal will be made on each Payment Date to the class or
classes of Bonds entitled thereto in accordance with the provisions described
in such Prospectus Supplement until the Bond Principal Balance of such class
has been reduced to zero.
COMPONENTS
To the extent specified in the related Prospectus Supplement, distribution
on a class of Bonds may be based on a combination of two or more different
components as described under "--General" above. To such extent, the
descriptions set forth under "--Distributions of Interest on the Bonds" and
"--Distributions of Principal of the Bonds" above also relate to components of
such a class of Bonds. In such case, reference in such sections to Bond
Principal Balance and Bond Interest Rate refer to the principal balance, if
any, of any such component and the Bond Interest Rate, if any, on any such
component, respectively.
DISTRIBUTIONS ON THE BONDS OF PREPAYMENT PREMIUMS
If so provided in the related Prospectus Supplement, Prepayment Premiums
that are collected on the Mortgage Assets of the related Issuer will be
distributed on each Payment Date to the class or classes of Bonds entitled
thereto in accordance with the provisions described in such Prospectus
Supplement.
ALLOCATION OF LOSSES AND SHORTFALLS
If so provided in the Prospectus Supplement for a series of Bonds consisting
of one or more classes of Subordinated Bonds on any Payment Date in respect of
which losses or shortfalls and collections on the Assets have been incurred,
the amount of such losses or shortfalls will be borne first by a class of
Subordinated Bonds in the priority and manner and subject to the limitations
specified in such Prospectus Supplement. See "Description of Credit Support"
for a description of the types of protection that an Issuer may have against
losses and shortfalls on Assets of such Issuer.
42
<PAGE>
ADVANCES IN RESPECT OF DELINQUENCIES
Unless provided otherwise in the related Prospectus Supplement, the Master
Servicer's (or another entity's) advance obligation will be subject to the
Master Servicer's (or another entity's) good faith determination that such
advances will be reimbursable from Related Proceeds (as defined below). See
"Description of Credit Support."
Advances are intended to maintain a regular flow of scheduled interest and
principal payments to holders of the class or classes of Bonds entitled
thereto, rather than to guarantee or insure against losses. Unless otherwise
provided in the related Prospectus Supplement, advances of the Master
Servicer's (or another entity's) funds will be reimbursable only out of
related recoveries on the Mortgage Loans or Contracts (including amounts
received under any form of Credit Support) respecting which such advances were
made (as to any Mortgage Loan or Contract, "Related Proceeds") and, if so
provided n the Prospectus Supplement, out of any amounts otherwise
distributable on one or more classes of Subordinate Bonds of such series;
provided, however, that any such advance will be reimbursable from any amounts
in the Collection Account prior to any distributions being made on the Bonds
to the extent that the Master Servicer (or such other entity) shall determine
in good faith that such advance (a "Nonrecoverable Advance") is not ultimately
recoverable from Related Proceeds or, if applicable, from collections on other
Assets otherwise distributable on such Subordinated Bonds. If advances have
been made by the Master Servicer from excess funds in the Collection Account,
the Master Servicer is required to replace such funds in the Collection
Account on any future Payment Date to the extent that funds in the Collection
Account on such Payment Date are less than payments required to be made to
Bondholders on such date. If so specified in the related Prospectus
Supplement, the obligations of the Master Servicer (or another entity) to make
advances may be secured by a cash advance reserve fund, a surety bond, a
letter of credit or another form of limited guaranty. If applicable,
information regarding the characteristics of, and the identity of any obligor
on, any such surety bond, will be set forth in the related Prospectus
Supplement.
If and to the extent so provided in the related Prospectus Supplement, the
Master Servicer (or another entity) will be entitled to receive interest at
the rate specified therein on its outstanding advances and will be entitled to
pay itself such interest periodically from general collections on the Assets
prior to any payment to Bondholders or as otherwise provided in the related
Agreement and described in such Prospectus Supplement.
REPORTS TO BONDHOLDERS
Unless otherwise provided in the Prospectus Supplement, with each
distribution to holders of any class of Bonds of a series, the Master Servicer
or the Indenture Trustee, as provided in the related Prospectus Supplement,
will forward or cause to be forwarded to each such holder, to the Company and
to such other parties as may be specified in the related Agreement, a
statement setting forth, in each case, to the extent applicable and available,
substantially the following:
(i) the amount of such distribution to holders of Bonds of such class
applied to reduce the Bond Principal Balance thereof;
(ii) the amount of such distribution to holders of Bonds of such class
allocable to accrued interest;
(iii) the amount of such distribution allocable to Prepayment Premiums;
(iv) the amount of related servicing compensation received by a Master
Servicer (and, if payable directly out of the related Assets, by any Sub-
Servicer) and such other customary information as any such Master Servicer
or the Indenture Trustee deems necessary or desirable, or that a Bondholder
reasonably requests, to enable Bondholders to prepare their tax returns;
(v) the aggregate amount of advances included in such distribution, and
the aggregate amount of unreimbursed advances at the close of business on
such Payment Date;
(vi) the aggregate principal balance of the Assets at the close of
business on such Payment Date;
43
<PAGE>
(vii) the number and aggregate principal balance of Whole Loans or
Contracts in respect of which (a) one scheduled payment is delinquent, (b)
two scheduled payments are delinquent, (c) three or more scheduled payments
are delinquent and (d) foreclosure proceedings have been commenced;
(viii) with respect to any Whole Loan or Contract liquidated during the
related Due Period, (a) the portion of such liquidation proceeds payable or
reimbursable to the Master Servicer (or any other entity) in respect of
such Mortgage Loan and (b) the amount of any loss to Bondholders;
(ix) with respect to each Mortgaged Property that is acquired by the
Issuer by foreclosure or deed in lieu of foreclosure (an "REO Property")
relating to a Whole Loan or Contract and included in the related Assets as
of the end of the related Due Period, (a) the loan number of the related
Mortgage Loan or Contract and (b) the date of acquisition;
(x) with respect to each REO Property relating to a Whole Loan or
Contract and included in the related Assets as of the end of the related
Due Period, (a) the book value, (b) the principal balance of the related
Mortgage Loan or Contract immediately following such Payment Date
(calculated as if such Mortgage Loan or Contract were still outstanding
taking into account certain limited modifications to the terms thereof
specified in the Agreement), (c) the aggregate amount of unreimbursed
servicing expenses and unreimbursed advances in respect thereof and (d) if
applicable, the aggregate amount of interest accrued and payable on related
servicing expenses and related advances;
(xi) with respect to any such REO Property sold during the related Due
Period (a) the aggregate amount of sale proceeds, (b) the portion of such
sales proceeds payable or reimbursable to the Master Servicer in respect of
such REO Property or the related Mortgage Loan or Contract and (c) the
amount of any loss to Bondholders in respect of the related Mortgage Loan;
(xii) the aggregate Bond Principal Balance of each class of Bonds at the
close of business on such Payment Date, separately identifying any
reduction in such Bond Principal Balance due to the allocation of any loss;
(xiii) the aggregate amount of principal prepayments made during the
related Due Period;
(xiv) the amount deposited in the reserve fund, if any, on such Payment
Date;
(xv) the amount remaining in the reserve fund, if any, as of the close of
business on such Payment Date;
(xvi) the aggregate unpaid Accrued Bond Interest, if any, on each class
of Bonds at the close of business on such Payment Date;
(xvii) in the case of Bonds with a variable Bond Interest Rate, the Bond
Interest Rate applicable to such Payment Date, and, if available, the
immediately succeeding Payment Date, as calculated in accordance with the
method specified in the related Prospectus Supplement;
(xviii) in the case of Bonds with an adjustable Bond Interest Rate, for
statements to be distributed in any month in which an adjustment date
occurs, the adjustable Bond Interest Rate applicable to such Payment Date,
if available, and the immediately succeeding Payment Date as calculated in
accordance with the method specified in the related Prospectus Supplement;
(xix) as to any series which includes Credit Support, the amount of
coverage of each instrument of Credit Support included therein as of the
close of business on such Payment Date; and
(xx) the aggregate amount of payments by the obligors of (a) default
interest, (b) late charges and (c) assumption and modification fees
collected during the related Due Period.
In the case of information furnished pursuant to subclauses (i)-(iv) above,
the amounts shall be expressed as a dollar amount per minimum denomination of
Bonds or for such other specified portion thereof. In addition, in the case of
information furnished pursuant to subclauses (i), (ii), (xii), (xvi) and
(xvii) above, such amounts shall also be provided with respect to each
component, if any, of a class of Bonds. The Master Servicer or the Indenture
Trustee, as specified in the related Prospectus Supplement, will forward or
cause to be forwarded to
44
<PAGE>
each holder, to the Company and to such other parties as may be specified in
the Agreement, a copy of any statements or reports received by the Master
Servicer or the Indenture Trustee, as applicable, with respect to any MBS. The
Prospectus Supplement for each series of Offered Bonds will describe any
additional information to be included in reports to the holders of such Bonds.
Within a reasonable period of time after the end of each calendar year, the
Master Servicer or the Indenture Trustee, as provided in the related
Prospectus Supplement, shall furnish to each person who at any time during the
calendar year was a holder of a Bond a statement containing the information
set forth in subclauses (i)-(iv) above, aggregated for such calendar year or
the applicable portion thereof during which such person was a Bondholder. Such
obligation of the Master Servicer or the Indenture Trustee shall be deemed to
have been satisfied to the extent that substantially comparable information
shall be provided by the Master Servicer or the Indenture Trustee pursuant to
any requirements of the Code as are from time to time in force. See
"Description of the Bonds--Book-Entry Registration and Definitive Bonds."
TERMINATION
The obligations created by the related Agreement for each series of Bonds
will terminate upon the payment to Bondholders of that series of all amounts
held in the Collection Account or by the Master Servicer, if any, or the
Indenture Trustee and required to be paid to them pursuant to such Agreement
following the earlier of (i) the final payment or other liquidation of the
last Asset subject thereto or the disposition of all property acquired upon
foreclosure of any Whole Loan or Contract subject thereto and (ii) the
purchase of all of the assets of the Issuer by the party entitled to effect
such termination, under the circumstances and in the manner set forth in the
related Prospectus Supplement. In no event, however, will the trust created by
the Agreement continue beyond the date specified in the related Prospectus
Supplement. Written notice of termination of the Agreement will be given to
each Bondholder, and the final distribution will be made only upon
presentation and surrender of the Bonds at the location to be specified in the
notice of termination.
If so specified in the related Prospectus Supplement, a series of Bonds may
be subject to optional early termination by the party specified therein, under
the circumstances and in the manner set forth therein. If so provided in the
related Prospectus Supplement, upon the reduction of the Bond Principal
Balance of a specified class or classes of Bonds by a specified percentage or
amount, the party specified therein may solicit bids for the purchase of all
assets of the Issuer, or of a sufficient portion of such assets to retire such
class or classes or purchase such class or classes at a price set forth in the
related Prospectus Supplement, in each case, under the circumstances and in
the manner set forth therein.
REDEMPTION
To the extent provided in the related Prospectus Supplement, a class of
Bonds may be subject to early redemption at the option of the Issuer. Notice
of such redemption must be given by the Issuer or by the Indenture Trustee as
provided in the related Prospectus Supplement. The redemption price for any
Bond (or portion thereof) so redeemed will be the percentage of the unpaid
principal amount of such Bond specified in the related Prospectus Supplement,
together with accrued interest thereon to the date specified in the related
Prospectus Supplement, or such other price as may be specified in the related
Prospectus Supplement. At the option of the Issuer, an optional redemption of
a class of Bonds may be effected without retiring such class of Bonds so that
the Issuer or a designee has the ability to own or resell such class of Bonds.
Upon redemption and retirement of all the Bonds, the Collateral securing the
Bonds will be released from the lien of the Indenture.
If set forth in the related Prospectus Supplement, the Issuer may redeem a
class of the Bonds in whole, but not in part, at any time upon a determination
by the Issuer, based upon an opinion of counsel, that a substantial risk
exists that the Bonds of the class to be redeemed will not be treated for
federal income tax purposes as evidences of indebtedness. Any such redemption
will be paid in cash at a price equal to 100% of the aggregate outstanding
principal balance of the class of Bonds so redeemed, plus accrued and unpaid
interest.
45
<PAGE>
PUT OPTION
If set forth in the related Prospectus Supplement, the holders of a class of
Bonds may have the right to put the Bonds to the Issuer or a designee at
certain limited times and under certain limited circumstances. The put rights
of Bondholders, if any, including the price at which the Bonds may be put, the
times at which such put may be exercised and other conditions and limitations
on the exercise of such put, will be set forth in the related Prospectus
Supplement.
BOOK-ENTRY REGISTRATION AND DEFINITIVE BONDS
If so provided in the related Prospectus Supplement, one or more classes of
the Offered Bonds of any series will be issued as Book-Entry Bonds, and each
such class will be represented by one or more single Bonds registered in the
name of a nominee for the depository, The Depository Trust Company ("DTC").
DTC is a limited-purpose trust company organized under the laws of the State
of New York, a member of the Federal Reserve System, a "clearing corporation"
within the meaning of the Uniform Commercial Code ("UCC") and a "clearing
agency" registered pursuant to the provisions of Section 17A of the Securities
Exchange Act of 1934, as amended. DTC was created to hold securities for its
participating organizations ("Participants") and facilitate the clearance and
settlement of securities transactions between Participants through electronic
book-entry changes in their accounts, thereby eliminating the need for
physical movement of certificates. Participants include securities brokers and
dealers, banks, trust companies and clearing corporations and may include
certain other organizations. Indirect access to the DTC system also is
available to others such as banks, brokers, dealers and trust companies that
clear through or maintain a custodial relationship with a Participant, either
directly or indirectly ("Indirect Participants").
Unless otherwise provided in the related Prospectus Supplement, investors
that are not Participants or Indirect Participants but desire to purchase,
sell or otherwise transfer ownership of, or other interests in, Book-Entry
Bonds may do so only through Participants and Indirect Participants. In
addition, such investors ("Bond Owners") will receive all distributions on the
Book-Entry Bonds through DTC and its Participants. Under a book-entry format,
Bond Owners will receive payments after the related Payment Date because,
while payments are required to be forwarded to Cede & Co., as nominee for DTC
("Cede"), on each such date, DTC will forward such payments to its
Participants which thereafter will be required to forward them to Indirect
Participants or Bond Owners. Unless otherwise provided in the related
Prospectus Supplement, the only "Bondholder" (as such term is used in the
Agreement) will be Cede, as nominee of DTC, and the Bond Owners will not be
recognized by the Indenture Trustee as Bondholders under the Agreement. Bond
Owners will be permitted to exercise the rights of Bondholders under the
related Agreement, trust agreement or, Indenture, as applicable, only
indirectly through the Participants who in turn will exercise their rights
through DTC.
Under the rules, regulations and procedures creating and affecting DTC and
its operations, DTC is required to make book-entry transfers among
Participants on whose behalf it acts with respect to the Book-Entry Bonds and
is required to receive and transmit distributions of principal of and interest
on the Book-Entry Bonds. Participants and Indirect Participants with which
Bond Owners have accounts with respect to the Book-Entry Bonds similarly are
required to make book-entry transfers and receive and transmit such payments
on behalf of their respective Bond Owners.
Because DTC can act only on behalf of Participants, who in turn act on
behalf of Indirect Participants and certain banks, the ability of a Bond Owner
to pledge its interest in the Book-Entry Bonds to persons or entities that do
not participate in the DTC system, or otherwise take actions in respect of its
interest in the Book-Entry Bonds, may be limited due to the lack of a physical
certificate evidencing such interest.
DTC has advised the Company that it will take any action permitted to be
taken by a Bondholder under an Agreement only at the direction of one or more
Participants to whose account with DTC interests in the Book-Entry Bonds are
credited.
46
<PAGE>
Unless otherwise specified in the related Prospectus Supplement, Bonds
initially issued in book-entry form will be issued in fully registered,
certificated form to Bond Owners or their nominees ("Definitive Bonds"),
rather than to DTC or its nominee only if (i) the Company advises the
Indenture Trustee in writing that DTC is no longer willing or able to properly
discharge its responsibilities as depository with respect to the Bonds and the
Company is unable to locate a qualified successor or (ii) the Company, at its
option, elects to terminate the book-entry system through DTC.
Upon the occurrence of either of the events described in the immediately
preceding paragraph, DTC is required to notify all Participants of the
availability through DTC of Definitive Bonds for the Bond Owners. Upon
surrender by DTC of the certificate or certificates representing the Book-
Entry Bonds, together with instructions for reregistration, the Indenture
Trustee will issue (or cause to be issued) to the Bond Owners identified in
such instructions the Definitive Bonds to which they are entitled, and
thereafter the Indenture Trustee will recognize the holders of such Definitive
Bonds as Bondholders under the Agreement.
DESCRIPTION OF THE AGREEMENTS
AGREEMENTS APPLICABLE TO A SERIES
General. Any Master Servicer and the Indenture Trustee with respect to any
series of Bonds will be named in the related Prospectus Supplement. In any
series of Bonds for which there are multiple Master Servicers, there may also
be multiple Mortgage Loan Groups or Contract Groups, each corresponding to a
particular Master Servicer; and, if the related Prospectus Supplement so
specifies, the servicing obligations of each such Master Servicer will be
limited to the Whole Loans in such corresponding Mortgage Loan Group or the
Contracts in the corresponding Contract Group. Such servicer will service all
or a significant number of Whole Loans or Contracts directly without a Sub-
Servicer. Unless otherwise specified in the related Prospectus Supplement, the
obligations of any such servicer shall be commensurate with those of the
Master Servicer described herein. References in this Prospectus to Master
Servicer and its rights and obligations, unless otherwise specified in the
related Prospectus Supplement, shall be deemed to also be references to any
servicer servicing Whole Loans or Contracts directly.
The Assets of each Issuer will be serviced in accordance with the terms of a
servicing agreement among the Company, the Master Servicer and the Indenture
Trustee (the "Agreement"). The following summaries describe certain provisions
that may appear in each Agreement. The Prospectus Supplement for a series of
Bonds will describe any provision of the Agreement relating to such series
that materially differs from the description thereof contained in this
Prospectus. The summaries do not purport to be complete and are subject to,
and are qualified in their entirety by reference to, all of the provisions of
the Agreement for each Issuer and the description of such provisions in the
related Prospectus Supplement. As used herein with respect to any series, the
term "Bond" refers to all of the Bonds of that series, whether or not offered
hereby and by the related Prospectus Supplement, unless the context otherwise
requires. The Company will provide a copy of the Agreement (without exhibits)
relating to any series of Bonds without charge upon written request of a
holder of a Bond of such series addressed to NovaStar Mortgage Funding
Corporation, 1900 West 47th Place, Suite 205, Westwood, Kansas 66205,
Attention: David J. Lee, Vice President.
ASSIGNMENT OF ASSETS; REPURCHASES
At the time of issuance of any series of Bonds, the Company will assign (or
cause to be assigned) to the designated Indenture Trustee the Assets of the
related Issuer, together with all principal and interest to be received on or
with respect to such Assets after the Cut-off Date, other than principal and
interest due on or before the Cut-off Date and other than any Retained
Interest. The Indenture Trustee will, concurrently with such assignment,
deliver a certificate to the Company in exchange for the Assets and the other
assets of the Issuer for such series. Each Asset will be identified in a
schedule appearing as an exhibit to the related Agreement. Unless otherwise
provided in the related Prospectus Supplement, such schedule will include
detailed information (i) in
47
<PAGE>
respect of each Whole Loan of the Issuer, including without limitation, the
address of the related Mortgaged Property and type of such property, the
Mortgage Rate and, if applicable, the applicable index, margin, adjustment
date and any rate cap information, the original and remaining term to
maturity, the original and outstanding principal balance and balloon payment,
if any, the Value and Loan-to-Value Ratio as of the date indicated and payment
and prepayment provisions, if applicable; (ii) in respect of each Contract of
the related Issuer, including without limitation the Contract number, the
outstanding principal amount and the Contract Rate; and (iii) in respect of
each MBS of the related Issuer, including without limitation, the MBS Issuer,
MBS Servicer and MBS Indenture Trustee, the pass-through or bond rate or
formula for determining such rate, the issue date and original and remaining
term to maturity, if applicable, the original and outstanding principal amount
and payment provisions, if applicable.
With respect to each Whole Loan, except as otherwise specified in the
related Prospectus Supplement, the Company will deliver or cause to be
delivered to the Indenture Trustee (or to the custodian hereinafter referred
to) certain loan documents, which unless otherwise specified in the related
Prospectus Supplement will include the original Mortgage Note endorsed,
without recourse, in blank or to the order of the Indenture Trustee, the
original Mortgage (or a certified copy thereof) with evidence of recording
indicated thereon and an assignment of the Mortgage to the Indenture Trustee
in recordable form. Notwithstanding the foregoing, an Issuer may hold Mortgage
Loans where the original Mortgage Note is not delivered to the Indenture
Trustee if the Company delivers to the Indenture Trustee or the custodian a
copy or a duplicate original of the Mortgage Note, together with an affidavit
certifying that the original thereof has been lost or destroyed. With respect
to such Mortgage Loans, the Indenture Trustee (or its nominee) may not be able
to enforce the Mortgage Note against the related borrower. Unless otherwise
specified in the related Prospectus Supplement, the Asset Seller will be
required to agree to repurchase, or substitute for, each such Mortgage Loan
that is subsequently in default if the enforcement thereof or of the related
Mortgage is materially adversely affected by the absence of the original
Mortgage Note. Unless otherwise provided in the related Prospectus Supplement,
the related Agreement will require the Company or another party specified
therein to promptly cause each such assignment of Mortgage to be recorded in
the appropriate public office for real property records, except in the State
of California or in other states where, in the opinion of counsel acceptable
to the Indenture Trustee, such recording is not required to protect the
Indenture Trustee's interest in the related Whole Loan against the claim of
any subsequent transferee or any successor to or creditor of the Company, the
Master Servicer, the relevant Asset Seller or any other prior holder of the
Whole Loan.
The Indenture Trustee (or a custodian) will review such Whole Loan documents
within a specified period of days after receipt thereof, and the Indenture
Trustee (or a custodian) will hold such documents in trust for the benefit of
the Bondholders. Unless otherwise specified in the related Prospectus
Supplement, if any such document is found to be missing or defective in any
material respect, the Indenture Trustee (or such custodian) shall immediately
notify the Master Servicer and the Company, and the Master Servicer shall
immediately notify the relevant Asset Seller. If the Asset Seller cannot cure
the omission or defect within a specified number of days after receipt of such
notice, then unless otherwise specified in the related Prospectus Supplement,
the Asset Seller will be obligated, within a specified number of days of
receipt of such notice, to repurchase the related Whole Loan from the
Indenture Trustee at the Purchase Price or substitute for such Mortgage Loan.
There can be no assurance that an Asset Seller will fulfill this repurchase or
substitution obligation, and neither the Master Servicer nor the Company will
be obligated to repurchase or substitute for such Mortgage Loan if the Asset
Seller defaults on its obligation. Unless otherwise specified in the related
Prospectus Supplement, this repurchase or substitution obligation constitutes
the sole remedy available to the Bondholders or the Indenture Trustee for
omission of, or a material defect in, a constituent document. To the extent
specified in the related Prospectus Supplement, in lieu of curing any omission
or defect in the Asset or repurchasing or substituting for such Asset, the
Asset Seller may agree to cover any losses suffered by the Issuer as a result
of such breach or defect.
Notwithstanding the preceding two paragraphs, unless otherwise specified in
the related Prospectus Supplement, the documents with respect to Home Equity
Loans will not be delivered to the Indenture Trustee (or a custodian), but
will be retained by the Master Servicer, which may also be the Asset Seller.
In addition,
48
<PAGE>
assignments of the related Mortgages to the Indenture Trustee will not be
recorded, unless otherwise provided in the related Prospectus Supplement.
With respect to each Contract, unless otherwise specified in the related
Prospectus Supplement, the Master Servicer (which may also be the Asset
Seller) will maintain custody of the original Contract and copies of documents
and instruments related to each Contract and the security interest in the
Manufactured Home securing each Contract. In order to give notice of the
right, title and interest of the Indenture Trustee in the Contracts, the
Company will cause UCC-1 financing statements to be executed by the related
Asset Seller identifying the Company as secured party and by the Company
identifying the Indenture Trustee as the secured party and, in each case,
identifying all Contracts as collateral. Unless otherwise specified in the
related Prospectus Supplement, the Contracts will not be stamped or otherwise
marked to reflect their assignment from the Company to the Issuer. Therefore,
if, through negligence, fraud or otherwise, a subsequent purchaser were able
to take physical possession of the Contracts without notice of such
assignment, the interest of the Indenture Trustee in the Contracts could be
defeated. See "Certain Legal Aspects of the Contracts."
While the Contract documents will not be reviewed by the Indenture Trustee
or the Master Servicer, if the Master Servicer finds that any such document is
missing or defective in any material respect, the Master Servicer shall
immediately notify the Company and the relevant Asset Seller. If the Asset
Seller cannot cure the omission or defect within a specified number of days
after receipt of such notice, then unless otherwise specified in the related
Prospectus Supplement, the Asset Seller will be obligated, within a specified
number of days of receipt of such notice, to repurchase the related Contract
from the Indenture Trustee at the Purchase Price or substitute for such
Contract. There can be no assurance that an Asset Seller will fulfill this
repurchase or substitution obligation, and neither the Master Servicer nor the
Company will be obligated to repurchase or substitute for such Contract if the
Asset Seller defaults on its obligation. Unless otherwise specified in the
related Prospectus Supplement, this repurchase or substitution obligation
constitutes the sole remedy available to the Bondholders or the Indenture
Trustee for omission of, or a material defect in, a constituent document. To
the extent specified in the related Prospectus Supplement, in lieu of curing
any omission or defect in the Asset or repurchasing or substituting for such
Asset, the Asset Seller may agree to cover any losses suffered by the Issuer
as a result of such breach or defect.
With respect to each Government Bond or MBS in certificated form, the
Company will deliver or cause to be delivered to the Indenture Trustee (or the
custodian) the original certificate or other definitive evidence of such
Government Bond or MBS, as applicable, together with bond power or other
instruments, certifications or documents required to transfer fully such
Government Bond or MBS, as applicable, to the Indenture Trustee for the
benefit of the Bondholders. With respect to each Government Bond or MBS in
uncertificated or book-entry form or held through a "clearing corporation"
within the meaning of the UCC, the Company and the Indenture Trustee will
cause such Government Bond or MBS to be registered directly or on the books of
such clearing corporation or of a financial intermediary in the name of the
Indenture Trustee for the benefit of the Bondholders. Unless otherwise
provided in the related Prospectus Supplement, the related Agreement will
require that either the Company or the Indenture Trustee promptly cause any
MBS and Government Bonds in certificated form not registered in the name of
the Indenture Trustee to be re-registered, with the applicable persons, in the
name of the Indenture Trustee.
REPRESENTATIONS AND WARRANTIES; REPURCHASES
Unless otherwise provided in the related Prospectus Supplement the Company
will, with respect to each Whole Loan or Contract, assign certain
representations and warranties, as of a specified date (the person making such
representations and warranties, the "Warranting Party") covering, by way of
example, the following types of matters: (i) the accuracy of the information
set forth for such Whole Loan or Contract on the schedule of Assets appearing
as an exhibit to the related Agreement; (ii) in the case of a Whole Loan, the
existence of title insurance insuring the lien priority of the Whole Loan and,
in the case of a Contract, that the Contract creates a valid first security
interest in or lien on the related Manufactured Home; (iii) the authority of
the Warranting Party to sell the Whole Loan or Contract; (iv) the payment
status of the Whole Loan or Contract; (v) in the case
49
<PAGE>
of a Whole Loan, the existence of customary provisions in the related Mortgage
Note and Mortgage to permit realization against the Mortgaged Property of the
benefit of the security of the Mortgage; and (vi) the existence of hazard and
extended perils insurance coverage on the Mortgaged Property or Manufactured
Home.
Any Warranting Party shall be an Asset Seller or an affiliate thereof or
such other person acceptable to the Company and shall be identified in the
related Prospectus Supplement.
Representations and warranties made in respect of a Whole Loan or Contract
may have been made as of a date prior to the applicable Cut-off Date. A
substantial period of time may have elapsed between such date and the date of
initial issuance of the related series of Bonds. Unless otherwise specified in
the related Prospectus Supplement, in the event of a breach of any such
representation or warranty, the Warranting Party will be obligated to
reimburse the Issuer for losses caused by any such breach or either cure such
breach or repurchase or replace the affected Whole Loan or Contract as
described below. Since the representations and warranties may not address
events that may occur following the date as of which they were made, the
Warranting Party will have a reimbursement, cure, repurchase or substitution
obligation in connection with a breach of such a representation and warranty
only if the relevant event that causes such breach occurs prior to such date.
Such party would have no such obligations if the relevant event that causes
such breach occurs after such date.
Unless otherwise provided in the related Prospectus Supplement, each
Agreement will provide that the Master Servicer and/or Indenture Trustee will
be required to notify promptly the relevant Warranting Party of any breach of
any representation or warranty made by it in respect of a Whole Loan or
Contract that materially and adversely affects the value of such Whole Loan or
Contract or the interests therein of the Bondholders. If such Warranting Party
cannot cure such breach within a specified period following the date on which
such party was notified of such breach, then such Warranting Party will be
obligated to repurchase such Whole Loan or Contract from the Indenture Trustee
within a specified period from the date on which the Warranting Party was
notified of such breach, at the Purchase Price therefor. As to any Whole Loan
or Contract, unless otherwise specified in the related Prospectus Supplement,
the "Purchase Price" is equal to the sum of the unpaid principal balance
thereof, plus unpaid accrued interest thereon at the Mortgage Rate or Contract
Rate from the date as to which interest was last paid to the due date in the
Due Period in which the relevant purchase is to occur, plus certain servicing
expenses that are reimbursable to the Master Servicer. A Warranting Party,
rather than repurchase a Whole Loan or Contract as to which a breach has
occurred, will have the option, within a specified period after initial
issuance of such series of Bonds, to cause the removal of such Whole Loan or
Contract from the related Assets of the Issuer and substitute in its place one
or more other Whole Loans or Contracts, as applicable, in accordance with the
standards described in the related Agreement. If so provided in the Prospectus
Supplement for a series, a Warranting Party, rather than repurchase or
substitute a Whole Loan or Contract as to which a breach has occurred, will
have the option to reimburse the Issuer or the Bondholders for any losses
caused by such breach. Unless otherwise specified in the related Prospectus
Supplement, this reimbursement, repurchase or substitution obligation will
constitute the sole remedy available to holders of Bonds or the Indenture
Trustee for a breach of representation by a Warranting Party.
Neither the Company (except to the extent that it is the Warranting Party)
nor the Master Servicer will be obligated to purchase or substitute for a
Whole Loan or Contract if a Warranting Party defaults on its obligation to do
so, and no assurance can be given that Warranting Parties will carry out such
obligations with respect to Whole Loans or Contracts.
Unless otherwise provided in the related Prospectus Supplement the
Warranting Party will, with respect to an Issuer that holds Government Bonds
or MBS, make or assign certain representations or warranties, as of a
specified date, with respect to such Government Bonds or MBS, covering (i) the
accuracy of the information set forth therefor on the schedule of Assets
appearing as an exhibit to the related Agreement and (ii) the authority of the
Warranting Party to sell such Assets. The related Prospectus Supplement will
describe the remedies for a breach thereof.
50
<PAGE>
COLLECTION ACCOUNT AND RELATED ACCOUNTS
General
The Master Servicer and/or the Indenture Trustee will, as to each Issuer,
establish and maintain or cause to be established and maintained one or more
separate accounts for the collection of payments on the related Assets
(collectively, the "Collection Account"), which must be either (i) an account
or accounts the deposits in which are insured by the Bank Insurance Fund or
the Savings Association Insurance Fund of the Federal Deposit Insurance
Corporation ("FDIC") (to the limits established by the FDIC) and the uninsured
deposits in which are otherwise secured such that the Bondholders have a claim
with respect to the funds in the Collection Account or a perfected first
priority security interest against any collateral securing such funds that is
superior to the claims of any other depositors or general creditors of the
institution with which the Collection Account is maintained or (ii) otherwise
maintained with a bank or trust company, and in a manner, satisfactory to the
Rating Agency or Agencies rating any class of Bonds of such series. The
collateral eligible to secure amounts in the Collection Account is limited to
United States government securities and other investment grade obligations
specified in the Agreement ("Permitted Investments"). A Collection Account may
be maintained as an interest bearing or a non-interest bearing account and the
funds held therein may be invested pending each succeeding Payment Date in
certain short-term Permitted Investments. The Collection Account may be
maintained with an institution that is an affiliate of the Master Servicer, if
applicable, provided that such institution meets the standards imposed by the
Rating Agency or Agencies. If permitted by the Rating Agency or Agencies and
so specified in the related Prospectus Supplement, a Collection Account may
contain funds relating to more than one series of mortgage pass-through
certificates and may contain other funds respecting payments on mortgage loans
belonging to the Master Servicer or serviced or master serviced by it on
behalf of others.
Deposits
A Master Servicer or the Indenture Trustee will deposit or cause to be
deposited in the Collection Account for one or more Issuers within two
Business Days, unless otherwise provided in the related Agreement, the
following payments and collections received, or advances made, by the Master
Servicer or the Indenture Trustee or on its behalf subsequent to the Cut-off
Date (other than payments due on or before the Cut-off Date, and exclusive of
any amounts representing a Retained Interest):
(i) all payments on account of principal, including principal
prepayments, on the Assets;
(ii) all payments on account of interest on the Assets, including any
default interest collected, in each case net of any portion thereof
retained by a Master Servicer or a Sub-Servicer as its servicing
compensation and net of any Retained Interest;
(iii) all proceeds of the hazard insurance policies to be maintained in
respect of each Mortgaged Property securing a Whole Loan (to the extent
such proceeds are not applied to the restoration of the property or
released to the mortgagor in accordance with the normal servicing
procedures of a Master Servicer or the related Sub-Servicer, subject to the
terms and conditions of the related Mortgage and Mortgage Note)
(collectively, "Insurance Proceeds") and all other amounts received and
retained in connection with the liquidation of defaulted Mortgage Loans, by
foreclosure or otherwise ("Liquidation Proceeds"), together with the net
proceeds on a monthly basis with respect to any Mortgaged Properties
acquired for the benefit of Bondholders by foreclosure or by deed in lieu
of foreclosure or otherwise;
(iv) any amounts paid under any instrument or drawn from any fund that
constitutes Credit Support for the related series of Bonds as described
under "Description of Credit Support";
(v) any advances made as described under "Description of the Bonds--
Advances in Respect of Delinquencies";
(vi) any amounts paid under any Cash Flow Agreement, as described under
"Description of the Assets--Cash Flow Agreements";
51
<PAGE>
(vii) all proceeds of any Asset or, with respect to a Whole Loan,
property acquired in respect thereof purchased by the Company, any Asset
Seller or any other specified person as described under "--Assignment of
Assets; Repurchases" and "--Representations and Warranties; Repurchases,"
all proceeds of any defaulted Mortgage Loan purchased as described under
"--Realization Upon Defaulted Whole Loans," and all proceeds of any Asset
purchased as described under "Description of the Bonds--Termination" (also,
"Liquidation Proceeds");
(viii) any amounts paid by a Master Servicer to cover certain interest
shortfalls arising out of the prepayment of Whole Loans or Contracts as
described under "Description of the Agreements--Retained Interest;
Servicing Compensation and Payment of Expenses";
(ix) to the extent that any such item does not constitute additional
servicing compensation to a Master Servicer, any payments on account of
modification or assumption fees, late payment charges or Prepayment
Premiums on the Mortgage Assets;
(x) all payments required to be deposited in the Collection Account with
respect to any deductible clause in any blanket insurance policy described
under "Hazard Insurance Policies";
(xi) any amount required to be deposited by a Master Servicer or the
Indenture Trustee in connection with losses realized on investments for the
benefit of the Master Servicer or the Indenture Trustee, as the case may
be, of funds held in the Collection Account; and
(xii) any other amounts required to be deposited in the Collection
Account as provided in the related Agreement and described in the related
Prospectus Supplement.
Withdrawals
A Master Servicer or the Indenture Trustee may, from time to time, unless
otherwise specified in the related Prospectus Supplement or the related
Agreement, make withdrawals from the Collection Account for each Issuer for
any of the following purposes:
(i) to make distributions to the Bondholders on each Payment Date;
(ii) to reimburse a Master Servicer for unreimbursed amounts advanced as
described under "Description of the Bonds--Advances in Respect of
Delinquencies," such reimbursement to be made out of amounts received which
were identified and applied by the Master Servicer as late collections of
interest (net of related servicing fees and Retained Interest) on and
principal of the particular Whole Loans or Contracts with respect to which
the advances were made or out of amounts drawn under any form of Credit
Support with respect to such Whole Loans or Contracts;
(iii) to reimburse a Master Servicer for unpaid servicing fees earned and
certain unreimbursed servicing expenses incurred with respect to Whole
Loans or Contracts and properties acquired in respect thereof, such
reimbursement to be made out of amounts that represent Liquidation Proceeds
and Insurance Proceeds collected on the particular Whole Loans or Contracts
and properties, and net income collected on the particular properties, with
respect to which such fees were earned or such expenses were incurred or
out of amounts drawn under any form of Credit Support with respect to such
Whole Loans or Contracts and properties;
(iv) to reimburse a Master Servicer for any advances described in clause
(ii) above and any servicing expenses described in clause (iii) above
which, in the Master Servicer's good faith judgment, will not be
recoverable from the amounts described in clauses (ii) and (iii),
respectively, such reimbursement to be made from amounts collected on other
Assets;
(v) if and to the extent described in the related Prospectus Supplement,
to pay a Master Servicer interest accrued on the advances described in
clause (ii) above and the servicing expenses described in clause (iii)
above while such remain outstanding and unreimbursed or, if and to the
extent provided by the related Agreement and described in the related
Prospectus Supplement, just from that portion of amounts collected on other
Assets that is otherwise distributable on one or more classes of
Subordinated Bonds, if any, remaining outstanding, and otherwise any
outstanding class of Bonds, of the related series;
52
<PAGE>
(vi) to reimburse a Master Servicer, the Company, or any of their
respective directors, officers, employees and agents, as the case may be,
for certain expenses, costs and liabilities incurred thereby, as and to the
extent described under "--Certain Matters Regarding a Master Servicer and
the Company";
(vii) if and to the extent described in the related Prospectus
Supplement, to pay (or to transfer to a separate account for purposes of
escrowing for the payment of) the Indenture Trustee's fees;
(viii) to reimburse the Indenture Trustee or any of its directors,
officers, employees and agents, as the case may be, for certain expenses,
costs and liabilities incurred thereby, as and to the extent described
under "--Certain Matters Regarding the Indenture Trustee";
(ix) unless otherwise provided in the related Prospectus Supplement, to
pay a Master Servicer, as additional servicing compensation, interest and
investment income earned in respect of amounts held in the Collection
Account;
(x) to pay the person entitled thereto any amounts deposited in the
Collection Account that were identified and applied by the Master Servicer
as recoveries of Retained Interest;
(xi) to pay for costs reasonably incurred in connection with the proper
management and maintenance of any Mortgaged Property acquired for the
benefit of Bondholders by foreclosure or by deed in lieu of foreclosure or
otherwise, such payments to be made out of income received on such
property;
(xii) to pay for the cost of an independent appraiser or other expert in
real estate matters retained to determine a fair sale price for a defaulted
Whole Loan or a property acquired in respect thereof in connection with the
liquidation of such Whole Loan or property;
(xiii) to pay for the cost of various opinions of counsel obtained
pursuant to the related Agreement for the benefit of Bondholders;
(xiv) to pay for the costs of recording the related Agreement if such
recordation materially and beneficially affects the interests of
Bondholders, provided that such payment shall not constitute a waiver with
respect to the obligation of the Warranting Party to remedy any breach of
representation or warranty under the Agreement;
(xv) to pay the person entitled thereto any amounts deposited in the
Collection Account in error, including amounts received on any Asset after
its removal from the Issuer whether by reason of purchase or substitution
as contemplated by "--Assignment of Assets; Repurchases" and "--
Representations and Warranties; Repurchases" or otherwise;
(xvi) to make any other withdrawals permitted by the related Agreement;
and
(xvii) to clear and terminate the Collection Account at the termination
of the Issuer.
Other Collection Accounts
Notwithstanding the foregoing, if so specified in the related Prospectus
Supplement, the Agreement for any series of Bonds may provide for the
establishment and maintenance of a separate collection account into which the
Master Servicer or any related Sub-Servicer will deposit within two Business
Days the amounts described under "--Deposits" above, for one or more series of
Bonds. Any amounts on deposit in any such collection account will be withdrawn
therefrom and deposited into the appropriate Collection Account by a time
specified in the related Prospectus Supplement. to the extent specified in the
related Prospectus Supplement, any amounts which could be withdrawn from the
Collection Account as described under "--Withdrawals" above, may also be
withdrawn from any such collection account. The Prospectus Supplement will set
forth any restrictions with respect to any such collection account, including
investment restrictions and any restrictions with respect to financial
institutions with which any such collection account may be maintained.
COLLECTION AND OTHER SERVICING PROCEDURES
The Master Servicer, directly or through Sub-Servicers, is required to make
reasonable efforts to collect all scheduled payments under the Whole Loans and
will follow or cause to be followed such collection procedures as it would
follow with respect to mortgage loans that are comparable to the Whole Loans
or manufactured housing contracts comparable to the Contracts and held for its
own account, provided such procedures are consistent with (i) the terms of the
related Agreement and any related hazard insurance policy or instrument of
53
<PAGE>
Credit Support, if any, held by the related Issuer described herein or under
"Description of Credit Support," (ii) applicable law and (iii) the general
servicing standard specified in the related Prospectus Supplement or, if no
such standard is so specified, its normal servicing practices (in either case,
the "Servicing Standard"). In connection therewith, the Master Servicer will
be permitted in its discretion to waive any late payment charge or penalty
interest in respect of a late payment on a Whole Loan or Contract.
Each Master Servicer will also be required to perform other customary
functions of a servicer of comparable loans, including maintaining hazard
insurance policies as described herein and in any related Prospectus
Supplement, and filing and settling claims thereunder; maintaining escrow or
impoundment accounts of mortgagors for payment of taxes, insurance and other
items required to be paid by any mortgagor pursuant to a Whole Loan;
processing assumptions or substitutions in those cases where the Master
Servicer has determined not to enforce any applicable due-on-sale clause;
attempting to cure delinquencies; supervising foreclosures or repossessions;
inspecting and managing Mortgaged Properties or Manufactured Homes under
certain circumstances; and maintaining accounting records relating to the
Whole Loans or Contracts. Unless otherwise specified in the related Prospectus
Supplement, the Master Servicer will be responsible for filing and settling
claims in respect of particular Whole Loans or Contracts under any applicable
instrument of Credit Support. See "Description of Credit Support."
The Master Servicer may agree to modify, waive or amend any term of any
Whole Loan or Contract in a manner consistent with the Servicing Standard so
long as the modification, waiver or amendment will not (i) affect the amount
or timing of any scheduled payments of principal or interest on the Whole Loan
or Contract or (ii) in its judgment, materially impair the security for the
Whole Loan or Contract or reduce the likelihood of timely payment of amounts
due thereon. The Master Servicer also may agree to any modification, waiver or
amendment that would so affect or impair the payments on, or the security for,
a Whole Loan or Contract if, unless otherwise provided in the related
Prospectus Supplement, (i) in its judgment, a material default on the Whole
Loan or Contract has occurred or a payment default is imminent and (ii) in its
judgment, such modification, waiver or amendment is reasonably likely to
produce a greater recovery with respect to the Whole Loan or Contract on a
present value basis than would liquidation. The Master Servicer is required to
notify the Indenture Trustee in the event of any modification, waiver or
amendment of any Whole Loan or Contract.
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 Loan debt, or may reflect the diversion of that income
from the servicing of the Mortgage Loan 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 all required taxes and otherwise maintain and
insure the related Mortgaged Property. In general, the Master 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 Multifamily Property and take such other actions
as are consistent with the related 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 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 may vary considerably
depending on the particular multifamily loan, the Multifamily Property, the
mortgagor, the presence of an acceptable to party to assume the multifamily
loan and the laws of the jurisdiction in which the Multifamily Property is
located.
SUB-SERVICERS
A Master Servicer may delegate its servicing obligations in respect of the
Whole Loans or Contracts to third-party servicers (each, a "Sub-Servicer"),
but such Master Servicer will remain obligated under the related Agreement.
Each sub-servicing agreement between a Master Servicer and a Sub-Servicer (a
"Sub-Servicing Agreement") must be consistent with the terms of the related
Agreement and must provide that, if for any reason the Master Servicer for the
related series of Bonds is no longer acting in such capacity, the Indenture
Trustee or
54
<PAGE>
any successor Master Servicer may assume the Master Servicer's rights and
obligations under such Sub-Servicing Agreement.
Unless otherwise provided in the related Prospectus Supplement, the Master
Servicer will be solely liable for all fees owed by it to any Sub-Servicer,
irrespective of whether the Master Servicer's compensation pursuant to the
related Agreement is sufficient to pay such fees. However, a Sub-Servicer may
be entitled to a Retained Interest in certain Whole Loans or Contracts. Each
Sub-Servicer will be reimbursed by the Master Servicer for certain
expenditures which it makes, generally to the same extent the Master Servicer
would be reimbursed under an Agreement. See "--Retained Interest; Servicing
Compensation and Payment of Expenses."
REALIZATION UPON DEFAULTED WHOLE LOANS
Unless otherwise provided in the related Prospectus Supplement, the Master
Servicer is required to monitor any Whole Loan or Contract which is in
default, initiate corrective action in cooperation with the mortgagor or
obligor if cure is likely, inspect the Mortgaged Property or Manufactured Home
and take such other actions as are consistent with the Servicing Standard. A
significant period of time may elapse before the Master Servicer is able to
assess the success of such corrective action or the need for additional
initiatives.
Any Agreement relating to an Issuer that holds Whole Loans or Contracts may
grant to the Master Servicer a right of first refusal to purchase from the
Issuer at a predetermined purchase price any such Whole Loan or Contract as to
which a specified number of scheduled payments thereunder are delinquent. Any
such right granted to the holder of an Offered Bond will be described in the
related Prospectus Supplement. The related Prospectus Supplement will also
describe any such right granted to any person if the predetermined purchase
price is less than the Purchase Price described under "--Representations and
Warranties; Repurchases."
If so specified in the related Prospectus Supplement, the Master Servicer
may offer to sell any defaulted Whole Loan or Contract described in the
preceding paragraph and not otherwise purchased by any person having a right
of first refusal with respect thereto, if and when the Master Servicer
determines, consistent with the Servicing Standard, that such a sale would
produce a greater recovery on a present value basis than would liquidation
through foreclosure, repossession or similar proceedings. The related
Agreement will provide that any such offering be made in a commercially
reasonable manner for a specified period and that the Master Servicer accept
the highest cash bid received from any person (including itself, or an
affiliate of the Master Servicer) that constitutes a fair price for such
defaulted Whole Loan or Contract. In the absence of any bid determined in
accordance with the related Agreement to be fair, the Master Servicer shall
proceed with respect to such defaulted Mortgage Loan or Contract as described
below. Any bid in an amount at least equal to the Purchase Price described
under "--Representations and Warranties; Repurchases" will in all cases be
deemed fair.
The Master Servicer, on behalf of the Indenture Trustee, may at any time
institute foreclosure proceedings, exercise any power of sale contained in any
mortgage, obtain a deed in lieu of foreclosure, or otherwise acquire title to
a Mortgaged Property securing a Whole Loan by operation of law or otherwise
and may at any time repossess and realize upon any Manufactured Home, if such
action is consistent with the Servicing Standard and a default on such Whole
Loan or Contract has occurred or, in the Master Servicer's judgment, is
imminent.
If recovery on a defaulted Whole Loan or Contract under any related
instrument of Credit Support is not available, the Master Servicer
nevertheless will be obligated to follow or cause to be followed such normal
practices and procedures as it deems necessary or advisable to realize upon
the defaulted Whole Loan or Contract. If the proceeds of any liquidation of
the property securing the defaulted Whole Loan or Contract are less than the
outstanding principal balance of the defaulted Whole Loan or Contract plus
interest accrued thereon at the Mortgage Rate or Contract Rate, as applicable,
plus the aggregate amount of expenses incurred by the Master Servicer in
connection with such proceedings and which are reimbursable under the
Agreement, the Issuer will realize a loss in the amount of such difference.
The Master Servicer will be entitled to withdraw or cause to be withdrawn from
the Collection Account out of the Liquidation Proceeds recovered on any
defaulted Whole Loan or Contract amounts representing its normal servicing
compensation on the Whole Loan or Contract, unreimbursed servicing expenses
incurred with respect to the Whole Loan or Contract and any unreimbursed
advances of delinquent payments made with respect to the Whole Loan or
Contract.
55
<PAGE>
If any property securing a defaulted Whole Loan or Contract is damaged the
Master Servicer is not required to expend its own funds to restore the damaged
property unless it determines (i) that such restoration will increase the
proceeds on liquidation of the Whole Loan or Contract after reimbursement of
the Master Servicer for its expenses and (ii) that such expenses will be
recoverable by it from related Insurance Proceeds or Liquidation Proceeds.
As servicer of the Whole Loans or Contracts, a Master Servicer, on behalf of
itself, the Indenture Trustee and the Bondholders, will present claims to the
obligor under each instrument of Credit Support, and will take such reasonable
steps as are necessary to receive payment or to permit recovery thereunder
with respect to defaulted Whole Loans or Contracts.
If a Master Servicer or its designee recovers payments under any instrument
of Credit Support with respect to any defaulted Whole Loan or Contract, the
Master Servicer will be entitled to withdraw or cause to be withdrawn from the
Collection Account out of such proceeds amounts representing its normal
servicing compensation on such Whole Loan or Contract, unreimbursed servicing
expenses incurred with respect to the Whole Loan or Contract and any
unreimbursed advances of delinquent payments made with respect to the Whole
Loan or Contract. See "--Hazard Insurance Policies" and "Description of Credit
Support."
HAZARD INSURANCE POLICIES
Whole Loans
Unless otherwise specified in the related Prospectus Supplement, each
Agreement for an Issuer holding Whole Loans will require the Master Servicer
to cause the mortgagor on each Whole Loan to maintain a hazard insurance
policy providing for such coverage as is required under the related Mortgage
or, if any Mortgage permits the holder thereof to dictate to the mortgagor the
insurance coverage to be maintained on the related Mortgaged Property, then
such coverage as is consistent with the Servicing Standard. Unless otherwise
specified in the related Prospectus Supplement, such coverage will be in
general in an amount equal to the lesser of the principal balance owing on
such Mortgage Loan and the amount necessary to fully compensate for any damage
or loss to the improvements on the Mortgaged Property on a replacement cost
basis, but in either case not less than the amount necessary to avoid the
application of any co-insurance clause contained in the hazard insurance
policy. In the case of High LTV Loans, such hazard insurance policy may not
cover the principal balance owning on such loan. The ability of the Master
Servicer to assure that hazard insurance proceeds are appropriately applied
may be dependent upon its being named as an additional insured under any
hazard insurance policy and under any other insurance policy referred to
below, or upon the extent to which information in this regard is furnished by
mortgagors. All amounts collected by the Master Servicer under any such policy
(except for amounts to be applied to the restoration or repair of the
Mortgaged Property or released to the mortgagor in accordance with the Master
Servicer's normal servicing procedures, subject to the terms and conditions of
the related Mortgage and Mortgage Note) will be deposited in the Collection
Account. The Agreement will provide that the Master Servicer may satisfy its
obligation to cause each mortgagor to maintain such a hazard insurance policy
by the Master Servicer's maintaining a blanket policy insuring against hazard
losses on the Whole Loans. If such blanket policy contains a deductible
clause, the Master Servicer will be required to deposit in the Collection
Account all sums that would have been deposited therein but for such clause.
In general, the standard form of fire and extended coverage policy covers
physical damage to or destruction of the improvements of the property by fire,
lightning, explosion, smoke, windstorm and hail, and riot, strike and civil
commotion, subject to the conditions and exclusions specified in each policy.
Although the policies relating to the Whole Loans will be underwritten by
different insurers under different state laws in accordance with different
applicable state forms, and therefore will not contain identical terms and
conditions, the basic terms thereof are dictated by respective state laws, and
most such policies typically do not cover any physical damage resulting from
war, revolution, governmental actions, floods and other water-related causes,
earth movement (including earthquakes, landslides and mudflows), wet or dry
rot, vermin, domestic animals and certain other kinds of uninsured risks.
56
<PAGE>
The hazard insurance policies covering the Mortgaged Properties securing the
Whole Loans will typically contain a co-insurance clause that in effect
requires the insured at all times to carry insurance of a specified percentage
(generally 80% to 90%) of the full replacement value of the improvements on
the property in order to recover the full amount of any partial loss. If the
insured's coverage falls below this specified percentage, such clause
generally provides that the insurer's liability in the event of partial loss
does not exceed the lesser of (i) the replacement cost of the improvements
less physical depreciation and (ii) such proportion of the loss as the amount
of insurance carried bears to the specified percentage of the full replacement
cost of such improvements.
Each Agreement for an Issuer holding Whole Loans will require the Master
Servicer to cause the mortgagor on each Whole Loan to maintain all such other
insurance coverage with respect to the related Mortgaged Property as is
consistent with the terms of the related Mortgage and the Servicing Standard,
which insurance may include flood insurance (if the related Mortgaged Property
was located at the time of origination in a federally designated flood area).
Any cost incurred by the Master Servicer in maintaining any such insurance
policy will be added to the amount owing under the Mortgage Loan where the
terms of the Mortgage Loan so permit. Such costs may be recovered by the
Master Servicer or Sub-Servicer, as the case may be, from the Collection
Account, with interest thereon, as provided by the Agreement.
Under the terms of the Whole Loans, mortgagors will generally be required to
present claims to insurers under hazard insurance policies maintained on the
related Mortgaged Properties. The Master Servicer, on behalf of the Indenture
Trustee, is obligated to present or cause to be presented claims under any
blanket insurance policy insuring against hazard losses on Mortgaged
Properties securing the Whole Loans. However, the ability of the Master
Servicer to present or cause to be presented such claims is dependent upon the
extent to which information in this regard is furnished to the Master Servicer
by mortgagors.
Contracts
Except as otherwise specified in the related Prospectus Supplement, the
terms of the Agreement for an Issuer holding Contracts will require the Master
Servicer 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 obligor on the related Contract,
whichever is less; provided, however, that the amount of coverage provided by
each such hazard insurance policy shall be sufficient to avoid the application
of any co-insurance clause contained therein. 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 Master Servicer 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. Each
hazard insurance policy caused to be maintained by the Master Servicer shall
contain a standard loss payee clause in favor of the Master Servicer and its
successors and assigns. If any obligor is in default in the payment of
premiums on its hazard insurance policy or policies, the Master Servicer shall
pay such premiums out of its own funds, and may add separately such premium to
the obligor's obligation as provided by the Contract, but may not add such
premium to the remaining principal balance of the Contract.
The Master 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 obligor to maintain a hazard insurance policy with respect to the related
Manufactured Home, one or more blanket insurance policies covering losses on
the obligor's interest in the Contracts resulting from the absence or
insufficiency of individual hazard insurance policies. The Master Servicer
shall pay the premium for such blanket policy on the basis described therein
and shall pay any deductible amount with respect to claims under such policy
relating to the Contracts.
57
<PAGE>
FIDELITY BONDS AND ERRORS AND OMISSIONS INSURANCE
Unless otherwise specified in the related Prospectus Supplement, each
Agreement will require that the Master Servicer obtain and maintain in effect
a fidelity bond or similar form of insurance coverage (which may provide
blanket coverage) or any combination thereof insuring against loss occasioned
by fraud, theft or other intentional misconduct of the officers, employees and
agents of the Master Servicer. The related Agreement will allow the Master
Servicer to self-insure against loss occasioned by the errors and omissions of
the officers, employees and agents of the Master Servicer so long as certain
criteria set forth in the Agreement are met.
DUE-ON-SALE PROVISIONS
The Whole Loans may contain clauses requiring the consent of the mortgagee
to any sale or other transfer of the related Mortgaged Property, or due-on-
sale clauses entitling the mortgagee to accelerate payment of the Whole Loan
upon any sale, transfer or conveyance of the related Mortgaged Property.
Unless otherwise provided in the related Prospectus Supplement, the Master
Servicer will generally enforce any due-on-sale clause to the extent it has
knowledge of the conveyance or proposed conveyance of the underlying Mortgaged
Property and it is entitled to do so under applicable law; provided, however,
that the Master Servicer will not take any action in relation to the
enforcement of any due-on-sale provision which would adversely affect or
jeopardize coverage under any applicable insurance policy. Unless otherwise
specified in the related Prospectus Supplement, any fee collected by or on
behalf of the Master Servicer for entering into an assumption agreement will
be retained by or on behalf of the Master Servicer as additional servicing
compensation. See "Certain Legal Aspects of Mortgage Loans--Due-on-Sale
Clauses." The Contracts may also contain such clauses. Unless otherwise
provided in the related Prospectus Supplement, the Master Servicer will permit
such transfer so long as the transferee satisfies the Master Servicer's then
applicable placement standards. The purpose of such transfers is often to
avoid a default by the transferring obligor. See "Certain Legal Aspects of the
Contracts--Transfers of Manufactured Homes; Enforceability of "Due-on-Sale"
Clauses".
RETAINED INTEREST; SERVICING COMPENSATION AND PAYMENT OF EXPENSES
The Prospectus Supplement for a series of Bonds will specify if there will
be any Retained Interest in the Assets, and, if so, the initial owner thereof.
If so, the Retained Interest will be established on a loan-by-loan basis and
will be specified on an exhibit to the related Agreement. A "Retained
Interest" in an Asset represents a specified portion of the interest payable
thereon. The Retained Interest will be deducted from mortgagor payments as
received and will not be held by the related Issuer.
Unless otherwise specified in the related Prospectus Supplement, the Master
Servicer's and a Sub-Servicer's primary servicing compensation with respect to
a series of Bonds will come from the periodic payment to it of a portion of
the interest payment on each Asset. Since any Retained Interest and a Master
Servicer's primary compensation are percentages of the principal balance of
each Asset, such amounts will decrease in accordance with the amortization of
the Assets. The Prospectus Supplement with respect to a series of Bonds
secured by Whole Loans or Contracts may provide that, as additional
compensation, the Master Servicer or the Sub-Servicers may retain all or a
portion of assumption fees, modification fees, late payment charges or
Prepayment Premiums collected from mortgagors and any interest or other income
which may be earned on funds held in the Collection Account or any account
established by a Sub-Servicer pursuant to the Agreement.
The Master Servicer may, to the extent provided in the related Prospectus
Supplement, pay from its servicing compensation certain expenses incurred in
connection with its servicing and managing of the Assets, including, without
limitation, payment of the fees and disbursements of the Indenture Trustee and
independent accountants, payment of expenses incurred in connection with
distributions and reports to Bondholders, and payment of any other expenses
described in the related Prospectus Supplement. Certain other expenses,
including certain expenses relating to defaults and liquidations on the Whole
Loans or Contracts and, to the extent so provided in the related Prospectus
Supplement, interest thereon at the rate specified therein may be borne by the
Issuer.
58
<PAGE>
If and to the extent provided in the related Prospectus Supplement, the
Master Servicer may be required to apply a portion of the servicing
compensation otherwise payable to it in respect of any Due Period to certain
interest shortfalls resulting from the voluntary prepayment of any Whole Loans
or Contracts of the related Issuer during such period prior to their
respective due dates therein.
EVIDENCE AS TO COMPLIANCE
Each Agreement relating to Assets which include Whole Loans or Contracts
will provide that on or before a specified date in each year, beginning with
the first such date at least six months after the related Cut-off Date, a firm
of independent public accountants will furnish a statement to the Indenture
Trustee to the effect that, on the basis of the examination by such firm
conducted substantially in compliance with either the Uniform Single
Attestation Program for Mortgage Bankers, the Audit Program for Mortgages
serviced for the Federal Home Loan Mortgage Corporation ("FHLMC") or such
other program used by the Master Servicer, the servicing by or on behalf of
the Master Servicer of mortgage loans under agreements substantially similar
to each other (including the related Agreement) was conducted in compliance
with the terms of such agreements or such program except for any significant
exceptions or errors in records that, in the opinion of the firm, either the
Audit Program for Mortgages serviced for FHLMC, or paragraph 4 of the Uniform
Single Attestation Program for Mortgage Bankers, or such other program,
requires it to report. In rendering its statement such firm may rely, as to
matters relating to the direct servicing of mortgage loans by Sub-Servicers,
upon comparable statements for examinations conducted substantially in
compliance with the Uniform Single Attestation Program for Mortgage Bankers or
the Audit Program for Mortgages serviced for FHLMC or such other program used
by such Sub-Servicer (rendered within one year of such statement) of firms of
independent public accountants with respect to the related Sub-Servicer.
Each such Agreement will also provide for delivery to the Indenture Trustee,
on or before a specified date in each year, of an annual statement signed by
two officers of the Master Servicer to the effect that the Master Servicer has
fulfilled its obligations under the Agreement throughout the preceding
calendar year or other specified twelve-month period.
Unless otherwise provided in the related Prospectus Supplement, copies of
such annual accountants' statement and such statements of officers will be
obtainable by Bondholders without charge upon written request to the Master
Servicer at the address set forth in the related Prospectus Supplement.
CERTAIN MATTERS REGARDING A MASTER SERVICER AND THE COMPANY
The Master Servicer, if any, or a servicer for substantially all the Whole
Loans or Contracts under each Agreement will be named in the related
Prospectus Supplement. The entity serving as Master Servicer (or as such
servicer) may be an affiliate of the Company and may have other normal
business relationships with the Company or the Company's affiliates. Reference
herein to the Master Servicer shall be deemed to be to the servicer of
substantially all of the Whole Loans or Contracts, if applicable.
Unless otherwise specified in the related Prospectus Supplement, the related
Agreement will provide that the Master Servicer may resign from its
obligations and duties thereunder only upon a determination that the
performance of its obligations or duties under the Agreement are no longer
permissible under applicable law. No such resignation will become effective
until the Indenture Trustee or a successor servicer has assumed the Master
Servicer's obligations and duties under the Agreement.
Unless otherwise specified in the related Prospectus Supplement, each
Agreement will further provide that neither any Master Servicer, the Company
nor any director, officer, employee, or agent of a Master Servicer or the
Company will be under any liability to the related Issuer or Bondholders for
any action taken, or for refraining from the taking of any action, in good
faith pursuant to the Agreement; provided, however, that neither a Master
Servicer, the Company nor any such person will be protected against any
liability which would otherwise be imposed by reason of willful misfeasance,
bad faith or gross negligence in the performance of
59
<PAGE>
obligations or duties thereunder or by reason of reckless disregard of
obligations and duties thereunder. Unless otherwise specified in the related
Prospectus Supplement, each Agreement will further provide that any Master
Servicer and any director, officer, employee or agent of a Master Servicer
will be entitled to indemnification by the related Issuer and will be held
harmless against any loss, liability or expense incurred in connection with
any legal action relating to the Agreement or the Bonds; provided, however,
that such indemnification will not extend to any loss, liability or expense
(i) related to any specific Mortgage Loan or Mortgage Loans (except as any
such loss, liability or expense shall be otherwise reimbursable pursuant to
such Agreement) or (ii) incurred by reason of willful misfeasance, bad faith
or negligence in the performance of obligations or duties thereunder, or by
reason of reckless disregard of such obligation or duties. In addition, each
Agreement will provide that the Master Servicer will not be under any
obligation to appear in, prosecute or defend any legal action which is not
incidental to its responsibilities under the Agreement and which in its
opinion may involve it in any expense or liability. Any such Master Servicer
may, however, in its discretion undertake any such action which it may deem
necessary or desirable with respect to the Agreement and the rights and duties
of the parties thereto and the interests of the Bondholders thereunder. In
such event, the legal expenses and costs of such action and any liability
resulting therefrom will be expenses, costs and liabilities of the Issuer will
be entitled to be reimbursed therefor.
Any person into which the Master Servicer or the Company may be merged or
consolidated, or any person resulting from any merger or consolidation to
which the Master Servicer is a party, or any person succeeding to the business
of the Master Servicer, will be the successor of the Master Servicer under the
related Agreement.
EVENTS OF DEFAULT UNDER THE AGREEMENT
Unless otherwise provided in the related Prospectus Supplement for an Issuer
holding Whole Loans or Contracts, "Events of Default" under the related
Agreement will include (i) any failure by the Master Servicer to distribute or
cause to be distributed to Bondholders, or to remit to the Indenture Trustee
for distribution to Bondholders, any required payment that continues after a
grace period, if any; (ii) any failure by the Master Servicer duly to observe
or perform in any material respect any of its other covenants or obligations
under the Agreement which continues unremedied for 30 days after written
notice of such failure has been given to the Master Servicer by the Indenture
Trustee or the Company, or to the Master Servicer, the Company and the
Indenture Trustee by the Bond Insurer; (iii) any breach of a representation or
warranty made by the Master Servicer under the Agreement which materially and
adversely affects the interests of Bondholders and which continues unremedied
for 30 days after written notice of such breach has been given to the Master
Servicer by the Indenture Trustee or the Company, or to the Master Servicer,
the Company and the Indenture Trustee by the Bond Insurer; and (iv) certain
events of insolvency, readjustment of debt, marshaling of assets and
liabilities or similar proceedings and certain actions by or on behalf of the
Master Servicer indicating its insolvency or inability to pay its obligations.
Material variations to the foregoing Events of Default (other than to shorten
cure periods or eliminate notice requirements) will be specified in the
related Prospectus Supplement. Unless otherwise specified in the related
Prospectus Supplement, the Master Servicer shall immediately notify the
Indenture Trustee and the Bond Insurer in writing of any Event of Default
under the related Agreement.
RIGHTS UPON EVENT OF DEFAULT UNDER THE AGREEMENT
So long as an Event of Default under an Agreement remains unremedied, either
the Issuer with the consent of the Bond Insurer or the Bond Insurer, or if a
default exists under the Bond Insurance Policy, the holders of at least 51% of
the aggregate Bond Principal Balance of such series may, by notice to the
Master Servicer, terminate all of the rights and obligations of the Master
Servicer under the Agreement (other than its right to receive servicing
compensation and expenses for servicing the Mortgage Loans), whereupon the
Indenture Trustee will succeed to all of the authority and power of the Master
Servicer under the Agreement (except that if the Indenture Trustee is
prohibited by law from obligating itself to make advances regarding delinquent
Mortgage Loans or Contracts, or if the related Prospectus Supplement so
specifies, then the Indenture Trustee will not be obligated to make such
advances) and will be entitled to similar compensation arrangements. Unless
otherwise
60
<PAGE>
specified in the related Prospectus Supplement, in the event that the
Indenture Trustee is unwilling or unable so to act, it may or, at the written
request of the holders of Bonds entitled to at least 51% (or such other
percentage specified in the related Prospectus Supplement) of the Bond
Principal Balances of such series, it shall appoint, or petition a court of
competent jurisdiction for the appointment of, a loan servicing institution
acceptable to the Rating Agency with a net worth at the time of such
appointment of at least $10,000,000 (or such other amount specified in the
related Prospectus Supplement) to act as successor to the Master Servicer
under the Agreement. Pending such appointment, the Indenture Trustee is
obligated to act in such capacity. The Indenture Trustee and any such
successor may agree upon the servicing compensation to be paid, which in no
event may be greater than the compensation payable to the Master Servicer
under the Agreement.
Unless otherwise described in the related Prospectus Supplement, the Bond
Insurer, or if a Bond Insurer default exits, the holders of Bonds representing
at least 51% (or such other percentage specified in the related Prospectus
Supplement) aggregate Bond Principal Balance of such series affected by any
Event of Default will be entitled to waive such Event of Default, except a
default in the making of or the causing to be made any required distribution
on the Bonds. Upon any such waiver of an Event of Default, such Event of
Default shall cease to exist and shall be deemed to have been remedied for
every purpose under the Agreement.
AMENDMENT
Each Agreement may be amended by the Master Servicer, the Indenture Trustee
and the Issuer with the prior written consent of the Bond Insurer, provided
that any amendment be accompanied by a letter from the Rating Agencies to the
effect that the amendment will not result in the downgrading or withdrawal of
the rating then assigned to the Bonds, or the rating then assigned to the
Bonds without taking into account the Bond Insurance Policy.
THE INDENTURE TRUSTEE
The Indenture Trustee under each Indenture will be named in the related
Prospectus Supplement. The commercial bank, national banking association,
banking corporation or trust company serving as Indenture Trustee may have a
banking relationship with the Company and its affiliates and with any Master
Servicer and its affiliates.
DUTIES OF THE INDENTURE TRUSTEE
The Indenture Trustee will make no representations as to the validity or
sufficiency of any Agreement or Indenture, the Bonds or any Asset or related
document and is not accountable for the use or application by or on behalf of
any Master Servicer of any funds paid to the Master Servicer or its designee
in respect of the Bonds or the Assets, or deposited into or withdrawn from the
Collection Account or any other account by or on behalf of the Master
Servicer. If no Event of Default has occurred and is continuing, the Indenture
Trustee is required to perform only those duties specifically required under
the related Agreement or Indenture, as applicable. However, upon receipt of
the various certificates, reports or other instruments required to be
furnished to it, the Indenture Trustee is required to examine such documents
and to determine whether they conform to the requirements of the Agreement or
Indenture, as applicable.
CERTAIN MATTERS REGARDING THE INDENTURE TRUSTEE
Unless otherwise specified in the related Prospectus Supplement, the
Indenture Trustee and any director, officer, employee or agent of the
Indenture Trustee shall be entitled to indemnification out of the Collection
Account for any loss, liability or expense (including costs and expenses of
litigation, and of investigation, counsel fees, damages, judgments and amounts
paid in settlement) incurred in connection with the Indenture Trustee's (i)
enforcing its rights and remedies and protecting the interests, of the
Bondholders during the continuance of an Event of Default, (ii) defending or
prosecuting any legal action in respect of the related Agreement or series
61
<PAGE>
of Bonds (iii) being the mortgagee of record with respect to the Mortgage
Loans held by an Issuer and the owner of record with respect to any Mortgaged
Property acquired in respect thereof for the benefit of Bondholders, or (iv)
acting or refraining from acting in good faith at the direction of the holders
of the related series of Bonds entitled to not less than 25% (or such other
percentage as is specified in the related Agreement with respect to any
particular matter) of the Bond Principal Balance for such series; provided,
however, that such indemnification will not extend to any loss, liability or
expense that constitutes a specific liability of the Indenture Trustee
pursuant to the related Agreement, or to any loss, liability or expense
incurred by reason of willful misfeasance, bad faith or negligence on the part
of the Indenture Trustee in the performance of its obligations and duties
thereunder, or by reason of its reckless disregard of such obligations or
duties, or as may arise from a breach of any representation, warranty or
covenant of the Indenture Trustee made therein.
RESIGNATION AND REMOVAL OF THE INDENTURE TRUSTEE
The Indenture Trustee may at any time resign from its obligations and duties
under an Indenture by giving written notice thereof to the Company, the Master
Servicer, if any, and all Bondholders. Upon receiving such notice of
resignation, the Company or the Issuer is required promptly to appoint a
successor trustee acceptable to the Master Servicer, if any. If no successor
trustee shall have been so appointed and have accepted appointment within 30
days after the giving of such notice of resignation, the resigning Indenture
Trustee may petition any court of competent jurisdiction for the appointment
of a successor trustee.
If at any time the Indenture Trustee shall cease to be eligible to continue
as such under the related Indenture, or if at any time the Indenture Trustee
shall become incapable of acting, or shall be adjudged bankrupt or insolvent,
or a receiver of the Indenture Trustee or of its property shall be appointed,
or any public officer shall take charge or control of the Indenture Trustee or
of its property or affairs for the purpose of rehabilitation, conservation or
liquidation, or if a change in the financial condition of the Indenture
Trustee has adversely affected or will adversely affect the rating on any
class of the Bonds, then the Company or the Issuer may remove the Indenture
Trustee and appoint a successor trustee acceptable to the Master Servicer, if
any. Holders of the Bonds of any series entitled to at least 51% (or such
other percentage specified in the related Prospectus Supplement) of the voting
rights for such series may at any time remove the Indenture Trustee without
cause and appoint a successor trustee.
Any resignation or removal of the Indenture Trustee and appointment of a
successor trustee shall not become effective until acceptance of appointment
by the successor trustee.
CERTAIN TERMS OF THE INDENTURE
Events of Default. Unless otherwise specified in the related Prospectus
Supplement, "Events of Default" under the Indenture for each series of Bonds
include: (a) a default for thirty (30) days (or such other number of days
specified in such Prospectus Supplement) or more in the payment of any
principal of or interest due on any Bonds of such series; (b) failure to
perform any other covenant of the Issuer in the Indenture which continues for
a period of sixty (60) days (or such other number of days specified in such
Prospectus Supplement) after notice thereof is given in accordance with the
procedures described in the related Prospectus Supplement); (c) any
representation or warranty made by the Issuer in the Indenture or in any
certificate or other writing delivered pursuant thereto or in connection
therewith with respect to or affecting such series having been incorrect in a
material respect as of the time made, and such breach is not cured within
sixty (60) days (or such other number of days specified in such Prospectus
Supplement) after notice thereof is given in accordance with the procedures
described in the related Prospectus Supplement; (d) certain events of
bankruptcy, insolvency, receivership or liquidation of the Issuer; or (e) any
other event of default provided in the Indenture with respect to the Bonds of
that series.
If an Event of Default with respect to the Bonds of any series at the time
outstanding occurs and is continuing, the Indenture Trustee may and, at the
written direction of the Bond Insurer, or if a Bond Insurer default exists,
the holders of a majority of the then aggregate outstanding amount of the
Bonds of such series,
62
<PAGE>
shall declare the Bond Principal Balance of all the Bonds of such series to be
due and payable immediately. Such declaration may, under certain
circumstances, be rescinded and annulled by the holders of a majority in
aggregate outstanding Bond Principal Balance of the Bonds of such series.
If, following an Event of Default with respect to any series of Bonds, the
Bonds of such series have been declared to be due and payable, the Indenture
Trustee may, in its discretion (provided that the Bond Insurer or Bondholders
representing more than 50% of the Bond Principal Balances of the Bonds have
not directed the Indenture Trustee to sell the Assets), notwithstanding such
acceleration, elect to maintain possession of the collateral securing the
Bonds of such series and to continue to apply distributions on such collateral
as if there had been no declaration of acceleration if such collateral
continues to provide sufficient funds for the payment of principal of and
interest on the Bonds of such series as they would have become due if there
had not been such a declaration. In addition, the Indenture Trustee may not
sell or otherwise liquidate the Assets securing the Bonds of a series
following an Event of Default, unless (a) the holders of 100% (or such other
percentage specified in the related Prospectus Supplement) of the then
aggregate outstanding Bond Principal Balance of such series consent to such
sale, (b) the proceeds of such sale or liquidation distributable to the
Bondholders are sufficient to pay in full the principal of and accrued
interest, due and unpaid, on the outstanding Bonds of such series at the date
of such sale and to reimburse the Bond Insurer for any amounts drawn under the
Bond Insurance Policy and any other amounts due to the Bond Insurer under the
insurance agreement or (c) the Indenture Trustee determines that such
collateral would not be sufficient on an ongoing basis to make all payments on
such Bonds as such payments would have become due if such Bonds had not been
declared due and payable, and the Indenture Trustee obtains the consent of a
majority of the aggregate Bond Principal Balance (or such other percentage
specified in the related Prospectus Supplement).
In the event that the Indenture Trustee liquidates the collateral in
connection with an Event of Default involving a default for thirty (30) days
(or such other number of days specified in the related Prospectus Supplement)
or more in the payment of principal of or interest on the Bonds of a series,
the Indenture provides that the Indenture Trustee will have a prior lien on
the proceeds of any such liquidation for unpaid fees and expenses. As a
result, upon the occurrence of such an Event of Default, the amount available
for distribution to the Bondholders would be less than would otherwise be the
case. However, the Indenture Trustee may not institute a proceeding for the
enforcement of its lien except in connection with a proceeding for the
enforcement of the lien of the Indenture for the benefit of the Bondholders
after the occurrence of such an Event of Default.
Subject to the provisions of the Indenture relating to the duties of the
Indenture Trustee, in case an Event of Default shall occur and be continuing,
the Indenture Trustee shall be under no obligation to exercise any of the
rights or powers under the Indenture at the request or direction of any of the
Bondholders of such series, unless such holders offered to the Indenture
Trustee security or indemnity satisfactory to it against the costs, expenses
and liabilities which might be incurred by it in complying with such request
or direction. Subject to such provisions for indemnification and certain
limitations contained in the Indenture, the holders of a majority of the Bond
Principal Balance of the Bonds shall have the right to direct the time, method
and place of conducting any proceeding for any remedy available to the
Indenture Trustee or exercising any trust or power conferred on the Indenture
Trustee with respect to the Bonds of such series, and the holders of a
majority of the Bond Principal Balance of the Bonds may, in certain cases,
waive any default with respect thereto, except a default in the payment of
principal or interest or a default in respect of a covenant or provision of
the Indenture that cannot be modified without the waiver or consent of all the
holders of the outstanding Bonds of such series affected thereby.
Discharge of the Indenture. The Indenture will be discharged with respect to
a series of Bonds (except with respect to certain continuing rights specified
in the Indenture) upon the delivery to the Indenture Trustee for cancellation
of all the Bonds of such series or, with certain limitations, upon deposit
with the Indenture Trustee of funds sufficient for the payment in full of all
of the Bonds of such series.
63
<PAGE>
In addition to such discharge with certain limitations, the Indenture will
provide that, if so specified with respect to the Bonds of any series, the
related Issuer will be discharged from any and all obligations in respect of
the Bonds of such series (except for certain obligations relating to temporary
Bonds and exchange of Bonds, to register the transfer of or exchange Bonds of
such series, to replace stolen, lost or mutilated Bonds of such series, to
maintain paying agencies and to hold monies for payment in trust) upon the
deposit with the Indenture Trustee, in trust, of money and/or direct
obligations of or obligations guaranteed by the United States of America which
through the payment of interest and principal in respect thereof in accordance
with their terms will provide money in an amount sufficient to pay the
principal of and each installment of interest on the Bonds of such series on
the maturity date for such Bonds and any installment of interest on such Bonds
in accordance with the terms of the Indenture and the Bonds of such series. In
the event of any such defeasance and discharge of Bonds of such series,
holders of Bonds of such series would be able to look only to such money
and/or direct obligations for payment of principal and interest, if any, on
their Bonds until maturity.
Indenture Trustee's Annual Report. The Indenture Trustee for each series of
Bonds will be required to mail each year to all related Bondholders a brief
report relating to its eligibility and qualification to continue as Indenture
Trustee under the related Indenture, any amounts advanced by it under the
Indenture, the amount, interest rate and maturity date of certain indebtedness
owing by such trust to the applicable Indenture Trustee in its individual
capacity, the property and funds physically held by such Indenture Trustee as
such and any action taken by it that materially affects such Bonds and that
has not been previously reported.
The Indenture Trustee. The Indenture Trustee for a series of Bonds will be
specified in the related Prospectus Supplement. The Indenture Trustee for any
series may resign at any time, in which event the Company will be obligated to
appoint, with the consent of the Bond Insurer, a successor trustee for such
series. The Company may also remove any such Indenture Trustee if such
Indenture Trustee ceases to be eligible to continue as such under the related
Indenture or if such Indenture Trustee becomes insolvent. In such
circumstances the Company will be obligated to appoint a successor trustee for
the applicable series of Bonds. Any resignation or removal of the Indenture
Trustee and appointment of a successor trustee for any series of Bonds does
not become effective until acceptance of the appointment by the successor
trustee for such series.
The bank or trust company serving as Indenture Trustee may have a banking
relationship with the Company or any of its affiliates or the Master Servicer
or any of its affiliates.
DESCRIPTION OF CREDIT SUPPORT
GENERAL
For any series of Bonds, Credit Support may be provided with respect to one
or more classes of Bonds or the related Assets. Credit Support may be in the
form of certain cash accounts, overcollateralization, excess spread, reserve
funds, insurance policies, surety bonds, guarantees, letters of credit or
another method of Credit Support described in the related Prospectus
Supplement, or any combination of the foregoing. If so provided in the related
Prospectus Supplement, any form of Credit Support may be structured so as to
be drawn upon by more than one series to the extent described therein.
Unless otherwise provided in the related Prospectus Supplement for a series
of Bonds, Credit Support will not provide protection against all risks of loss
and will not guarantee repayment of the entire Bond Principal Balance of the
Bonds and interest thereon. If losses or shortfalls occur that exceed the
amount covered by Credit Support or that are not covered by Credit Support,
Bondholders will bear their allocable share of deficiencies. Moreover, if a
form of Credit Support covers more than one series of Bonds (each, a "Covered
Trust"), holders of Bonds evidencing interests in any of such Covered Trusts
will be subject to the risk that such Credit Support will be exhausted by the
claims of other Covered Trusts prior to such Covered Trust receiving any of
its intended share of such coverage.
64
<PAGE>
If Credit Support is provided with respect to one or more classes of Bonds
of a series, or the related Assets, the related Prospectus Supplement will
include a description of (a) the nature and amount of coverage under such
Credit Support, (b) any conditions to payment thereunder not otherwise
described herein, (c) the conditions (if any) under which the amount of
coverage under such Credit Support may be reduced and under which such Credit
Support may be terminated or replaced and (d) the material provisions relating
to such Credit Support. Additionally, the related Prospectus Supplement will
set forth certain information with respect to the obligor under any instrument
of Credit Support, including (i) a brief description of its principal business
activities, (ii) its principal place of business, place of incorporation and
the jurisdiction under which it is chartered or licensed to do business, (iii)
if applicable, the identity of regulatory agencies that exercise primary
jurisdiction over the conduct of its business and (iv) its total assets, and
its stockholders' or policyholders' surplus, if applicable, as of the date
specified in the Prospectus Supplement. See "Risk Factors--Credit Support
Limitations."
OVERCOLLATERALIZATION
If so specified in the related Prospectus Supplement, credit enhancement may
consist of over-collateralization whereby the aggregate principal balance of
the related Mortgage Loans exceeds the aggregate principal balance of the
Bonds of the related series. Such over-collateralization may exist on the
related closing date and/or develop thereafter as a result of the application
of a portion of the interest payments on each Mortgage Loan as an additional
payment in respect of principal to reduce the principal balance of a certain
class or classes of Bonds and, thus, accelerate the rate of payment of
principal on such class or classes of Bonds.
CROSSCOLLATERALIZATION
If so specified in the related Prospectus Supplement, separate groups of
Mortgage Loans may be pledged to secure separate classes of the related series
of Bonds. In such case, credit support may be provided by a
crosscollateralization feature which requires that payments be made with
respect to Bonds secured by one or more groups of Mortgage Loans prior to
distributions to Bonds secured by one or more other groups of Mortgage Loans.
Crosscollateralization may be provided by (i) the allocation of certain excess
amounts generated by one or more groups of Mortgage Loans to one or more other
groups of Mortgage Loans or (ii) the allocation of losses with respect to one
or more groups of Mortgage Loans to one or more other groups of Mortgage
Loans. Such excess amounts will be applied and/or such losses will be
allocated to the class or classes of Bonds of the related series then
outstanding having the lowest payment priority, in each case to the extent and
in the manner more specifically described in the related Prospectus
Supplement. The Prospectus Supplement for a series which includes a cross-
collateralization feature will describe the manner and conditions for applying
such cross-collateralization feature.
EXCESS SPREAD
"Excess Spread" refers to the positive spread that may exist to the extent
specified in the related Prospectus Supplement between the weighted average of
the interest rates (less servicing or other applicable fees) on the Mortgage
Loans and the weighted average of the Bond Interest Rates. Whether at any time
any such positive spread exists will depend on a variety of factors,
including, with respect to a series of Bonds with respect to which both the
Bonds and the Mortgage Loans bear interest at adjustable rates, the
relationship of the movements in the indices applicable to the Mortgage Loans
and those applicable to the Bonds, over which no prediction can be made or
assurance given.
SUBORDINATION
If so specified in the related Prospectus Supplement, a series of Bonds may
consist of one or more classes of Senior Bonds (the "Senior Bonds") and one or
more classes of Subordinated Bonds (the "Subordinated Bonds"). The rights of
the holders of the Subordinated Bonds of a series (the "Subordinated
Bondholders") to receive payments of principal and/or interest (or any
combination thereof) will be subordinated to such rights of
65
<PAGE>
the holders of the Senior Bonds of the same series (the "Senior Bondholders")
to the extent described in the related Prospectus Supplement. This
subordination is intended to enhance the likelihood of regular receipt by the
Senior Bondholders of the full amount of their scheduled payments of principal
and/or interest. The protection afforded to the Senior Bondholders of a series
by means of the subordination feature will be accomplished by (i) the
preferential right of such holders to receive, prior to any payment being made
on the related Subordinated Bonds, the amounts of principal and/or interest
due them on each Payment Date out of the funds available for payment on such
date and, to the extent described in the related Prospectus Supplement, by the
right of such holders to receive future payments that would otherwise have
been payable to the Subordinated Bondholders; or (ii) as otherwise described
in the related Prospectus Supplement. If so specified in the related
Prospectus Supplement, subordination may apply only in the event of certain
types of losses not covered by other forms of credit support, such as hazard
losses not covered by standard hazard insurance policies or losses due to the
bankruptcy or fraud of the borrower. The related Prospectus Supplement will
set forth information concerning, among other things, the amount of
subordination of a class or classes of Subordinated Bonds in a series, the
circumstances in which such subordination will be applicable and the manner,
if any, in which the amount of subordination will decrease over time.
If so specified in the related Prospectus Supplement, delays in receipt of
scheduled payments on the Mortgage Collateral and losses with respect to the
Mortgage Collateral will be borne first by the various classes of Subordinated
Bonds and thereafter by the various classes of Senior Bonds, in each case
under the circumstances and subject to the limitations specified in such
Prospectus Supplement. The aggregate payments in respect of delinquent
payments on the Mortgage Collateral over the lives of the Bonds or at any
time, the aggregate losses in respect of Mortgage Collateral which must be
borne by the Subordinated Bonds by virtue of subordination and the amount of
payments otherwise distributable to the Subordinated Bondholders that will be
distributable to Senior Bondholders on any Payment Date may be limited as
specified in the related Prospectus Supplement. If aggregate payments in
respect of delinquent payments on the Mortgage Collateral or aggregate losses
in respect of such Mortgage Collateral were to exceed the amount specified in
the related Prospectus Supplement, Senior Bondholders would experience losses
on the Bonds.
If so specified in the related Prospectus Supplement, various classes of
Senior Bonds and Subordinated Bonds may themselves be subordinate in their
right to receive certain payments to other classes of Senior and Subordinated
Bonds, respectively.
As between classes of Senior Bonds and as between classes of Subordinated
Bonds, payments may be allocated among such classes (i) in accordance with a
schedule or formula, (ii) in relation to the occurrence of events or (iii)
otherwise, in each case as specified in the related Prospectus Supplement. As
between classes of Subordinated Bonds, payments to Senior Bondholders on
account of delinquencies or losses and payments to the Reserve Fund will be
allocated as specified in the related Prospectus Supplement.
RESERVE FUNDS
If so provided in the Prospectus Supplement for a series of Bonds,
deficiencies in amounts otherwise payable on such Bonds or certain classes
thereof will be covered by one or more reserve funds in which cash, a letter
of credit, Permitted Investments, a demand note or a combination thereof will
be deposited, in the amounts so specified in such Prospectus Supplement. The
reserve funds for a series may also be funded over time by depositing therein
a specified amount of the distributions received on the related Assets as
specified in the related Prospectus Supplement.
Amounts on deposit in any reserve fund for a series, together with the
reinvestment income thereon, if any, will be applied for the purposes, in the
manner, and to the extent specified in the related Prospectus Supplement. A
reserve fund may be provided to increase the likelihood of timely
distributions of principal of and interest on the Bonds. If so specified in
the related Prospectus Supplement, reserve funds may be established to provide
limited protection against only certain types of losses and shortfalls.
Following each Payment Date amounts in a
66
<PAGE>
reserve fund in excess of any amount required to be maintained therein may be
released from the reserve fund under the conditions and to the extent
specified in the related Prospectus Supplement and will not be available for
further application to the Bonds.
Moneys deposited in any Reserve Funds will be invested in Permitted
Investments, except as otherwise specified in the related Prospectus
Supplement. Unless otherwise specified in the related Prospectus Supplement,
any reinvestment income or other gain from such investments will be credited
to the related Reserve Fund for such series, and any loss resulting from such
investments will be charged to such Reserve Fund. However, such income may be
payable to any related Master Servicer or another service provider as
additional compensation. The Reserve Fund, if any, for a series will not be
set up by the Issuer unless otherwise specified in the related Prospectus
Supplement.
Additional information concerning any Reserve Fund will be set forth in the
related Prospectus Supplement, including the initial balance of such Reserve
Fund, the balance required to be maintained in the Reserve Fund, the manner in
which such required balance will decrease over time, the manner of funding
such Reserve Fund, the purposes for which funds in the Reserve Fund may be
applied to make distributions to Bondholders and use of investment earnings
from the Reserve Fund, if any.
BOND INSURANCE POLICIES, SURETY BONDS AND GUARANTEES
If specified in the related Prospectus Supplement, deficiencies in amounts
otherwise payable on Bonds of a series or certain classes thereof will be
covered by insurance policies and/or surety bonds (a "Bond Insurance Policy")
provided by one or more insurance companies or sureties (a "Bond Insurer").
Such instruments may cover, with respect to one or more classes of Bonds of
the related series, timely payments of interest and/or full payments of
principal on the basis of a schedule of principal payments set forth in or
determined in the manner specified in the related Prospectus Supplement. In
addition, if specified in the related Prospectus Supplement, a series of Bonds
may also be covered by insurance or guarantees for the purpose of (i)
maintaining timely payments or providing additional protection against losses
on the Mortgage Collateral pledged to secure such series, (ii) paying
administrative expenses or (iii) establishing a minimum reinvestment rate on
the payments made in respect of such Mortgage Collateral or principal payment
rate on such Mortgage Collateral. Such arrangements may include agreements
under which Bondholders are entitled to receive amounts deposited in various
accounts held by the Indenture Trustee upon the terms specified in such
Prospectus Supplement. A copy of any such instrument for a series will be
filed with the Commission as an exhibit to a Current Report on Form 8-K to be
filed within 15 days of issuance of the Bonds of the related series.
LETTER OF CREDIT
If so specified in the related Prospectus Supplement, credit enhancement may
be provided by a letter of credit. The letter of credit, if any, with respect
to a series of Bonds will be issued by the bank or financial institution
specified in the related Prospectus Supplement (the "L/C Bank"). Under the
letter of credit, the L/C Bank will be obligated to honor drawings thereunder
in an aggregate fixed dollar amount, net of unreimbursed payments thereunder,
equal to the percentage specified in the related Prospectus Supplement of the
aggregate principal balance of the Mortgage Loans pledged to secure the
related series of Bonds on the related Cut-off Date or of one or more classes
of Bonds (the "L/C Percentage"). If so specified in the related Prospectus
Supplement, the letter of credit may permit drawings in the event of losses
not covered by insurance policies or other credit support, such as losses
arising from damage not covered by standard hazard insurance policies, losses
resulting from the bankruptcy of a borrower and the application of certain
provisions of the federal Bankruptcy Code, or losses resulting from denial of
insurance coverage due to misrepresentations in connection with the
origination of a Mortgage Loan. The amount available under the letter of
credit will, in all cases, be reduced to the extent of the unreimbursed
payments thereunder. The obligations of the L/C Bank under the letter of
credit for each series of Bonds will expire at the date specified in the
related Prospectus Supplement.
67
<PAGE>
CREDIT SUPPORT WITH RESPECT TO MBS
If so provided in the Prospectus Supplement for a series of Bonds, the MBS
of the related Issuer and/or the Mortgage Loans underlying such MBS may be
covered by one or more of the types of Credit Support described herein. The
related Prospectus Supplement will specify as to each such form of Credit
Support the information indicated above with respect thereto, to the extent
such information is material and available.
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS
The following discussion contains summaries, which are general in nature, of
certain legal aspects of loans secured by single-family or multi-family
residential properties. 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 is situated. The summaries are qualified in their entirety by reference
to the applicable federal and state laws governing the Mortgage Loans. See
"Description of the Assets--Assets."
GENERAL
All of the Mortgage Loans are loans evidenced by a note or bond and secured
by instruments granting a security interest in real property which may be
mortgages, deeds of trust, security deeds or deeds to secure debt, depending
upon the prevailing practice and law in the state in which the Mortgaged
Property is located. Mortgages, deeds of trust and deeds to secure debt are
herein collectively referred to as "mortgages." Any of the foregoing types of
mortgages will create a lien upon, or grant a title interest in, the subject
property, the priority of which will depend on the terms of the particular
security instrument, as well as separate, recorded, contractual arrangements
with others holding interests in the mortgaged property, the knowledge of the
parties to such instrument as well as the order of recordation of the
instrument in the appropriate public recording office. However, recording does
not generally establish priority over governmental claims for real estate
taxes and assessments and other charges imposed under governmental police
powers.
TYPES OF MORTGAGE INSTRUMENTS
A mortgage either creates a lien against or constitutes a conveyance of real
property between two parties--a mortgagor (the borrower and usually the owner
of the subject property) and a mortgagee (the lender). In contrast, a deed of
trust is a three-party instrument, among a trustor (the equivalent of a
mortgagor), a trustee to whom the mortgaged property is conveyed, and a
beneficiary (the lender) for whose benefit the conveyance is made. As used in
this Prospectus, unless the context otherwise requires, "mortgagor" includes
the trustor under a deed of trust and a grantor under a security deed or a
deed to secure debt. Under a deed of trust, the mortgagor grants the property,
irrevocably until the debt is paid, in trust, generally with a power of sale
as security for the indebtedness evidenced by the related note. A deed to
secure debt typically has two parties. By executing a deed to secure debt, the
grantor conveys title to, as opposed to merely creating a lien upon, the
subject property to the grantee until such time as the underlying debt is
repaid, generally with a power of sale as security for the indebtedness
evidenced by the related mortgage note. In case the mortgagor under a mortgage
is a land trust, there would be an additional party because legal title to the
property is held by a land trustee under a land trust agreement for the
benefit of the mortgagor. At origination of a mortgage loan involving a land
trust, the mortgagor executes a separate undertaking to make payments on the
mortgage note. The mortgagee's authority under a mortgage, the trustee's
authority under a deed of trust and the grantee's authority under a deed to
secure debt are governed by the express provisions of the mortgage, the law of
the state in which the real property is located, certain federal laws
(including, without limitation, the Soldiers' and Sailors' Civil Relief Act of
1940, as hereinafter defined) and, in some cases, in deed of trust
transactions, the directions of the beneficiary.
The Mortgages that encumber Multifamily Properties may contain an assignment
of rents and leases, pursuant to which the mortgagor assigns to the lender the
mortgagor's right, title and interest as landlord under each lease and the
income derived therefrom, while retaining a revocable license to collect the
rents for so long as there is no default unless rents are to be paid directly
to the lender. If the mortgagor defaults, the license terminates and the
lender is entitled to collect the rents. Local law may require that the lender
take possession of the property and/or obtain a court-appointed receiver
before becoming entitled to collect the rents.
68
<PAGE>
INTEREST IN REAL PROPERTY
The real property covered by a mortgage, deed of trust, security deed or
deed to secure debt is most often the fee estate in land and improvements.
However, such an instrument may encumber other interests in real property such
as a tenant's interest in a lease of land or improvements, or both, and the
leasehold estate created by such lease. An instrument covering an interest in
real property other than the fee estate requires special provisions in the
instrument creating such interest or in the mortgage, deed of trust, security
deed or deed to secure debt, to protect the mortgagee against termination of
such interest before the mortgage, deed of trust, security deed or deed to
secure debt is paid. Unless otherwise specified in the Prospectus Supplement,
the Company or the Asset Seller will make certain representations and
warranties in the Agreement with respect to any Mortgage Loans that are
secured by an interest in a leasehold estate. Such representation and
warranties, if applicable, will be set forth in the Prospectus Supplement.
COOPERATIVE LOANS
If specified in the Prospectus Supplement relating to a series of Offered
Bonds, the Mortgage Loans may also consist of cooperative apartment loans
("Cooperative Loans") secured by security interests in shares issued by a
cooperative housing corporation (a "Cooperative") and in the related
proprietary leases or occupancy agreements granting exclusive rights to occupy
specific dwelling units in the cooperatives' buildings. The security agreement
will create a lien upon, or grant a title interest in, the property which it
covers, the priority of which will depend on the terms of the particular
security agreement as well as the order of recordation of the agreement in the
appropriate recording office. Such a lien or title interest is not prior to
the lien for real estate taxes and assessments and other charges imposed under
governmental police powers.
Each cooperative owns in fee or has a leasehold interest in all the real
property and owns in fee or leases the building and all separate dwelling
units therein. The cooperative is directly responsible for property management
and, in most cases, payment of real estate taxes, other governmental
impositions and hazard and liability insurance. If there is a blanket mortgage
or mortgages on the cooperative apartment building or underlying land, as is
generally the case, or an underlying lease of the land, as is the case in some
instances, the cooperative, as property mortgagor, or lessee, as the case may
be, is also responsible for meeting these mortgage or rental obligations. A
blanket mortgage is ordinarily incurred by the cooperative in connection with
either the construction or purchase of the cooperative's apartment building or
obtaining of capital by the cooperative. The interest of the occupant under
proprietary leases or occupancy agreements as to which that cooperative is the
landlord are generally subordinate to the interest of the holder of a blanket
mortgage and to the interest of the holder of a land lease. If the cooperative
is unable to meet the payment obligations (i) arising under a blanket
mortgage, the mortgagee holding a blanket mortgage could foreclose on that
mortgage and terminate all subordinate proprietary leases and occupancy
agreements or (ii) arising under its land lease, the holder of the landlord's
interest under the land lease could terminate it and all subordinate
proprietary leases and occupancy agreements. Also, a 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 final
payment at maturity. The inability of the cooperative to refinance a mortgage
and its consequent inability to make such final payment could lead to
foreclosure by the mortgagee. Similarly, a land lease has an expiration date
and the inability of the cooperative to extend its term or, in the
alternative, to purchase the land could lead to termination of the
cooperatives's interest in the property and termination of all proprietary
leases and occupancy agreement. In either event, a foreclosure by the holder
of a blanket mortgage or the termination of the underlying lease could
eliminate or significantly diminish the value of any collateral held by the
lender that financed the purchase by an individual tenant stockholder of
cooperative shares or, in the case of the Mortgage Loans, the collateral
securing the Cooperative Loans.
The cooperative is owned by tenant-stockholders who, through ownership of
stock or shares in the corporation, receive proprietary lease or occupancy
agreements which confer exclusive rights to occupy specific
69
<PAGE>
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 are
financed through a cooperative share loan evidenced by a promissory note and
secured by an assignment of and a security interest in the occupancy agreement
or proprietary lease and a security interest in the related cooperative
shares. The lender generally takes possession of the share certificate and a
counterpart of the proprietary lease or occupancy agreement and a financing
statement covering the proprietary lease or occupancy agreement and the
cooperative shares is filed in the appropriate state and local offices to
perfect the lender's interest in its collateral. Subject to the limitations
discussed below, upon default of the tenant-stockholder, the lender may sue
for judgment on the 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. See "Foreclosure--Cooperative Loans" below.
TAX ASPECTS OF COOPERATIVE OWNERSHIP
In general, a "tenant-stockholder" (as defined in Section 216(b)(2) of the
Code) of a corporation that qualifies as a "cooperative housing corporation"
within the meaning of Section 216(b)(1) of the Code is allowed a deduction for
amounts paid or accrued within his taxable year to the corporation
representing his proportionate share of certain interest expenses and certain
real estate taxes allowable as a deduction under Section 216(a) of the Code to
the corporation under Sections 163 and 164 of the Code. In order for a
corporation to qualify under Section 216(b)(1) of the Code for its taxable
year in which such items are allowable as a deduction to the corporation, such
section requires, among other things, that at least 80% of the gross income of
the corporation be derived from its tenant-stockholders. By virtue of this
requirement, the status of a corporation for purposes of Section 216(b)(1) of
the Code must be determined on a year-to-year basis. Consequently, there can
be no assurance that cooperatives relating to the Cooperative Loans will
qualify under such section for any particular year. In the event that such a
cooperative fails to qualify for one or more years, the value of the
collateral securing any related Cooperative Loans could be significantly
impaired because no deduction would be allowable to tenant-stockholders under
Section 216(a) of the Code with respect to those years. In view of the
significance of the tax benefits accorded tenant-stockholders of a corporation
that qualifies under Section 216(b)(1) of the Code, the likelihood that such a
failure would be permitted to continue over a period of years appears remote.
FORECLOSURE
General
Foreclosure is a legal procedure that allows the mortgagee to recover its
mortgage debt by enforcing its rights and available legal remedies under the
mortgage. If the mortgagor defaults in payment or performance of its
obligations under the note or mortgage, the mortgagee has the right to
institute foreclosure proceedings to sell the mortgaged property at public
auction to satisfy the indebtedness.
Foreclosure procedures with respect to the enforcement of a mortgage vary
from state to state. Two primary methods of foreclosing a mortgage are
judicial foreclosure and non-judicial foreclosure pursuant to a power of sale
granted in the mortgage instrument. There are several other foreclosure
procedures available in some states that are either infrequently used or
available only in certain limited circumstances, such as strict foreclosure.
Judicial Foreclosure
A judicial foreclosure proceeding is conducted in a court having
jurisdiction over the mortgaged property. Generally, the action is initiated
by the service of legal pleadings upon all parties having an interest of
record in the real property. Delays in completion of the foreclosure may
occasionally result from difficulties in locating defendants. When the
lender's right to foreclose is contested, the legal proceedings can be time-
consuming. Upon successful completion of a judicial foreclosure proceeding,
the court generally issues a judgment of foreclosure and appoints a referee or
other officer to conduct a public sale of the mortgaged property, the proceeds
of which are used to satisfy the judgment. Such sales are made in accordance
with procedures that vary from state to state.
70
<PAGE>
Equitable Limitations on Enforceability of Certain Provisions
United States courts have traditionally imposed general equitable principles
to limit the remedies available to a mortgagee in connection with foreclosure.
These equitable principles are generally designed to relieve the mortgagor
from the legal effect of mortgage defaults, to the extent that such effect is
perceived as harsh or unfair. Relying on such principles, a court may alter
the specific terms of a loan to the extent it considers necessary to prevent
or remedy an injustice, undue oppression or overreaching, or may require the
lender to undertake affirmative and expensive actions to determine the cause
of the mortgagor's default and the likelihood that the mortgagor will be able
to reinstate the loan. In some cases, courts have substituted their judgment
for the lender's and have required that lenders reinstate loans or recast
payment schedules in order to accommodate mortgagors who are suffering from a
temporary financial disability. In other cases, courts have limited the right
of the lender to foreclose if the default under the mortgage is not monetary,
e.g., the mortgagor failed to maintain the mortgaged property adequately or
the mortgagor executed a junior mortgage on the mortgaged property. The
exercise by the court of its equity powers will depend on the individual
circumstances of each case presented to it. Finally, some courts have been
faced with the issue of whether federal or state constitutional provisions
reflecting due process concerns for adequate notice require that a mortgagor
receive notice in addition to statutorily-prescribed minimum notice. For the
most part, these cases have upheld the reasonableness of the notice provisions
or have found that a public sale under a mortgage providing for a power of
sale does not involve sufficient state action to afford constitutional
protections to the mortgagor.
Non-Judicial Foreclosure/Power of Sale
Foreclosure of a deed of trust is generally accomplished by a non-judicial
trustee's sale pursuant to the power of sale granted in the deed of trust. A
power of sale is typically granted in a deed of trust. It may also be
contained in any other type of mortgage instrument. A power of sale allows a
non-judicial public sale to be conducted generally following a request from
the beneficiary/lender to the trustee to sell the property upon any default by
the mortgagor under the terms of the mortgage note or the mortgage instrument
and after notice of sale is given in accordance with the terms of the mortgage
instrument, as well as applicable state law. In some states, prior to such
sale, the trustee under a deed of trust must record a notice of default and
notice of sale and send a copy to the mortgagor and to any other party who has
recorded a request for a copy of a notice of default and notice of sale. In
addition, in some states the trustee must provide notice to any other party
having an interest of record in the real property, including junior
lienholders. A notice of sale must be posted in a public place and, in most
states, published for a specified period of time in one or more newspapers.
The mortgagor or junior lienholder may then have the right, during a
reinstatement period required in some states, to cure the default by paying
the entire actual amount in arrears (without acceleration) plus the expenses
incurred in enforcing the obligation. In other states, the mortgagor or the
junior lienholder is not provided a period to reinstate the loan, but has only
the right to pay off the entire debt to prevent the foreclosure sale.
Generally, the procedure for public sale, the parties entitled to notice, the
method of giving notice and the applicable time periods are governed by state
law and vary among the states. Foreclosure of a deed to secure debt is also
generally accomplished by a non-judicial sale similar to that required by a
deed of trust, except that the lender or its agent, rather than a trustee, is
typically empowered to perform the sale in accordance with the terms of the
deed to secure debt and applicable law.
Public Sale
A third party may be unwilling to purchase a mortgaged property at a public
sale because of the difficulty in determining the value of such property at
the time of sale, due to, among other things, redemption rights which may
exist and the possibility of physical deterioration of the property during the
foreclosure proceedings. For these reasons, it is common for the lender to
purchase the mortgaged property for an amount equal to or less than the
underlying debt and accrued and unpaid interest plus the expenses of
foreclosure, in which case the mortgagor's debt will be extinguished unless
the lender purchases the property for a lesser amount in order to preserve its
right against a borrower to seek a deficiency judgment and such remedy is
available under state law
71
<PAGE>
and the related loan documents. In the same states, there is a statutory
minimum purchase price which the lender may offer for the property and
generally, state law controls the amount of foreclosure costs and expenses
which may be recovered by a lender. Thereafter, subject to the mortgagor's
right in some states to remain in possession during a redemption period, if
applicable, the lender will become the owner of the property and have both the
benefits and burdens of ownership of the mortgaged property. For example, the
lender will become obligated to pay taxes, obtain casualty insurance and to
make 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 and
in some states, the lender may be entitled to a deficiency judgment. Moreover,
a lender commonly incurs substantial legal fees and court costs in acquiring a
mortgaged property through contested foreclosure and/or bankruptcy
proceedings. Generally, state law controls the amount of foreclosure expenses
and costs, including attorneys' fees, that may be recovered by a lender.
A junior mortgagee may not foreclose on the property securing the junior
mortgage unless it forecloses subject to senior mortgages and any other prior
liens, in which case it may be obliged to make payments on the senior
mortgages to avoid their foreclosure. In addition, in the event that the
foreclosure of a junior mortgage triggers the enforcement of a "due-on-sale"
clause contained in a senior mortgage, the junior mortgagee may be required to
pay the full amount of the senior mortgage to avoid its foreclosure.
Accordingly, with respect to those Mortgage Loans, if any, that are junior
mortgage loans, if the lender purchases the property the lender's title will
be subject to all senior mortgages, prior liens and certain governmental
liens.
The proceeds received by the referee or trustee from the sale are applied
first to the costs, fees and expenses of sale and then in satisfaction of the
indebtedness secured by the mortgage under which the sale was conducted. Any
proceeds remaining after satisfaction of senior mortgage debt are generally
payable to the holders of junior mortgages and other liens and claims in order
of their priority, whether or not the mortgagor is in default. Any additional
proceeds are generally payable to the mortgagor. The payment of the proceeds
to the holders of junior mortgages may occur in the foreclosure action of the
senior mortgage or a subsequent ancillary proceeding or may require the
institution of separate legal proceedings by such holders.
Rights of Redemption
The purposes of a foreclosure action are to enable the mortgagee to realize
upon its security and to bar the mortgagor, and all persons who have an
interest in the property which is subordinate to the mortgage being
foreclosed, from exercise of their "equity of redemption." The doctrine of
equity of redemption provides that, until the property covered by a mortgage
has been sold in accordance with a properly conducted foreclosure and
foreclosure sale, those having an interest which is subordinate to that of the
foreclosing mortgagee have an equity of redemption and may redeem the property
by paying the entire debt with interest. In addition, in some states, when a
foreclosure action has been commenced, the redeeming party must pay certain
costs of such action. Those having an equity of redemption must generally be
made parties and joined in the foreclosure proceeding in order for their
equity of redemption to be cut off and terminated.
The equity of redemption is a common-law (non-statutory) right which exists
prior to completion of the foreclosure, is not waivable by the mortgagor, must
be exercised prior to foreclosure sale and should be distinguished from the
post-sale statutory rights of redemption. In some states, after sale pursuant
to a deed of trust or foreclosure of a mortgage, the mortgagor and foreclosed
junior lienors are given a statutory period in which to redeem the property
from the foreclosure sale. In some states, statutory redemption may occur only
upon payment of the foreclosure sale price. In other states, redemption may be
authorized if the former mortgagor 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 exercise of a right of redemption
would defeat the title of any purchaser from a foreclosure sale or sale under
a deed of trust. Consequently, the practical effect of the redemption right is
to force the lender to maintain the property and pay the expenses of ownership
until the redemption period has expired. In some states, a post-sale statutory
right of redemption may exist following a judicial foreclosure, but not
following a trustee's sale under a deed of trust.
72
<PAGE>
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 By-laws, 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 owed by such tenant-stockholder, including mechanics'
liens against the cooperative apartment building incurred by such tenant-
stockholder. The proprietary lease or occupancy agreement generally permit 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 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 the 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.
Because of the nature of Cooperative Loans, lenders do not require the
tenant-stockholder (i.e., the borrower) to obtain title insurance of any type.
Consequently, the existence of any prior liens or other imperfections of title
affecting the cooperative's building or real estate also may adversely affect
the marketability of the shares allocated to the dwelling unit in the event of
foreclosure.
In some states, foreclosure on the Cooperative shares is accomplished by a
sale in accordance with the provisions of Article 9 of 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 Cooperatives 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.
In the case of foreclosure on a building which was converted from a rental
building to a building owned by a Cooperative under a non-eviction plan, some
states require that a purchaser at a foreclosure sale take the property
subject to rent control and rent stabilization laws which apply to certain
tenants who elected to remain in a building so converted.
73
<PAGE>
JUNIOR MORTGAGES
Some of the Mortgage Loans may be secured by junior mortgages or deeds of
trust, which are subordinate to first or other senior mortgages or deeds of
trust held by other lenders. The rights of the Issuer as the holder of a
junior deed of trust or a junior mortgage are subordinate in lien and in
payment to those of the holder of the senior mortgage or deed of trust,
including the prior rights of the senior mortgagee or beneficiary to receive
and apply hazard insurance and condemnation proceeds and, upon default of the
mortgagor, to cause a foreclosure on the property. Upon completion of the
foreclosure proceedings by the holder of the senior mortgage or the sale
pursuant to the deed of trust, the junior mortgagee's or junior beneficiary's
lien will be extinguished unless the junior lienholder satisfies the defaulted
senior loan or asserts its subordinate interest in a property in foreclosure
proceedings. See "--Foreclosure" herein.
Furthermore, because the terms of the junior mortgage or deed of trust are
subordinate to the terms of the first mortgage or deed of trust, in the event
of a conflict between the terms of the first mortgage or deed of trust and the
junior mortgage or deed of trust, the terms of the first mortgage or deed of
trust will generally govern. Upon a failure of the mortgagor or trustor to
perform any of its obligations, the senior mortgagee or beneficiary, subject
to the terms of the senior mortgage or deed of trust, may have the right to
perform the obligation itself. Generally, all sums so expended by the
mortgagee or beneficiary become part of the indebtedness secured by the
mortgage or deed of trust. To the extent a first mortgagee expends such sums,
such sums will generally have priority over all sums due under the junior
mortgage.
ANTI-DEFICIENCY LEGISLATION AND OTHER LIMITATIONS ON LENDERS
Statutes in some states limit the right of a beneficiary under a deed of
trust or a mortgagee under a mortgage to obtain a deficiency judgment against
the mortgagor following foreclosure or sale under a deed of trust. A
deficiency judgment would be a personal judgment against the former mortgagor
equal to the difference between the net amount realized upon the public sale
of the real property and the amount due to the lender. Some states require the
lender to exhaust the security afforded under a mortgage by foreclosure in an
attempt to satisfy the full debt before bringing a personal action against the
mortgagor. In certain other states, the lender has the option of bringing a
personal action against the mortgagor on the debt without first exhausting
such security; however, in some of these states, the lender, following
judgment on such personal action, may be deemed to have elected a remedy and
may be precluded from exercising remedies with respect to the security. In
some cases, a lender will be precluded from exercising any additional rights
under the note or mortgage if it has taken any prior enforcement action.
Consequently, the practical effect of the election requirement, in those
states permitting such election, is that lenders will usually proceed against
the security first rather than bringing a personal action against the
mortgagor. Finally, other statutory provisions limit any deficiency judgment
against the former mortgagor 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 lender
from obtaining a large deficiency judgment against the former mortgagor as a
result of low or no bids at the judicial sale.
In addition to laws limiting or prohibiting deficiency judgments, numerous
other federal and state statutory provisions, including the federal bankruptcy
laws and state laws affording relief to debtors, may interfere with or affect
the ability of the secured mortgage lender to realize upon collateral or
enforce a deficiency judgment. For example, under the federal Bankruptcy Code,
as amended from time to time (Title 11 of the United States Code) (the
"Bankruptcy Code"), virtually all actions (including foreclosure actions and
deficiency judgment proceedings) to collect a debt are automatically stayed
upon the filing of the bankruptcy petition and, often, no interest or
principal payments are made during the course of the bankruptcy case. The
delay and the consequences thereof caused by such automatic stay can be
significant. Also, under the Bankruptcy Code, the filing of a petition in a
bankruptcy by or on behalf of a union lender may stay the senior lender from
taking action to foreclose out of such junior lien. Moreover, with respect to
federal bankruptcy law, a court with federal bankruptcy jurisdiction may
permit a debtor through his or her Chapter 11 or Chapter 13 rehabilitative
plan to cure a monetary default in respect of a mortgage loan on a debtor's
residence by paying arrearages within a
74
<PAGE>
reasonable time period and reinstating the original mortgage loan payment
schedule even though the lender accelerated the mortgage loan and final
judgment of foreclosure had been entered in state court (provided no sale of
the residence had yet occurred) prior to the filing of the debtor's petition.
Some courts with federal bankruptcy jurisdiction have approved plans, based on
the particular facts of the reorganization case, that effected the curing of a
mortgage loan default by paying 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 allowed modifications that include reducing the amount of
each monthly payment, changing the rate of interest, altering the repayment
schedule, forgiving all or a portion of the debt and reducing the lender's
security interest to the value of the residence, thus leaving the lender a
general unsecured creditor for the difference between the value of the
residence and the outstanding balance of the loan. Generally, however, the
terms of a mortgage loan secured only by a mortgage on real property that is
the debtor's principal residence may not be modified pursuant to a plan
confirmed pursuant to Chapter 11 or Chapter 13 except with respect to mortgage
payment arrearages, which may be cured within a reasonable time period.
In the case of income-producing Multifamily Properties, federal bankruptcy
law may also have the effect of interfering with or affecting the ability of
the secured lender to enforce the borrower's assignment of rents and leases
related to the mortgaged property. Under Section 362 of the Bankruptcy Code,
the lender will be stayed from enforcing the assignment, and the legal
proceedings necessary to resolve the issue could be time-consuming, with
resulting delays in the lender's receipt of the rents.
Certain tax liens arising under the Internal Revenue Code of 1986, as
amended, may in certain circumstances provide priority over the lien of a
mortgage or deed of trust. In addition, substantive requirements are imposed
upon mortgage lenders in connection with the origination and the servicing of
mortgage loans by numerous federal and some state consumer protection laws.
These laws include the federal Truth-in-Lending Act, Real Estate Settlement
Procedures Act, Equal Credit Opportunity Act, Fair Credit Billing Act, Fair
Credit Reporting Act and related statutes. These federal laws impose specific
statutory liabilities upon lenders who originate mortgage loans and who fail
to comply with the provisions of the law. In some cases this liability may
affect assignees of the mortgage loans.
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.
ENVIRONMENTAL LEGISLATION
Under the federal Comprehensive Environmental Response, Compensation and
Liability Act, as amended ("CERCLA"), and under state law in certain states, a
secured party which takes a deed in lieu of foreclosure, purchases a mortgaged
property at a foreclosure sale, or operates a mortgaged property may become
liable in certain circumstances for the costs of cleaning up hazardous
substances regardless of whether they have contaminated the property. CERCLA
imposes strict, as well as joint and several, liability on several classes of
potentially hazardous substances regardless of whether they have contaminated
the property, CERCLA imposes strict, as well as joint and several, liability
on several classes of potentially responsible parties, including current
owners and operators of the property who did not cause or contribute to the
contamination. Furthermore, liability under CERCLA is not limited to the
original or unamortized principal balance of a loan or to the value of the
property securing a loan. Lenders may be held liable under CERCLA as owners or
operators unless they qualify for the secured creditor exemption to CERCLA.
This exemption exempts from the definition of owners and operators those who,
without participating in the management of a facility, hold indicia of
ownership primarily to protect a security interest in the facility.
75
<PAGE>
The Asset Conservation, Lender Liability and Deposit Insurance Act of 1996
(the "Conservation Act") amended, among other things, the provisions of CERCLA
with respect to lender liability and the secured creditor exemption. The
Conservation Act offers substantial protection to lenders by defining the
activities in which a lender can engage and still have the benefit of the
secured creditor exemption. In order for lender to be deemed to have
participated in the management of a mortgaged property, the lender must
actually participate in the operational affairs of the property of the
borrower. The Conservation Act provides that "merely having the capacity to
influence, or unexercised right to control" operations does not constitute
participation in management. A lender will lose the protection of the secured
creditor exemption only if it exercises decision-making control over the
borrower's environmental compliance and hazardous substance handling and
disposal practices, or assumes day-to-day management of all operational
functions of the mortgaged property. The Conservation Act also provides that a
lender will continue to have the benefit of the secured creditor exemption
even if it forecloses on a mortgaged property, purchases it at a foreclosure
sale or accepts a deed-in-lieu of foreclosure provided that the lender seeks
to sell the mortgaged property at the earliest practicable commercially
reasonable time on commercially reasonable terms.
Other federal and state laws in certain circumstances may impose liability
on a secured party which takes a deed-in-lieu of foreclosure, purchases a
mortgaged property at a foreclosure sale, or operates a mortgaged property on
which contaminants other than CERCLA hazardous substances are present,
including petroleum, agricultural chemicals, hazardous wastes, asbestos,
radon, and lead-based paint. Such cleanup costs may be substantial. It is
possible that such cleanup costs could become a liability of the Indenture
Trustee and reduce the amounts otherwise distributable to the holders of the
related series of Bonds. Moreover, certain federal statutes and certain states
by statute impose a lien for any cleanup costs incurred by such state on the
property that is the subject of such cleanup costs (an "Environmental Lien").
All subsequent liens on such property generally are subordinated to such an
Environmental Lien and, in some states, even prior recorded liens are
subordinated to Environmental Liens. In the latter states, the security
interest of the Indenture Trustee in a related parcel of real property that is
subject to such an Environmental Lien could be adversely affected.
Traditionally, many residential mortgage lenders have not taken steps to
evaluate whether contaminants are present with respect to any mortgaged
property prior to the origination of the mortgage loan or prior to foreclosure
or accepting a deed-in-lieu of foreclosure. Accordingly, the Company has not
made and will not make such evaluations prior to the origination of the Bonds.
Neither the Company nor any replacement Servicer will be required by any
Agreement to undertake any such evaluations prior to foreclosure or accepting
a deed-in-lieu of foreclosure. The Company does not make any representations
or warranties or assume any liability with respect to the absence or effect of
contaminants on any related real property or any casualty resulting from the
presence or effect of contaminants. However, the Company will not be obligated
to foreclose on related real property or accept a deed-in-lieu of foreclosure
if it knows or reasonably believes that there are material contaminated
conditions on such property. A failure so to foreclose may reduce the amounts
otherwise available to holders of the related series of Bonds.
DUE-ON-SALE CLAUSES
Unless the related Prospectus Supplement indicates otherwise, the Mortgage
Loans will contain due-on-sale clauses. These clauses generally provide that
the lender may accelerate the maturity of the loan if the mortgagor sells,
transfers or conveys the related Mortgaged Property. The enforceability of
due-on-sale clauses has been the subject of legislation or litigation in many
states and, in some cases, the enforceability of these clauses was limited or
denied. However, with respect to certain loans the Garn-St Germain Depository
Institutions Act of 1982 (the "Garn-St. Germain Act") preempts state
constitutional, statutory and case law that prohibits the enforcement of due-
on-sale clauses and permits lenders to enforce these clauses in accordance
with their terms, subject to certain limited exceptions. Due-on-sale clauses
contained in mortgage loans originated by federal savings and loan
associations or federal savings banks are fully enforceable pursuant to
regulations of the United States Federal Home Loan Bank Board, as succeeded by
the Office of Thrift Supervision, which preempt state law restrictions on the
enforcement of such clauses. Similarly, "due-on-sale" clauses in mortgage
loans made by national banks and federal credit unions are now fully
enforceable pursuant to preemptive regulations of the Comptroller of the
Currency and the National Credit Union Administration, respectively.
76
<PAGE>
The Garn-St Germain Act also sets forth nine specific instances in which a
mortgage lender covered by the 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 also
prohibit the imposition of a prepayment penalty upon the acceleration of a
loan pursuant to a due-on-sale clause. The inability to enforce a "due-on-
sale" clause may result in a mortgage that bears an interest rate below the
current market rate being assumed by a new home buyer rather than being paid
off, which may affect the average life of the Mortgage Loans and the number of
Mortgage Loans which may extend to maturity.
PREPAYMENT CHARGES
Under certain state laws, prepayment charges may not be imposed after a
certain period of time following the origination of mortgage loans secured by
liens encumbering owner-occupied residential properties, if such loans are
paid prior to maturity. With respect to Mortgaged Properties that are owner-
occupied, it is anticipated that prepayment charges may not be imposed with
respect to many of the Mortgage Loans. The absence of such a restraint on
prepayment, particularly with respect to fixed rate Mortgage Loans having
higher Mortgage Rates, may increase the likelihood of refinancing or other
early retirement of such loans.
SUBORDINATE FINANCING
Where a mortgagor encumbers mortgaged property with one or more junior
liens, the senior lender is subjected to additional risk. First, the mortgagor
may have difficulty servicing and repaying multiple loans. In addition, if the
junior loan permits recourse to the mortgagor (as junior loans often do) and
the senior loan does not, a mortgagor may be more likely to repay sums due on
the junior loan than those on the senior loan. Second, acts of the senior
lender that prejudice the junior lender or impair the junior lender's security
may create a superior equity in favor of the junior lender. For example, if
the mortgagor and the senior lender agree to an increase in the principal
amount of or the interest rate payable on the senior loan, the senior lender
may lose its priority to the extent any existing junior lender is harmed or
the mortgagor is additionally burdened. Third, if the mortgagor defaults on
the senior loan and/or any junior loan or loans, the existence of junior loans
and actions taken by junior lenders can impair the security available to the
senior lender and can interfere with or delay the taking of action by the
senior lender. Moreover, the bankruptcy of a junior lender may operate to stay
foreclosure or similar proceedings by the senior lender.
APPLICABILITY OF USURY LAWS
Title V of the Depository Institutions Deregulation and Monetary Control Act
of 1980, enacted in March 1980 ("Title V"), provides that state usury
limitations shall not apply to certain types of residential first mortgage
loans originated by certain lenders after March 31, 1980. A similar federal
statute was in effect with respect to mortgage loans made during the first
three months of 1980. The Office of Thrift Supervision is authorized to issue
rules and regulations and to publish interpretations governing implementation
of Title V. The statute authorized any state to reimpose interest rate limits
by adopting, before April 1, 1983, a law or constitutional provision that
expressly rejects application of the federal law. In addition, even where
Title V is not so rejected, any state is authorized by the law to adopt a
provision limiting discount points or other charges on mortgage loans covered
by Title V. Certain states have taken action to reimpose interest rate limits
and/or to limit discount points or other charges.
The Company believes that a court interpreting Title V would hold that
residential first mortgage loans that are originated on or after January 1,
1980 are subject to federal preemption. Therefore, in a state that has not
taken the requisite action to reject application of Title V or to adopt a
provision limiting discount points or other charges prior to origination of
such mortgage loans, any such limitation under such state's usury law would
not apply to such mortgage loans.
77
<PAGE>
In any state in which application of Title V has been expressly rejected or
a provision limiting discount points or other charges is adopted, no mortgage
loan originated after the date of such state action will be eligible for
inclusion in the Assets unless (i) such mortgage loan provides for such
interest rate, discount points and charges as are permitted in such state or
(ii) such mortgage loan provides that the terms thereof shall be construed in
accordance with the laws of another state under which such interest rate,
discount points and charges would not be usurious and the mortgagor's counsel
has rendered an opinion that such choice of law provision would be given
effect.
Statutes differ in their provisions as to the consequences of a usurious
loan. One group of statutes requires the lender to forfeit the interest due
above the applicable limit or impose a specified penalty. Under this statutory
scheme, the mortgagor may cancel the recorded mortgage or deed of trust upon
paying its debt with lawful interest, and the lender may foreclose, but only
for the debt plus lawful interest. A second group of statutes is more severe.
A violation of this type of usury law results in the invalidation of the
transaction, thereby permitting the mortgagor to cancel the recorded mortgage
or deed of trust without any payment or prohibiting the lender from
foreclosing.
ALTERNATIVE MORTGAGE INSTRUMENTS
Alternative mortgage instruments, including adjustable rate mortgage loans
and early ownership mortgage loans, originated by non-federally chartered
lenders have historically been subject to a variety of restrictions. Such
restrictions differed from state to state, resulting in difficulties in
determining whether a particular alternative mortgage instrument originated by
a state-chartered lender was in compliance with applicable law. These
difficulties were alleviated substantially as a result of the enactment of
Title VIII of the Garn-St Germain Act ("Title VIII"). Title VIII provides
that, notwithstanding any state law to the contrary, state-chartered banks may
originate alternative mortgage instruments in accordance with regulations
promulgated by the Comptroller of the Currency with respect to origination of
alternative mortgage instruments by national banks; state-chartered credit
unions may originate alternative mortgage instruments in accordance with
regulations promulgated by the National Credit Union Administration with
respect to origination of alternative mortgage instruments by federal credit
unions; and all other non-federally chartered housing creditors, including
state-chartered savings and loan associations, state-chartered savings banks
and mutual savings banks and mortgage banking companies, may originate
alternative mortgage instruments in accordance with the regulations
promulgated by the Federal Home Loan Bank Board, predecessor to the Office of
Thrift Supervision, with respect to origination of alternative mortgage
instruments by federal savings and loan associations. Title VIII provides that
any state may reject applicability of the provisions of Title VIII by
adopting, prior to October 15, 1985, a law or constitutional provision
expressly rejecting the applicability of such provisions. Certain states have
taken such action.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT OF 1940
Under the terms of the Soldiers' and Sailors' Civil Relief Act of 1940, as
amended (the "Relief Act"), a mortgagor who enters military service after the
origination of such mortgagor's Mortgage Loan (including a mortgagor who was
in reserve status and is called to active duty after origination of the
Mortgage Loan), may not be charged interest (including fees and charges) above
an annual rate of 6% during the period of such mortgagor's active duty status,
unless a court orders otherwise upon application of the lender. The Relief Act
applies to mortgagors who are members of the Army, Navy, Air Force, Marines,
National Guard, Reserves, Coast Guard and officers of the U.S. Public Health
Service assigned to duty with the military. Because the Relief Act applies to
mortgagors who enter military service (including reservists who are called to
active duty) after origination of the related Mortgage Loan, no information
can be provided as to the number of loans that may be affected by the Relief
Act. Application of the Relief Act would adversely affect, for an
indeterminate period of time, the ability of any servicer to collect full
amounts of interest on certain of the Mortgage Loans. Any shortfalls in
interest collections resulting from the application of the Relief Act would
result in a reduction of the amounts distributable to the holders of the
related series of Bonds, and would not be covered by advances or, unless
otherwise specified in the related Prospectus Supplement, any form of Credit
Support provided in
78
<PAGE>
connection with such Bonds. In addition, the Relief Act imposes limitations
that would impair the ability of the servicer to foreclose on an affected
Mortgage Loan during the mortgagor's period of active duty status, and, under
certain circumstances, during an additional three month period thereafter.
Thus, in the event that the Relief Act or similar legislation or regulations
applies to any Mortgage Loan which goes into default, there may be delays in
payment and losses on the related bonds in connection therewith. Any other
interest shortfalls, deferrals or forgiveness of payments on the Mortgage
Loans resulting from similar legislation or regulations may result in delays
in payments or losses to holders of the related series of Bonds.
FORFEITURES IN DRUG AND RICO PROCEEDINGS
Federal law provides that property owned by persons convicted of drug-
related crimes or of criminal violations of the Racketeer Influenced and
Corrupt Organizations ("RICO") statute can be seized by the government if the
property was used in, or purchased with the proceeds of, such crimes. Under
procedures contained in the Comprehensive Crime Control Act of 1984 (the
"Crime Control Act"), the government may seize the property even before
conviction. The government must publish notice of the forfeiture proceeding
and may give notice to all parties "known to have an alleged interest in the
property," including the holders of mortgage loans.
A lender may avoid forfeiture of its interest in the property if it
establishes that: (i) its mortgage was executed and recorded before commission
of the crime upon which the forfeiture is based, or (ii) the lender was, at
the time of execution of the mortgage, "reasonably without cause to believe"
that the property was used in, or purchased with the proceeds of, illegal drug
or RICO activities.
CERTAIN LEGAL ASPECTS OF THE CONTRACTS
The following discussion contains summaries, which are general in nature, of
certain legal matters relating to the Contracts. 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 Contracts is situated. The summaries are qualified in
their entirety by reference to the appropriate laws of the states in which
Contracts may be originated.
GENERAL
As a result of the assignment of the Contracts to the Indenture Trustee, the
Indenture Trustee will succeed collectively to all of the rights (including
the right to receive payment on the Contracts) of the obligee under the
Contracts. 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 loan. Certain aspects of
both features of the Contracts are described more fully below.
The Contracts generally are "chattel paper" as defined in the Uniform
Commercial Code (the "UCC") in effect in the states in 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 Master Servicer will transfer physical
possession of the Contracts to the Indenture Trustee or its custodian or may
retain possession of the Contracts as custodian for the Indenture Trustee. In
addition, the Master Servicer will make an appropriate filing of a UCC-1
financing statement in the appropriate states to give notice of the Indenture
Trustee's ownership of the Contracts. Unless otherwise specified in the
related Prospectus Supplement, the Contracts will not be stamped or marked
otherwise to reflect their assignment from the Company to the Indenture
Trustee. Therefore, if, through negligence, fraud or otherwise, a subsequent
purchaser were able to take physical possession of the Contracts without
notice of such assignment, the Indenture Trustee's interest in Contracts could
be defeated.
79
<PAGE>
BOND INTERESTS IN THE MANUFACTURED HOMES
Except as set forth below, under the laws of most states, manufactured
housing constitutes personal property and is subject to the motor vehicle
registration laws of the state or other jurisdiction in which the unit is
located. In a few states, where certificates of title are not required for
manufactured homes, security interests are perfected by the filing of a
financing statement under Article 9 of the UCC which has been adopted by all
states. Such financing statements are effective for five years and must be
renewed prior to the end of each five year period. The certificate of title
laws adopted by the majority of states provide that ownership of motor
vehicles and manufactured housing shall be evidenced by a certificate of title
issued by the motor vehicles department (or a similar entity) of such state.
In the states that have enacted certificate of title laws, a security interest
in a unit of manufactured housing, so long as it is not attached to land in so
permanent a fashion as to become a fixture, is generally perfected by the
recording of such interest on the certificate of title to the unit in the
appropriate motor vehicle registration office or by delivery of the required
documents and payment of a fee to such office, depending on state law.
The Manufactured Homes securing the Contracts may be located in all 50
states. Bond 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 Asset Seller 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 Asset Seller fails,
due to clerical error, 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 Asset Seller
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 laws, the holder of the
security interest must file either a "fixture filing" under the provisions of
the UCC or a real estate mortgage under the real estate laws of the state
where the home is located. These filings must be made in the real estate
records office of the county where the home is located. Substantially all of
the Contracts contain provisions prohibiting the borrower from permanently
attaching the Manufactured Home to its site. 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 its site, other parties could obtain an interest in the
Manufactured Home which is prior to the security interest originally retained
by the Asset Seller and transferred to the Company. With respect to a series
of Bonds and if so described in the related Prospectus Supplement, the Master
Servicer may be required to perfect a security interest in the Manufactured
Home under applicable real estate laws. The Warranting Party will represent
that as of the date of the sale to the Company it has obtained a perfected
first priority security interest by proper notation or delivery of the
required documents and fees with respect to substantially all of the
Manufactured Homes securing the Contracts.
The Company will cause the security interests in the Manufactured Homes to
be assigned to the Indenture Trustee on behalf of the Bondholders. Unless
otherwise specified in the related Prospectus Supplement, neither the Company
nor the Indenture Trustee will amend the certificates of title (or file UCC-3
statements) to identify the Indenture Trustee as the new secured party, and
neither the Company nor the Master Servicer will deliver the certificates of
title to the Indenture Trustee or note thereon the interest of the Indenture
Trustee. Accordingly, the Asset Seller (or other originator of the Contracts)
will continue to be named as the secured party on the certificates of title
relating to the Manufactured Homes. In some states, such assignment is an
effective
80
<PAGE>
conveyance of such security interest without amendment of any lien noted on
the related certificate of title and the new secured party succeeds to Master
Servicer's rights as the secured party. However, in some states, in the
absence of an amendment to the certificate of title (or the filing of a UCC-3
statement), such assignment of the security interest in the Manufactured Home
may not be held effective or such security interests may not be perfected and
in the absence of such notation or delivery to the Indenture Trustee, the
assignment of the security interest in the Manufactured Home may not be
effective against creditors of the Asset Seller (or such other originator of
the Contracts) or a trustee in bankruptcy of the Asset Seller (or such other
originator).
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 Asset Seller (or
other originator of the Contracts) on the certificate of title or delivery of
the required documents and fees will be sufficient to protect the Bondholders
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 assigned to
the Indenture Trustee 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 Indenture Trustee as the new secured party on the
certificate of title that, through fraud or negligence, the security interest
of the Indenture Trustee could be released.
In the event that the owner of a Manufactured Home moves it to a state other
than the state in which such Manufactured Home initially is registered, under
the laws of most states the perfected security interest in the Manufactured
Home would continue for four months after such relocation and thereafter only
if and after the owner re-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 Indenture Trustee's security interest in such state, the
security interest in the Manufactured Home would cease to be perfected. A
majority of states generally require surrender of a certificate of title to
re-register a Manufactured Home; accordingly, the Master Servicer 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 Asset Seller (or other originator) would receive
notice of surrender if the security interest in the Manufactured Home is noted
on the certificate of title. Accordingly, the Indenture 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
contracts, the Master Servicer takes 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 contract
sells a manufactured home, the Master Servicer must surrender possession of
the certificate of title or, if it is noted as lienholder on the certificate
of title, 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 the Agreement, the Master Servicer is obligated to take such steps, at
the Master Servicer's expense, as are necessary to maintain perfection of
security interests in the Manufactured Homes.
Under the laws of most states, liens for repairs performed on a Manufactured
Home and liens for personal property taxes take priority even over a perfected
security interest. The Warranting Party 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 Indenture
Trustee or Bondholders in the event such a lien arises.
ENFORCEMENT OF SECURITY INTERESTS IN MANUFACTURED HOMES
General. Repossession of manufactured housing is governed by state law. A
few states have enacted legislation that requires that the debtor be given an
opportunity to cure its default (typically 30 days to bring the account
current) before repossession can commence. So long as a manufactured home has
not become so
81
<PAGE>
attached to real estate that it would be treated as a part of the real estate
under the law of the state where it is located, repossession of such home in
the event of a default by the obligor will generally be governed by the UCC
(except in Louisiana), Article 9 of the UCC provides the statutory framework
for the repossession of manufactured housing. While the UCC as adopted by the
various states may vary in certain small particulars, the general repossession
procedure established by the UCC is as follows:
(i) Except in those states where the debtor must receive notice of the
right to cure a default, repossession can commence immediately upon default
without prior notice. Repossession may be effected either through self-help
(peaceable retaking without court order), voluntary repossession or through
judicial process (repossession pursuant to court-issued writ of replevin).
The self-help and/or voluntary repossession methods are more commonly
employed, and are accomplished simply by retaking possession of the
manufactured home. In cases in which the debtor objects or raises a defense
to repossession, a court order must be obtained from the appropriate state
court, and the manufactured home must then be repossessed in accordance
with that order. Whether the method employed is self-help, voluntary
repossession or judicial repossession, the repossession can be accomplished
either by an actual physical removal of the manufactured home to a secure
location for refurbishment and resale or by removing the occupants and
their belongings from the manufactured home and maintaining possession of
the manufactured home on the location where the occupants were residing.
Various factors may affect whether the manufactured home is physically
removed or left on location, such as the nature and term of the lease of
the site on which it is located and the condition of the unit. In many
cases, leaving the manufactured home on location is preferable, in the
event that the home is already set up, because the expenses of retaking and
redelivery will be saved. However, in those cases where the home is left on
location, expenses for site rentals will usually be incurred.
(ii) Once repossession has been achieved, preparation for the subsequent
disposition of the manufactured home can commence. The disposition may be
by public or private sale provided the method, manner, time, place and
terms of the sale are commercially reasonable.
(iii) Sale proceeds are to be applied first to repossession expenses
(expenses incurred in retaking, storage, preparing for sale to include
refurbishing costs and selling) and then to satisfaction of the
indebtedness. While some states impose prohibitions or limitations on
deficiency judgments if the net proceeds from resale do not cover the full
amount of the indebtedness, the remainder may be sought from the debtor in
the form of a deficiency judgment in those states that do not prohibit or
limit such judgments. The deficiency judgment is a personal judgment
against the debtor for the shortfall. Occasionally, after resale of a
manufactured home and payment of all expenses and indebtedness, there is a
surplus of funds. In that case, the UCC requires the party suing for the
deficiency judgment to remit the surplus to the debtor. Because the
defaulting owner of a manufactured home generally has very little capital
or income available following repossession, a deficiency judgment may not
be sought in many cases or, if obtained, will be settled at a significant
discount in light of the defaulting owner's strained financial condition.
Louisiana Law. Any contract secured by a manufactured home located in
Louisiana will be governed by Louisiana law rather than Article 9 of the UCC.
Louisiana laws provide similar mechanisms for perfection and enforcement of
security interests in manufactured housing used as collateral for an
installment sale contract or installment loan agreement.
Under Louisiana law, a manufactured home that has been permanently affixed
to real estate will nevertheless remain subject to the motor vehicle
registration laws unless the obligor and any holder of a security interest in
the property execute and file in the real estate records for the parish in
which the property is located a document converting the unit into real
property. A manufactured home that is converted into real property but is then
removed from its site can be converted back to personal property governed by
the motor vehicle registration laws if the obligor executes and files various
documents in the appropriate real estate records and all mortgagees under real
estate mortgages on the property and the land to which it was affixed file
releases with the motor vehicle commission.
82
<PAGE>
So long as a manufactured home remains subject to the Louisiana motor
vehicle laws, liens are recorded on the certificate of title by the motor
vehicle commissioner and repossession can be accomplished by voluntary consent
of the obligor, executory process (repossession proceedings which must be
initiated through the courts but which involve minimal court supervision) or a
civil suit for possession. In connection with a voluntary surrender, the
obligor must be given a full release from liability for all amounts due under
the contract. In executing process repossessions, a sheriff's sale (without
court supervision) is permitted, unless the obligor brings suit to enjoin the
sale, and the lender is prohibited from seeking a deficiency judgment against
the obligor unless the lender obtained an appraisal of the manufactured home
prior to the sale and the property was sold for at least two-thirds of its
appraised value.
Under the terms of the federal Soldiers' and Sailors' Civil Relief Act of
1940, as amended (the "Relief Act"), an obligor who enters military service
after the origination of such obligor's Contract (including an obligor who is
a member of the National Guard or is in reserve status at the time of the
origination of the Contract and is later called to active duty) may not be
charged interest above an annual rate of 6% during the period of such
obligor's active duty status, unless a court orders otherwise upon application
of the lender. It is possible that such action could have an effect, for an
indeterminate period of time, on the ability of the Master Servicer to collect
full amounts of interest on certain of the Contracts. Any shortfall in
interest collections resulting from the application of the Relief Act, to the
extent not covered by the subordination of a class of Subordinated Bonds,
could result in losses to the holders of a series of Bonds. In addition, the
Relief Act imposes limitations which would impair the ability of the Master
Servicer to foreclose on an affected Contract during the obligor's period of
active duty status. Thus, in the event that such a Contract goes into default,
there may be delays and losses occasioned by the inability to realize upon the
Manufactured Home in a timely fashion.
CONSUMER PROTECTION LAWS
The so-called "Holder-in-Due-Course" Rule of the Federal Trade Commission
(the "FTC Rule") has the effect of subjecting a seller (and certain related
creditors and their assignees) in a consumer credit transaction and any
assignee of the creditor to all claims and defenses which the debtor in the
transaction could assert against the seller of the goods. Liability under the
FTC Rule is limited to the amounts paid by a debtor on the contract, and the
holder of the contract may also be unable to collect amounts still due
thereunder. Most of the Contracts assigned to the Indenture Trustee will be
subject to the requirements of the FTC Rule. Accordingly, the Indenture
Trustee, as holder of the Contracts, will be subject to any claims or defenses
that the purchaser of the related manufactured home may assert against the
seller of the manufactured home, subject to a maximum liability equal to the
amounts paid by the obligor on the Contract. If an obligor is successful in
asserting any such claim or defense, and if the seller had or should have had
knowledge of such claim or defense, the Master Servicer will have the right to
require the seller to repurchase the Contract because of a breach of its
seller's representation and warranty that no claims or defenses exist that
would affect the obligor's obligation to make the required payments under the
Contract. The seller would then have the right to require the originating
dealer to repurchase the Contract from it and might also have the right to
recover from the dealer any losses suffered by the seller with respect to
which the dealer would have been primarily liable to the obligor. Numerous
other federal and state consumer protection laws impose requirements
applicable to the origination 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.
ANTI-DEFICIENCY LEGISLATION AND OTHER LIMITATIONS ON LENDERS
Contracts. In addition to the laws limiting or prohibiting deficiency
judgments, numerous other statutory provisions, including federal bankruptcy
laws and related state laws, may interfere with or affect the ability of a
lender to realize upon collateral and/or enforce a deficiency judgment. For
example, in a Chapter 13 proceeding under the federal bankruptcy law, a court
may prevent a lender from repossessing a home, and, as part of the
83
<PAGE>
rehabilitation plan, reduce the amount of the secured indebtedness to the
market value of the home at the time of bankruptcy (as determined by the
court), leaving the party providing financing as a general unsecured creditor
for the remainder of the indebtedness. A bankruptcy court may also reduce the
monthly payments due under a contract or change the rate of interest and time
of repayment of the indebtedness.
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 Master Servicer and permit the
acceleration of the maturity of the Contracts by the Master Servicer upon any
such sale or transfer that is not consented to. Unless otherwise specified in
the related Prospectus Supplement, the Master Servicer expects that it will
permit most transfers of Manufactured Homes and not accelerate the maturity of
the related Contracts. 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 Master
Servicer desires to accelerate the maturity of the related Contract, the
Master Servicer's ability to do so will depend on the enforceability under
state law of the "due-on-sale" clause. The Garn-St Germain Depositary
Institutions Act of 1982 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 Master
Servicer may be prohibited from enforcing a "due-on-sale" clause in respect of
certain Manufactured Homes.
APPLICABILITY OF USURY LAWS
Title V of the Company Institutions Deregulation and Monetary Control Act of
1980, as amended ("Title V"), provides that, subject to the following
conditions, state usury limitations shall not apply to any loan which is
secured by a first lien on certain kinds of manufactured housing. The
Contracts would be covered if they satisfy certain conditions, among other
things, governing the terms of any prepayments, late charges and deferral fees
and requiring a 30-day notice period prior to instituting any action leading
to repossession of or foreclosure with respect to the related unit.
Title V authorized any state to reimpose limitations on interest rates and
finance charges by adopting before April 1, 1983 a law or constitutional
provision which expressly rejects application of the federal law. Fifteen
states adopted such a law prior to the April 1, 1983 deadline. In addition,
even where Title V was not so rejected, any state is authorized by the law to
adopt a provision limiting discount points or other charges on loans covered
by Title V. In any state in which application of Title V was expressly
rejected or a provision limiting discount points or other charges has been
adopted, no Contract which imposes finance charges or provides for discount
points or charges in excess of permitted levels has been included in the
Assets. The related Asset Seller will represent that all of the Contracts
comply with applicable usury law.
FORMALDEHYDE LITIGATION WITH RESPECT TO CONTRACTS
A number of lawsuits are pending in the United States alleging personal
injury from exposure to the chemical formaldehyde, which is present in many
building materials, including such components of manufactured housing as
plywood flooring and wall paneling. Some of these lawsuits are pending against
manufacturers of manufactured housing, suppliers of component parts, and
related persons in the distribution process. The Company is aware of a limited
number of cases in which plaintiffs have won judgments in these lawsuits.
Under the FTC Rule, which is described above under "Consumer Protection
Laws", the holder of any Contract secured by a Manufactured Home with respect
to which a formaldehyde claim has been successfully asserted may be liable to
the obligor for the amount paid by the obligor on the related Contract and may
be unable to collect amounts still due under the Contract. In the event an
obligor is successful in asserting such a claim, the related Bondholders could
suffer a loss if (i) the related seller fails or cannot be required to
repurchase
84
<PAGE>
the affected Contract for a breach of representation and warranty and (ii) the
Master Servicer or the Indenture Trustee were unsuccessful in asserting any
claim of contribution or subrogation on behalf of the Bondholders against the
manufacturer or other persons who were directly liable to the plaintiff for
the damages. Typical products liability insurance policies held by
manufacturers and component suppliers of manufactured homes may not cover
liabilities arising from formaldehyde in manufactured housing, with the result
that recoveries from such manufacturers, suppliers or other persons may be
limited to their corporate assets without the benefit of insurance.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
GENERAL
The following is a general discussion of certain anticipated federal income
tax consequences of the purchase, ownership and disposition of the Bonds
offered hereunder. This discussion has been prepared with the advice of
Stinson, Mag & Fizzell, P.C., counsel to the Company and the Issuer, and, to
the extent it states legal conclusions, represents the opinion of such
counsel, subject to the limitations set forth herein and in the related
Prospectus Supplement. This discussion is directed solely to Bondholders that
hold the Bonds as capital assets within the meaning of Section 1221 of the
Code and does not purport to discuss all federal income tax consequences that
may be applicable to particular categories of investors, some of which (such
as banks, insurance companies and foreign investors) may be subject to special
rules. Further, the authorities on which this discussion, and the opinion
referred to below, are based are subject to change or differing
interpretations, which could apply retroactively. Prospective investors should
note that no rulings have been or will be sought from the Internal Revenue
Service ("IRS") with respect to any of the federal income tax consequences
discussed below, and no assurance can be given the IRS will not take contrary
positions. In addition to the federal income tax consequences described
herein, potential investors should consider the state and local tax
consequences, if any, of the purchase, ownership and disposition of the Bonds.
See "State and Other Tax Consequences." Bondholders are advised to consult
their tax advisors concerning the federal, state, local or other tax
consequences to them of the purchase, ownership and disposition of the Bonds
offered hereunder.
CLASSIFICATION OF THE ISSUER AND THE BONDS
Taxable mortgage pool ("TMP") rules enacted as part of the Tax Reform Act of
1986 treat certain arrangements that securitize real estate mortgages as
taxable corporations. An entity will be characterized as a TMP if it does not
make an election to be classified as a "real estate mortgage investment
conduit" (a "REMIC") or a "financial asset securitization investment trust" (a
"FASIT") and (i) substantially all of its assets are debt obligations or
interests therein and more than 50 percent of such debt obligations or
interests consist of real estate mortgages or interests therein, (ii) the
entity is the obligor under debt obligations with two or more maturities, and
(iii) payments on the debt obligations referred to in (ii) bear a relationship
to payments on the debt obligations or interests referred to in (i).
Furthermore, in certain circumstances, a group of assets held by an entity can
be treated as a separate TMP if the above requirements are met with respect to
such assets.
The Company does not intend to make an election for any Issuer to be a REMIC
or FASIT. It is possible, therefore, that an Issuer or a portion of an Issuer
relating to the ownership of certain Assets and the Bonds related thereto
could be treated as a TMP for federal income tax purposes. The related
Prospectus Supplement for each series of Bonds will discuss whether the Issuer
is anticipated to be characterized as a TMP. It is anticipated that each
Issuer will be one hundred percent owned by the Company, which is a "qualified
REIT subsidiary" (as defined in Section 856(i)(2) of the Code) of NovaStar
Financial, which itself is a REIT. As a result, if the Issuer does not
constitute a TMP, all of the assets of the Issuer should be treated as owned
by NovaStar Financial for federal income tax purposes. If an Issuer is
classified as a TMP, it is anticipated that it would qualify as a "qualified
REIT subsidiary" of NovaStar Financial. Such characterization would result
only in the shareholders of NovaStar Financial being required to include in
income certain "excess inclusion" income generated by the TMP and would not
result in entity-level, corporate income taxation with respect to the Issuer.
On the other hand,
85
<PAGE>
if the Issuer constitutes a TMP but fails to qualify or continue to be treated
as a "qualified REIT subsidiary" by reason of NovaStar Financial's failure to
continue to qualify as a REIT for federal income tax purposes, or for any
other reason, the net income of the Issuer would be subject to corporate
income tax and the Issuer would not be permitted to be included on a
consolidated income tax return of another corporate entity. No assurance can
be given with regard to whether the assets of any Issuer will be treated as
owned by NovaStar Financial or to the prospective qualification of any Issuer
as a "qualified REIT subsidiary" or of NovaStar Financial as a REIT for
federal income tax purposes.
Upon the issuance of a series of Bonds, Stinson, Mag & Fizzell, P.C.,
counsel to the Company, will deliver its opinion generally to the effect that,
for federal income tax purposes, assuming compliance with all provisions of
the Indenture and certain related documents, the Bonds will be treated as
indebtedness.
Because the Bonds will be treated as indebtedness of the Issuer, among other
things, (i) Bonds held by a domestic building and loan association will not
constitute "loans ... secured by an interest in real property" within the
meaning of Code Section 7701(a)(19)(C)(v), (ii) Bonds held by a real estate
investment trust will not constitute "real estate assets" within the meaning
of Code Section 856(c)(4)(A) and interest on Bonds will not be considered
"interest on obligations secured by mortgages on real property" within the
meaning of Code Section 856(c)(3)(B), and (iii) Bonds held by a regulated
investment company will not constitute "Government Securities Government
Securities" within the meaning of Code Section 851(b)(4)(A)(i).
INTEREST AND ORIGINAL ISSUE DISCOUNT
General. The following general discussion is based in part upon the rules
governing original issue discount that are set forth in Sections 1271-1273 and
1275 of the Code and in the Treasury regulations issued thereunder (the "OID
Regulations OID Regulations"). The related Prospectus Supplement for a series
of Bonds will disclose whether such Bonds are anticipated to be issued with
"original issue discount" within the meaning of Code Section 1273(a). Interest
on any class of Bonds other than Bonds issued with original issue discount
generally will be includible in income of the Bondholder thereof in accordance
with such holder's applicable method of accounting. Any holders of Bonds
issued with original issue discount generally will be required to include
original issue discount in income as it accrues, in accordance with the method
described below, in advance of the receipt of the cash attributable to such
income.
Original Issue Discount Defined. Original issue discount, if any, on a Bond
generally will equal the excess of the Bond's stated redemption price at
maturity over its issue price. The issue price of a particular class of Bonds
will be the first cash price at which a substantial amount of Bonds of that
class is sold (excluding sales to bond houses, brokers or similar persons or
organizations), which generally will be set forth on the cover page of the
Prospectus Supplement for each series of Bonds. Under the OID Regulations, the
stated redemption price at maturity of a Bond generally will equal the total
of all payments to be made on such Bond other than "qualified stated
interest." "Qualified stated interest" includes interest that is
unconditionally payable at least annually at a single fixed rate, or in the
case of a variable rate debt instrument, at one or more "qualified floating
rates," a single "objective rate," a combination of a single fixed rate and
one or more "qualified floating rates" or a "qualified inverse floating rate."
In general, a variable rate debt instrument is an instrument (i) the issue
price of which does not exceed the total noncontingent principal payments by
more than the lessor of (A) .015 multiplied by the product of the total
noncontingent principal payments and the number of complete years to maturity
from the issue date (or, in the case of an installment obligation, the
weighted average maturity), or (B) 15 percent of the total noncontingent
principal payments, (ii) that does not provide for any stated interest other
than that described above, (iii) that provides for any qualified floating rate
or objective rate to be set at the current value of that rate, and (iv) that
provides for no contingent principal payments.
In the case of Bonds constituting variable rate debt instruments, the
determination of the total amount of original issue discount and the timing of
the inclusion thereof will vary according to the characteristics of such
Bonds. If the original issue discount rules apply to such Bonds, the related
Prospectus Supplement will describe the manner in which such rules will be
applied by the Issuer with respect to those Bonds in preparing information
86
<PAGE>
returns to the Bondholders and the IRS. Additionally , in certain cases, Bonds
may constitute contingent payment debt instruments, in which case the related
Prospectus Supplement will also describe the application of the original issue
discount rules to such instruments.
If the accrued interest to be paid to a Bondholder on the first Payment Date
is computed with respect to a period that begins prior to the closing date, a
portion of the purchase price paid for a Bond will reflect such accrued
interest. In such cases, information returns to the Bondholders and the IRS
will be based on the position that the portion of the purchase price paid for
the interest accrued with respect to periods prior to the closing date is
treated as part of the overall purchase price of such Bond (and not as a
separate asset the purchase price of which is recovered entirely out of
interest received on the next Payment Date) and that portion of the interest
paid on the first Payment Date in excess of interest accrued for a number of
days corresponding to the number of days from the closing date to the first
Payment Date should be included in the stated redemption price of such Bond.
However, the OID Regulations state that all or some portion of such accrued
interest in certain situations may be treated as a separate asset the cost of
which is recovered entirely out of interest paid on the first Payment Date. It
is unclear how an election to do so would be made under the OID Regulations
and whether such an election could be made unilaterally by a Bondholder.
De Minimis Original Issue Discount. Notwithstanding the general definition
of original issue discount above, any original issue discount with respect to
a Bond will be considered to be zero if such discount is less than 0.25% of
the stated redemption price at maturity of the Bond multiplied by the number
of full years from the issue date to the maturity date of the Bond (a "de
minimis amount"). With respect to installment obligations, the above
calculation is modified by using the weighted average maturity of the Bond
rather than the number of years to maturity. For this purpose, the weighted
average maturity of a Bond is computed as the sum of the following amounts
determined for each payment under the instrument other than qualified stated
interest (i) the number of complete years from the issue date until such
payment is expected to be made (presumably taking into account a prepayment
assumption, as described below), multiplied by (ii) a fraction, the numerator
of which is the amount of the payment, and the denominator of which is the
stated redemption price at maturity of such Bond. An installment obligation is
defined as a debt instrument that provides for the payment of any amount other
than qualified stated interest before maturity. Under the OID Regulations,
original issue discount of only a de minimis amount (other than de minimis
original issue discount attributable to a so-called "teaser" interest rate or
an initial interest holiday) will be included in income as each payment of
stated principal is made, based on the product of the total amount of such de
minimis original issue discount and a fraction, the numerator of which is the
amount of such principal payment and the denominator of which is the
outstanding stated principal amount of the Bond. The OID Regulations also
would permit a Bondholder to elect to accrue de minimis original issue
discount into income currently based on a constant yield method. See "--
Election to Treat All Interest as Original Issue Discount" for a description
of such election under the OID Regulations.
Accrual of Original Issue Discount. If original issue discount on a Bond is
in excess of a de minimis amount, the holder of such Bond generally must
include in ordinary gross income the sum of the "daily portions" of original
issue discount for each day during its taxable year on which it held such
Bond. In the case of an original holder of a Bond, a calculation will be made
of the portion of the original issue discount that accrues during each
successive period (or shorter period from date of original issue) (an "accrual
period") that generally ends on the day in the calendar year corresponding to
each of the Payment Dates on the Bonds (or the date prior to each such date).
Generally, the amount of original issue discount includible for each accrual
period is calculated using a constant yield method, under which the includible
amount equals the increase during such accrual period in the adjusted issue
price of a Bond. The increase in a Bond's adjusted issue price equals (i) the
excess, if any, of (A) the product of the adjusted issue price of the Bond at
the beginning of such accrual period and (B) the yield to maturity of the Bond
over (ii) the amount of any qualified stated interest allocable to the accrual
period. The adjusted issue price of a Bond at the beginning of the first
accrual period is the Bond's issue price. The adjusted issue price of a Bond
at the beginning of any subsequent accrual period will equal the issue price
of such Bond, increased by the aggregate amount of original issue discount
that accrued with respect to such Bond in prior accrual periods, and reduced
by the amount of any payments made on such Bond in prior accrual periods
87
<PAGE>
of amounts other than qualified stated interest. The original issue discount
accruing during any accrual period, computed as described above, will be
allocated ratably to each day during the accrual period to determine the daily
portion of original issue discount for such day.
Section 1272(a)(6) of the Code requires that a prepayment assumption (the
"Prepayment Assumption") be used in computing the accrual of original issue
discount for debt instruments if payments under such instruments may be
accelerated by reason of prepayments of other obligations securing such debt
instruments or for any pool of debt instruments the yield on which may be
affected by reason of prepayments, and that adjustments be made in the amount
and rate of accrual of such discount to reflect differences between the actual
prepayment rate and the Prepayment Assumption. The Prepayment Assumption is to
be determined in a manner prescribed in Treasury regulations which have not
yet been issued. The Conference Committee Report (the "Committee Report")
accompanying the Tax Reform Act of 1986, however, indicates that the
regulations will provide that the Prepayment Assumption used with respect to a
Bond must be the same as that used in pricing the initial offering of such
Bond. The Prepayment Assumption used by an Issuer in determining the existence
of original issue discount and in reporting original issue discount for each
series of Bonds which is issued with original issue discount will be
consistent with this standard and will be disclosed in the related Prospectus
Supplement. However, no representation will be made that the Assets will in
fact prepay at a rate conforming to the Prepayment Assumption or at any other
rate.
In the case of such debt instruments, the portion of original issue discount
that accrues in any accrual period will equal the excess, if any, of (i) the
sum of (A) the present value, as of the end of the accrual period, of all of
the payments remaining to be made on the Bond, if any, in future periods and
(B) the payments made on such Bond during the accrual period of amounts
included in the stated redemption price of the Bond, over (ii) the adjusted
issue price of such Bond at the beginning of the accrual period. The present
value of the remaining payments referred to in the preceding sentence will be
calculated (1) assuming that payments on the Bond will be received in future
periods based on the Assets being prepaid at a rate equal to the Prepayment
Assumption, (2) taking into account events that have occurred prior to the end
of the accrual period and (3) using a discount rate equal to the yield to
maturity of the Bond at the issue date.
A subsequent purchaser of a Bond whose adjusted basis in the Bond,
immediately after his or her purchase, is less than or equal to the Bond's
stated redemption price at maturity generally will also be required to include
in gross income the daily portions of any original issue discount with respect
to such Bond. However, each such daily portion will be reduced, if the
holder's adjusted basis is in excess of the Bond's adjusted issue price, in
proportion to the ratio such excess bears to the aggregate original issue
discount remaining to be accrued on such Bond. The adjusted issue price of a
Bond generally equals the issue price of the Bond (i) increased by any
original issue discount previously included in the gross income of any holder
with respect to such Bond and (ii) decreased by payments previously made on
the Bond other than qualified stated interest.
MARKET DISCOUNT
The market discount provisions of Code Sections 1276 through 1278 generally
provide that if a subsequent holder of a Bond purchases the Bond at a market
discount, some or all of any principal payment or of any gain recognized upon
the disposition of the Bond will be taxable as ordinary interest income. In
addition, in certain cases, the market discount provisions will be applicable
to Bonds acquired at original issue. Market discount on a Bond not issued with
original issue discount means the excess, if any, of the stated redemption
price of the Bond at maturity over the price paid by the holder for the Bond.
Market discount on a Bond issued with original issue discount means the
excess, if any, of (1) the sum of its issue price and the aggregate amount of
original issue discount includible in the gross income of all holders of the
Bond prior to the acquisition by the subsequent holder (presumably adjusted to
reflect prior principal payments), over (2) the price paid by the holder for
the Bond. Generally, under Code Section 1276, any principal payment (whether a
scheduled payment or a prepayment) or any gain on the disposition of a market
discount Bond is to be treated as ordinary income to the extent that it does
not exceed the accrued market discount at the time of the payment or
disposition. The amount
88
<PAGE>
of accrued market discount for purposes of determining the tax treatment of
subsequent principal payments or dispositions of the Bonds is to be reduced by
the amount so treated as ordinary income. The holder of a market discount
Bond, however, may elect to include market discount in gross income currently
in the tax year to which it is attributable. If made, such election will apply
to all market discount Bonds acquired by such Bondholder on or after the first
day of the first taxable year to which such election applies. The amount of
market discount generally is accrued using a ratable accrual method, unless
the Bondholder elects to determine the accrued market discount on the basis of
a constant interest rate as provided in Code Section 1272(a). The election to
use the constant interest method is irrevocable and is made on a Bond-by-Bond
basis.
Notwithstanding the general definition above, any market discount with
respect to a Bond will be considered to be zero if such market discount is
less than 0.25% of the remaining stated redemption price of such Bond
multiplied by the number of complete years to maturity remaining after the
date of its purchase (a "de minimis amount"). In interpreting a similar rule
with respect to original issue discount on obligations payable in
installments, the OID Regulations refer to the weighted average maturity of
obligations, and it is likely that the same rule will be applied with respect
to market discount, presumably taking into account the Prepayment Assumption.
If market discount is treated as a de minimis amount under this rule, it
appears that the actual discount would be treated in a manner similar to
original issue discount of a de minimis amount. See "--De Minimus Original
Issue Discount" above.
Section 1276(b)(3) of the Code specifically authorizes the Treasury
Department to issue regulations providing for the method for accruing market
discount on debt instruments, the principal of which is payable in more than
one installment. Until regulations are issued by the Treasury Department,
certain rules described in the legislative history accompanying Code Section
1276(b)(3) will apply. Such legislative history indicates that the holder of a
market discount Bond may elect to accrue market discount either on the basis
of a constant interest rate or using one of the following methods. For Bonds
issued with original issue discount, the amount of market discount that
accrues during a period will equal to the product of (i) the total remaining
market discount, multiplied by (ii) a fraction, the numerator of which is the
original issue discount accruing during the period and the denominator of
which is the total remaining original issue discount at the beginning of the
period. For Bonds issued without original issue discount, the amount of market
discount that accrues during a period will equal the product of (i) the total
remaining market discount, multiplied by (ii) a fraction, the numerator of
which is the amount of stated interest paid during the accrual period and the
denominator of which is the total amount of stated interest remaining to be
paid at the beginning of the period. For purposes of calculating market
discount under any of the above methods in the case of instruments that
provide for payments that may be accelerated by reason of prepayments of other
obligations securing such instruments, the same Prepayment Assumption
applicable to calculating the accrual of original issue discount will likely
apply.
A Bondholder who acquired the Bond at a market discount also may be required
to defer the deduction of a portion of the amount of interest that the holder
paid or accrued during the taxable year on indebtedness incurred or maintained
to purchase or carry the Bond in excess of the aggregate amount of interest
(including original issue discount) includible in his or her gross income for
the taxable year with respect to such Bond. The amount of such net interest
expense deferred in a taxable year may not exceed the amount of market
discount accrued on the Bond for the days during the taxable year on which the
holder held the Bond. Any expense that is not deductible under the above rule
is deferred and deducted in the year of disposition, or, if a special election
is made, in a year prior to the disposition year. If market discount Bonds are
disposed of in nonrecognition transaction, the deferred deduction generally is
limited to the amount of gain recognized on the disposition. These deferral
rules do not apply to a holder that elects to include market discount in
income currently as it accrues on all market discount instruments acquired by
such holder in that taxable year or thereafter.
Because the regulations referred to above have not been issued, it is not
possible to predict what effect such regulations might have on the tax
treatment of a Bond purchased at a discount in the secondary market.
89
<PAGE>
PREMIUM
A Bond purchased at a cost greater than its stated redemption price at
maturity will be considered to be purchased at a premium. The holder of such a
Bond generally may elect under Section 171 of the Code to amortize such
premium under the constant yield method over the remaining term of the Bond.
If made, such an election generally would apply to all debt instruments having
amortizable Bond premium that the holder owns or subsequently acquires.
Amortizable premium will be treated as an offset to interest income on the
related Bond, rather than as a separate interest deduction. Although no
regulations addressing the computation of premium accrual on instruments that
provide for payments that may be accelerated by reason of prepayments of other
obligations securing such instrument have been issued, the legislative history
of the Tax Reform Act of 1986 indicates that such premium is to be accrued in
the same manner as market discount. Accordingly, it appears that the accrual
of premium on a class of Bonds of a series in such cases will be calculated
using the Prepayment Assumption used in pricing such class. Until regulations
are issued, however, such tax treatment is uncertain.
ELECTION TO TREAT ALL INTEREST AS ORIGINAL ISSUE DISCOUNT
The OID Regulations permit a holder of a Bond in certain circumstances to
elect to accrue all interest, discount (including de minimis market or
original issue discount) and premium in income as interest, based on a
constant yield method for Bonds acquired on or after April 4, 1994. If such an
election were to be made with respect to a Bond with market discount, the
holder of the Bond would be deemed to have made an election to include in
income currently market discount with respect to all other debt instruments
having market discount that such holder acquires during the year of the
election or thereafter. Similarly, a holder of a Bond that makes this election
for a Bond that is acquired at a premium will be deemed to have made an
election to amortize Bond premium with respect to all debt instruments having
amortizable Bond premium that such holder owns or acquires. The election to
accrue interest, discount and premium on a constant yield method with respect
to a Bond is irrevocable.
REALIZED LOSSES
Under Section 166 of the Code, both corporate holders of the Bonds and
noncorporate holders of the Bonds that acquire such Bonds in connection with a
trade or business should be allowed to deduct, as ordinary losses, any losses
sustained during a taxable year in which their Bonds become wholly or
partially worthless as the result of one or more realized losses on the
Assets. However, it appears that a noncorporate holder that does not acquire a
Bond in connection with a trade or business will not be entitled to deduct a
loss under Section 166 of the Code until such holder's Bond becomes wholly
worthless (i.e., until its outstanding principal balance has been reduced to
zero) and that the loss will be characterized as a short-term capital loss.
Each holder of a Bond generally will be required to accrue interest and
original issue discount with respect to such Bond, without giving effect to
any reductions in distributions attributable to defaults or delinquencies on
the Assets until it can be established that any such reduction ultimately will
not be recoverable. As a result, the amount of taxable income reported in any
period by the holder of a Bond could exceed the amount of economic income
actually realized by the holder in such period. Although the holder of a Bond
eventually will recognize a loss or reduction in income attributable to
previously accrued and included income that, as the result of a realized loss,
ultimately will not be realized, the law is unclear with respect to the timing
and character of such loss or reduction in income.
SALES OF BONDS
If a Bond is sold, the selling Bondholder generally will recognize gain or
loss equal to the difference between the amount realized on the sale and the
holder's adjusted basis in the Bond. The adjusted basis of a Bond generally
will equal the cost of such Bond to the Bondholder, increased by any original
issue discount and
90
<PAGE>
market discount income included in gross income with respect to the Bond and
reduced by any amortized premium and any payments on the Bond received by the
Bondholder, other than payments of qualified stated interest. Any such gain or
loss should be capital gain or loss, provided such Bond is held by the
Bondholder as a capital asset (generally, property held for investment) within
the meaning of Section 1221 of the Code.
Gain recognized on the sale of a Bond by a seller who purchased the Bond at
a market discount will likely be taxable as ordinary income in an amount not
exceeding the portion of the discount that accrued during the period such Bond
was held by such holder, reduced by any market discount included in income, in
accordance with the rules described above under "--Market Discount."
A portion of any gain from the sale of a Bond that might otherwise be
capital gain may be treated as ordinary income to the extent that such Bond is
held as part of a "conversion transaction" within the meaning of Section 1258
of the Code. A conversion transaction generally is one in which the taxpayer
has taken two or more positions in the same or similar property that reduce or
eliminate market risk, if substantially all of the taxpayer's expected return
is attributable to the time value of the taxpayer's net investment in such
transaction. The amount of gain so realized in a conversion transaction that
is recharacterized as ordinary income generally will not exceed the amount of
interest that would have accrued on the taxpayer's net investment in the
conversion transaction at 120% of the appropriate "applicable Federal rate"
(which rate is computed and published monthly by the IRS) for the period
ending on the date of disposition, subject to appropriate reduction for
amounts previously recaptured as ordinary income on the transaction.
In certain situations, a taxpayer may elect to have net capital gain taxed
at ordinary income rates rather than capital gains rates in order to include
such net capital gain in total net investment income for the taxable year, for
purposes of the rule that limits the deduction of interest on indebtedness
incurred to purchase or carry property held for investment to a taxpayer's net
investment income.
BACKUP WITHHOLDING AND INFORMATION REPORTING
Certain "reportable payments," which generally include payments of interest
and principal, as well as payments of proceeds from the sale of Bonds, may be
subject to the "backup withholding tax" under Section 3406 of the Code at a
rate of 31%. Backup withholding generally applies only if (1) the recipient
fails to furnish a social security number or other taxpayer identification
number ("TIN") to the payor, (2) the IRS notifies the payor that the TIN
furnished by the recipient is incorrect, (3) the IRS notifies the payor that
backup withholding should be commenced because the recipient has failed to
properly report interest or dividends, or (4) under certain circumstances, the
recipient fails to provide to the payor a statement, signed under penalty of
perjury, that the TIN number furnished is the correct number and that such
recipient is not subject to backup withholding. Any amounts deducted and
withheld from a distribution to a recipient would be allowed as a credit
against such recipient's federal income tax. Furthermore, certain penalties
may be imposed by the IRS on a recipient of payments that is required to
supply information but that does not do so in the proper manner.
Backup withholding will not apply, however, with respect to certain payments
made to certain Bondholders, including payments to certain exempt recipients
and to certain foreign persons. Bondholders should consult their tax advisors
regarding their qualification from backup withholding and the procedure for
obtaining such an exemption.
The Issuer will report to the Bondholders and to the IRS for each calendar
year the amount of any "reportable payments" during such year and the amount
of tax withheld, if any, with respect to payments on the Bonds.
TAX TREATMENT OF FOREIGN INVESTORS
In the case of interest paid on a Bond to a nonresident alien individual,
foreign partnership or foreign corporation that has no connection with the
United States other than holding Bonds ("Nonresidents"), such interest will
normally qualify as portfolio interest (except where (i) the recipient is a
holder, directly or by the
91
<PAGE>
application of the attribution rules of Code Section 871(h)(3)(C), of 10% or
more of the total voting power of all classes of voting stock or 10% or more
of the capital or profits interest in the Issuer, or (ii) the recipient is a
controlled foreign corporation to which the Issuer is a related person
pursuant to Code Section 881(c)(3)(C)) and will be exempt from U.S. federal
income tax. Upon receipt of the ownership statements from the Nonresident
which qualify under Code Section 871(h)(5), the Issuer normally will be
relieved of obligations to withhold tax from such interest payments. These
provisions supersede the generally applicable provisions of United States law
that would otherwise require the Issuer to withhold at a 30% rate (unless such
rate were reduced or eliminated by an applicable tax treaty) on, among other
things, interest and other fixed or determinable, annual or periodic income
paid to Nonresidents. The 30% withholding tax will apply, however, in certain
situations where contingent interest is paid to a Nonresident or the IRS
determines that withholding is required in order to prevent tax evasion by
United States persons.
STATE AND OTHER TAX CONSEQUENCES
In addition to the federal income tax consequences described in "Certain
Federal Income Tax Consequences," potential investors should consider the
state, local and other tax consequences of the acquisition, ownership, and
disposition of the Bonds offered hereunder. State tax law may differ
substantially from the corresponding federal tax law, and the discussion above
does not purport to describe any aspect of the tax laws of any state or other
jurisdiction. Therefore, prospective investors should consult their own tax
advisors with respect to the various state, local and other tax consequences
of investments in the Bonds offered hereunder.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
and the Code impose certain 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 (and, as applicable, insurance company general accounts)
in which such plans, accounts or arrangements are invested that are subject to
the fiduciary responsibility provisions of ERISA and Section 4975 of the Code
("Plans") and on persons who are fiduciaries with respect to such Plans in
connection with the investment of Plan assets. Certain employee benefit plans,
such as governmental plans (as defined in ERISA Section 3 (32)), and, if no
election has been made under Section 410(d) of the Code, church plans (as
defined in Section 3(33) of ERISA) are not subject to ERISA requirements.
Accordingly, assets of such plans may be invested in Bonds without regard to
the ERISA considerations described below, subject to the provisions of other
applicable federal and state law. Any such plan which is qualified and exempt
from taxation under Sections 401(a) and 501(a) of the Code, however, is
subject to the prohibited transaction rules set forth in Section 503 of the
Code.
ERISA generally imposes on Plan fiduciaries certain general fiduciary
requirements, including those of investment prudence and diversification and
the requirement that a Plan's investments be made in accordance with the
documents governing the Plan. In addition, Section 406 of ERISA and Section
4975 of the Code prohibit a broad range of transactions involving assets of a
Plan and persons (parties in interest under ERISA and disqualified persons
under the Code, collectively, "Parties in Interest Parties in Interest") who
have certain specified relationships to the Plan unless a statutory or
administrative exemption is available. Certain Parties in Interest that
participate in a prohibited transaction may be subject to an excise tax
imposed pursuant to Section 4975 of the Code or a penalty imposed pursuant to
Section 502(i) of ERISA, unless a statutory or administrative exemption is
available. These prohibited transactions generally are set forth in Section
406 of ERISA and Section 4975 of the Code.
The Trust fund, the Company, any underwriter, the Indenture Trustee, the
Master Servicer, any Administrator, any provider of credit support or any of
their affiliates may be considered to be or may become Parties in Interest (or
Disqualified Persons) with respect to certain Plans. Prohibited transactions
under Section 406 of ERISA and Section 4975 of the Code may arise if a Bond is
acquired by a Plan with respect to which
92
<PAGE>
such persons are Parties in Interest (or Disqualified Persons) unless such
transactions are subject to one or more statutory or administrative
exemptions, such as: Prohibited Transaction Class Exemption ("PTCE") 75-1,
which exempts certain transactions involving Plans and certain broker-dealers,
reporting dealers and banks; PTCE 83-1, regarding transactions involving
mortgage pool investment trusts; PTCE 84-14, which exempts certain
transactions effected on behalf of a Plan by a "qualified professional asset
manager"; PTCE 90-1, which exempts certain transactions between insurance
company separate accounts and Parties in Interest (or Disqualified Persons);
PTCE 91-38, which exempts certain transactions between bank collective
investment funds and Parties in Interest (or Disqualified Persons); PTCE 95-
60, which exempts certain transactions between insurance company general
accounts and Parties in Interest (or Disqualified Persons); or PTCE 96-23,
regarding transactions effected by an "in-house asset manager". There can be
no assurance that any of these class exemptions will apply with respect to any
particular Plan investment in Bonds, or even if it were deemed to apply, that
any exemption would apply to all prohibited transactions that may occur in
connection with such investment. Accordingly, prior to making an investment in
the Bonds, investing Plans should determine whether the Trust Fund, the
Company, any underwriter, the Indenture Trustee, the Master Servicer, any
Administrator, any provider of credit support or any of their affiliates is a
Party in Interest (or Disqualified Person) with respect to such Plan and, if
so, whether such transaction is subject to one or more statutory or
administrative exemptions.
Any Plan fiduciary considering whether to invest in Bonds on behalf of a
Plan should consult with its counsel regarding the applicability of the
fiduciary responsibility and prohibited transaction provisions of ERISA and
the Code to such investment. Each Plan fiduciary also should determine
whether, under the general fiduciary standards of investment prudence and
diversification, an investment in the Bonds is appropriate for the Plan
considering the overall investment policy of the Plan and the composition of
the Plan's investment portfolio as well as whether such investment is
permitted under the governing Plan instruments.
LEGAL INVESTMENT
Each class of Offered Bonds will be rated at the date of issuance in one of
the four highest rating categories by at least one Rating Agency. The related
Prospectus Supplement will specify which classes of the Bonds, if any, will
constitute "mortgage related securities" ("SMMEA Bonds") for purposes of the
Secondary Mortgage Market Enhancement Act of 1984 ("SMMEA"). SMMEA Bonds will
constitute legal investments for persons, trusts, corporations, partnerships,
associations, business trusts and business entities (including, but not
limited to, state chartered savings banks, commercial banks, savings 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 of 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.
Alaska, Arkansas, Colorado, Connecticut, Delaware, Florida, Georgia, Illinois,
Kansas, Maryland, Michigan, Missouri, Nebraska, New Hampshire, New York, North
Carolina, Ohio, South Dakota, Utah, Virginia and West Virginia enacted
legislation before the October 4, 1991 cutoff established by SMMEA for such
enactments, limiting to varying extents the ability of certain entities (in
particular, insurance companies) to invest in mortgage related securities, in
most cases by requiring the affected investors to rely solely upon existing
state law, and not SMMEA. Investors affected by such legislation will be
authorized to invest in SMMEA Certificates 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, hold or invest in "mortgage related securities," or require the sale
or other disposition of such securities, so long as such contractual
commitment was made or such securities acquired prior to the enactment of such
legislation.
SMMEA also amended the legal investment authority of federally chartered
depository institutions as follows: federal savings and loan associations and
federal savings banks may invest in, sell or otherwise deal with "mortgage
related securities" without limitation as to the percentage of their assets
represented thereby, federal credit unions may invest in such securities, and
national banks may purchase such securities for their
93
<PAGE>
own account without regard to the limitations generally applicable to
investment securities set forth in 12 U.S.C. 24 (Seventh), subject in each
case to such regulations as the applicable federal regulatory authority may
prescribe. In this connection, federal credit unions should review the
National Credit Union Administration ("NCUA") Letter to Credit Unions No. 96,
as modified by Letter to Credit Unions No. 108, which includes guidelines to
assist federal credit unions in making investment decisions for mortgage
related securities, and the NCUA's regulation "Investment and Deposit
Activities" (12 C.F.R. Part 703), which sets forth certain restrictions on
investment by federal credit unions in mortgage related securities.
Institutions where 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 Offered Bonds. 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
Federal Deposit Insurance Corporation ("FDIC"), the Office of Thrift
Supervision ("OTS"), the NCUA or other federal or state agencies with similar
authority should review any applicable rules, guidelines and regulations prior
to purchasing any Offered Bond. The Federal Financial Institutions Examination
Council, for example, has issued a Supervisory Policy Statement on Bonds
Activities effective February 10, 1992 (the "Policy Statement") setting forth
guidelines for and significant restrictions on investments in "high-risk
mortgage securities." The Policy Statement has been adopted by the Comptroller
of the Currency, the Federal Reserve Board, the FDIC, the OTS and the NCUA
(with certain modifications), with respect to the depository institutions that
they regulate. The Policy Statement generally indicates that a mortgage
derivative product will be deemed to be high risk if it exhibits greater price
volatility than a standard fixed rate thirty-year mortgage security. According
to the Policy Statement, prior to purchase, a depository institution will be
required to determine whether a mortgage derivative product that it is
considering acquiring is high-risk, and if so that the proposed acquisition
would reduce the institution's overall interest rate risk. Reliance on
analysis and documentation obtained from a securities dealer or other outside
party without internal analysis by the institution would be unacceptable.
There can be no assurance that any classes of Offered Bonds will not be
treated as high-risk under the Policy Statement.
The predecessor to the OTS issued a bulletin, entitled, "Mortgage Derivative
Products and Mortgage Swaps," which is applicable to thrift institutions
regulated by the OTS. The bulletin established guidelines for the investment
by savings institutions in certain "high-risk" mortgage derivative securities
and limitations on the use of such securities by insolvent, undercapitalized
or otherwise "troubled" institutions. According to the bulletin, such "high-
risk" mortgage derivative securities include securities having certain
specified characteristics, which may include certain classes of Bonds. In
accordance with Section 402 of the Financial Institutions Reform, Recovery and
Enhancement Act of 1989, the foregoing bulletin will remain in effect unless
and until modified, terminated, set aside or superseded by the FDIC. Similar
policy statements have been issued by regulators having jurisdiction over the
types of depository institutions.
In September 1993 the National Association of Insurance Commissioners
released a draft model investment law (the "Model Law") which sets forth model
investment guidelines for the insurance industry. Institutions subject to
insurance regulatory authorities may be subject to restrictions on investment
similar to those set forth in the Model Law and other restrictions.
If specified in the related Prospectus Supplement, other classes of Offered
Bonds offered pursuant to this Prospectus will not constitute "mortgage
related securities" under SMMEA. The appropriate characterization of this
Offered Bond under various legal investment restrictions, and thus the ability
of investors subject to these restrictions to purchase such Offered Bonds, may
be subject to significant interpretive uncertainties.
Except as to the status of SMMEA Bonds identified in the Prospectus
Supplement for a series as "mortgage related securities" under SMMEA, the
Company will make no representations as to the proper characterization of the
Offered Certificates for legal investment or financial institution regulatory
purposes, or as to the ability of particular investors to purchase any 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
Bonds) may adversely affect the liquidity of the Offered Bonds.
94
<PAGE>
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."
There may be other restrictions on the ability of certain investors,
including depository institutions, either to purchase Offered Bonds or to
purchase Offered Bonds representing more than a specified percentage of the
investor's assets. Accordingly, all investors whose investment activities are
subject to legal investment laws and regulations, regulatory capital
requirements or review by regulatory authorities should consult with their own
legal advisors in determining whether and to what extent the Offered Bonds of
any class constitute legal investments or are subject to investment, capital
or other restrictions, and, if applicable, whether SMMEA has been overridden
in any jurisdiction relevant to such investor.
RATING
It is a condition to the issuance of the Bonds of each series offered hereby
and by the Prospectus Supplement that they shall have been rated in one of the
four highest rating categories by the nationally recognized statistical rating
agency or agencies (each, a "Rating Agency") specified in the related
Prospectus Supplement.
Any such rating would be based on, among other things, the adequacy of the
value of the Assets securing a series of Bonds and any credit enhancement with
respect to such Bonds. Ratings on the Bonds will reflect such Rating Agency's
assessment of the likelihood that Bondholders will receive payments to which
such Bondholders are entitled under the related Bonds. Such rating will not
constitute an assessment of the likelihood that principal prepayments on the
related Mortgage Loans will be made, the degree to which the rate of such
prepayments might differ from that originally anticipated or the likelihood of
early optional termination of the series of Bonds. Such rating should not be
deemed a recommendation to purchase, hold or sell Bonds, inasmuch as it does
not address market price or suitability for a particular investor. Each
security rating should be evaluated independently of any other security
rating. Such rating will not address the possibility that prepayment at higher
or lower rates than anticipated by an investor may cause such investor to
experience a lower than anticipated yield or that an investor purchasing a
security at a significant premium might fail to recoup its initial investment
under certain prepayment scenarios.
There is also no assurance that any such rating will remain in effect for
any given period of time or that it may not be lowered or withdrawn entirely
by the applicable Rating Agency in the future if in its judgment circumstances
in the future so warrant. In addition to being lowered or withdrawn due to any
erosion in the adequacy of the value of the Assets securing a series of Bonds
or any credit enhancement with respect to a series of Bonds, such rating might
also be lowered or withdrawn among other reasons, because of an adverse change
in the financial or other condition of a credit enhancement provider or a
change in the rating of such credit enhancement provider's long term debt.
The amount, type and nature of credit enhancement, if any, established with
respect to a series of Bonds will be determined on the basis of criteria
established by each Rating Agency rating such Bonds. Such criteria are
sometimes based upon an actuarial analysis of the behavior of mortgage loans
in a larger group. Such analysis is often the basis upon which each Rating
Agency determines the amount of credit enhancement required with respect to
each class of Bonds. There can be no assurance that the historical data
supporting any such actuarial analysis will accurately reflect future
experience nor any assurance that the data derived from a large actuarial
analysis will accurately reflect future experience nor any assurance that the
data derived from a large pool of mortgage loans accurately predicts the
delinquency, foreclosure or loss experience of any particular pool of Mortgage
Loans.
No assurance can be given that values of any Mortgaged Properties have
remained or will remain at their levels on the respective dates of origination
of the related Mortgage Loans. If the residential real estate markets
95
<PAGE>
should experience an overall decline in property values such that the
outstanding principal balances of the Mortgage Loans securing a particular
series of Bonds and any secondary financing on the related Mortgaged
Properties become equal to or greater than the value of the Mortgaged
Properties the rates of delinquencies, foreclosures and losses could be higher
than those now generally experienced in the mortgage lending industry. In
addition, adverse economic conditions (which may or may not affect real
property values) may affect the timely payment by mortgagors of scheduled
payments of principal and interest on the Mortgage Loans and, accordingly, the
rates of delinquencies, foreclosures and losses with respect to any Mortgage
Loans securing a particular series of Bonds. To the extent that such losses
are not covered by credit enhancement, such losses will be borne, at least in
part, by Bondholders.
PLAN OF DISTRIBUTION
The Issuer may sell the Bonds offered hereby either directly or through an
underwriter or underwriters or through underwriting syndicates managed by an
underwriter or underwriters. The Prospectus Supplement for each series will
set forth the terms of the offering of such series and of each class within
such series, including the name or names of the underwriters, the proceeds to
and their use by the Issuer, and either the initial public offering price, the
discounts and commissions to the underwriters and any discounts or concessions
allowed or reallowed to certain dealers or the method by which the price at
which the underwriters will sell the Bonds will be determined.
The Bonds of a series may be acquired by underwriters for their own account
and may be resold from time to time in one or more transactions, including
negotiated transactions, at a fixed public offering price or at varying prices
determined at the time of sale. The obligations of any underwriters will be
subject to certain conditions precedent, and such underwriters will be
severally obligated to purchase all the Bonds of a series described in the
related Prospectus Supplement, if any are purchased. If Bonds of a series are
offered other than through underwriters, the related Prospectus Supplement
will contain information regarding the nature of such offering and any
agreements to be entered into between the Issuer and purchasers of Bonds of
such series.
The place and time of delivery for the Bonds of a series in respect of which
this Prospectus is delivered will be set forth in the related Prospectus
Supplement.
LEGAL MATTERS
Unless otherwise set forth in the related Prospectus Supplement, the
validity of the Bonds will be passed upon for the Issuer by Stinson, Mag &
Fizzell, P.C., Kansas City, Missouri, and Thacher, Proffitt & Wood, New York,
New York, will act as counsel for the underwriters.
96
<PAGE>
INDEX OF PRINCIPAL DEFINITIONS
<TABLE>
<CAPTION>
PAGE(S) ON WHICH
TERM IS DEFINED
TERMS IN THE PROSPECTUS
- ----- -----------------
<S> <C>
Accrued Bond Interest......................................... 52
Agency Securities............................................. 1, 34
Agreement..................................................... 59
ARM Contracts................................................. 41
ARM Loans..................................................... 36
Asset Seller.................................................. 34
Assets........................................................ 1, 7, 34
Available Funds............................................... 50
Balloon Mortgage Loans........................................ 23
Bankruptcy Code............................................... 92
Bond Insurance Policy......................................... 14, 83
Bond Insurer.................................................. 14, 83
Bond Interest Rate............................................ 51
Bond Owners................................................... 57
Bond Principal Balance........................................ 17, 52
Bondholders................................................... 16, 28
Bonds......................................................... 1
Book-Entry Bonds.............................................. 50
Buydown Mortgage Loans........................................ 46
Buydown Period................................................ 46
Cash Flow Agreement........................................... 15, 42
Cash Flow Agreements.......................................... 1
Cede.......................................................... 57
CERCLA........................................................ 31, 93
Closed-End Loans.............................................. 36
Code.......................................................... 6, 32
Collection Account............................................ 63
Combined Loan-to-Value Ratio.................................. 35
Commission.................................................... 3
Committee Report.............................................. 108
Company....................................................... 1, 32
Conservation Act.............................................. 94
Contract Group................................................ 50
Contract Rate................................................. 11, 41
Contracts..................................................... 1, 34
Convertible Mortgage Loans.................................... 48
Cooperative................................................... 85
Cooperative Loans............................................. 85
Cooperatives.................................................. 34
Covered Trust................................................. 80
CPR........................................................... 45
Credit Support................................................ 1, 12, 42
Crime Control Act............................................. 98
Cut-off Date.................................................. 17
Debt Service Coverage Ratio................................... 38
Definitive Bonds.............................................. 50, 58
Depositor..................................................... 1
</TABLE>
97
<PAGE>
<TABLE>
<CAPTION>
PAGE(S) ON WHICH
TERM IS DEFINED
TERMS IN THE PROSPECTUS
- ----- -----------------
<S> <C>
Determination Date............................................ 50
Distribution Date............................................. 17
DTC........................................................... 57
Due Period.................................................... 51
Environmental Lien............................................ 94
ERISA......................................................... 19, 114
Events of Default............................................. 75, 77
Excess Spread................................................. 13, 81
Exchange Act.................................................. 4
FASIT......................................................... 105
FDIC.......................................................... 63, 116
FHLMC......................................................... 1, 34, 73
FHLMC Certificates............................................ 8
FIRREA........................................................ 39
FNMA.......................................................... 1, 34
FNMA Certificates............................................. 8
FTC Rule...................................................... 103
Funding Period................................................ 29
GAAP.......................................................... 26
Garn-St. Germain Act.......................................... 95
GNMA.......................................................... 1, 34
GNMA Certificates............................................. 8
Government Bonds.............................................. 1, 11, 34
Government Securities......................................... 106
Guaranteed Mortgage Pass-Through Certificates................. 8
High LTV Loans................................................ 35
Home Equity Loans............................................. 7, 36
Indenture..................................................... 32
Indenture Trustee............................................. 6, 32
Indirect Participants......................................... 57
Insurance Proceeds............................................ 64
Interest Accrual Period....................................... 43
IRS........................................................... 105
Issuer........................................................ 2
L/C Bank...................................................... 15, 83
L/C Percentage................................................ 83
Liquidation Proceeds.......................................... 64
Loan-to-Value Ratio........................................... 35
Lock-out Date................................................. 37
Lock-out Period............................................... 37
Manufactured Home............................................. 11
Master Servicer............................................... 6
MBS........................................................... 1, 7, 34
MBS Agreement................................................. 39
MBS Indenture Trustee......................................... 39
MBS Issuer.................................................... 39
MBS Servicer.................................................. 39
Mixed-Use Mortgage Loan....................................... 34
Mixed-Use Properties.......................................... 7
</TABLE>
98
<PAGE>
<TABLE>
<CAPTION>
PAGE(S) ON WHICH
TERM IS DEFINED
TERMS IN THE PROSPECTUS
- ----- -----------------
<S> <C>
Mixed-Use Property............................................ 34
Model Law..................................................... 116
Mortgage Assets............................................... 1, 7, 34
Mortgage Collateral........................................... 1
Mortgage Loan Group........................................... 17, 50
Mortgage Loans................................................ 1, 7, 34
Mortgage Notes................................................ 35
Mortgage Rate................................................. 7, 37
Mortgaged Properties.......................................... 22
Mortgages..................................................... 35
Multifamily Mortgage Loan..................................... 34
Multifamily Properties........................................ 7
Multifamily Property.......................................... 34
NCUA.......................................................... 115
Net Operating Income.......................................... 38
Nonrecoverable Advance........................................ 53
Nonresidents.................................................. 113
NovaStar Financial............................................ 6, 32
Offered Bonds................................................. 6
OID Regulations............................................... 106
Originator.................................................... 35
OTS........................................................... 116
Owner Trustee................................................. 6, 32
Participants.................................................. 57
Parties in Interest........................................... 114
Permitted Investments......................................... 63
Plans......................................................... 114
PMBS Issuer................................................... 10
PMBS Servicer................................................. 10
PMBS Trustee.................................................. 10
Policy Statement.............................................. 116
Pre-Funded Amount............................................. 16, 42
Pre-Funding Account........................................... 16, 42
Prepayment Assumption......................................... 108
Prepayment Premium............................................ 37
Private Mortgage-Backed Securities............................ 1, 34
PTCE.......................................................... 114
Purchase Price................................................ 62
Rating Agency................................................. 20, 117
Record Date................................................... 50
Refinance Loans............................................... 35
REIT.......................................................... 30
Related Proceeds.............................................. 53
Relief Act.................................................... 97, 102
REMIC......................................................... 105
REO Property.................................................. 54
Reserve Funds................................................. 14
Retained Interest............................................. 72
Revolving Credit Loans........................................ 36
</TABLE>
99
<PAGE>
<TABLE>
<CAPTION>
PAGE(S) ON WHICH
TERM IS DEFINED
TERMS IN THE PROSPECTUS
- ----- -----------------
<S> <C>
RICO.......................................................... 98
Securities Act................................................ 3
Seller........................................................ 32
Senior Bondholders............................................ 12, 81
Senior Bonds.................................................. 12, 49, 81
Senior Lien................................................... 24
Servicer...................................................... 6
Servicing Standard............................................ 67
Single Family Mortgage Loan................................... 34
Single Family Properties...................................... 7
Single Family Property........................................ 34
SMMEA......................................................... 20, 115
SMMEA Bonds................................................... 115
SPA........................................................... 45
Sub-Servicer.................................................. 68
Sub-Servicing Agreement....................................... 68
Subordinated Bondholders...................................... 12, 81
Subordinated Bonds............................................ 12, 49, 81
Subsequent Assets............................................. 16, 41
TIN........................................................... 112
Title V....................................................... 96, 104
Title VIII.................................................... 97
TMP........................................................... 105
UCC........................................................... 57, 98
Underlying Mortgage Loans..................................... 34
Value......................................................... 35
Warranting Party.............................................. 61
Whole Loans................................................... 34
</TABLE>
100
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMA-
TION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS SUPPLE-
MENT AND THE PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTA-
TIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR BY
THE UNDERWRITERS. THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS DO NOT CONSTI-
TUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE BONDS OFFERED
HEREBY TO ANYONE IN ANY JURISDICTION IN WHICH THE PERSON MAKING SUCH OFFER OR
SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANYONE TO WHOM IT IS UNLAWFUL TO
MAKE ANY SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS
SUPPLEMENT AND THE PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE AN IMPLICATION THAT INFORMATION HEREIN OR THEREIN IS
CORRECT AS OF ANY TIME SINCE THE DATE OF THIS PROSPECTUS SUPPLEMENT OR THE
PROSPECTUS.
----------------
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary.................................................................... 5
Risk Factors............................................................... 17
Description of the Mortgage Pool...........................................
The Seller.................................................................
The Issuer................................................................. 26
The Owner Trustee..........................................................
The Indenture Trustee......................................................
The Bond Insurer...........................................................
Description of the Bonds................................................... 40
Certain Yield and Prepayment Considerations................................
Description of the Servicing Agreement.....................................
The Indenture..............................................................
Federal Income Tax Consequences............................................ 85
Method of Distribution.....................................................
Legal Opinions.............................................................
Legal Investment........................................................... 93
Ratings.................................................................... 95
ERISA Considerations.......................................................
Experts....................................................................
Index of Principal Definitions............................................. 97
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
$
NOVASTAR MORTGAGE FUNDING TRUST SERIES
COLLATERALIZED MORTGAGE
OBLIGATION BONDS, SERIES
----------------
PROSPECTUS SUPPLEMENT
----------------
[UNDERWRITER]
, 19
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The expenses expected to be incurred in connection with the issuance and
distribution of the Bonds being registered, other than underwriting
compensation, are as set forth below. All such expenses, except for the filing
fee, are estimated.
<TABLE>
<S> <C>
Filing Fee for Registration Statement............................ $606.00
Legal Fees and Expenses.......................................... *
Accounting Fees and Expenses..................................... *
Trustee's Fees and Expenses (including counsel fees)............. *
Printing and Engraving Fees...................................... *
Rating Agency Fees............................................... *
Miscellaneous.................................................... *
-------
Total........................................................ $606.00
=======
</TABLE>
- --------
* To be provided by amendment.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Servicing Agreements and the Trust Agreements will provide that no
director, officer, employee or agent of the Registrant is liable to the Trust
Fund or the Bondholders, except for such person's own willful misfeasance, bad
faith or gross negligence in the performance of duties or reckless disregard
of obligations and duties. The Servicing Agreements and the Trust Agreements
will further provide that, with the exceptions stated above, a director,
officer, employee or agent of the Registrant is entitled to be indemnified
against any loss, liability or expense incurred in connection with legal
action relating to such and related Bonds other than such expenses related to
particular Mortgage Loans.
Any underwriters who execute an Underwriting Agreement in the form filed as
Exhibit 1.1 to this Registration Statement will agree to indemnify the
Registrant's directors and its officers who signed this Registration Statement
against certain liabilities which might arise under the Securities act of 1933
from certain information furnished to the Registrant by or on behalf of such
indemnifying party.
Section 145 of the Delaware General Corporation Law allows for the
indemnification of officers, directors and other corporate agents in terms
sufficiently broad to indemnify such persons under certain circumstances for
liabilities (including reimbursement for expenses incurred) arising under the
Securities Act of 1933, as amended (the "Act"). Article Nine of the
Registrant's Certificate of Incorporation (Exhibit 3.1 hereto) and Article
Five of the Registrant's Bylaws (Exhibit 3.2 hereto) provide for
indemnification of the Registrant's directors, officers, employees and other
agents to the extent and under the circumstances permitted by the Delaware
General Corporation Code.
II-1
<PAGE>
ITEM 16. EXHIBITS.
<TABLE>
<CAPTION>
EXHIBITS
--------
<C> <S>
1.1 Form of Underwriting Agreement.
3.1 Certificate of Incorporation.
3.2 By-Laws.
4.1 Form of Servicing Agreement.
4.2 Form of Trust Agreement.
4.3 Form of Indenture.
5.1 Opinion of Stinson, Mag & Fizzell, P.C. with respect to legality.
8.1 Opinion of Stinson, Mag & Fizzell, P.C. with respect to certain tax mat-
ters (included with Exhibit 5.1).
23.1 Consent of Stinson, Mag & Fizzell, P.C. (included as part of Exhibit 5.1
and Exhibit 8.1).
24.1 Power of Attorney (set forth on signature page).
</TABLE>
ITEM 17. UNDERTAKINGS.
(a) The Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of this Registration Statement (or the most recent
post-effective amendment hereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in this Registration Statement; and
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in this Registration Statement;
PROVIDED, HOWEVER, that paragraphs (a)(1)(i) and (a)(1)(ii) do not apply if
the information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed with or furnished to the
Commission by the Registrant pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 that are incorporated by reference in this Registration
Statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial BONA FIDE offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(b) The Registrant hereby undertakes that, for purposes of determining any
liability under the Securities Act of 1933, each filing of the Registrant's
annual report pursuant to Section 13(a) or 15(d) of the Securities Exchange
Act of 1934 that is incorporated by reference in this Registration Statement
shall be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be initial BONA FIDE offering thereof.
II-2
<PAGE>
(h) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act
and will be governed by the final adjudication of such issue.
(j) The Registrant hereby undertakes to file an application for the purpose
of determining the eligibility of the trustee to act under subsection (a) of
Section 310 of the Trust Indenture Act in accordance with the rules and
regulations prescribed by the Commission under Section 305(b)(2) of the Trust
Indenture Act.
II-3
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, NOVASTAR
MORTGAGE FUNDING CORPORATION CERTIFIES THAT IT HAS REASONABLE GROUNDS TO
BELIEVE THAT IT MEETS ALL OF THE REQUIREMENTS FOR FILING ON FORM S-3,
REASONABLY BELIEVES THAT THE SECURITY RATING REQUIREMENT CONTAINED IN
TRANSACTION REQUIREMENT B.5 OF FORM S-3 WILL BE MET BY THE TIME OF THE SALE OF
THE SECURITIES REGISTERED HEREUNDER, AND HAS DULY CAUSED THIS REGISTRATION
STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY
AUTHORIZED, IN THE CITY OF WESTWOOD, STATE OF KANSAS, ON THE 9TH DAY OF
JANUARY, 1998.
NOVASTAR MORTGAGE FUNDING
CORPORATION
/s/ Scott F. Hartman
By: _________________________________
Name: Scott F. Hartman
Title: President
POWER OF ATTORNEY
EACH PERSON WHOSE SIGNATURE APPEARS BELOW HEREBY CONSTITUTES AND APPOINTS
SCOTT F. HARTMAN THE TRUE AND LAWFUL ATTORNEY-IN-FACT AND AGENT OF THE
UNDERSIGNED, WITH FULL POWER OF SUBSTITUTION AND RESUBSTITUTION, FOR AND IN
THE NAME, PLACE AND STEAD OF THE UNDERSIGNED, IN ANY AND ALL CAPACITIES, TO
SIGN ANY AND ALL AMENDMENTS (INCLUDING POST-EFFECTIVE AMENDMENTS, EXHIBITS
THERETO, AND OTHER DOCUMENTS IN CONNECTION THEREWITH) WITH THE SECURITIES AND
EXCHANGE COMMISSION, AND HEREBY GRANT TO SUCH ATTORNEY-IN-FACT AND AGENT, FULL
POWER AND AUTHORITY TO DO AND PERFORM EACH AND EVERY ACT AND THING REQUISITE
AND NECESSARY TO BE DONE, AS FULLY TO ALL INTENTS AND PURPOSES AS THE
UNDERSIGNED MIGHT OR COULD DO IN PERSON, HEREBY RATIFYING AND CONFIRMING ALL
THAT SAID ATTORNEY-IN-FACT AND AGENT, OR HIS SUBSTITUTES, MAY LAWFULLY DO OR
CAUSE TO BE DONE BY VIRTUE HEREOF.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Scott F. Hartman Director and President January 9, 1998
____________________________________ (Principal Executive
Scott F. Hartman Officer)
/s/ Mark Kohlrus Chief Financial Officer January 9, 1998
____________________________________ (Principal Financial
Mark Kohlrus Officer and Principal
Accounting Officer)
/s/ W. Lance Anderson Director January 9, 1998
____________________________________
W. Lance Anderson
/s/ Mike Bamburg Director January 9, 1998
____________________________________
Mike Bamburg
</TABLE>
II-4
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT PAGE
NO. DESCRIPTION OF DOCUMENT NUMBER
------- ----------------------- ------
<C> <S> <C>
1.1 Form of Underwriting Agreement.
3.1 Certificate of Incorporation.
3.2 By-Laws.
4.1 Form of Servicing Agreement.
4.2 Form of Trust Agreement.
4.3 Form of Indenture.
5.1 Opinion of Stinson, Mag & Fizzell, P.C. with respect to le-
gality.
8.1 Opinion of Stinson, Mag & Fizzell, P.C. with respect to
certain tax matters (included as part of Exhibit 5.1).
23.1 Consent of Stinson, Mag & Fizzell, P.C. (included as part
of Exhibit 5.1).
24.1 Power of Attorney (set forth on signature page).
</TABLE>
II-5
<PAGE>
EXHIBIT 1.1
NOVASTAR FINANCIAL, INC.
a Maryland corporation
AND
NOVASTAR MORTGAGE FUNDING CORPORATION
a Delaware corporation
AND
[NAME OF UNDERWRITER]
UNDERWRITING AGREEMENT
$______________________________
NovaStar Mortgage Funding Trust
Collateralized Mortgage Obligation
Bonds, Series ______________________
[DATE]
<PAGE>
Table of Contents
1. Representations and Warranties.................................... 2
(a) Representations and Warranties by the Seller and the Company. 2
(i) Compliance with Registration Requirements............. 2
(ii) Incorporated Documents................................ 3
(iii) No Material Adverse Change in Business................ 3
(iv) Good Standing of the Seller and Company............... 4
(v) Authorization of Agreement............................ 4
(vi) Authorization of Other Agreements..................... 4
(vii) Description of the Transaction Documents.............. 4
(viii) Description of the Bonds.............................. 4
(ix) Absence of Defaults and Conflicts..................... 5
(x) Absence of Proceedings................................ 5
(xi) Absence of Further Requirements....................... 6
(xii) Possession of Licenses and Permits.................... 6
(xiii) Tax Returns........................................... 6
(xiv) No Business with Cuba................................. 6
(xv) Investment Company Act................................ 6
(b) Officer's Certificates....................................... 7
2. Sale and Delivery to the Underwriter; Closing..................... 7
(a) Bonds........................................................ 7
(b) Payment...................................................... 7
3. Covenants of the Company.......................................... 7
(a) Compliance with Securities Regulations and Commission
Requests..................................................... 7
(b) Filing of Amendments......................................... 8
(c) Delivery of Registration Statements.......................... 8
(d) Delivery of Prospectuses..................................... 8
(e) Continued Compliance with Securities Laws.................... 8
(f) Blue Sky Qualifications...................................... 9
(g) Reporting Requirements....................................... 9
(h) Rating of Bonds.............................................. 9
(i) DTC.......................................................... 9
(j) Restriction on Sale of Securities............................ 9
4. Payment of Expenses............................................... 9
(a) Expenses..................................................... 9
(b) Termination of Agreement..................................... 10
5. Conditions of Underwriter's Obligations........................... 10
(a) Effectiveness of Registration Statement...................... 10
i
<PAGE>
(b) Opinions of Counsel for NovaStar Entities.................... 10
(c) Opinion of Counsel for Underwriter........................... 10
(d) Officers' Certificates of NovaStar Entities.................. 11
(e) Accountant's Comfort Letter.................................. 11
(f) Bring-down Comfort Letter.................................... 11
(g) Accountant's Consent Letter.................................. 11
(h) Maintenance of Rating........................................ 11
(i) Opinion of Counsel for Indenture Trustee..................... 11
(j) Opinion of Counsel for Owner Trustee......................... 11
(k) Bond Insurance Policy........................................ 12
(l) Additional Documents......................................... 12
(m) Termination of Agreement..................................... 12
6. Indemnification................................................... 12
(a) Indemnification of Underwriter............................... 12
(b) Indemnification of the Seller, the Company, their Directors
and Officers................................................. 13
(c) Actions against Parties; Notification........................ 14
(d) Settlement without Consent if Failure to Reimburse........... 15
7. Contribution...................................................... 15
8. Representations, Warranties and Agreements to Survive Delivery.... 16
9. Termination of Agreement.......................................... 16
(a) Termination; General......................................... 16
(b) Liabilities.................................................. 17
10. Notices........................................................... 17
11. Parties........................................................... 17
12. Governing Law and Time............................................ 17
13. Effect of Headings................................................ 17
SCHEDULE A............................................................. Sch A-1
SCHEDULE B............................................................. Sch B-1
ii
<PAGE>
$_____________
NOVASTAR FINANCIAL, INC.
(a Maryland corporation)
and
NOVASTAR MORTGAGE FUNDING CORPORATION
(a Delaware corporation)
NovaStar Mortgage Funding Trust Collateralized Mortgage
Obligation Bonds, Series _________________
UNDERWRITING AGREEMENT
----------------------
[DATE]
The Firm or Firms of Underwriters
named on the signature page hereof
Ladies and Gentlemen:
NovaStar Financial, Inc., a Maryland corporation (the "Seller") and
NovaStar Mortgage Funding Corporation, a Delaware corporation (the "Company")
confirm their agreement with __________________ (the "Underwriter"), with
respect to the issue and sale by the Company and the purchase by the Underwriter
of the principal amount set forth in Schedule A hereto of $____________
aggregate principal amount of the Company's NovaStar Mortgage Funding Trust
Collateralized Mortgage Obligation Bonds, Series __________________ (the
"Bonds"). The Bonds are to be issued pursuant to an indenture dated as of
_________________________________ (the "Indenture") between NovaStar Mortgage
Funding Trust, Series _________, as issuer (the "Issuer") and _________________,
as indenture trustee (the "Indenture Trustee"). Bonds issued in book entry form
will be issued to Cede & Co. as nominee of The Depository Trust Company ("DTC")
pursuant to a letter agreement, to be dated as of the Closing Time (as defined
in Section 2(b)) (the "DTC Agreement"), among the Issuer, the Indenture Trustee
and DTC.
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form S-3 (File No._________________)
relating to the Bonds, and the offering thereof from time to time in accordance
with Rule 415 under the Securities Act of 1933, as amended (the "1933 Act"), and
has filed, and proposes to file, such amendments thereto as may have been
required to the date hereof and as shall be required prior to the effective date
thereof pursuant to the
1
<PAGE>
1933 Act and the rules of the Commission thereunder (the "1933 Act
Regulations"). Such registration statement, as amended at the time when each
becomes effective under the 1933 Act and at the Closing Time defined below, is
referred to herein as the "Registration Statement". The Company proposes to file
with the Commission pursuant to Rule 424(b)(5) under the 1933 Regulations a
supplement (the "Prospectus Supplement") to the form of prospectus (as may be
amended in connection with such Prospectus Supplement, the "Basic Prospectus";
the Basic Prospectus, together with the Prospectus Supplement, the
"Prospectus"). Any preliminary form of the Prospectus that has heretofore been
filed pursuant to Rule 424(b) or prior to the effective date of the Registration
Statement, pursuant to Rule 402(a) or 424(a) is hereinafter called a
"preliminary prospectus".
For purposes of this Agreement, all references to the Registration
Statement, any preliminary prospectus, the Prospectus or any amendment or
supplement to any of the foregoing shall be deemed to include the copy filed
with the Commission pursuant to its Electronic Data Gathering, Analysis and
Retrieval system ("EDGAR").
All references in this Agreement to financial statements and schedules and
other information which is "contained," "included" or "stated" in the
Registration Statement, any preliminary prospectus or the Prospectus (or other
references of like import) shall be deemed to mean and include all such
financial statements and schedules and other information which are incorporated
by reference in the Registration Statement, any preliminary prospectus or the
Prospectus, as the case may be; and all references in this Agreement to
amendments or supplements to the Registration Statement, any preliminary
prospectus or the Prospectus shall be deemed to mean and include the filing of
any document under the Securities Exchange Act of 1934, as amended (the "1934
Act") which is incorporated by reference in the Registration Statement, such
preliminary prospectus or the Prospectus, as the case may be.
Capitalized terms used but not defined herein shall have the meanings given
to them in the Definitions attached to the Indenture as Appendix A.
1. Representations and Warranties.
------------------------------
(a) Representations and Warranties by the Seller and the Company. The
Seller and the Company jointly and severally represent and warrant to the
Underwriter as of the date hereof, and as of the Closing Time referred to in
Section 2(b) hereof, and agree with the Underwriter as follows:
(i) Compliance with Registration Requirements. The Company meets the
requirements for use of Form S-3 under the 1933 Act. The Registration
Statement has become effective under the 1933 Act and no stop order
suspending the effectiveness of the Registration Statement has been issued
under the 1933 Act and no proceedings for that purpose have been instituted
or are pending or, to the knowledge of the Company, are contemplated by the
Commission, and any request on the part of the Commission for additional
information has been complied with. At the time the Registration Statement
2
<PAGE>
became effective and at the Closing Time, the Registration Statement and any
amendments and supplements thereto complied and will comply in all material
respects with the requirements of the 1933 Act and the 1933 Act Regulations and
the Trust Indenture Act of 1939, as amended (the "1939 Act") and the rules and
regulations of the Commission thereunder (the "1939 Act Regulations"), and did
not and will not contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading. Neither the Prospectus nor any amendments or
supplements thereto, at the time the Prospectus or any such amendment or
supplement was issued and at the Closing Time, included or will include an
untrue statement of a material fact or omitted or will omit to state a material
fact necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading. The representations
and warranties in this subsection shall not apply to statements in or omissions
from the Registration Statement or Prospectus (A) made in reliance upon and in
conformity with information furnished to the Company in writing by the
Underwriter expressly for use in the Registration Statement or Prospectus, and
(B) under the headings "THE BOND INSURER" and "DESCRIPTION OF THE BONDS[_]Bond
Insurance Policy" or the consolidated financial statements of the Bond Insurer
incorporated by reference in the Registration Statement or Prospectus.
Each preliminary prospectus and the prospectus filed as part of the
Registration Statement as originally filed or as part of any amendment thereto,
or filed pursuant to Rule 424 under the 1933 Act, complied when so filed in all
material respects with the 1933 Act Regulations and each preliminary prospectus
and the Prospectus delivered to the Underwriter for use in connection with this
offering was identical to the electronically transmitted copies thereof filed
with the Commission pursuant to EDGAR, except to the extent permitted by
Regulation S-T.
(ii) Incorporated Documents. The documents incorporated or deemed to be
incorporated by reference in the Registration Statement and the Prospectus, at
the time they were or hereafter are filed with the Commission, complied and will
comply in all material respects with the requirements of the 1934 Act and the
rules and regulations of the Commission thereunder (the "1934 Act Regulations"),
and, when read together with the other information in the Prospectus, at the
time the Registration Statement became effective, at the time the Prospectus was
issued and at the Closing Time, did not and will not contain an untrue statement
of a material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein not misleading. The
representations and warranties in this subsection shall not apply to the
consolidated financial statements of the Bond Insurer incorporated by reference
in the Registration Statement or Prospectus.
(iii) No Material Adverse Change in Business. Since the respective dates as
of which information is given in the Registration Statement and the Prospectus,
except as otherwise stated therein, (A) there has been no material adverse
change in the financial condition, earnings, business affairs or business
prospects of the Seller or the Company (a
3
<PAGE>
"Material Adverse Effect"), whether or not arising in the ordinary course of
business and (B) there have been no transactions entered into by the Seller or
the Company, other than those in the ordinary course of business, which are
material with respect to the Seller or the Company.
(iv) Good Standing of the Seller and Company. Each of the Seller and the
Company has been duly incorporated and is validly existing as a corporation in
good standing under the laws of its respective State of incorporation and has
corporate power and authority to own, lease and operate its respective
properties and to conduct its respective business as described in the Prospectus
and to enter into and perform its respective obligations under this Agreement;
and each of the Seller and the Company is duly qualified as a foreign
corporation to transact business and is in good standing in each other
jurisdiction in which such qualification is required, whether by reason of the
ownership or leasing of property or the conduct of business, except where the
failure so to qualify or to be in good standing would not result in a Material
Adverse Effect.
(v) Authorization of Agreement. This Agreement has been duly authorized,
executed and delivered by the Seller and the Company.
(vi) Authorization of Other Agreements. Each of the Transaction Documents
(as defined below) to which the Seller or the Company is a party has been duly
authorized and, at the Closing Time, will have been duly executed and delivered
by the Seller or the Company and will each constitute a legal, valid and binding
instrument enforceable against the Seller or the Company in accordance with its
terms, subject (i) to applicable bankruptcy, reorganization, insolvency,
moratorium or other similar laws affecting creditors' rights generally, (ii) as
to enforceability, to general principles of equity (regardless of whether
enforcement is sought in a proceeding in equity or at law) and (iii) as to
enforceability with respect to rights of indemnity thereunder, to limitations of
public policy under applicable securities laws.
(vii) Description of the Transaction Documents. The description of the
Purchase Agreement, the Trust Agreement, the Indenture and the Servicing
Agreement (collectively, the "Transaction Documents") in the Prospectus conforms
in all material respects with the terms thereof. At the Closing Time, the
Transaction Documents will conform in all material respects to the descriptions
thereof contained in the Prospectus.
(viii) Description of the Bonds. At the Closing Time, the Bonds will have
been duly and validly authorized and executed by the Indenture Trustee, and,
assuming authentication as specified in the Indenture, will be validly issued
and outstanding and entitled to the benefits of the Indenture. The description
of the Bonds in the Prospectus conforms or will conform in all material respects
with the terms thereof and will be in substantially the respective forms filed
or incorporated by reference, as the case may be, as exhibits to the
Registration Statement.
4
<PAGE>
(ix) Absence of Defaults and Conflicts. Neither the Seller nor the Company
is in violation of its charter or by-laws or in default in the performance or
observance of any obligation, agreement, covenant or condition contained in any
contract, indenture, mortgage, deed of trust, loan or credit agreement, note,
lease or other agreement or instrument to which the Seller or the Company is a
party or by which it or any of them may be bound, or to which any of the
property or assets of the Seller or the Company is subject (collectively,
"Agreements and Instruments") except for such defaults that would not result in
a Material Adverse Effect; and the execution, delivery and performance of this
Agreement and any other agreement or instrument entered into or issued or to be
entered into or issued by the Seller or the Company in connection with the
transactions contemplated hereby or thereby or in the Registration Statement and
the consummation of the transactions contemplated herein and in the Registration
Statement (including the issuance and sale of the Bonds) and compliance by the
Seller or the Company with its respective obligations hereunder have been duly
authorized by all necessary corporate action and do not and will not, whether
with or without the giving of notice or passage of time or both, conflict with
or constitute a breach of, or default or a Repayment Event (as defined below)
under, or result in the creation or imposition of any lien, charge or
encumbrance upon any property or assets of the Seller or the Company pursuant
to, the Agreements and Instruments except for such conflicts, breaches or
defaults or liens, charges or encumbrances that, singly or in the aggregate,
would not result in a Material Adverse Effect, nor will such action result in
any violation of the provisions of the charter or by-laws of the Seller or the
Company or any applicable law, statute, rule, regulation, judgment, order, writ
or decree of any government, government instrumentality or court, domestic or
foreign, having jurisdiction over the Seller or the Company or any of its
respective assets or properties. As used herein, a "Repayment Event" means any
event or condition which gives the holder of any note, debenture or other
evidence of indebtedness (or any person acting on such holder's behalf) the
right to require the repurchase, redemption or repayment of all or a portion of
such indebtedness by the Seller or the Company or their affiliates.
(x) Absence of Proceedings. There is no action, suit, proceeding, inquiry
or investigation before or by any court or governmental agency or body, domestic
or foreign, now pending, or, to the knowledge of the Seller or the Company
threatened, against or affecting the Seller or the Company which would
reasonably be expected to result in a Material Adverse Effect, or which would
reasonably be expected to materially and adversely affect the respective
properties or assets of the Seller or the Company or the consummation of this
Agreement or the performance by the Seller or the Company of its respective
obligations hereunder. The aggregate of all pending legal or governmental
proceedings to which the Seller or the Company is a party or of which any of its
respective property or assets is the subject which are not described in the
Registration Statement, including ordinary routine litigation incidental to the
business, would not reasonably be expected to result in a Material Adverse
Effect.
5
<PAGE>
(xi) Absence of Further Requirements. No filing with, or authorization,
approval, consent, license, order, registration, qualification or decree of, any
court or governmental authority or agency is necessary or required for the
performance by the Seller or the Company of its respective obligations
hereunder, in connection with the offering, issuance or sale of the Bonds
hereunder or the consummation of the transactions contemplated by this
Agreement, except such as may be required under the 1933 Act, the 1939 Act
Regulations or state securities or blue sky laws and except for the
qualification of the Indenture under the 1939 Act.
(xii) Possession of Licenses and Permits. Each of the Seller and the
Company possesses such permits, licenses, approvals, consents and other
authorizations (collectively, "Governmental Licenses") issued by the appropriate
federal, state, local or foreign regulatory agencies or bodies necessary to
conduct the respective business now operated by them; each of the Seller and the
Company is in compliance with the terms and conditions of all such Governmental
Licenses, except where the failure so to comply would not, singly or in the
aggregate, have a Material Adverse Effect; all of the Governmental Licenses are
valid and in full force and effect, except when the invalidity of such
Governmental Licenses or the failure of such Governmental Licenses to be in full
force and effect would not have a Material Adverse Effect; and neither the
Seller nor the Company has received any notice of proceedings relating to the
revocation or modification of any such Governmental Licenses which, singly or in
the aggregate, if the subject of an unfavorable decision, ruling or finding,
would result in a Material Adverse Effect.
(xiii) Tax Returns. Each of the Seller and the Company has filed all
federal, state, local and foreign tax returns that are required to be filed or
have duly requested extensions thereof and have paid all taxes required to be
paid by any of them and any related assessments, fines or penalties, except for
any such tax, assessment, fine or penalty that is being contested in good faith
and by appropriate proceedings; and adequate charges, accruals and reserves have
been provided for in respect of all federal, state, local and foreign taxes for
all periods as to which the tax liability of the Seller or the Company has not
been finally determined or remains open to examination by applicable taxing
authorities.
(xiv) No Business with Cuba. Neither the Seller nor the Company is doing
business with Cuba.
(xv) Investment Company Act. Neither the Seller nor the Company is and upon
the issuance and sale of the Bonds as herein contemplated and the application of
the net proceeds therefrom as described in the Prospectus will not be, an
"investment company" or an entity "controlled" by an "investment company" as
such terms are defined in the Investment Company Act of 1940, as amended (the
"1940 Act").
6
<PAGE>
(b) Officer's Certificates. Any certificate signed by any officer of the
Seller or the Company delivered to the Underwriter or to counsel for the
Underwriter shall be deemed a representation and warranty by the Company to the
Underwriter to the matters covered thereby.
2. Sale and Delivery to the Underwriter; Closing.
(a) Bonds. On the basis of the representations and warranties herein
contained and subject to the terms and conditions herein set forth, the Company
agrees to sell to the Underwriter, and the Underwriter agrees to purchase from
the Company, at the price set forth in Schedule B, the aggregate principal
amount of Bonds set forth in Schedule A opposite the name of the Underwriter.
(b) Payment. Payment of the purchase price for, and delivery of
certificates for, the Bonds shall be made at the office of _____________________
located at ____________________________________, or at such other place as shall
be agreed upon by the Underwriter and the Company, at 10:00 A.M. on or about
____________________________ or such other time not later than ten business days
after such date as shall be agreed upon by the Underwriter and the Company (such
time and date of payment and delivery being herein called the "Closing Time").
Payment shall be made to the Company by wire transfer of immediately
available funds to a bank account designated by the Company, against delivery to
the Underwriter for the account of the Underwriter of certificates for the Bonds
to be purchased by them. The certificates representing the Bonds shall be
registered in the name of Cede & Co. pursuant to the DTC Agreement and shall be
made available for examination and packaging by the Underwriter in The City of
___________________________ not later than 10:00 A.M. on the last business day
prior to the Closing Time.
3. Covenants of the Company. The Company covenants with the Underwriter
as follows:
(a) Compliance with Securities Regulations and Commission Requests. The
Company will notify the Underwriter immediately, and confirm the notice in
writing, (i) when any post-effective amendment to the Registration Statement
shall become effective, or any supplement to the Prospectus or any amended
Prospectus shall have been filed, (ii) of the receipt of any comments from the
Commission, (iii) of any request by the Commission for any amendment to the
Registration Statement or any amendment or supplement to the Prospectus or for
additional information, and (iv) of the issuance by the Commission of any stop
order suspending the effectiveness of the Registration Statement or of any order
preventing or suspending the use of any preliminary prospectus, or of the
suspension of the qualification of the Bonds for offering or sale in any
jurisdiction, or of the initiation or threatening of any proceedings for any of
such purposes. The Company will promptly effect the filings necessary pursuant
to Rule 424(b) and will take such steps as it deems necessary to ascertain
promptly whether the form of prospectus transmitted for filing under Rule 424(b)
was received for filing by the Commission and, in the event that it was not, it
will promptly file such prospectus. The Company will make every reasonable
effort to prevent the issuance of any stop order and, if any stop order is
issued, to obtain the lifting thereof at the earliest possible moment.
7
<PAGE>
(b) Filing of Amendments. The Company will give the Underwriter notice of
its intention to file or prepare any amendment to the Registration Statement or
any amendment, supplement or revision to either the Basic Prospectus or to the
Prospectus, whether pursuant to the 1933 Act, the 1934 Act or otherwise (other
than reports to be filed pursuant to the 1934 Act), will furnish the Underwriter
with copies of any such documents a reasonable amount of time prior to such
proposed filing or use, as the case may be, and will not file or use any such
document to which the Underwriter or counsel for the Underwriter shall object.
(c) Delivery of Registration Statements. The Company has furnished or will
deliver to the Underwriter and counsel for the Underwriter, without charge,
signed copies of the Registration Statement as originally filed and of each
amendment thereto (including exhibits filed therewith or incorporated by
reference therein and documents incorporated or deemed to be incorporated by
reference therein) and signed copies of all consents and certificates of
experts, and will also deliver to the Underwriter without charge, a conformed
copy of the Registration Statement as originally filed and of each amendment
thereto (without exhibits) for the Underwriter. The copies of the Registration
Statement and each amendment thereto furnished to the Underwriter will be
identical to the electronically transmitted copies thereof filed with the
Commission pursuant to EDGAR, except to the extent permitted by Regulation S-T.
(d) Delivery of Prospectuses. The Company has delivered to the
Underwriter, without charge, as many copies of each preliminary prospectus as
the Underwriter reasonably requested, and the Company hereby consents to the use
of such copies for purposes permitted by the 1933 Act. The Company will furnish
to the Underwriter, without charge, during the period when the Prospectus is
required to be delivered under the 1933 Act or the 1934 Act, such number of
copies of the Prospectus (as amended or supplemented) as the Underwriter may
reasonably request. The Prospectus and any amendments or supplements thereto
furnished to the Underwriter will be identical to the electronically transmitted
copies thereof filed with the Commission pursuant to EDGAR, except to the extent
permitted by Regulation S-T.
(e) Continued Compliance with Securities Laws. The Company will comply
with the 1933 Act and the 1933 Act Regulations, the 1934 Act and the 1934 Act
Regulations and the 1939 Act and the 1939 Act Regulations so as to permit the
completion of the distribution of the Bonds as contemplated in this Agreement
and in the Prospectus. If at any time when a prospectus is required by the 1933
Act to be delivered in connection with sales of the Bonds, any event shall occur
or condition shall exist as a result of which it is necessary, in the opinion of
counsel for the Underwriter or for the Company, to amend the Registration
Statement or amend or supplement the Prospectus in order that the Prospectus
will not include any untrue statements of a material fact or omit to state a
material fact necessary in order to make the statements therein not misleading
in light of the circumstances existing at the time it is delivered to a
purchaser, or if it shall be necessary, in the opinion of such counsel, at any
such time to amend the Registration Statement or amend or supplement the
Prospectus in order to comply with the requirements of the 1933 Act or the 1933
Act Regulations, the Company will promptly prepare and file with the Commission,
subject to Section
8
<PAGE>
3(b), such amendment or supplement as may be necessary to correct such statement
or omission or to make the Registration Statement or the Prospectus comply with
such requirements, and the Company will furnish to the Underwriter such number
of copies of such amendment or supplement as the Underwriter may reasonably
request.
(f) Blue Sky Qualifications. The Company will use its best efforts, in
cooperation with the Underwriter, to qualify the Bonds for offering and sale
under the applicable securities laws of such states and other jurisdictions as
the Underwriter may designate and to maintain such qualifications in effect for
a period of not less than one year from the effective date of the Registration
Statement; provided, however, that the Company shall not be obligated to file
any general consent to service of process or to qualify as a foreign corporation
or as a dealer in securities in any jurisdiction in which it is not so qualified
or to subject itself to taxation in respect of doing business in any
jurisdiction in which it is not otherwise so subject. In each jurisdiction in
which the Bonds have been so qualified, the Company will file such statements
and reports as may be required by the laws of such jurisdiction to continue such
qualification in effect for a period of not less than one year from the
effective date of the Registration Statement. The Company will also supply the
Underwriter with such information as is necessary for the determination of the
legality of the Bonds for investment under the laws of such jurisdictions as the
Underwriter may request.
(g) Reporting Requirements. The Company, during the period when the
Prospectus is required to be delivered under the 1933 Act or the 1934 Act, will
file all documents required to be filed with the Commission pursuant to the 1934
Act within the time periods required by the 1934 Act and the 1934 Act
Regulations.
(h) Rating of Bonds. The Company shall take all reasonable action
necessary to enable __________________________________________ ("______"), and
______________________ ("__________") to provide their respective credit ratings
of the Bonds as described in the Prospectus.
(i) DTC. The Company will cooperate with the Underwriter and use its best
efforts to permit the Bonds to be eligible for clearance and settlement through
the facilities of DTC.
(j) Restriction on Sale of Securities. During the period from the date
hereof to the Closing Time, the Company will not, without the prior written
consent of the Underwriter, directly or indirectly, issue, sell, offer or agree
to sell, grant any option for the sale of, or otherwise dispose of, any other
mortgage-related securities of the Company or securities of the Company that are
convertible into, or exchangeable for, the Bonds or such other debt securities.
4. Payment of Expenses.
(a) Expenses. The Seller or the Company will pay all expenses incident to
the performance of their obligations under this Agreement, including (i) the
preparation, printing and any filing of the Registration Statement (including
any schedules or exhibits and any document incorporated therein by reference)
originally filed and of each amendment or supplement thereto, (ii)
9
<PAGE>
the preparation, printing and delivery to the Underwriter of this Agreement, the
Indenture and such other documents as may be required in connection with the
offering, purchase, sale and delivery of the Bonds, (iii) the preparation,
issuance and delivery of the certificates for the Bonds to the Underwriter,
including any charges of DTC in connection therewith; (iv) the fees and
disbursements of the Seller's and the Company's accountants and other advisors,
(v) the qualification of the Bonds under securities laws in accordance with the
provisions of Section 3(f) hereof, including filing fees and the reasonable fees
and disbursements of counsel for the Underwriter in connection therewith and in
connection with the preparation of the Blue Sky Survey and any supplement
thereto, (vi) the printing and delivery to the Underwriter of copies of each
preliminary prospectus and of the Prospectus and any amendments or supplements
thereto, (vii) the fees and expenses of the Indenture Trustee and Owner Trustee,
including the fees and disbursements of counsel for the Indenture Trustee and
Owner Trustee in connection with the Indenture, the Trust Agreement and the
Bonds and (viii) any fees payable in connection with the rating of the Bonds.
(b) Termination of Agreement. If this Agreement is terminated by the
Underwriter in accordance with the provisions of Section 5 or Section 9(a)(i)
hereof, the Seller or the Company shall reimburse the Underwriter for all of
their out-of-pocket expenses, including the reasonable fees and disbursements of
counsel for the Underwriter.
5. Conditions of Underwriter's Obligations. The obligations of the
Underwriter hereunder are subject to the accuracy of the representations and
warranties of the Seller and the Company contained in Section 1 hereof or in
certificates of any officer of the Seller or the Company delivered pursuant to
the provisions hereof, to the performance by the Seller and the Company of their
respective covenants and other obligations hereunder, and to the following
further conditions:
(a) Effectiveness of Registration Statement. At the Closing Time no stop
order suspending the effectiveness of the Registration Statement shall have been
issued under the 1933 Act or proceedings therefor initiated or threatened by the
Commission, and any request on the part of the Commission for additional
information shall have been complied with to the reasonable satisfaction of
counsel to the Underwriter.
(b) Opinions of Counsel for NovaStar Entities. At the Closing Time, the
Underwriter shall have received the favorable opinions, dated as of the Closing
Time, of Stinson, Mag & Fizzell, P.C., counsel for the Seller, the Company and
the Servicer (collectively, the "NovaStar Entities"), in form and substance
satisfactory to counsel for the Underwriter. Such counsel may also state that,
insofar as such opinion involves factual matters, they have relied, to the
extent they deem proper, upon certificates of officers of the NovaStar Entities
and certificates of public officials.
(c) Opinion of Counsel for Underwriter. At the Closing Time, the
Underwriter shall have received the favorable opinions, dated as of the Closing
Time, of ____________________, counsel for the Underwriter. Such counsel may
also state that, insofar as such opinion involves factual matters, they have
relied, to the extent they deem proper, upon certificates of officers of the
Underwriter and certificates of public officials.
10
<PAGE>
(d) Officers' Certificates of NovaStar Entities. At the Closing Time,
there shall not have been, since the date hereof or since the respective dates
as of which information is given in the Prospectus, any material adverse change
in the financial condition, earnings, business affairs or business prospects of
the NovaStar Entities, whether or not arising in the ordinary course of
business, and the Underwriter shall have received a certificate of the President
or a Vice President of each of the Seller and the Company, dated as of the
Closing Time, to the effect that (i) there has been no such material adverse
change, (ii) the representations and warranties in Section 1(a) hereof are true
and correct with the same force and effect as though expressly made at and as of
the Closing Time, (iii) each has complied with all agreements and satisfied all
conditions on its part to be performed or satisfied at or prior to the Closing
Time, and (iv) no stop order suspending the effectiveness of the Registration
Statement has been issued and no proceedings for that purpose have been
instituted or are pending or are contemplated by the Commission.
(e) Accountant's Comfort Letter. At or prior to the time of the execution
of this Agreement, the Underwriter shall have received from ____________________
a letter dated such date, in form and substance satisfactory to the Underwriter,
containing statements and information of the type ordinarily included in
accountants' "comfort letters" to the Underwriter with respect to certain
financial information contained in the Registration Statement and the
Prospectus.
(f) Bring-down Comfort Letter. At the Closing Time, the Underwriter shall
have received from _________________ a letter, dated as of the Closing Time, to
the effect that they reaffirm the statements made in the letter furnished
pursuant to subsection (f) of this Section, except that the specified date
referred to shall be a date not more than three business days prior to the
Closing Time.
(g) Accountant's Consent Letter. With respect to the Bond Insurer, at or
prior to the time of the execution of this Agreement, the Underwriter shall have
received from ___________________ a letter dated such date consenting to its
inclusion in the Prospectus Supplement as an expert with respect to certain
information contained in the Registration Statement and the Prospectus.
(h) Maintenance of Rating. At the Closing Time, the Bonds shall be rated
"____" by _____________ and "____" by __________ and the Company shall have
delivered to the Underwriter a letter dated the Closing Time, from each such
rating agency, or other evidence satisfactory to the Underwriter, confirming
that the Bonds have such ratings.
(i) Opinion of Counsel for Indenture Trustee. At the Closing Time, the
Underwriter shall have received the favorable opinion, dated as of the Closing
Time, of __________________, counsel for the Indenture Trustee, in form and
substance satisfactory to counsel for the Underwriter.
(j) Opinion of Counsel for Owner Trustee. At the Closing Time, the
Underwriter shall have received the favorable opinion, dated as of the Closing
Time, of ______________________, counsel for the Owner Trustee, in form and
substance satisfactory to counsel for the Underwriter.
11
<PAGE>
(k) Bond Insurance Policy. At the Closing Time, the Bond Insurer shall
have issued the Bond Insurance Policy in favor of the Indenture Trustee for the
benefit of the holders of the Bonds.
(l) Additional Documents. At the Closing Time, counsel for the Underwriter
shall have been furnished with such documents and opinions as they may require
for the purpose of enabling them to pass upon the issuance and sale of the Bonds
as herein contemplated, or in order to evidence the accuracy of any of the
representations or warranties, or the fulfillment of any of the conditions,
herein contained; and all proceedings taken by the Seller and the Company in
connection with the issuance and sale of the Bonds as herein contemplated shall
be satisfactory in form and substance to the Underwriter and counsel for the
Underwriter.
(m) Termination of Agreement. If any condition specified in this Section
shall not have been fulfilled when and as required to be fulfilled, this
Agreement may be terminated by the Underwriter by notice to the Seller and the
Company at any time at or prior to the Closing Time, and such termination shall
be without liability of any party to any other party except as provided in
Section 4 and except that Sections 1, 6, 7 and 8 shall survive any such
termination and remain in full force and effect.
6. Indemnification.
(a) Indemnification of Underwriter. The Seller and the Company jointly and
severally agree to indemnify and hold harmless the Underwriter and each person,
if any, who controls the Underwriter, as the case may be, within the meaning of
Section 15 of the 1933 Act or Section 20 of the 1934 Act as follows:
(i) against any and all loss, liability, claim, damage and expense
whatsoever, as incurred, arising out of any untrue statement or alleged
untrue statement of a material fact contained in the Registration Statement
(or any amendment thereto), or the omission or alleged omission therefrom
of a material fact required to be stated therein or necessary to make the
statements therein not misleading or arising out of any untrue statement or
alleged untrue statement of a material fact contained in any preliminary
prospectus or the Prospectus (or any amendment or supplement thereto), or
the omission or alleged omission therefrom of a material fact necessary in
order to make the statements therein, in light of the circumstances under
which they were made, not misleading;
(ii) against any and all loss, liability, claim, damage and expense
whatsoever, as incurred, arising out of any untrue statement or alleged
untrue statement of material fact contained in the Computational Materials,
ABS Term Sheets or Collateral Term Sheets distributed by such Underwriter,
unless such untrue statement or alleged untrue statement of a material fact
was made in reliance upon and in conformity with Derived Information
provided by such Underwriter to the Seller or the Company expressly for use
in the Registration Statement, the Prospectus, the Computational Materials,
ABS Term Sheets or Collateral Term Sheets and the untrue statement or
alleged untrue statement did not derive
12
<PAGE>
from an inaccuracy in the Seller-Provided Information used in the
preparation of such Computational Materials, ABS Term Sheets or Collateral
Term Sheets;
(iii) against any and all loss, liability, claim, damage and expense
whatsoever, as incurred, to the extent of the aggregate amount paid in
settlement of any litigation, or any investigation or proceeding by any
governmental agency or body, commenced or threatened, or of any claim
whatsoever based upon any such untrue statement or omission, or any such
alleged untrue statement or omission; provided that (subject to Section
6(d) below) any such settlement is effected with the written consent of the
Seller and the Company; and
(iv) against any and all expense whatsoever, as incurred (including
the fees and disbursements of counsel chosen by the Underwriter),
reasonably incurred in investigating, preparing or defending against any
litigation, or any investigation or proceeding by any governmental agency
or body, commenced or threatened, or any claim whatsoever based upon any
such untrue statement or omission, or any such alleged untrue statement or
omission, to the extent that any such expense is not paid under (i), (ii)
or (iii) above;
provided, however, that this indemnity agreement shall not apply to any
loss, liability, claim, damage or expense to the extent arising out of any
untrue statement or omission or alleged untrue statement or omission made
in reliance upon and in conformity with written information furnished to
the Seller or the Company by the Underwriter or the Bond Insurer expressly
for use in the Registration Statement (or any amendment thereto), or any
preliminary prospectus or the Prospectus (or any amendment or supplement
thereto).
(b) Indemnification of the Seller, the Company, their Directors and
Officers. The Underwriter agrees to indemnify and hold harmless the Seller and
the Company and each person, if any, who controls the Seller or the Company
within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act
as follows (i) against any and all loss, liability, claim, damage and expense
described in the indemnity contained in subsection (a) of this Section, as
incurred, but only with respect to untrue statements or omissions, or alleged
untrue statements or omissions, made in the Registration Statement (or any
amendment thereto) or any preliminary prospectus or the Prospectus (or any
amendment or supplement thereto) in reliance upon and in conformity with written
information furnished to the Seller or the Company by the Underwriter expressly
for use in the Registration Statement (or any amendment thereto) or any
preliminary prospectus or the Prospectus (or any amendment or supplement
thereto), and (ii) against any and all loss, liability, claim, damage and
expense described in the indemnity contained in subsection (a) of this Section,
as incurred, but only with respect to untrue statements or alleged untrue
statements made in the Computational Materials, Collateral Term Sheets or ABS
Term Sheets to the extent that such untrue statement or alleged untrue statement
of a material fact was made in reliance upon and in conformity with Derived
Information provided by the Underwriter expressly for use in the Computational
Materials, the ABS Term Sheets or the Collateral Term Sheets and the untrue
statements or alleged untrue statements did not derive from an inaccuracy in the
Seller-Provided Information used in the preparation of such Computational
Materials, ABS Term Sheets or Collateral Term Sheets.
13
<PAGE>
For purposes of this Agreement, "Computational Materials" shall have the
meaning given such term in the No-Action Letter of May 20, 1994 issued by the
Commission to Kidder, Peabody Acceptance Corporation I, Kidder, Peabody & Co.
Incorporated and Kidder Structured Asset Corporation, as made applicable to
other issuers and underwriters by the Commission in response to the request of
the Public Securities Association dated May 24, 1994 (collectively, the
"Kidder/PSA Letter"), and the requirement of the No-Action Letter of February
20, 1995 issued by the Commission to the Public Securities Association (the "PSA
Letter" and, together with the Kidder/PSA Letter, the "No-Action Letters"), but
shall include only those Computational Materials that have been prepared or
delivered to prospective investors by the Underwriter. For purposes hereof,
"ABS Term Sheets" and "Collateral Term Sheets" shall have the meanings given
such terms in the PSA Letter but shall include only those ABS Term Sheets or
Collateral Term Sheets that have been prepared or delivered to prospective
investors, by the Underwriter. For purposes hereof, "Derived Information" means
such portion, if any, of the information delivered to the Company by the
Underwriter for filing with the Commission on Form 8-K and (i) is not contained
in the Prospectus without taking into account information incorporated therein
by reference, and (ii) does not constitute Seller-Provided Information.
"Seller-Provided Information" means any computer tape (or other information)
furnished to the Underwriter by or on behalf of the Company concerning the
assets of the Trust.
(c) Actions against Parties; Notification. Each indemnified party shall
give notice as promptly as reasonably practicable to each indemnifying party of
any action commenced against it in respect of which indemnity may be sought
hereunder, but failure to so notify an indemnifying party shall not relieve such
indemnifying party from any liability hereunder to the extent it is not
materially prejudiced as a result thereof and in any event shall not relieve it
from any liability which it may have otherwise than on account of this indemnity
agreement. In the case of parties indemnified pursuant to 6(a) above, counsel
to the indemnified parties shall be selected by the Underwriter and, in the case
of parties indemnified pursuant to Section 6(b) above, counsel to the
indemnified parties shall be selected by the Seller or the Company. An
indemnifying party may participate at its own expense in the defense of any such
action; provided, however, that counsel to the indemnifying party shall not
(except with the consent of the indemnified party) also be counsel to the
indemnified party. In no event shall the indemnifying parties be liable for
fees and expenses of more than one counsel (in addition to any local counsel)
separate from their own counsel for all indemnified parties in connection with
any one action or separate but similar or related actions in the same
jurisdiction arising out of the same general allegations or circumstances. No
indemnifying party shall, without the prior written consent of the indemnified
parties, settle or compromise or consent to the entry of any judgment with
respect to any litigation, or any investigation or proceeding by any
governmental agency or body, commenced or threatened, or any claim whatsoever in
respect of which indemnification or contribution could be sought under this
Section 6 or Section 7 hereof (whether or not the indemnified parties are actual
or potential parties thereto), unless such settlement, compromise or consent (i)
includes an unconditional release of each indemnified party from all liability
arising out of such litigation, investigation, proceeding or claim and (ii) does
not include a statement as to or an admission of fault, culpability or a failure
to act by or on behalf of any indemnified party.
14
<PAGE>
(d) Settlement without Consent if Failure to Reimburse. If at any time an
indemnified party shall have requested an indemnifying party to reimburse the
indemnified party for fees and expenses of counsel, such indemnifying party
agrees that it shall be liable for any settlement of the nature contemplated by
Section 6(a)(iii) effected without its written consent if (i) such settlement is
entered into more than 45 days after receipt by such indemnifying party of the
aforesaid request, (ii) such indemnifying party shall have received notice of
the terms of such settlement at least 30 days prior to such settlement being
entered into and (iii) such indemnifying party shall not have reimbursed such
indemnified party in accordance with such request prior to the date of such
settlement.
7. Contribution. If the indemnification provided for in Section 6 hereof
is for any reason unavailable to or insufficient to hold harmless an indemnified
party in respect of any losses, liabilities, claims, damages or expenses
referred to therein, then each indemnifying party shall contribute to the
aggregate amount of such losses, liabilities, claims, damages and expenses
incurred by such indemnified party, as incurred, (i) in such proportion as is
appropriate to reflect the relative benefits received by the Seller and the
Company on the one hand and the Underwriter on the other hand from the offering
of the Bonds pursuant to this Agreement or (ii) if the allocation provided by
clause (i) is not permitted by applicable law, in such proportion as is
appropriate to reflect not only the relative benefits referred to in clause (i)
above but also the relative fault of the Seller and the Company on the one hand
and of the Underwriter on the other hand in connection with the statements or
omissions which resulted in such losses, liabilities, claims, damages or
expenses, as well as any other relevant equitable considerations.
The relative benefits received by the Seller and the Company on the one
hand and the Underwriter on the other hand in connection with the offering of
the Bonds pursuant to this Agreement shall be deemed to be in the same
respective proportions as the total net proceeds from the offering of the Bonds
pursuant to this Agreement (before deducting expenses) received by the Seller or
the Company and the total underwriting discount received by the Underwriter, in
each case as set forth on the cover of the Prospectus, bear to the aggregate
initial public offering price of the Bonds as set forth on such cover. The
relative fault of the Seller and the Company on the one hand and the Underwriter
on the other hand shall be determined by reference to, among other things,
whether any such untrue or alleged untrue statement of a material fact or
omission or alleged omission to state a material fact relates to information
supplied by the Seller or the Company, or by the Underwriter and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission.
The Seller, the Company and the Underwriter agree that it would not be just
and equitable if contribution pursuant to this Section 7 were determined by pro
rata allocation or by any other method of allocation which does not take account
of the equitable considerations referred to above in this Section 7. The
aggregate amount of losses, liabilities, claims, damages and expenses incurred
by an indemnified party and referred to above in this Section 7 shall be deemed
to include any legal or other expenses reasonably incurred by such indemnified
party in investigating, preparing or defending against any litigation, or any
investigation or proceeding by any governmental agency or
15
<PAGE>
body, commenced or threatened, or any claim whatsoever based upon any such
untrue or alleged untrue statement or omission or alleged omission.
Notwithstanding the provisions of this Section 7, the Underwriter shall not
be required to contribute any amount in excess of the amount by which the total
price at which the Bonds underwritten by the Underwriter and distributed to the
public were offered to the public exceeds the amount of any damages which the
Underwriter has otherwise been required to pay by reason of such untrue or
alleged untrue statement or omission or alleged omission.
No person guilty of fraudulent misrepresentation (within the meaning of
Section 11(f) of the 1933 Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation.
For purposes of this Section 7, each person, if any, who controls the
Underwriter within the meaning of Section 15 of the 1933 Act or Section 20 of
the 1934 Act shall have the same rights to contribution as the Underwriter and
each person, if any, who controls the Seller or the Company within the meaning
of Section 15 of the 1933 Act or Section 20 of the 1934 Act shall have the same
rights to contribution as the Seller and the Company. The Underwriter's
obligations to contribute pursuant to this Section 7 is in proportion to the
principal amount of Bonds set forth opposite its name in Schedule A hereto.
8. Representations, Warranties and Agreements to Survive Delivery. All
representations, warranties and agreements contained in this Agreement or in
certificates of officers of the Seller or the Company submitted pursuant hereto,
shall remain operative and in full force and effect, regardless of any
investigation made by or on behalf of the Underwriter or controlling person, or
by or on behalf of the Seller or the Company, and shall survive delivery of the
Bonds to the Underwriter.
9. Termination of Agreement.
(a) Termination; General. The Underwriter may terminate this Agreement, by
notice to the Seller and the Company, at any time at or prior to the Closing
Time (i) if there has been, since the time of execution of this Agreement or
since the respective dates as of which information is given in the Prospectus,
any material adverse change in the financial condition, earnings, business
affairs or business prospects of the Company or the Seller, whether or not
arising in the ordinary course of business, or (ii) if there has occurred any
material adverse change in the financial markets in the United States, any
outbreak of hostilities or escalation thereof or other calamity or crisis or any
change or development involving a prospective change in national or
international political, financial or economic conditions, in each case the
effect of which is such as to make it, in the judgment of the Underwriter,
impracticable to market the Bonds or to enforce contracts for the sale of the
Bonds, or (iii) if trading in any securities of the Company or the Seller has
been suspended or limited by the Commission or the New York Stock Exchange, or
if trading generally on the American Stock Exchange or the New York Stock
Exchange or in the NASDAQ National Market System has been suspended or limited,
or minimum or maximum prices for trading have been fixed, or maximum
16
<PAGE>
ranges for prices have been required, by any of said exchanges or by such system
or by order of the Commission, the National Association of Securities Dealers,
Inc. or any other governmental authority, or (iv) if a banking moratorium has
been declared by either Federal or New York authorities.
(b) Liabilities. If this Agreement is terminated pursuant to this Section,
such termination shall be without liability of any party to any other party
except as provided in Section 4 hereof, and provided further that Sections 1, 6,
7 and 8 shall survive such termination and remain in full force and effect.
10. Notices. All notices and other communications hereunder shall be in
writing and shall be deemed to have been duly given if mailed or transmitted by
any standard form of telecommunication. Notices to the Seller or the Company
shall be directed to the Company or Seller, as applicable, at 1900 West 47th
Place, Suite 205, Westwood, Kansas 66205, attention: David J. Lee and notices to
the Underwriter shall be directed to the Underwriter at _______________________,
attention ________________________.
11. Parties. This Agreement shall each inure to the benefit of and be
binding upon the Underwriter, the Seller, the Company and their respective
successors. Nothing expressed or mentioned in this Agreement is intended or
shall be construed to give any person, firm or corporation, other than the
Underwriter, the Seller, the Company and their respective successors and the
controlling persons and officers and directors referred to in Sections 6 and 7
and their heirs and legal representatives, any legal or equitable right, remedy
or claim under or in respect of this Agreement or any provision herein
contained. This Agreement and all conditions and provisions hereof are intended
to be for the sole and exclusive benefit of the Underwriter, the Seller, the
Company and their respective successors, and said controlling persons and
officers and directors and their heirs and legal representatives, and for the
benefit of no other person, firm or corporation. No purchaser of Bonds from any
Underwriter shall be deemed to be a successor by reason merely of such purchase.
12. GOVERNING LAW AND TIME. THIS AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. SPECIFIED TIMES
OF DAY REFER TO NEW YORK CITY TIME.
13. Effect of Headings. The Article and Section headings herein and the
Table of Contents are for convenience only and shall not affect the construction
hereof.
17
<PAGE>
If the foregoing is in accordance with your understanding of our agreement,
please sign and return to the Seller and the Company a counterpart hereof,
whereupon this instrument, along with all counterparts, will become a binding
agreement between the Underwriter, the Seller and the Company in accordance with
its terms.
Very truly yours,
NOVASTAR FINANCIAL, INC.
By __________________________
Title:_______________________
NOVASTAR MORTGAGE FUNDING CORPORATION
By___________________________
Title:_______________________
CONFIRMED AND ACCEPTED,
as of the date first above written:
[UNDERWRITER]
By_______________________________
Authorized Signatory
18
<PAGE>
SCHEDULE A
Name of Underwriter Total
------------------- Principal
Amount of
Bonds
-----
_______________________________ ..................... $______________
Sch A-1
<PAGE>
SCHEDULE B
NOVASTAR FINANCIAL, INC.
AND
NOVASTAR MORTGAGE FUNDING CORPORATION
$______________ NovaStar Mortgage Funding Trust
Collateralized Mortgage Obligation Bonds, Series _________
1. The initial public offering price of the Bonds shall be ______% of the
principal amount thereof.
2. The purchase price to be paid by the Underwriter for the Bonds shall
be __% of the principal amount thereof.
3. The interest rate on the Bonds shall be as set forth in the Prospectus
Supplement.
Sch B-1
<PAGE>
EXHIBIT 3.1
CERTIFICATE OF INCORPORATION
OF
NOVASTAR MORTGAGE FUNDING CORPORATION
-------------------------------------
FIRST. The name of the Corporation is:
NovaStar Mortgage Funding Corporation
SECOND. The address of its registered office in the State of Delaware
is Corporation Trust Center, 1209 Orange Street, Wilmington, County of New
Castle, Delaware 19801. The name of its registered agent at such address is The
Corporation Trust Company.
THIRD. The nature of the business or purposes to be conducted or
promoted by the Corporation are:
(a) to acquire, purchase, invest in, hold, finance, refinance,
sell, pledge, hypothecate, grant a security interest in, assign and otherwise
transfer mortgage loans, mortgage assets, mortgage collateral and mortgage
securities, including, without limitation, certificates representing ownership
interests in Delaware business trusts that have issued debt or other securities
collateralized or otherwise secured or backed by mortgage collateral
(collectively, the "Mortgage Collateral");
(b) to (1) engage in the establishment of one or more Delaware
business trusts (each a "Trust") which will issue, sell and deliver from time to
time one or more series (each of which series may consist of one or more
classes) of certificates, bonds, notes, debt obligations and other securities
and instruments (collectively, the "Bonds"), which Bonds shall be collateralized
or otherwise secured or backed by, or otherwise represent interests in, the
Mortgage Collateral or other assets pledged or sold to secure payment of such
Bonds, and (2) incur, assume or guaranty indebtedness in the manner permitted by
paragraph (a)(4) of Article TWELFTH below;
(c) to do all such things as are reasonable or necessary to
enable the corporation to carry out any of the activities specified in
paragraphs (a) and (b) of this Article THIRD, including without limitation
entering into purchase agreements, sale agreements, trust agreements, servicing
agreements, underwriting agreements, insurance agreements, indemnification
agreements and any additional agreements relating to or regarding the issuance
of the Bond; and
<PAGE>
(d) to engage in any activity and to exercise any powers
permitted of corporations under the laws of the State of Delaware, provided that
it is incidental to the foregoing and necessary or convenient to accomplish the
foregoing, and it is not prohibited by law or required to be specifically set
forth in the Certificate of Incorporation.
FOURTH.
(a) The total number of shares of stock which the Corporation
shall have authority to issue is 1,000 shares of common stock, of the par value
of $1.00 per share.
(b) No holder of any shares of stock of the Corporation of any
class shall be entitled as such, as a matter of right, to subscribe for or
purchase any shares of stock of the Corporation of any class, whether now or
hereafter authorized or whether issued for cash, property or services or as a
dividend or otherwise, or to subscribe for or purchase any obligations, bonds,
notes, debentures, other securities or stock convertible into shares of stock of
the Corporation of any class or carrying or evidencing any right to purchase
shares of stock of any class.
(c) Section 203 (as amended from time to time) of the General
Corporation Law of Delaware shall not apply to any business combination (as
defined in such law from time to time) of the Corporation with any interested
stockholder (as defined in such law from time to time) of the Corporation.
FIFTH. The name and mailing address of the incorporator are as
follows:
<TABLE>
<CAPTION>
Name Address
---- -------
<S> <C>
SMF Registered Services, Inc. c/o Stinson, Mag & Fizzell, P.C.
1201 Walnut, Ste. 2800
Kansas City, MO 64106
</TABLE>
SIXTH. (a) The number of directors of the Corporation shall be fixed
by, or in the manner provided in, the Bylaws. The names and mailing addresses of
the persons who are to serve as the initial directors of the Corporation until
such directors' successor are duly elected and qualified, or until such
directors' earlier resignation or removal, are as follows:
<TABLE>
<CAPTION>
Names Addresses
----- ---------
<S> <C>
Scott F. Hartman NovaStar Financial, Inc.
1900 West 47th Place, Ste. 205
Westwood, KS 66205
W. Lance Anderson NovaStar Financial, Inc.
1900 West 47th Place, Ste. 205
</TABLE>
2
<PAGE>
<TABLE>
<S> <C>
Westwood, KS 66205
Mike Bamburg 7300 College Blvd., Ste. 4300
Overland Park, KS 66210
</TABLE>
(b) The Corporation shall at all times have at least one
Independent Director. The Independent Director shall be an individual who,
except in his, her or its respective capacity as an Independent Director of the
Corporation, is not and has not been (i) a stockholder, director, partner,
officer, employee, significant customer, creditor, supplier or independent
contractor of the Corporation or its Affiliates; (ii) affiliated with a
significant customer, creditor, supplier or independent contractor of the
Corporation or its Affiliates; or (iii) a spouse, parent, sibling or child of
any person described by (i) or (ii) above; provided, however, an Independent
Director may also be an Independent Director of other special purpose
corporations established from time to time as subsidiaries of NovaStar
Financial, Inc. and Affiliates of the Corporation. When voting on matters
subject to the vote of the Board of Directors, notwithstanding that the
Corporation is not then insolvent, the Independent Director shall take into
account the interests of creditors of the Corporation, creditors of all Trusts
and all holders of Bonds.
As used herein, the term "Affiliate" shall mean any entity other
than the Corporation (i) which owns beneficially, directly or indirectly, any
outstanding shares of the Corporation's stock or (ii) which controls or is under
common control with the Corporation. The term "control" means the possession,
directly or indirectly, of the power to direct or cause the direction of the
management and policies of an entity, whether through ownership of voting
securities, by contract or otherwise.
SEVENTH. Elections of directors need not be by ballot unless the
Bylaws of the Corporation shall so provide.
EIGHTH. The original Bylaws of the Corporation shall be adopted in
any manner provided by law. Thereafter, the Bylaws of the Corporation may from
time to time be amended or repealed, or new Bylaws may be adopted, in any of the
following ways: (i) by the holders of a majority of the outstanding shares of
stock of the Corporation entitled to vote, or (ii) by a majority of the full
Board of Directors, and any change so made by the stockholders may thereafter be
further changed by a majority of the directors; provided, however, that the
power of the Board of Directors to alter, amend or repeal the Bylaws, or to
adopt new Bylaws, (A) may be denied as to any Bylaw or portion thereof by the
stockholders if at the time of enactment the stockholders shall so expressly
provide and (B) such power of the Board of Directors shall not divest the
stockholders of the power, nor limit their power to amend or repeal the Bylaws,
or to adopt new Bylaws.
NINTH. The Corporation may agree to the terms and conditions upon
which any director, officer, employee or agent accepts his office or position
and in its Bylaws, by contract or in any other manner may agree to indemnify and
protect any director, officer, employee or agent of the Corporation, or any
person who serves at the request of the Corporation as a director, officer,
3
<PAGE>
employee or agent of another corporation, partnership, joint venture, trust,
employee benefit plan or other enterprise, to the fullest extent permitted by
the laws (including, without limitation, the statutes, case law and principles
of equity) of the State of Delaware; provided, however, that the Corporation's
indemnification obligations shall be fully subordinate to indebtedness of the
Corporation relating to the Bonds.
TENTH. Except as may be otherwise provided by statute, the
Corporation shall be entitled to treat the registered holder of any shares of
the Corporation as the owner of such shares and of all rights derived from such
shares for all purposes, and the Corporation shall not be obligated to recognize
any equitable or other claim to or interest in such shares or rights on the part
of any other person, including, but without limiting the generality of the term
"person" to, a purchaser, pledgee, assignee or transferee of such shares or
rights, unless and until such person becomes the registered holder of such
shares. The foregoing shall apply whether or not the Corporation shall have
either actual or constructive notice of the claim by or the interest of such
person.
ELEVENTH. The books of the Corporation may be kept (subject to any
provisions contained in the statutes of the State of Delaware) outside the State
of Delaware at such place or places as may be designated from time to time by
the Board of Directors or in the Bylaws of the Corporation.
TWELFTH. The following provisions are for the management of the
business and for the conduct of the affairs of the Corporation and for the
further creation, definition, limitation and regulation of the powers of the
Corporation and of its directors and stockholders:
(a) Notwithstanding any other provision of this Certificate of
Incorporation and any provision of law that otherwise so empowers the
Corporation, the Corporation shall not, without the prior approval of the board
of directors of the Corporation, which approval shall include the affirmative
vote of all of the directors of the Corporation (including the Independent
Director), do any of the following:
(1) consolidate or merge unless (A) the entity (if other than the
Corporation) formed or surviving the consolidation or merger expressly assumes
the due and punctual payment of, and all obligations of the Corporation, and has
a Certificate of Incorporation containing provisions substantially the same to
the provisions of Articles TWELFTH, THIRTEENTH, FOURTEENTH and FIFTEENTH of this
Certificate of Incorporation, (B) immediately after giving effect to the
transaction, no default or event of default has occurred and is continuing under
any Bonds or any agreements relating to any Bonds and (C) the Corporation
receives written confirmation from each rating agency then rating any
outstanding Bonds that such merger or consolidation will not result in the
downgrade or withdrawal of the rating then assigned to any Bonds then rated by
such rating agency;
4
<PAGE>
(2) dissolve or liquidate unless immediately after giving effect
to the dissolution or liquidation no default or event of default has occurred
and is continuing under any Bonds or any agreements relating to any Bonds;
(3) approve a reduction in, or transfer to surplus of, any of the
capital of the Corporation pursuant to Section 244 of the Delaware General
Corporation Law; or
(4) incur, assume or guarantee any indebtedness except for such
indebtedness as (A) may be incurred by the Corporation in connection with the
issuance of Bonds, (B) provides for recourse solely to the Mortgage Collateral
pledged to secure such indebtedness or to entities other than the Corporation
and (C) provides that the holder thereof may not cause or join in the filing of
a petition in bankruptcy or take any similar action against the Corporation
until at least one year and one day after every indebtedness of the Corporation
relating to Bonds is indefeasibly paid in full;
(b) If an Independent Director resigns or otherwise ceases to be a
director of the Corporation, a replacement Independent Director of the
Corporation shall be selected pursuant to the provisions of the Bylaws of the
Corporation.
(c) Notwithstanding any provision set forth herein or in the Bylaws of
the Corporation which may be to the contrary, the board of directors of the
Corporation shall not vote at a meeting or by unanimous consent without a
meeting pursuant to Section 141 of the Delaware General Corporation Law with
respect to any of the actions set forth in any of clauses (1) through (4)
inclusive of paragraph (a) of this Article TWELFTH unless, at the time of such
vote, the Independent Director is serving as a member of said board of
directors.
THIRTEENTH.
(a) The Corporation shall not engage in any business activity other
than in connection with or relating to the activities permitted in Article THIRD
hereof.
(b) The Corporation shall not consolidate or merge with or into any
other entity or liquidate or dissolve except as provided in clauses (1) and (2)
of subparagraph (a) of Article TWELFTH hereof.
(c) The funds and other assets of the Corporation shall not be
commingled with those of any other individual, corporation, estate, partnership,
joint venture, association, joint stock company, trust, unincorporated
organization, or government or any agency or political subdivision thereof.
(d) The Corporation shall not hold itself out as being liable for the
debts of any other entity.
5
<PAGE>
(e) Except for the formation of trusts pursuant to subparagraph (b) of
Article THIRD hereof, the Corporation shall not form, or cause to be formed, any
subsidiaries nor shall the Corporation acquire any interest as a general or
limited partner in any partnership or limited liability company.
(f) The Corporation shall act solely in its corporate name and through
its duly authorized officers or agents in the conduct of its business, and shall
conduct its business so as not to mislead others as to the identity of the
entity with which they are concerned and not fail to correct any known
misunderstanding regarding its separate identity.
(g) The Corporation shall maintain corporate records and books of
account and shall not commingle its corporate records and books of account with
the corporate records and books of account of any other entity.
(h) The Board of Directors of the Corporation shall hold appropriate
meetings or act by statement of unanimous consent to authorize all of its
corporate actions. Regular meetings of the Board of Directors shall be held not
less frequently than once per annum.
(i) Meetings of stockholders of the Corporation shall be held not less
frequently than one time per annum.
(j) The Corporation shall at all times ensure that its capitalization
is adequate in light of its business and purpose.
(k) No guarantees of loans or other indebtedness to third parties
shall be made by the Corporation and no stockholder shall guaranty, become
liable on or hold itself out as being liable for the debts of the Corporation.
(l) The Corporation shall maintain an arm's-length relationship with
its Affiliates.
(m) The Corporation shall not enter into any amendment of any document
evidencing or securing securities issued in any transaction to which it was a
party without the unanimous affirmative vote of its Board of Directors and the
consent of the insurer of the Bonds affected by the amendment.
FOURTEENTH. The Corporation shall not amend, alter, change or repeal
any provision contained in this Certificate of Incorporation without (a) the
unanimous vote in favor thereof of the entire Board of Directors, including the
Independent Director, (b) the consent of any insurer of any Bonds then
outstanding and (c) if any Bonds are outstanding, the prior written confirmation
from any rating agency rating the Bonds that such amendment, alteration, change
or repeal shall not result in a downgrading of the ratings assigned to the
Bonds.
FIFTEENTH.
6
<PAGE>
(a) Neither the Corporation, without the affirmative vote of the
entire Board of Directors of the Corporation, including the Independent
Director, nor the stockholders of the Corporation shall (1) institute any
proceedings to adjudicate the Corporation a bankrupt or insolvent, (2) consent
to the institution of bankruptcy or insolvency proceedings against the
Corporation, (3) file a petition seeking or consenting to reorganization or
relief under any applicable federal or state law relating to bankruptcy, (4)
consent to the appointment of a receiver, liquidator, assignee, trustee,
sequestrator (or other similar official ) of the Corporation or a substantial
part of the Corporation's property, (5) make any assignment for the benefit of
the Corporation's creditors, (6) cause the Corporation to admit in writing its
inability to pay its debts generally as they become due, or (7) take any action,
or cause the Corporation to take any action, in furtherance of any of the
foregoing (any of the above foregoing actions, a "Bankruptcy Action").
(b) No Director or officer of the Corporation shall be liable to the
Corporation or any stockholder on account of such Director's or officer's good
faith reliance on the provisions of this Article FIFTEENTH and neither the
Corporation nor any stockholder of the Corporation shall have any claim for
breach of fiduciary duty or otherwise against any Director or officer for
failing to take any Bankruptcy Action.
7
<PAGE>
Exhibit 3.1
The undersigned, for the purpose of forming a corporation under the
General Corporation Law of Delaware, does hereby execute this Certificate, and
does hereby declare and certify that this is its act and deed and the facts
herein stated are true, and accordingly has executed this Certificate of
Incorporation as of January 7, 1998.
SMF REGISTERED SERVICES, INC.
/s/ Michael Lochmann
-------------------------------------
Michael Lochmann, Vice President
Incorporator
8
<PAGE>
EXHIBIT 3.2
================================================================================
BYLAWS
OF
NOVASTAR MORTGAGE FUNDING CORPORATION
As adopted by the Board of Directors on January 9, 1998.
================================================================================
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE I OFFICES AND RECORDS................................................... 1
1.1 Corporate Offices..................................................... 1
1.2 Registered Office and Registered Agent................................ 1
1.3 Books, Accounts and Records, and Inspection Rights.................... 1
ARTICLE II STOCKHOLDERS......................................................... 1
2.1 Place of Meetings..................................................... 1
2.2 Annual Meetings....................................................... 1
2.3 Special Meetings...................................................... 2
2.4 Consent of Stockholders in Lieu of Meeting............................ 2
2.5 Notice................................................................ 2
2.6 Waiver of Notice...................................................... 3
2.7 Quorum; Voting Requirements........................................... 3
2.8 Proxies............................................................... 3
2.9 Voting................................................................ 4
2.10 Stockholders' Lists................................................... 4
2.11 Stock Ledger.......................................................... 4
ARTICLE III BOARD OF DIRECTORS.................................................. 4
3.1 Number................................................................ 4
3.2 Powers of the Board................................................... 5
3.3 Meetings of the Newly Elected Board................................... 5
3.4 Notice of Meetings; Waiver of Notice.................................. 5
3.5 Meetings by Conference Telephone or Similar Communications Equipment.. 6
3.6 Action Without a Meeting.............................................. 6
3.7 Quorum; Voting Requirements........................................... 6
3.8 Vacancies and Newly Created Directorships............................. 7
3.9 Committees............................................................ 7
3.10 Compensation.......................................................... 8
3.11 Resignations.......................................................... 8
3.12 Reliance on Records................................................... 8
ARTICLE IV OFFICERS............................................................. 8
4.1 Designations.......................................................... 8
4.2 Term of Office........................................................ 9
4.3 Other Agents.......................................................... 9
4.4 Removal............................................................... 9
4.5 Salaries and Compensation.............................................10
4.6 Delegation of Authority to Hire, Discharge and Designate Duties.......10
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
4.7 Chairman of the Board.................................................10
4.8 President.............................................................10
4.9 Vice Presidents.......................................................11
4.10 Secretary and Assistant Secretaries...................................11
4.11 Treasurer and Assistant Treasurers....................................12
4.12 Duties of Officers May Be Delegated...................................13
ARTICLE V LIABILITY AND INDEMNIFICATION.........................................13
5.1 Limitation of Liability...............................................13
5.2 Indemnification, Generally............................................13
5.3 Indemnification in Actions by Third Parties...........................13
5.4 Indemnification in Derivative Actions.................................14
5.5 Indemnification for Expenses..........................................15
5.6 Determination of Right to Indemnification.............................15
5.7 Advancement of Expenses...............................................15
5.8 Non-Exclusivity.......................................................16
5.9 Insurance.............................................................16
5.10 Vesting of Rights.....................................................16
5.11 Definitions...........................................................16
5.12 Severability..........................................................17
ARTICLE VI STOCK................................................................18
6.1 Certificates for Shares of Stock......................................18
6.2 Transfers of Stock....................................................18
6.3 Registered Stockholders...............................................18
6.4 Record Date...........................................................19
6.5 Regulations...........................................................20
6.6 Lost Certificates.....................................................20
ARTICLE VII CORPORATE FINANCE.................................................. 20
7.1 Dividends............................................................ 20
7.2 Creation of Reserves................................................. 21
ARTICLE VIII GENERAL PROVISIONS................................................ 21
8.1 Fiscal Year.......................................................... 21
8.2 Corporate Seal....................................................... 21
8.3 Depositories......................................................... 21
8.4 Contracts............................................................ 21
8.5 Amendments........................................................... 21
</TABLE>
ii
<PAGE>
BYLAWS
OF
NOVASTAR MORTGAGE FUNDING CORPORATION.
--------------------------------------
ARTICLE I
----------
OFFICES AND RECORDS
-------------------
1.1 Corporate Offices. The principal office of the Corporation shall
be located at any place within or without the State of Delaware as designated in
the Corporation's most current Annual Report filed with the Delaware Secretary
of State. The Corporation may have such other corporate offices and places of
business anywhere within or without the State of Delaware as the Board of
Directors may from time to time designate or the business of the Corporation may
require.
1.2 Registered Office and Registered Agent. The location of the
registered office and the name of the registered agent of the Corporation in the
State of Delaware shall be as stated in the Certificate of Incorporation or as
determined from time to time by the Board of Directors and on file in the
appropriate public offices of the State of Delaware pursuant to applicable
provisions of law.
1.3 Books, Accounts and Records, and Inspection Rights. The books,
accounts and records of the Corporation, except as otherwise required by the
laws of the State of Delaware, may be kept outside of the State of Delaware, at
such place or places as the Board of Directors may from time to time designate.
ARTICLE II
----------
STOCKHOLDERS
------------
2.1 Place of Meetings. All meetings of the stockholders shall be
held at the offices of the Corporation in the City of Westwood, State of Kansas,
or at such other place either within or without the State of Delaware as shall
be designated from time to time by the Board of Directors and stated in the
notice of the meeting or in a duly executed waiver of notice thereof.
2.2 Annual Meetings. An annual meeting of the stockholders of the
Corporation shall be held on the second Wednesday in May of each year, if not a
legal holiday, and if a legal holiday, then on the next secular day following,
at 11:00 a.m., or at such other date and time as shall be designated from time
to time by the Board of Directors and stated in the notice of the meeting. At
such meeting, the stockholders shall elect directors by a plurality vote. Each
director shall be elected to serve until his successor is duly elected and
qualified, or until his
<PAGE>
earlier resignation or removal. At the annual meeting the stockholders may
transact such other business as may be desired, whether or not the same was
specified in the notice of the meeting, unless the consideration of such other
business without its having been specified in the notice of the meeting as one
of the purposes thereof is prohibited by law.
2.3 Special Meetings. Special meetings of the stockholders may be
held for any purpose or purposes unless otherwise prohibited by statute or by
the Certificate of Incorporation, and may be called by the Chairman of the
Board, by the President, by the Secretary, by the Board of Directors, or by the
holders of, or by any officer or stockholder upon the written request of the
holders of, not less than 20% of the outstanding stock entitled to vote on the
subject matter at such meeting, and shall be called by any officer directed to
do so by the Board of Directors or requested to do so in writing by a majority
of the Board of Directors. Such written request shall state the purpose or
purposes of the proposed meeting.
The "call" and the "notice" of any such meeting shall be deemed to be
synonymous.
2.4 Consent of Stockholders in Lieu of Meeting. Unless otherwise
provided in the Certificate of Incorporation, any action required to be taken at
any annual or special meeting of stockholders of the Corporation, or any action
which may be taken at any annual or special meeting of such stockholders, may be
taken without a meeting, without prior notice and without a vote, if a consent
or consents in writing, setting forth the action so taken, shall be signed by
the holders of outstanding stock having not less than the minimum number of
votes that would be necessary to authorize or take such action at a meeting at
which all shares entitled to vote thereon were present and voted and shall be
delivered to the Corporation by delivery to its registered office in the State
of Delaware, its principal place of business, or an officer or agent of the
Corporation having custody of the book in which the proceedings of meetings of
stockholders are recorded.
Every written consent shall bear the date of signature of each
stockholder who signs the consent and no written consent shall be effective to
take the corporate action referred to therein unless, within 60 days of the
earliest dated consent delivered in the manner required by this Section 2.4 to
the Corporation, written consents signed by a sufficient number of stockholders
to take such action are delivered to the Corporation. Delivery made to the
Corporation's registered office shall be by hand or by certified or registered
mail, return receipt requested. Prompt notice of the taking of the corporate
action without a meeting by less than unanimous written consent shall be given
to those stockholders who have not consented in writing.
2.5 Notice. Written notice of each meeting of the stockholders,
whether annual or special, stating the place, date and hour of the meeting, and,
in the case of a special meeting, the purpose or purposes thereof, shall be
given as provided in Section 6.4 of these Bylaws to each stockholder of record
of the Corporation entitled to vote at such meeting, either personally or by
mail, not less than 10 days nor more than 60 days prior to the meeting. If
mailed,
2
<PAGE>
such notice shall be deemed to be delivered when it is deposited in the United
States mail, postage prepaid, directed to the stockholder at his address as it
appears on the records of the Corporation.
2.6 Waiver of Notice. Whenever any notice is required to be given to
any stockholder under any law, the Certificate of Incorporation or these Bylaws,
a written waiver thereof, signed by the person or persons entitled to such
notice, whether before or after the time stated therein, shall be deemed
equivalent to the giving of such notice. Attendance by a stockholder at a
meeting shall constitute a waiver of notice of such meeting, except when the
stockholder attends a meeting for the express purpose of objecting, at the
beginning of the meeting, to the transaction of any business because the meeting
is not lawfully called or convened. Neither the business to be transacted at,
nor the purpose of, any regular or special meeting of the stockholders need be
specified in any written waiver of notice unless so required by the Certificate
of Incorporation or these Bylaws.
2.7 Quorum; Voting Requirements. The holders of a majority of the
outstanding shares of stock entitled to vote at any meeting, present in person
or represented by proxy, shall constitute a quorum at all meetings of the
stockholders for the transaction of any business, except as otherwise provided
by law, by the Certificate of Incorporation or by these Bylaws. In all matters
other than the election of directors, the affirmative vote of a majority in
amount of stock of such quorum shall be valid as a corporate act, except in
those specific instances in which a larger vote is required by law or by the
Certificate of Incorporation or by these Bylaws. Directors shall be elected by
a plurality of the votes present in person or represented by proxy at a meeting
at which a quorum is present and entitled to vote on the election of directors.
If the holders of a majority of the outstanding shares of stock
entitled to vote are not present in person or represented by proxy, at a meeting
of stockholders, the holders of a majority of the stock present in person or
represented by proxy at such meeting shall have power successively to adjourn
the meeting from time to time to a specified time and place, without notice to
anyone other than an announcement at the meeting at which such adjournment is
taken, until a quorum is present in person or by proxy. At such adjourned
meeting at which a quorum is present in person or by proxy, any business may be
transacted which might have been transacted at the original meeting. If the
adjournment is for more than 30 days, or if after adjournment a new record date
is fixed for the adjourned meeting, a notice of the adjourned meeting shall be
given to each stockholder of record entitled to vote at the meeting.
2.8 Proxies. At all meetings of stockholders, every stockholder
having the right to vote shall be entitled to vote in person, or by proxy
appointed by an instrument in writing or by the transmission of a telegram,
cablegram, or other means of electronic transmission which sets forth or is
submitted with information from which it can be determined that the transmission
was authorized by the stockholder. No proxy shall be voted or acted upon after
three years from its date unless the proxy shall provide for a longer period.
3
<PAGE>
2.9 Voting. Unless otherwise provided by the Certificate of
Incorporation, each stockholder shall have one vote for each share of stock
entitled to vote at such meeting registered in his name on the books of the
Corporation including, without limitation, respecting the election of directors.
At all meetings of stockholders the voting may be otherwise than by ballot,
including the election of directors, except that, unless otherwise provided by
the Certificate of Incorporation, any qualified voter may demand a vote by
ballot on any matter, in which event such vote shall be taken by ballot.
2.10 Stockholders' Lists. The Secretary or an Assistant Secretary,
who shall have charge of the stock ledger, shall prepare and make, at least 10
days before every meeting of stockholders, a complete list of the stockholders
entitled to vote at the meeting, arranged in alphabetical order, and showing the
address of each stockholder and the number of shares registered in the name of
each stockholder. Such list shall be open to the examination of any
stockholder, for any purpose germane to the meeting, during ordinary business
hours, for a period of at least 10 days prior to the meeting, either at a place
within the city where the meeting is to be held, which place shall be specified
in the notice of the meeting, or, if not so specified, at the place where the
meeting is to be held. The list shall also be produced and kept at the time and
place of the meeting during the whole time thereof, and may be inspected by any
stockholder who is present.
2.11 Stock Ledger. The stock ledger shall be the only evidence as to
who are the stockholders entitled to examine the list required under Section
2.10 of these Bylaws or the books of the Corporation, or to vote in person or by
proxy at any meeting of the stockholders.
ARTICLE III
-----------
BOARD OF DIRECTORS
------------------
3.1 Number. Unless and until changed by the Board of Directors as
hereinafter provided, the number of directors to constitute the Board of
Directors shall be the same as the number of directors provided for the first
Board in the Certificate of Incorporation or, if not so provided, shall be the
same as the number of directors elected by the incorporator or incorporators as
the initial directors of the Corporation. The Board of Directors shall have the
power to change the number of directors by resolution adopted by a majority of
the whole Board unless that number of directors is established in the
Certificate of Incorporation. If the number of directors is established in the
Certificate of Incorporation, then the number may be changed only by amendment.
Unless otherwise provided for in the Certificate of Incorporation, directors
need not be stockholders of the Corporation.
4
<PAGE>
3.2 Powers of the Board. The business and affairs of the Corporation
shall be managed by or under the direction of the Board of Directors. In
addition to the powers and authorities by these Bylaws and the Certificate of
Incorporation expressly conferred upon it, the Board of Directors may exercise
all such powers of the Corporation, and do all such lawful acts and things, that
are not by statute or by the Certificate of Incorporation or by these Bylaws
directed or required to be exercised or done by the stockholders.
3.3 Meetings of the Newly Elected Board. The first meeting of the
members of each newly elected Board of Directors shall be held (a) at such time
and place either within or without the State of Delaware as shall be suggested
or provided by resolution of the stockholders at the meeting at which such newly
elected Board was elected, and no notice of such meeting shall be necessary to
the newly elected directors in order legally to constitute the meeting, provided
a quorum shall be present, or (b) if not so suggested or provided for by
resolution of the stockholders or if a quorum shall not be present, at such time
and place as shall be consented to in writing by a majority of the newly elected
directors, provided that written or printed notice of such meeting shall be
given to each of the other directors in the same manner as provided in Section
3.4 of these Bylaws with respect to the giving of notice for special meetings of
the Board except that it shall not be necessary to state the purpose of the
meeting in such notice, or (c) regardless of whether or not the time and place
of such meeting shall be suggested or provided for by resolution of the
stockholders, at such time and place as shall be consented to in writing by all
of the newly elected directors.
Every director of the Corporation, upon his election, shall qualify by
accepting the office of director, and his attendance at, or his written approval
of the minutes of, any meeting of the Board subsequent to his election shall
constitute his acceptance of such office; or he may execute such acceptance by a
separate writing, which shall be placed in the minute book.
3.4 Notice of Meetings; Waiver of Notice.
(a) Regular Meetings. Regular meetings of the Board of Directors
may be held without notice at such times and places either within or without the
State of Delaware as shall from time to time be fixed by resolution adopted by
the full Board of Directors. Any business may be transacted at a regular
meeting.
(b) Special Meetings.
(i) Special meetings of the Board of Directors may be called
at any time by the Chairman of the Board, the President, any Vice President, the
Secretary, or any of the directors. The place may be within or without the State
of Delaware as designated in the notice.
(ii) Written notice of each special meeting of the Board,
stating the place, date and hour of the meeting and the purpose or purposes
thereof, shall be mailed to
5
<PAGE>
each director addressed to him at his residence or usual place of business at
least three days before the day on which the meeting is to be held, or shall be
sent to him by telegram, or delivered to him personally, at least two days
before the day on which the meeting is to be held. If mailed, such notice shall
be deemed to be delivered when it is deposited in the United States mail with
postage thereon addressed to the director at his residence or usual place of
business. If given by telegraph, such notice shall be deemed to be delivered
when it is delivered to the telegraph company. The notice may be given by any
person having authority to call the meeting.
(iii) "Notice" and "call" with respect to such meetings
shall be deemed to be synonymous.
(c) Waiver of Notice. Whenever any notice is required to be
given to any director under any law, the Certificate of Incorporation or these
Bylaws, a written waiver thereof, signed by the director entitled to notice,
whether before or after the time stated therein, shall be deemed equivalent to
the giving of such notice. Attendance by a director at a meeting shall
constitute a waiver of notice of such meeting, except when the director attends
a meeting for the express purpose of objecting, at the beginning of the meeting,
to the transaction of any business because it was not lawfully called or
convened. Neither the business to be transacted at, nor the purposes of, any
regular or special meeting of the directors or members of a committee of
directors need be specified in any written waiver of notice unless so required
by the Certificate of Incorporation or these Bylaws.
3.5 Meetings by Conference Telephone or Similar Communications
Equipment. Unless otherwise restricted by the Certificate of Incorporation or
these Bylaws, members of the Board of Directors of the Corporation, or any
committee designated by the Board, may participate in a meeting of the Board or
committee by means of conference telephone or similar communications equipment
by means of which all persons participating in the meeting can hear each other,
and participation in a meeting by that means shall constitute presence in person
at such meeting.
3.6 Action Without a Meeting. Unless otherwise restricted by the
Certificate of Incorporation or these Bylaws, any action required or permitted
to be taken at any meeting of the Board of Directors or any committee thereof
may be taken without a meeting if written consent thereto is signed by all
members of the Board of Directors or of such committee, as the case may be, and
such written consent is filed with the minutes of proceedings of the Board or
committee.
3.7 Quorum; Voting Requirements.
(a) Unless otherwise required by law, the Certificate of
Incorporation or these Bylaws, a majority of the total number of directors shall
constitute a quorum for the transaction of business and the act of a majority of
the directors present at any meeting at which there is a quorum shall be the act
of the Board of Directors.
6
<PAGE>
(b) If at least one-third of the total number of directors is
present at any meeting at which a quorum is not present, a majority of the
directors present at such meeting shall have power successively to adjourn the
meeting from time to time to a subsequent date, without notice to any director
other than announcement at the meeting at which the adjournment is taken. At
such subsequent session of the adjourned meeting at which a quorum is present,
any business may be transacted which might have been transacted at the original
meeting which was adjourned. If the adjournment is for more than 30 days, a
notice of the subsequent session of the adjourned meeting shall be given each
director.
3.8 Vacancies and Newly Created Directorships. Vacancies and newly
created directorships resulting from any increase in the authorized number of
directors elected by all of the stockholders having the right to vote as a
single class may be filled by a majority of the directors then in office,
although less than a quorum, or by a sole remaining director, unless it is
otherwise provided in the Certificate of Incorporation or these Bylaws, and any
director so chosen shall hold office until such director's successor is duly
elected and qualified, or until such director's earlier resignation or removal.
Whenever the holders of any class or classes of stock or series thereof are
entitled to elect one or more directors by the provisions of the Certificate of
Incorporation, vacancies and newly created directorships of such class or
classes or series may be filled by a majority of the directors elected by such
class or classes or series thereof then in office, or by a sole remaining
director so elected. If there are no directors in office, then an election of
directors may be held in the manner provided by statute.
3.9 Committees.
(a) The Board of Directors may, by resolution or resolutions
passed by a majority of the whole Board, designate one or more committees, each
committee to consist of one or more directors of the Corporation. The Board may
designate one or more directors as alternate members of any committee, who may
replace any absent or disqualified member at any meeting of the committee.
(b) In the absence or disqualification of a member of a
committee, the member or members thereof present at any meeting and not
disqualified from voting, whether or not he or they constitute a quorum, may
unanimously appoint another member of the Board of Directors to act at the
meeting in the place of any such absent or disqualified member.
(c) Any such committee, to the extent provided in the resolution
of the Board of Directors or in these Bylaws, shall have and may exercise all of
the powers and authority of the Board of Directors in the management of the
business and affairs of the Corporation and may authorize the seal of the
Corporation to be affixed to all papers which may require it; but no such
committee shall have the power or authority of the Board of Directors with
respect to amending the Certificate of Incorporation, adopting an agreement of
merger or consolidation, recommending to the stockholders the sale, lease or
exchange of all or substantially all of the Corporation's property and assets,
recommending to the stockholders a dissolution of the
7
<PAGE>
Corporation or a revocation of a dissolution, or amending the Bylaws of the
Corporation; and, unless the resolution, these Bylaws or the Certificate of
Incorporation expressly so provide, no such committee shall have power or
authority to declare a dividend or to authorize the issuance of stock or to
adopt a Certificate of Ownership and Merger.
(d) All committees so appointed shall, unless otherwise provided
by the Board of Directors, keep regular minutes of the transactions at their
meetings and shall cause them to be recorded in books kept for that purpose in
the office of the Corporation and shall report the same to the Board of
Directors at its next meeting. The Secretary or an Assistant Secretary of the
Corporation may act as secretary of the committee if the committee so requests.
3.10 Compensation. Unless otherwise restricted by law, the
Certificate of Incorporation or these Bylaws, the Board of Directors may, by
resolution, fix the compensation to be paid directors for serving as directors
of the Corporation and may, by resolution, fix a sum which shall be allowed and
paid for attendance at each meeting of the Board of Directors and may provide
for reimbursement of expenses incurred by directors in attending each meeting;
provided that nothing herein contained shall be construed to preclude any
director from serving the Corporation in any other capacity and receiving his
regular compensation therefor. Members of standing or temporary committees may
be allowed similar compensation for attending standing or temporary committee
meetings.
3.11 Resignations. Any director may resign at any time upon written
notice to the Corporation. Such resignation shall take effect at the time
specified therein or shall take effect upon receipt thereof by the Corporation
if no time is specified therein, and, unless otherwise specified therein, the
acceptance of such resignation shall not be necessary to make it effective.
3.12 Reliance on Records. A director, or a member of any committee
designated by the Board of Directors, shall be fully protected in relying in
good faith upon the records of the Corporation and upon such information,
opinions, reports or statements presented to the Corporation by any of its
officers or employees, or committees of the Board of Directors, or by any other
person as to matters the director reasonably believes are within such other
person's professional or expert competence and who has been selected with
reasonable care by or on behalf of the Corporation.
ARTICLE IV
----------
OFFICERS
--------
4.1 Designations.
(a) The officers of the Corporation shall be a Chairman of the
Board, a President, one or more Vice Presidents, a Secretary, a Treasurer, one
or more Assistant
8
<PAGE>
Secretaries and one or more Assistant Treasurers. The Board of Directors shall
elect a President and a Secretary at its first meeting after each annual meeting
of the stockholders. The Board then, or from time to time, may also elect one
or more of the other prescribed officers as it may deem advisable, but need not
elect any officers other than a President and a Secretary. The Board may, if it
desires, elect or appoint additional officers and may further identify or
describe any one or more of the officers of the Corporation.
(b) Officers of the Corporation need not be members of the Board
of Directors. Any two or more offices may be held by the same person.
(c) An officer shall be deemed qualified when he enters upon the
duties of the office to which he has been elected or appointed and furnishes any
bond required by the Board of Directors; but the Board may also require his
written acceptance and promise faithfully to discharge the duties of such
office.
4.2 Term of Office. Each officer of the Corporation shall hold his
office at the pleasure of the Board of Directors or for such other period as the
Board may specify at the time of his election or appointment, or until his
death, resignation or removal by the Board, whichever first occurs. In any
event, each officer of the Corporation who is not reelected or reappointed at
the annual election of officers by the Board next succeeding such person's
election or appointment shall be deemed to have been removed by the Board,
unless the Board provides otherwise at the time of such person's election or
appointment.
4.3 Other Agents. The Board of Directors from time to time may
appoint such other agents for the Corporation as it shall deem necessary or
advisable, each of whom shall serve at the pleasure of the Board or for such
period as the Board may specify, and shall exercise such powers, have such
titles and perform such duties as shall be determined from time to time by the
Board or by an officer empowered by the Board to make such determinations.
4.4 Removal. Any officer or agent elected or appointed by the Board
of Directors, and any employee, may be removed or discharged by the Board
whenever in its judgment the best interests of the Corporation would be served
thereby, but such removal or discharge shall be without prejudice to the
contract rights, if any, of the person so removed or discharged.
9
<PAGE>
4.5 Salaries and Compensation. Salaries and compensation of all
elected officers of the Corporation shall be fixed, increased or decreased by
the Board of Directors, but this power, except as to the salary or compensation
of the Chairman of the Board and the President, may, unless prohibited by law,
be delegated by the Board to the Chairman of the Board or the President, or may
be delegated to a committee. Salaries and compensation of all appointed
officers, agents and employees of the Corporation may be fixed, increased or
decreased by the Board of Directors, but until action is taken with respect
thereto by the Board of Directors, the same may be fixed, increased or decreased
by the President or such other officer or officers as may be empowered by the
Board of Directors to do so.
4.6 Delegation of Authority to Hire, Discharge and Designate Duties.
The Board of Directors from time to time may delegate to the Chairman of the
Board, the President or other officer or executive employee of the Corporation,
authority to hire and discharge and to fix and modify the duties and salary or
other compensation of employees of the Corporation under their jurisdiction, and
the Board may delegate to such officer or executive employee similar authority
with respect to obtaining and retaining for the Corporation the services of
attorneys, accountants and other experts.
4.7 Chairman of the Board. If a Chairman of the Board is elected, he
shall preside at all meetings of the stockholders and directors at which he may
be present and shall have such other duties, powers and authority as may be
prescribed elsewhere in these Bylaws. The Board of Directors may delegate such
other authority and assign such additional duties to the Chairman of the Board,
other than those conferred by law exclusively upon the President, as the Board
may from time to time determine, and, to the extent permissible by law, the
Board may designate the Chairman of the Board as the chief executive officer of
the Corporation with all of the powers otherwise conferred upon the President of
the Corporation under Section 4.8 of these Bylaws, or it may, from time to time,
divide the responsibilities, duties and authority for the general control and
management of the Corporation's business and affairs between the Chairman of the
Board and the President.
4.8 President.
(a) Unless the Board of Directors otherwise provides, the
President shall be the chief executive officer of the Corporation with such
general executive powers and duties of supervision and management as are usually
vested in the office of the chief executive officer of a corporation, and he
shall carry into effect all directions and resolutions of the Board. The
President, in the absence of the Chairman of the Board or if there is no
Chairman of the Board, shall preside at all meetings of the stockholders and
directors.
(b) The President may execute all bonds, notes, debentures,
mortgages and other instruments for and in the name of the Corporation, may
cause the corporate seal to be affixed thereto, and may execute all other
instruments for and in the name of the Corporation.
10
<PAGE>
(c) Unless the Board of Directors otherwise provides, the
President, or any person designated in writing by him, shall have full power and
authority on behalf of the Corporation to (i) attend and to vote or take action
at any meeting of the holders of securities of corporations in which this
Corporation may hold securities, and at such meetings shall possess and may
exercise any and all rights and powers incident to being a holder of such
securities, and (ii) execute and deliver waivers of notice and proxies for and
in the name of the Corporation with respect to any securities held by the
Corporation.
(d) The President shall, unless the Board of Directors otherwise
provides, be an ex officio member of all standing committees.
(e) The President shall have such other or further duties and
authority as may be prescribed elsewhere in these Bylaws or from time to time by
the Board of Directors.
(f) If a chairman of the board is elected or appointed and
designated as the chief executive officer of the Corporation, as provided in
Section 4.7 of these Bylaws, the President shall perform such duties as may be
specifically delegated to him by the Board of Directors or are conferred by law
exclusively upon him, and in the absence or disability of the Chairman of the
Board or in the event of his inability or refusal to act, the President shall
perform the duties and exercise the powers of the Chairman of the Board.
4.9 Vice Presidents. In the absence or disability of the President
or in the event of his inability or refusal to act, any Vice President may
perform the duties and exercise the powers of the President until the Board of
Directors otherwise provides. Vice Presidents shall perform such other duties
as the Board may from time to time prescribe.
4.10 Secretary and Assistant Secretaries.
(a) The Secretary shall attend all sessions of the Board of
Directors and all meetings of the stockholders, shall prepare minutes of all
proceedings at such meetings and shall preserve them in a minute book of the
Corporation. He shall perform similar duties for each standing or temporary
committee when requested by the Board or such committee.
(b) The Secretary shall see that all books, records, lists and
information, or duplicates, required to be maintained in the State of Delaware,
or elsewhere, are so maintained.
(c) The Secretary shall keep in safe custody the seal of the
Corporation, and shall have authority to affix the seal to any instrument
requiring a corporate seal and, when so affixed, he may attest the seal by his
signature. The Board of Directors may give general authority to any other
officer to affix the seal of the Corporation and to attest the affixing by his
signature.
11
<PAGE>
(d) The Secretary shall have the general duties, powers,
responsibilities and authorities of a secretary of a corporation and shall
perform such other duties and have such other responsibility and authority as
may be prescribed elsewhere in these Bylaws or from time to time by the Board of
Directors or the chief executive officer of the Corporation, under whose direct
supervision the Secretary shall be.
(e) In the absence or disability of the Secretary or in the event
of his inability or refusal to act, any Assistant Secretary may perform the
duties and exercise the powers of the Secretary until the Board of Directors
otherwise provides. Assistant Secretaries shall perform such other duties and
have such other authority as the Board of Directors may from time to time
prescribe.
4.11 Treasurer and Assistant Treasurers.
(a) The Treasurer shall have supervision and custody, and
responsibility for the safekeeping, of the funds and securities of the
Corporation, shall keep or cause to be kept full and accurate accounts of
receipts and disbursements in books belonging to the Corporation and shall keep,
or cause to be kept, all other books of account and accounting records of the
Corporation. He shall deposit or cause to be deposited all moneys and other
valuable effects in the name and to the credit of the Corporation in such
depositories as may be designated by the Board of Directors or by any officer of
the Corporation to whom such authority has been granted by the Board.
(b) The Treasurer shall disburse, or permit to be disbursed, the
funds of the Corporation as may be ordered, or authorized generally, by the
Board of Directors, and shall render to the chief executive officer of the
Corporation and the directors whenever they may require, an account of all his
transactions as Treasurer and of those under his jurisdiction, and of the
financial condition of the Corporation.
(c) The Treasurer shall perform such other duties and shall have
such other responsibility and authority as may be prescribed elsewhere in these
Bylaws or from time to time by the Board of Directors.
(d) The Treasurer shall have the general duties, powers,
responsibilities and authorities of a treasurer of a corporation and shall,
unless otherwise provided by the Board of Directors, be the chief financial and
accounting officer of the Corporation.
(e) If required by the Board of Directors, the Treasurer shall
give the Corporation a bond in a sum and with one or more sureties satisfactory
to the Board for the faithful performance of the duties of his office and for
the restoration to the Corporation, in the case of his death, resignation,
retirement or removal from office, of all books, papers, vouchers, money and
other property of whatever kind in his possession or under his control which
belong to the Corporation.
12
<PAGE>
(f) In the absence or disability of the Treasurer or in the event
of his inability or refusal to act, any Assistant Treasurer may perform the
duties and exercise the powers of the Treasurer until the Board of Directors
otherwise provides. Assistant Treasurers shall perform such other duties and
have such other authority as the Board of Directors may from time to time
prescribe.
4.12 Duties of Officers May Be Delegated. If any officer of the
Corporation be absent or unable to act, or for any other reason that the Board
of Directors may deem sufficient, the Board may delegate, for the time being,
some or all of the functions, duties, powers and responsibilities of any officer
to any other officer, or to any other agent or employee of the Corporation or
other responsible person, provided a majority of the total number of directors
concurs.
ARTICLE V
---------
LIABILITY AND INDEMNIFICATION
-----------------------------
5.1 Limitation of Liability. No person shall be liable to the
Corporation or its stockholders for any loss, damage, liability or expense
suffered by the Corporation on account of any action taken or omitted to be
taken by such person as a director or officer of the Corporation or of any Other
Enterprise which such person serves or has served as a director or officer at
the request of the Corporation, if such person (a) acted in good faith and in a
manner such person reasonably believed to be in or not opposed to the best
interests of the Corporation, or (b) took or omitted to take such action in
reliance upon advice of counsel for the Corporation, or for such Other
Enterprise, or upon statements made or information furnished by directors,
officers, employees or agents of the Corporation, or of such Other Enterprise,
which such person had no reasonable grounds to disbelieve.
5.2 Indemnification, Generally. In addition to and without limiting
the rights to indemnification and advancement of expenses specifically provided
for in the other Sections of this Article V, the Corporation shall indemnify and
advance expenses to each person who is or was a director or officer of the
Corporation or is or was serving at the Corporation's request as a director or
officer of any Other Enterprise to the full extent permitted by the laws of the
State of Delaware as in effect on the date of the adoption of these Bylaws as
may hereafter be amended.
5.3 Indemnification in Actions by Third Parties. The Corporation
shall indemnify each person who has been or is a party or is threatened to be
made a party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative, investigative or appellate (other than
an action by or in the right of the Corporation) by reason of the fact that such
person is or was a director or officer of the Corporation, or is or was serving
at the request of the Corporation as a director or officer of any Other
Enterprise against all liabilities and expenses, including without limitation
judgments, fines
13
<PAGE>
and amounts paid in settlement (provided that such settlement and all amounts
paid in connection therewith are approved in advance by the Corporation using
the procedures set forth in Section 5.6 of these Bylaws, which approval shall
not be unreasonably withheld or delayed), attorneys' fees, ERISA excise taxes or
penalties, fines and other expenses actually and reasonably incurred by such
person in connection with such action, suit or proceeding (including without
limitation the investigation, defense, settlement or appeal of such action, suit
or proceeding) if such person acted in good faith and in a manner he reasonably
believed to be in or not opposed to the best interests of the Corporation, and,
with respect to any criminal action or proceeding, had no reasonable cause to
believe his conduct was unlawful; provided, however, that the Corporation shall
not be required to indemnify or advance expenses to any such person or persons
seeking indemnification or advancement of expenses in connection with an action,
suit or proceeding initiated by such person including, without limitation, any
cross-claim or counterclaim initiated by such person unless the initiation of
such action, suit or proceeding was authorized by the Board of Directors of the
Corporation. The termination of any such action, suit or proceeding by
judgment, order, settlement, conviction or under a plea of nolo contendere or
its equivalent, shall not, of itself, create a presumption that the person did
not act in good faith and in a manner which he reasonably believed to be in or
not opposed to the best interests of the Corporation, and, with respect to any
criminal action or proceeding, that he had reasonable cause to believe that his
conduct was unlawful.
5.4 Indemnification in Derivative Actions. The Corporation shall
indemnify each person who has been or is a party or is threatened to be made a
party to any threatened, pending or completed action, suit or proceeding by or
in the right of the Corporation to procure a judgment in its favor by reason of
the fact that such person is or was a director or officer of the Corporation or
is or was serving at the request of the Corporation as a director or officer of
any Other Enterprise against all expenses (including attorneys' fees) actually
and reasonably incurred by such person in connection with the defense or
settlement of such action, suit or proceeding (including without limitation the
investigation, defense, settlement or appeal of such action, suit or proceeding)
if such person acted in good faith and in a manner such person reasonably
believed to be in or not opposed to the best interests of the Corporation,
except that no indemnification under this Section 5.4 shall be made in respect
of any claim, issue or matter as to which such person shall have been adjudged
to be liable to the Corporation unless and only to the extent that the court in
which the action, suit or proceeding was brought shall determine upon
application that, despite the adjudication of liability but in view of all the
circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses which such court shall deem proper.
14
<PAGE>
5.5 Indemnification for Expenses. Notwithstanding the other
provisions of this Article V, to the extent a person who is or was serving as a
director or officer of the Corporation, or is or was serving at the request of
the Corporation as a director or officer of any Other Enterprise, has been
successful on the merits or otherwise in defense of any action, suit or
proceeding referred to in Sections 5.3 and 5.4 of these Bylaws (including the
dismissal of any such action, suit or proceeding without prejudice), or in
defense of any claim, issue or matter therein, such person shall be indemnified
against expenses (including attorneys' fees) actually and reasonably incurred by
him in connection therewith.
5.6 Determination of Right to Indemnification. Prior to indemnifying
a person pursuant to the provisions of Sections 5.2, 5.3 and 5.4 of these
Bylaws, unless ordered by a court and except as otherwise provided by Section
5.5 of these Bylaws, the Corporation shall determine that such person has met
the specified standard of conduct entitling such person to indemnification as
set forth under Sections 5.3 and 5.4 of these Bylaws. Any determination that a
person shall or shall not be indemnified under the provisions of Sections 5.2,
5.3 and 5.4 of these Bylaws shall be made by the Board of Directors (a) by a
majority vote of directors who are not parties to such action, suit or
proceeding, even though less than a quorum, (b) if there are no such directors,
or if such directors so direct, by independent legal counsel in a written
opinion, or (c) by the stockholders, and such determination shall be final and
binding upon the Corporation; provided, however, that in the event such
determination is adverse to the person or persons to be indemnified hereunder,
such person or persons shall have the right to maintain an action in any court
of competent jurisdiction against the Corporation to determine whether or not
such person has met the requisite standard of conduct and is entitled to such
indemnification hereunder. If such court action is successful and the person or
persons shall be determined to be entitled to such indemnification, such person
or persons shall be reimbursed by the Corporation for all fees and expenses
(including attorneys' fees) actually and reasonably incurred in connection with
any such action (including, without limitation, the investigation, defense,
settlement or appeal of such action).
5.7 Advancement of Expenses. Expenses (including attorneys' fees)
actually and reasonably incurred by a person who may be entitled to
indemnification hereunder in defending an action, suit or proceeding, whether
civil, criminal, administrative, investigative or appellate, shall be paid by
the Corporation in advance of the final disposition of such action, suit or
proceeding upon receipt of an undertaking by or on behalf of such person to
repay such amount if it shall ultimately be determined that he is not entitled
to indemnification by the Corporation. Notwithstanding the foregoing, no
advance shall be made by the Corporation if a determination is reasonably and
promptly made by (a) the Board of Directors by a majority vote of the directors
who are not parties to such action, suit or proceeding for which the advancement
is requested, even though less than a quorum, or (b) if there are no such
directors, or if such directors so direct, or even if obtainable, by independent
legal counsel in a written opinion or (c) by the stockholders, that, based upon
the facts known to the Board, independent legal counsel or stockholders at the
time such determination is made, such person acted in bad faith and in a manner
that such person did not believe to be in or not opposed to the best interests
of the
15
<PAGE>
Corporation, or, with respect to any criminal proceeding, that such person
believed or had reasonable cause to believe his conduct was unlawful. In no
event shall any advancement of expenses be made in instances where the Board,
independent legal counsel or stockholders reasonably determines that such person
intentionally breached such person's duty to the Corporation or its
stockholders.
5.8 Non-Exclusivity. The indemnification and advancement of expenses
provided by this Article V shall not be exclusive of any other rights to which
those seeking indemnification or advancement of expenses may be entitled under
any statute, the Certificate of Incorporation, these Bylaws, any agreement, the
vote of stockholders or disinterested directors, policy of insurance or
otherwise, both as to action in their official capacity and as to action in
another capacity while holding their respective offices, and shall not limit in
any way any right which the Corporation may have to make additional
indemnifications with respect to the same or different persons or classes of
person. The indemnification and advancement of expenses provided by, or granted
pursuant to, this Article V shall, unless otherwise specifically provided when
authorized or ratified, continue as to a person who has ceased to be a director
or officer and shall inure to the benefit of the heirs, executors,
administrators and estate of such a person.
5.9 Insurance. Upon resolution passed by the Board of Directors, the
Corporation may purchase and maintain insurance on behalf of any person who is
or was a director or officer of the Corporation, or is or was serving at the
request of the Corporation as a director or officer of any Other Enterprise,
against any liability asserted against him and incurred by him in any such
capacity, or arising out of his status as such, whether or not the Corporation
would have the power to indemnify him against such liability under the
provisions of this Article V.
5.10 Vesting of Rights. The rights granted by this Article V shall
be vested in each person entitled to indemnification hereunder as a bargained-
for, contractual condition of such person's serving or having served as a
director or officer of the Corporation or serving at the request of the
Corporation as a director or officer of any Other Enterprise and while this
Article V may be amended or repealed, no such amendment or repeal shall release,
terminate or adversely affect the rights of such person under this Article V
with respect to any act taken or the failure to take any act by such person
prior to such amendment or repeal or with respect to any action, suit or
proceeding with respect to such act or failure to act filed after such amendment
or repeal.
5.11 Definitions. For the purposes of this Article V, references to:
(a) The "Corporation" shall, if and only if the Board of
Directors shall determine, include, in addition to the resulting corporation,
any constituent corporation (including any constituent of a constituent)
absorbed in a consolidation or merger which, if its separate existence had
continued, would have had power and authority to indemnify its directors or
officers or persons serving at the request of such constituent corporation as a
director or officer of any Other Enterprise, so that any person who is or was a
director or officer of such constituent
16
<PAGE>
corporation, or is or was serving at the request of such constituent corporation
as a director or officer of any Other Enterprise, shall stand in the same
position under the provisions of this Article V with respect to the resulting or
surviving corporation as such person would have with respect to such constituent
corporation if its separate existence had continued;
(b) "Other Enterprise" or "Other Enterprises" shall include
without limitation any other corporation, partnership, joint venture, trust or
employee benefit plan;
(c) "director or officer of any Other Enterprise" shall include
any person performing similar functions with respect to such Other Enterprise,
whether incorporated or unincorporated;
(d) "fines" shall include any excise taxes assessed against a
person with respect to an employee benefit plan;
(e) "defense" shall include investigations of any threatened,
pending or completed action, suit or proceeding as well as appeals thereof and
shall also include any defensive assertion of a cross-claim or counterclaim; and
(f) "serving at the request of the Corporation" shall include any
service as a director or officer of a corporation which imposes duties on, or
involves services by, such director or officer with respect to an employee
benefit plan, its participants or beneficiaries; and a person who acted in good
faith and in a manner he reasonably believed to be in the interest of the
participants and beneficiaries of an employee benefit plan shall be deemed to
have acted in a manner "not opposed to the best interests of the Corporation" as
referred to in this Article V.
For purposes of this Article V, unless the Board of Directors of the
Corporation shall determine otherwise, any director or officer of the
Corporation who shall serve as a director or officer of any Other Enterprise of
which the Corporation, directly or indirectly, is a stockholder or creditor, or
in which the Corporation is in any way interested, shall be presumed to be
serving as such director or officer at the request of the Corporation. In all
other instances where any person shall serve as a director or officer of any
Other Enterprise, if it is not otherwise established that such person is or was
serving as such director or officer at the request of the Corporation, the Board
of Directors of the Corporation shall determine whether such person is or was
serving at the request of the Corporation, and it shall not be necessary to show
any prior request for such service, which determination shall be final and
binding on the Corporation and the person seeking indemnification.
5.12 Severability. If any provision of this Article V or the
application of any such provision to any person or circumstance is held invalid,
illegal or unenforceable for any reason whatsoever, the remaining provisions of
this Article V and the application of such provision to other persons or
circumstances shall not be affected thereby and, to the fullest extent possible,
the court finding such provision invalid, illegal or unenforceable shall modify
and
17
<PAGE>
construe the provision so as to render it valid and enforceable as against all
persons or entities and to give the maximum possible protection to persons
subject to indemnification hereby within the bounds of validity, legality and
enforceability. Without limiting the generality of the foregoing, if any
director or officer of the Corporation, or any person who is or was serving at
the request of the Corporation as a director or officer of any Other Enterprise,
is entitled under any provision of this Article V to indemnification by the
Corporation for some or a portion of the judgments, amounts paid in settlement,
attorneys' fees, ERISA excise taxes or penalties, fines or other expenses
actually and reasonably incurred by any such person in connection with any
threatened, pending or completed action, suit or proceeding (including without
limitation the investigation, defense, settlement or appeal of such action, suit
or proceeding), whether civil, criminal, administrative, investigative or
appellate, but not, however, for all of the total amount thereof, the
Corporation shall nevertheless indemnify such person for the portion thereof to
which such person is entitled.
ARTICLE VI
----------
STOCK
-----
6.1 Certificates for Shares of Stock. Certificates for shares of
stock shall be issued in numerical order, and each stockholder shall be entitled
to a certificate signed by, or in the name of the Corporation by, the Chairman
of the Board or the President or a Vice President, and by the Treasurer or an
Assistant Treasurer or the Secretary or an Assistant Secretary, certifying the
number of shares owned by such stockholder. Any of or all the signatures on
such certificate may be a facsimile. In case any officer, transfer agent or
registrar who has signed or whose facsimile signature has been placed upon a
certificate shall have ceased to be such officer, transfer agent or registrar
before such certificate is issued, such certificate may nevertheless be issued
by the Corporation with the same effect as if such officer, transfer agent or
registrar who signed such certificate, or whose facsimile signature shall have
been used thereon, were such officer, transfer agent or registrar of the
Corporation at the date of issue.
6.2 Transfers of Stock. Transfers of stock shall be made only upon
the stock transfer books of the Corporation, kept at the office of the
Corporation or of the transfer agent designated to transfer the class of stock,
and before a new certificate is issued the old certificate shall be surrendered
for cancellation, subject to Section 6.6 of these Bylaws. Until and unless the
Board of Directors appoints some other person, firm or Corporation as its
transfer agent (and upon the revocation of any such appointment, thereafter
until a new appointment is similarly made), the Secretary of the Corporation
shall be the transfer agent of the Corporation without the necessity of any
formal action of the Board, and the Secretary, or any person designated by him,
shall perform all of the duties of such transfer agent.
6.3 Registered Stockholders. Only registered stockholders shall be
entitled to be treated by the Corporation as the holders and owners in fact of
the shares standing in their
18
<PAGE>
respective names, and the Corporation shall not be bound to recognize any
equitable or other claim to or interest in such shares on the part of any other
person, whether or not it shall have express or other notice thereof, except as
expressly provided by the laws of Delaware.
6.4 Record Date.
(a) Stockholders' Meetings. In order that the Corporation may
determine the stockholders entitled to notice of or to vote at any meeting of
stockholders or any adjournment thereof, the Board of Directors may fix a record
date, which record date shall not precede the date upon which the resolution
fixing the record date is adopted by the Board of Directors, and which record
date shall not be more than 60 nor less than 10 days before the date of such
meeting. If no record date is fixed by the Board of Directors, the record date
for determining stockholders entitled to notice of or to vote at a meeting of
stockholders shall be at the close of business on the day next preceding the day
on which notice is given, or, if notice is waived, at the close of business on
the day next preceding the day on which the meeting is held. A determination of
stockholders of record entitled to notice of or to vote at a meeting of
stockholders shall apply to any adjournment of the meeting; provided, however,
that the Board of Directors may fix a new record date for the adjourned meeting.
(b) Consent of Stockholders to Action Without a Meeting. In
order that the Corporation may determine the stockholders entitled to consent to
corporate action in writing without a meeting, the Board of Directors may fix a
record date, which record date shall not precede the date upon which the
resolution fixing the record date is adopted by the Board of Directors, which
date shall not be more than 10 days after the date upon which the resolution
fixing the record date is adopted by the Board of Directors, and which date
shall be effective for no more than 60 days after such record date. If no
record date has been fixed by the Board of Directors, the record date for
determining stockholders entitled to consent to corporate action in writing
without a meeting, when no prior action by the Board of Directors is required by
any statute, the Certificate of Incorporation or these Bylaws, shall be the
first date on which a signed written consent setting forth the action taken or
proposed to be taken is delivered to the Corporation by delivery to its
registered office in the State of Delaware, its principal place of business, or
an officer or agent of the Corporation having custody of the book in which
proceedings of meetings of stockholders are recorded and which date shall be
effective for 60 days after such record date. Delivery made to the
Corporation's registered office shall be by hand or by certified or registered
mail, return receipt requested. If no record date has been fixed by the Board
of Directors and prior action by the Board of Directors is required by any
statute, the Certificate of Incorporation or any Bylaw, the record date for
determining stockholders entitled to consent to corporate action in writing
without a meeting shall be at the close of business on the day on which the
Board of Directors adopts the resolution taking such prior action, and which
date shall be effective for 60 days after such record date.
(c) Dividends and Other Distributions. In order that the
Corporation may determine the stockholders entitled to receive payment of any
dividend or other distribution
19
<PAGE>
or allotment of any rights or the stockholders entitled to exercise any rights
in respect of any change, conversion or exchange of stock, or for the purpose of
any other lawful action, the Board of Directors may fix a record date, which
record date shall not precede the date upon which the resolution fixing the
record date is adopted, and which record date shall not be more than 60 days
prior to such action. If no record date is fixed, the record date for
determining stockholders for any such purpose shall be at the close of business
on the day on which the Board of Directors adopts the resolution relating
thereto.
6.5 Regulations. The Board of Directors shall have power and
authority to make all such rules and regulations as it may deem expedient
concerning the issue, transfer, conversion and registration of certificates for
shares of stock of the Corporation, not inconsistent with the laws of Delaware,
the Certificate of Incorporation and these Bylaws.
6.6 Lost Certificates. The Board of Directors may direct that a new
certificate or certificates be issued in place of any certificate or
certificates theretofore issued by the Corporation, alleged to have been lost,
stolen or destroyed, upon the making of an affidavit of that fact by the person
claiming the certificate or certificates to be lost, stolen or destroyed. When
authorizing the issue of such replacement certificate or certificates, the Board
of Directors may, in its discretion and as a condition precedent to the issuance
thereof, require the owner of such allegedly lost, stolen or destroyed
certificate or certificates, or his legal representative, to give the
Corporation a bond in such sum as it may direct to indemnify the Corporation
against any claim that may be made against it on account of the alleged loss,
theft or destruction of any such certificate or the issuance of such new
certificate or uncertified shares.
ARTICLE VII
-----------
CORPORATE FINANCE
-----------------
7.1 Dividends. Dividends on the outstanding shares of stock of the
Corporation, subject to the provisions of the Certificate of Incorporation and
of any applicable law and of these Bylaws, may be declared by the Board of
Directors at any meeting. Subject to such provisions, dividends may be paid in
cash, in property or in shares of stock of the Corporation. A member of the
Board of Directors, or a member of any committee designated by the Board of
Directors, shall be fully protected in relying in good faith upon the records of
the Corporation and upon such information, opinions, reports or statements
presented to the Corporation by any of its officers or employees, or committees
of the Board of Directors, or by any other person as to matters the director
reasonably believes are within such other person's professional or expert
competence and who has been selected with reasonable care by or on behalf of the
Corporation, as to the value and amount of the assets, liabilities and/or net
profits of the Corporation, or any other facts pertinent to the existence and
amount of surplus or other funds from which dividends might properly be declared
and paid, or with which the Corporation's stock might properly be purchased or
redeemed.
20
<PAGE>
7.2 Creation of Reserves. The Board of Directors may set apart out
of any of the funds of the Corporation available for dividends a reserve or
reserves for any proper purpose or may abolish any such reserve.
ARTICLE VIII
------------
GENERAL PROVISIONS
------------------
8.1 Fiscal Year. The Board of Directors shall have power to fix and
from time to time change the fiscal year of the Corporation. In the absence of
action by the Board of Directors, the fiscal year of the Corporation shall end
each year on the date which the Corporation treated as the close of its first
fiscal year, until such time, if any, as the fiscal year shall be changed by the
Board of Directors.
8.2 Corporate Seal. The corporate seal shall have inscribed thereon
the name of the Corporation and the words "Corporate Seal -- Delaware." The
corporate seal may be used by causing it, or a facsimile thereof, to be
impressed or affixed or in any manner reproduced.
8.3 Depositories. The moneys of the Corporation shall be deposited
in the name of the Corporation in such bank or banks or other depositories as
the Board of Directors shall designate, and shall be drawn out only by check or
draft signed by persons designated by resolution adopted by the Board of
Directors. Notwithstanding the foregoing the Board of Directors may by
resolution authorize an officer or officers of the Corporation to designate any
bank or banks or other depositories in which moneys of the Corporation may be
deposited, and to designate the persons who may sign checks or drafts on any
particular account or accounts of the Corporation, whether created by direct
designation of the Board of Directors or by an authorized officer or officers as
aforesaid.
8.4 Contracts. The Board of Directors may authorize any officer or
officers, or agent or agents, to enter into any contract or execute and deliver
any instrument for, and in the name of, the Corporation, and such authority may
be general or confined to specific instances.
8.5 Amendments. These Bylaws may be altered, amended or repealed, or
new Bylaws may be adopted, in the manner provided in the Certificate of
Incorporation.
21
<PAGE>
Exhibit 3.2
CERTIFICATE
-----------
The undersigned Secretary of NovaStar Mortgage Funding Corporation, a
Delaware corporation, hereby certifies that the foregoing Bylaws are the
original Bylaws of the Corporation adopted by the initial directors named in the
Articles of Incorporation.
Dated: January 9, 1998
/s/ David J. Lee
------------------------------------
David J. Lee, Secretary
22
<PAGE>
EXHIBIT 4.1
================================================================================
NOVASTAR MORTGAGE, INC.,
as Servicer,
[NAME OF INDENTURE TRUSTEE]
as Indenture Trustee,
and
NOVASTAR MORTGAGE FUNDING TRUST, SERIES ______,
as Issuer
--------------------------
SERVICING AGREEMENT
Dated as of ___________, 199_
--------------------------
Fixed and Adjustable-Rate Mortgage Loans
NovaStar Mortgage Funding Trust, Series ______
Collateralized Mortgage Obligation Bonds
================================================================================
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE I Definitions.................................................. 1
Section 1.01. Definitions................................... 1
Section 1.02. Other Definitional Provisions................. 1
Section 1.03. Interest Calculations......................... 2
ARTICLE II Representations and Warranties............................... 2
Section 2.01 Representations and Warranties Regarding the
Servicer...................................... 2
Section 2.02. Existence..................................... 3
Section 2.03. Enforcement of Representations and
Warranties.................................... 3
ARTICLE III Administration and Servicing of Mortgage Loans............... 5
Section 3.01. Servicer to Assure Servicing.................. 5
Section 3.02. Subservicing Agreements Between Servicer and
Subservicers.................................. 6
Section 3.03. Successor Subservicers........................ 7
Section 3.04. Liability of the Servicer..................... 7
Section 3.05. Assumption or Termination of Subservicing
Agreements by Indenture Trustee............... 8
Section 3.06. Collection of Mortgage Loan Payments.......... 8
Section 3.07. Withdrawals from the Collection Account....... 10
Section 3.08. Collection of Taxes, Assessments and Similar
Items; Servicing Accounts..................... 12
Section 3.09. Access to Certain Documentation and
Information Regarding the Mortgage Loans...... 13
Section 3.10. Reserved...................................... 13
Section 3.11. Maintenance of Hazard Insurance and Fidelity
Coverage...................................... 13
Section 3.12. Due-on-Sale Clauses; Assumption Agreements.... 15
Section 3.13. Realization Upon Defaulted Mortgage Loans..... 16
Section 3.14. Indenture Trustee to Cooperate; Release of
Mortgage Files................................ 17
Section 3.15. Servicing Compensation........................ 18
Section 3.16. Annual Statements of Compliance............... 19
Section 3.17. Annual Independent Public Accountants'
Servicing Report.............................. 19
Section 3.18. Optional Purchase of Defaulted Mortgage
Loans......................................... 20
Section 3.19. Information Required by the Internal Revenue
Service Generally and Reports of Foreclosures
and Abandonments of Mortgaged Property........ 20
ARTICLE IV Remittance Reports........................................... 20
Section 4.01. Remittance Reports............................ 20
Section 4.02. Advances...................................... 21
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
Section 4.03. Compensating Interest Payments................ 21
ARTICLE V The Servicer................................................. 21
Section 5.01. Liability of the Servicer..................... 21
Section 5.02. Merger or Consolidation of, or Assumption
of the Obligations of, the Servicer........... 21
Section 5.03. Limitation on Liability of the Servicer and
Others........................................ 22
Section 5.04. Servicer Not to Resign........................ 23
Section 5.05. Delegation of Duties.......................... 23
Section 5.06. Servicer to Pay Indenture Trustee's and Owner
Trustee's Fees and Expenses; Indemnification.. 23
ARTICLE VI Default...................................................... 25
Section 6.01. Servicing Default............................. 25
Section 6.02. Indenture Trustee to Act; Appointment of
Successor..................................... 28
Section 6.03. Notification to Bondholders................... 29
Section 6.04. Waiver of Defaults............................ 29
ARTICLE VII Miscellaneous Provisions..................................... 29
Section 7.01. Amendment..................................... 29
Section 7.02. Governing Law................................. 30
Section 7.03. Notices....................................... 30
Section 7.04. Severability of Provisions.................... 31
Section 7.05. Third-Party Beneficiaries..................... 31
Section 7.06. Counterparts.................................. 32
Section 7.07. Effect of Headings and Table of Contents...... 32
Section 7.08. Termination................................... 32
Section 7.09. No Petition................................... 32
Section 7.10. No Recourse................................... 32
ARTICLE VIII Administrative Duties of the Servicer........................ 32
Section 8.01. Administrative Duties......................... 32
Section 8.02. Records....................................... 34
Section 8.03. Additional Information to be Furnished........ 34
EXHIBIT A - MORTGAGE LOAN SCHEDULE........................................ A-1
EXHIBIT B - FORM OF REQUEST FOR RELEASE................................... B-1
EXHIBIT C - FORM OF LIQUIDATION REPORT.................................... C-1
</TABLE>
ii
<PAGE>
This Servicing Agreement, dated as of ________________, 199 , among
NovaStar Mortgage, Inc., as Servicer (the "Servicer"),
_________________________, as Indenture Trustee, and NovaStar Mortgage Funding
Trust, Series ______, as Issuer (the "Issuer").
W I T N E S S E T H T H A T:
-----------------------------
WHEREAS, pursuant to the terms of the Mortgage Loan Purchase
Agreement, the Seller will sell to the Company the Mortgage Loans on the Closing
Date;
WHEREAS, the Company will sell the Mortgage Loans and transfer all of
its rights under the Mortgage Loan Purchase Agreement to the Issuer on the
Closing Date;
WHEREAS, pursuant to the terms of the Trust Agreement, the Issuer will
issue and transfer to or at the direction of the Company, the Certificates;
WHEREAS, pursuant to the terms of the Indenture, the Issuer will issue
and transfer to or at the direction of the Company, the Bonds; and
WHEREAS, pursuant to the terms of this Servicing Agreement, the
Servicer will service the Mortgage Loans directly or through one or more
Subservicers;
NOW, THEREFORE, in consideration of the mutual covenants herein
contained, the parties hereto agree as follows:
ARTICLE I
Definitions
-----------
Section 1.01. Definitions. For all purposes of this Servicing Agreement,
except as otherwise expressly provided herein or unless the context otherwise
requires, capitalized terms not otherwise defined herein shall have the meanings
assigned to such terms in the Definitions contained in Appendix A to the
Indenture dated as of ___________, 199 (the "Indenture") between the Issuer and
the Indenture Trustee, which Definitions are incorporated by reference herein.
All other capitalized terms used herein shall have the meanings specified
herein.
Section 1.02. Other Definitional Provisions. (a) All terms defined in this
Servicing Agreement shall have the defined meanings when used in any certificate
or other document made or delivered pursuant hereto unless otherwise defined
therein.
(b) As used in this Servicing Agreement and in any certificate or other
document made or delivered pursuant hereto or thereto, accounting terms not
defined in this Servicing Agreement or in any such certificate or other
document, and accounting terms partly defined in this Servicing Agreement or in
any such certificate or other document, to the extent not defined, shall have
the
<PAGE>
respective meanings given to them under generally accepted accounting
principles. To the extent that the definitions of accounting terms in this
Servicing Agreement or in any such certificate or other document are
inconsistent with the meanings of such terms under generally accepted accounting
principles, the definitions contained in this Servicing Agreement or in any such
certificate or other document shall control.
(c) The words "hereof," "herein," "hereunder" and words of similar import
when used in this Servicing Agreement shall refer to this Servicing Agreement as
a whole and not to any particular provision of this Servicing Agreement; Section
and Exhibit references contained in this Servicing Agreement are references to
Sections and Exhibits in or to this Servicing Agreement unless otherwise
specified; and the term "including" shall mean "including without limitation".
(d) The definitions contained in this Servicing Agreement are applicable to
the singular as well as the plural forms of such terms and to the masculine as
well as the feminine and neuter genders of such terms.
(e) Any agreement, instrument or statute defined or referred to herein or
in any instrument or certificate delivered in connection herewith means such
agreement, instrument or statute as from time to time amended, modified or
supplemented and includes (in the case of agreements or instruments) references
to all attachments thereto and instruments incorporated therein; references to a
Person are also to its permitted successors and assigns.
Section 1.03. Interest Calculations. All calculations of interest hereunder
that are made in respect of the Principal Balance of a Mortgage Loan shall be
made in accordance with the terms of the related Mortgage Note and Mortgage. The
calculation of the Servicing Fee shall be made on the basis of a 360-day year
consisting of twelve 30-day months. All dollar amounts calculated hereunder
shall be rounded to the nearest penny with one-half of one penny being rounded
up.
ARTICLE II
Representations and Warranties
------------------------------
Section 2.01. Representations and Warranties Regarding the Servicer. The
Servicer represents and warrants to the Issuer and for the benefit of the
Indenture Trustee, as pledgee of the Mortgage Loans, the Bond Insurer and the
Bondholders, as of the Closing Date, that:
(i) The Servicer is a corporation duly organized, validly existing and
in good standing under the laws of the State of Virginia and has the
corporate power to own its assets and to transact the business in which it
is currently engaged. The Servicer is duly qualified to do business as a
foreign corporation and is in good standing in each jurisdiction in which
the character of the business transacted by it or properties owned or
leased by it requires such qualification and in which the failure to so
qualify would have a material adverse effect on the
-2-
<PAGE>
business, properties, assets, or condition (financial or other) of the
Servicer or the validity or enforceability of the Mortgage Loans;
(ii) The Servicer has the corporate power and authority to make,
execute, deliver and perform this Servicing Agreement and all of the
transactions contemplated under this Servicing Agreement, and has taken all
necessary corporate action to authorize the execution, delivery and
performance of this Servicing Agreement. When executed and delivered, this
Servicing Agreement will constitute the legal, valid and binding obligation
of the Servicer enforceable in accordance with its terms, except as
enforcement of such terms may be limited by bankruptcy, insolvency or
similar laws affecting the enforcement of creditors' rights generally and
by the availability of equitable remedies;
(iii) The Servicer is not required to obtain the consent of any other
Person or any consent, license, approval or authorization from, or
registration or declaration with, any governmental authority, bureau or
agency in connection with the execution, delivery, performance, validity or
enforceability of this Servicing Agreement, except for such consent,
license, approval or authorization, or registration or declaration, as
shall have been obtained or filed, as the case may be;
(iv) The execution and delivery of this Servicing Agreement and the
performance of the transactions contemplated hereby by the Servicer will
not violate any provision of any existing law or regulation or any order or
decree of any court applicable to the Servicer or any provision of the
certificate of incorporation or bylaws of the Servicer, or constitute a
material breach of any mortgage, indenture, contract or other agreement to
which the Servicer is a party or by which the Servicer may be bound; and
(v) No litigation or administrative proceeding of or before any court,
tribunal or governmental body is currently pending, or to the knowledge of
the Servicer threatened, against the Servicer or any of its properties or
with respect to this Servicing Agreement or the Bonds or the Certificates
which, to the knowledge of the Servicer, has a reasonable likelihood of
resulting in a material adverse effect on the transactions contemplated by
this Servicing Agreement.
The foregoing representations and warranties shall survive any termination
of the Servicer hereunder.
Section 2.02. Existence. The Issuer will keep in full effect its existence,
rights and franchises as a business trust under the laws of the State of
Delaware and will obtain and preserve its qualification to do business in each
jurisdiction in which such qualification is or shall be necessary to protect the
validity and enforceability of this Servicing Agreement.
Section 2.03. Enforcement of Representations and Warranties. The Servicer,
on behalf of and subject to the direction of the Indenture Trustee, as pledgee
of the Mortgage Loans, or the Bond
-3-
<PAGE>
Insurer, shall enforce the representations and warranties and related
obligations for breaches thereof of the Seller pursuant to the Mortgage Loan
Purchase Agreement. Upon the discovery by the Seller, the Servicer, the
Indenture Trustee, the Issuer, the Owner Trustee, the Bond Insurer or the
Company of a breach of any of the representations and warranties made in the
Mortgage Loan Purchase Agreement, in respect of any Mortgage Loan which
materially and adversely affects the value of the related Mortgage Loan or the
interests of the Bondholders or the Certificateholders or the Bond Insurer, the
party discovering such breach shall give prompt written notice to the other
parties. The Servicer shall promptly notify the Seller of such breach and
request that, pursuant to the terms of the Mortgage Loan Purchase Agreement, the
Seller either (i) cure such breach in all material respects or (ii) purchase
such Mortgage Loan, in each instance in accordance with the Mortgage Loan
Purchase Agreement; provided that the Seller shall, subject to the conditions
set forth in the Mortgage Loan Purchase Agreement, have the option to substitute
an Eligible Substitute Mortgage Loan or Eligible Substitute Mortgage Loans for
such Mortgage Loan. Monthly Payments due with respect to Eligible Substitute
Mortgage Loans in the month of substitution shall not be part of the Trust
Estate and will be retained by the Servicer and remitted by the Servicer to the
Seller on the next succeeding Payment Date. For the month of substitution,
distributions to the Payment Account pursuant to the Servicing Agreement will
include the Monthly Payment due on a Deleted Mortgage Loan for such month and
thereafter the Seller shall be entitled to retain all amounts received in
respect of such Deleted Mortgage Loan. The Servicer shall amend or cause to be
amended the Mortgage Loan Schedule to reflect the removal of such Mortgage Loan
and the substitution of the Eligible Substitute Mortgage Loans and the Servicer
shall promptly deliver the amended Mortgage Loan Schedule to the related
Subservicer, if any, the Bond Insurer, the Owner Trustee and the Indenture
Trustee.
In connection with the substitution of one or more Eligible Substitute
Mortgage Loans for one or more Deleted Mortgage Loans, the Servicer will
determine the amount (such amount, a "Substitution Adjustment Amount"), if any,
by which the aggregate principal balance of all such Eligible Substitute
Mortgage Loans as of the date of substitution is less than the aggregate
principal balance of all such Deleted Mortgage Loans (after application of the
principal portion of the Monthly Payments due in the month of substitution that
are to be distributed to the Payment Account in the month of substitution). The
Seller shall pay the Substitution Adjustment Amount to the Servicer and the
Servicer shall deposit such Substitution Adjustment Amount into the Collection
Account upon receipt.
It is understood and agreed that the obligation of the Seller to cure such
breach or purchase or substitute for such Mortgage Loan as to which such a
breach has occurred and is continuing shall constitute the sole remedy
respecting such breach available to the Issuer and the Indenture Trustee, as
pledgee of the Mortgage Loans, against the Seller, except as set forth in
Section 5.1 of the Mortgage Loan Purchase Agreement. In connection with the
purchase of or substitution for any such Mortgage Loan by the Seller, the Issuer
shall assign to the Seller all of its right, title and interest in respect of
the Mortgage Loan Purchase Agreement applicable to such Mortgage Loan. Upon
receipt of the Repurchase Price, or upon completion of such substitution, the
Servicer shall notify the Indenture Trustee and then the Indenture Trustee shall
deliver the Mortgage Files relating to such
-4-
<PAGE>
Mortgage Loan to the Servicer, together with all relevant endorsements and
assignments prepared by the Servicer which the Indenture Trustee shall execute.
ARTICLE III
Administration and Servicing of Mortgage Loans
----------------------------------------------
Section 3.01. Servicer to Assure Servicing. (a) The Servicer shall
supervise, or take such actions as are necessary to ensure, the servicing and
administration of the Mortgage Loans and any REO Property in accordance with
this Servicing Agreement and its normal servicing practices, which generally
shall conform to the standards of an institution prudently servicing mortgage
loans for its own account and shall have full authority to do anything it
reasonably deems appropriate or desirable in connection with such servicing and
administration. The Servicer may perform its responsibilities relating to
servicing through other agents or independent contractors, but shall not thereby
be released from any of its responsibilities as hereinafter set forth. The
authority of the Servicer, in its capacity as Servicer, and any Subservicer
acting on its behalf, shall include, without limitation, the power to (i)
consult with and advise any Subservicer regarding administration of a related
Mortgage Loan, (ii) approve any recommendation by a Subservicer to foreclose on
a related Mortgage Loan, (iii) supervise the filing and collection of insurance
claims and take or cause to be taken such actions on behalf of the insured
Person thereunder as shall be reasonably necessary to prevent the denial of
coverage thereunder, and (iv) effectuate foreclosure or other conversion of the
ownership of the Mortgaged Property securing a related Mortgage Loan, including
the employment of attorneys, the institution of legal proceedings, the
collection of deficiency judgments, the acceptance of compromise proposals and
any other matter pertaining to a delinquent Mortgage Loan. The authority of the
Servicer shall include, in addition, the power on behalf of the Bondholders, the
Indenture Trustee, the Bond Insurer or any of them to (i) execute and deliver
customary consents or waivers and other instruments and documents, (ii) consent
to transfer of any related Mortgaged Property and assumptions of the related
Mortgage Notes and Security Instruments (in the manner provided in this
Servicing Agreement) and (iii) collect any Insurance Proceeds and Liquidation
Proceeds. Without limiting the generality of the foregoing, the Servicer and any
Subservicer acting on its behalf may, and is hereby authorized, and empowered by
the Indenture Trustee when the Servicer believes it is reasonably necessary in
its best judgment in order to comply with its servicing duties hereunder, to
execute and deliver, on behalf of itself, the Bondholders, the Indenture
Trustee, the Bond Insurer or any of them, any instruments of satisfaction,
cancellation, partial or full release, discharge and all other comparable
instruments, with respect to the related Mortgage Loans, the Insurance Policies
and the accounts related thereto, and the Mortgaged Properties. The Servicer may
exercise this power in its own name or in the name of a Subservicer.
The Servicer, in such capacity, may not consent to the placing of a lien
senior to that of the Mortgage on the related Mortgaged Property.
-5-
<PAGE>
The relationship of the Servicer (and of any successor to the Servicer as
servicer under this Servicing Agreement) to the Issuer and the Indenture Trustee
under this Servicing Agreement is intended by the parties to be that of an
independent contractor and not that of a joint venturer, partner or agent.
(b) Notwithstanding the provisions of Subsection 3.01(a), the Servicer
shall not take any action inconsistent with the interests of the Indenture
Trustee, the Bond Insurer or the Bondholders or with the rights and interests of
the Indenture Trustee, the Bond Insurer or the Bondholders under this Servicing
Agreement.
(c) The Indenture Trustee shall furnish the Servicer with any powers of
attorney and other documents in form as provided to it necessary or appropriate
to enable the Servicer to service and administer the related Mortgage Loans and
REO Property and the Indenture Trustee shall not be liable for the actions of
the Servicer or any Subservicers under such powers of attorney.
Section 3.02. Subservicing Agreements Between Servicer and Subservicers.
(a) The Servicer may enter into Subservicing Agreements with Subservicers for
the servicing and administration of the Mortgage Loans and for the performance
of any and all other activities of the Servicer hereunder. Each Subservicer
shall be either (i) an institution the accounts of which are insured by the FDIC
or (ii) another entity that engages in the business of originating or servicing
mortgage loans comparable to the Mortgage Loans, and in either case shall be
authorized to transact business in the state or states in which the related
Mortgaged Properties it is to service are situated, if and to the extent
required by applicable law to enable the Subservicer to perform its obligations
hereunder and under the Subservicing Agreement. Any Subservicing Agreement
entered into by the Servicer shall include the provision that such Agreement may
be immediately terminated (i) (x) with cause and without any termination fee by
the Servicer hereunder and/or (y) without cause, in which case the Servicer
shall be solely responsible for any termination fee or penalty resulting
therefrom and (ii) at the option of the Bond Insurer upon the termination or
resignation of the Servicer hereunder, in which case the Servicer shall be
solely responsible for any termination fee or penalty resulting therefrom. In
addition, each Subservicing Agreement shall provide for servicing of the
Mortgage Loans consistent with the terms of this Servicing Agreement. The
Servicer and the Subservicers may enter into Subservicing Agreements and make
amendments to the Subservicing Agreements or enter into different forms of
Subservicing Agreements providing for, among other things, the delegation by the
Servicer to a Subservicer of additional duties regarding the administration of
the Mortgage Loans; provided, however, that any such amendments or different
forms shall be consistent with and not violate the provisions of this Servicing
Agreement, and that no such amendment or different form shall be made or entered
into which could be reasonably expected to be materially adverse to the
interests of the Bond Insurer or the Bondholders, without the consent of the
Bond Insurer or, if a Bond Insurer Default exists, the holders of at least 51%
of the aggregate Bond Principal Balance of the Outstanding Bonds.
(b) As part of its servicing activities hereunder, the Servicer, for the
benefit of the Indenture Trustee, the Bond Insurer and the Bondholders, shall
enforce the obligations of each
-6-
<PAGE>
Subservicer under the related Subservicing Agreement. Such enforcement,
including, without limitation, the legal prosecution of claims, termination of
Subservicing Agreements and the pursuit of other appropriate remedies, shall be
in such form and carried out to such an extent and at such time as the Servicer,
in its good faith business judgment, would require were it the owner of the
related Mortgage Loans. The Servicer shall pay the costs of such enforcement at
its own expense, but shall be reimbursed therefor only (i) from a general
recovery resulting from such enforcement only to the extent, if any, that such
recovery exceeds all amounts due in respect of the related Mortgage Loan or (ii)
from a specific recovery of costs, expenses or attorneys' fees against the party
against whom such enforcement is directed.
Section 3.03. Successor Subservicers. The Servicer shall be entitled to
terminate any Subservicing Agreement that may exist in accordance with the terms
and conditions of such Subservicing Agreement and without any limitation by
virtue of this Servicing Agreement; provided, however, that upon termination,
the Servicer shall either act as servicer of the related Mortgage Loans or enter
into an appropriate contract with a successor Subservicer reasonably acceptable
to the Indenture Trustee and the Bond Insurer pursuant to which such successor
Subservicer will be bound by all relevant terms of the related Subservicing
Agreement pertaining to the servicing of such Mortgage Loans.
Section 3.04. Liability of the Servicer. (a) Notwithstanding any
Subservicing Agreement, any of the provisions of this Servicing Agreement
relating to agreements or arrangements between the Servicer and a Subservicer or
reference to actions taken through a Subservicer or otherwise, the Servicer
shall under all circumstances remain obligated and primarily liable to the
Indenture Trustee, the Bondholders and the Bond Insurer for the servicing and
administering of the Mortgage Loans and any REO Property in accordance with this
Servicing Agreement. The obligations and liability of the Servicer shall not be
diminished by virtue of Subservicing Agreements or by virtue of indemnification
of the Servicer by any Subservicer, or any other Person. The obligations and
liability of the Servicer shall remain of the same nature and under the same
terms and conditions as if the Servicer alone were servicing and administering
the related Mortgage Loans. The Servicer shall, however, be entitled to enter
into indemnification agreements with any Subservicer or other Person and nothing
in this Servicing Agreement shall be deemed to limit or modify such
indemnification. For the purposes of this Servicing Agreement, the Servicer
shall be deemed to have received any payment on a Mortgage Loan on the date the
Subservicer received such payment; provided, however, that this sentence shall
not apply to the Indenture Trustee acting as the Servicer; provided, further,
however, that the foregoing provision shall not affect the obligation of the
Servicer if it is also the Indenture Trustee to advance amounts which are not
Nonrecoverable Advances.
(b) Any Subservicing Agreement that may be entered into and any
transactions or services relating to the Mortgage Loans involving a Subservicer
in its capacity as such and not as an originator shall be deemed to be between
the Subservicer and the Servicer alone, and the Indenture Trustee, the Bond
Insurer and the Bondholders shall not be deemed parties thereto and shall have
no claims, rights, obligations, duties or liabilities with respect to the
Subservicer except as set forth in Section 3.05.
-7-
<PAGE>
Section 3.05. Assumption or Termination of Subservicing Agreements by
Indenture Trustee. (a) If the Indenture Trustee or its designee shall assume the
servicing obligations of the Servicer in accordance with Section 6.02 below, the
Indenture Trustee, to the extent necessary to permit the Indenture Trustee to
carry out the provisions of Section 6.02 with respect to the Mortgage Loans,
shall succeed to all of the rights and obligations of the Servicer under each of
the Subservicing Agreements. In such event, the Indenture Trustee or its
designee as the successor Servicer shall be deemed to have assumed all of the
Servicer's rights and obligations therein and to have replaced the Servicer as a
party to such Subservicing Agreements to the same extent as if such Subservicing
Agreements had been assigned to the Indenture Trustee or its designee as a
successor Servicer, except that the Indenture Trustee or its designee as a
successor Servicer shall not be deemed to have assumed any obligations or
liabilities of the Servicer arising prior to such assumption and the Servicer
shall not thereby be relieved of any liability or obligations under such
Subservicing Agreements arising prior to such assumption. Nothing in the
foregoing shall be deemed to entitle the Indenture Trustee or its designee as a
successor Servicer at any time to receive any portion of the servicing
compensation provided under Section 3.17 except for such portion as the Servicer
would be entitled to receive.
(b) In the event that the Indenture Trustee or its designee as successor
Servicer for the Indenture Trustee assumes the servicing obligations of the
Servicer under Section 6.02, upon the request of the Indenture Trustee or such
designee as successor Servicer, the Servicer shall at its own expense deliver to
the Indenture Trustee, or at its written request to such designee, originals or,
if originals are not available, photocopies of all documents, files and records,
electronic or otherwise, relating to the Subservicing Agreements and the related
Mortgage Loans or REO Property then being serviced and an accounting of amounts
collected and held by it, if any, and will otherwise cooperate and use its
reasonable efforts to effect the orderly and efficient transfer of the
Subservicing Agreements, or responsibilities hereunder to the Indenture Trustee,
or at its written request to such designee as successor Servicer.
Section 3.06. Collection of Mortgage Loan Payments. (a) The Servicer will
coordinate and monitor remittances by Subservicers to it with respect to the
Mortgage Loans in accordance with this Servicing Agreement.
(b) The Servicer shall make its best reasonable efforts to collect or
cause to be collected all payments required under the terms and provisions of
the Mortgage Loans and shall follow, and use its best reasonable efforts to
cause Subservicers to follow, collection procedures comparable to the collection
procedures of prudent mortgage lenders servicing mortgage loans for their own
account to the extent such procedures shall be consistent with this Servicing
Agreement. Consistent with the foregoing, the Servicer or the related
Subservicer may in its discretion (i) waive or permit to be waived any late
payment charge, prepayment charge, assumption fee, or any penalty interest in
connection with the prepayment of a Mortgage Loan and (ii) suspend or reduce or
permit to be suspended or reduced regular monthly payments for a period of up to
six months, or arrange or permit an arrangement with a Mortgagor for a scheduled
liquidation of delinquencies; provided, however, that the Servicer or the
related Subservicer may permit the foregoing only if it believes, in
-8-
<PAGE>
good faith, that recoveries of Monthly Payments will be maximized; provided
further, however, that the Servicer may not without the prior written consent of
the Bond Insurer permit any waiver, modification or variance which would (a)
change the loan rate, (b) forgive any payment of principal or interest, (c)
lessen the lien priority or (d) extend the final maturity date of a Mortgage
Loan past 12 months prior to the final maturity date on the Bonds. In the event
the Servicer or related Subservicer shall consent to the deferment of the due
dates for payments due on a Mortgage Note, the Servicer shall nonetheless make
an Advance or shall cause the related Subservicer to make an advance to the same
extent as if such installment were due, owing and delinquent and had not been
deferred through liquidation of the Mortgaged Property; provided, however, that
the obligation of the Servicer or the related Subservicer to make an Advance
shall apply only to the extent that the Servicer believes, in good faith, that
such advances are not Nonrecoverable Advances.
(c) Within five Business Days after the Servicer has determined that all
amounts which it expects to recover from or on account of a Mortgage Loan have
been recovered and that no further Liquidation Proceeds will be received in
connection therewith, the Servicer shall provide to (i) the Indenture Trustee a
certificate of a Servicing Officer that such Mortgage Loan became a Liquidated
Mortgage Loan as of the date of such determination and (ii) the Bond Insurer and
the Indenture Trustee a Liquidation Report in the form attached hereto as
Exhibit C.
(d) The Servicer shall establish a segregated account in the name of the
Indenture Trustee (the "Collection Account"), which shall be an Eligible
Account, in which the Servicer shall deposit or cause to be deposited any
amounts representing payments on and any collections in respect of the Mortgage
Loans received by it subsequent to the Cut-Off Date (other than in respect of
the payments referred to in the following paragraph) within two Business Days
following receipt thereof, including the following payments and collections
received or made by it (without duplication):
(i) all payments of principal of or interest on the Mortgage Loans
received by the Servicer directly from Mortgagors or from the respective
Subservicer;
(ii) the aggregate Repurchase Price of the Mortgage Loans purchased
by the Servicer pursuant to Section 3.18;
(iii) Net Liquidation Proceeds;
(iv) all proceeds of any Mortgage Loans repurchased by the Seller
pursuant to the Mortgage Loan Purchase Agreement, and all Substitution
Adjustment Amounts required to be deposited in connection with the
substitution of an Eligible Substitute Mortgage Loan pursuant to the
Mortgage Loan Purchase Agreement;
(v) Insurance Proceeds, other than Net Liquidation Proceeds,
resulting from any insurance policy maintained on a Mortgaged Property;
(vi) any Advance and any Compensating Interest payments; and
-9-
<PAGE>
(vii) any other amounts received by the Servicer, including all
Foreclosure Profits, assumption fees, prepayment penalties and any other
fees that are required to be deposited in the Collection Account pursuant
to this Servicing Agreement.
provided, however, that with respect to each Due Period, the Servicer shall be
permitted to retain from payments in respect of interest on the Mortgage Loans,
the Servicing Fee for such Due Period. The foregoing requirements respecting
deposits to the Collection Account are exclusive, it being understood that,
without limiting the generality of the foregoing, the Servicer need not deposit
in the Collection Account late payment charges payable by Mortgagors, as further
described in Section 3.15, or amounts received by the Subservicer for the
accounts of Mortgagors for application towards the payment of taxes, insurance
premiums, assessments and similar items. In the event any amount not required to
be deposited in the Collection Account is so deposited, the Servicer may at any
time (prior to being terminated under this Agreement) withdraw such amount from
the Collection Account, any provision herein to the contrary notwithstanding.
The Servicer shall keep records that accurately reflect the funds on deposit in
the Collection Account that have been identified by it as being attributable to
the Mortgage Loans and shall hold all collections in the Collection Account for
the benefit of the Owner Trustee, the Indenture Trustee, the Bondholders and the
Bond Insurer, as their interests may appear.
Funds in the Collection Account may be invested in Eligible Investments,
but shall not be commingled with the Servicer's own funds or general assets or
with funds respecting payments on mortgage loans or with any other funds not
related to the Bonds. Income earned on such Eligible Investments shall be for
the account of the Servicer.
(e) The Servicer will require each Subservicer to hold all funds
constituting collections on the Mortgage Loans, pending remittance thereof to
the Servicer, in one or more accounts in the name of the Indenture Trustee
meeting the requirements of an Eligible Account, and such funds shall not be
invested. The Subservicer shall segregate and hold all funds collected and
received pursuant to each Mortgage Loan separate and apart from any of its own
funds and general assets and any other funds. Each Subservicer shall make
remittances to the Servicer no later than one Business Day following receipt
thereof and the Servicer shall deposit any such remittances received from any
Subservicer within one Business Day following receipt by the Servicer.
Section 3.07. Withdrawals from the Collection Account. (a) The Servicer
shall, from time to time as provided herein, make withdrawals from the
Collection Account of amounts on deposit therein pursuant to Section 3.06 that
are attributable to the Mortgage Loans for the following purposes (without
duplication):
(i) to deposit in the Payment Account, by the fourth Business Day
prior to each Payment Date, all collections on the Mortgage Loans required
to be distributed from the Payment Account on a Payment Date;
-10-
<PAGE>
(ii) to the extent deposited to the Collection Account, to reimburse
itself or the related Subservicer for previously unreimbursed expenses
incurred in maintaining individual insurance policies pursuant to Section
3.11, or Liquidation Expenses, paid pursuant to Section 3.13, such
withdrawal right being limited to amounts received on particular Mortgage
Loans (other than any Repurchase Price in respect thereof) which represent
late recoveries of the payments for which such advances were made, or from
related Liquidation Proceeds;
(iii) to pay to itself out of each payment received on account of
interest on a Mortgage Loan as contemplated by Section 3.15, an amount
equal to the related Servicing Fee (to the extent not retained pursuant to
Section 3.06);
(iv) to pay to itself or the Seller, with respect to any Mortgage
Loan or property acquired in respect thereof that has been purchased by the
Seller, the Servicer or other entity, all amounts received thereon and not
required to be distributed to Bondholders as of the date on which the
related Repurchase Price is determined;
(v) to reimburse the Servicer or any Subservicer for any
unreimbursed Advance of its own funds or any unreimbursed advance of such
Subservicer's own funds, the right of the Servicer or a Subservicer to
reimbursement pursuant to this subclause (v) being limited to amounts
received on a particular Mortgage Loan (including, for this purpose, the
Repurchase Price therefor, Insurance Proceeds and Liquidation Proceeds)
which represent late payments or recoveries of the principal of or interest
on such Mortgage Loan respecting which such Advance or advance was made;
(vi) to reimburse the Servicer or any Subservicer from Insurance
Proceeds or Liquidation Proceeds relating to a particular Mortgage Loan for
amounts expended by the Servicer or such Subservicer pursuant to Section
3.13 in good faith in connection with the restoration of the related
Mortgage Property which was damaged by the uninsured cause or in connection
with the liquidation of such Mortgage Loan;
(vii) to reimburse the Servicer or any Subservicer for any
unreimbursed Nonrecoverable Advance previously made, and otherwise not
reimbursed pursuant to this Subsection 3.07(a);
(viii) to pay the Owner Trustee the Owner Trustee Fee;
(ix) to withdraw any other amount deposited in the Collection
Account that was not required to be deposited therein pursuant to Section
3.06;
(x) to reimburse the Servicer for costs associated with the
environmental report specified in Section 3.13(c);
-11-
<PAGE>
(xi) to clear and terminate the Collection Account upon a
termination pursuant to Section 7.08; and
(xii) to pay to the Servicer income earned on Eligible Investments in
the Collection Account.
In connection with withdrawals pursuant to clauses (ii), (iii), (iv), (v) and
(vi), the Servicer's entitlement thereto is limited to collections or other
recoveries on the related Mortgage Loan, and the Servicer shall keep and
maintain separate accounting, on a Mortgage Loan by Mortgage Loan basis, for the
purpose of justifying any withdrawal from the Collection Account pursuant to
such clauses.
(b) Notwithstanding the provisions of this Section 3.07, the Servicer may,
but is not required to, allow the Subservicers to deduct from amounts received
by them or from the related account maintained by a Subservicer, prior to
deposit in the Collection Account, any portion to which such Subservicers are
entitled as reimbursement of any reimbursable Advances made by such
Subservicers.
Section 3.08. Collection of Taxes, Assessments and Similar Items;
Servicing Accounts. (a) The Servicer shall establish and maintain or cause the
related Subservicer to establish and maintain, one or more Servicing Accounts.
The Servicer or a Subservicer will deposit and retain therein all collections
from the Mortgagors for the payment of taxes, assessments, insurance premiums,
or comparable items as agent of the Mortgagors.
(b) The deposits in the Servicing Accounts shall be held in trust by the
Servicer or a Subservicer (and its successors and assigns) in the name of the
Indenture Trustee. Such Servicing Accounts shall be Eligible Accounts and, if
permitted by applicable law, invested in Eligible Investments held in trust by
the Servicer or a Subservicer as described above and maturing, or be subject to
redemption or withdrawal, no later than the date on which such funds are
required to be withdrawn, and in no event later than 45 days after the date of
investment; withdrawals of amounts from the Servicing Accounts may be made only
to effect timely payment of taxes, assessments, insurance premiums, or
comparable items, to reimburse the Servicer or a Subservicer for any advances
made with respect to such items, to refund to any Mortgagors any sums as may be
determined to be overages, to pay interest, if required, to Mortgagors on
balances in the Servicing Accounts or to clear and terminate the Servicing
Accounts at or any time after the termination of this Servicing Agreement.
Amounts received from Mortgagors for deposit into the Servicing Accounts shall
be deposited in the Servicing Accounts by the Servicer within two days of
receipt. The Servicer shall advance from its own funds amounts needed to pay
items payable from the Servicing Accounts if the Servicer reasonably believes
that such amounts are recoverable from the related Mortgagor. The Servicer shall
comply with all laws relating to the Servicing Accounts, including laws relating
to payment of interest on the Servicing Accounts. If interest earned by the
Servicer on the Servicing Accounts is not sufficient to pay required interest on
the Servicing Accounts, the Servicer shall pay the difference from its own
funds. The Servicing Accounts shall not be the property of the Issuer.
-12-
<PAGE>
Section 3.09. Access to Certain Documentation and Information Regarding
the Mortgage Loans. The Servicer shall provide, and shall cause any Subservicer
to provide, to the Indenture Trustee, the Owner Trustee and the Bond Insurer
access to the documentation regarding the related Mortgage Loans and REO
Property and to the Bondholders, the FDIC, and the supervisory agents and
examiners of the FDIC (to which the Indenture Trustee shall also provide) access
to the documentation regarding the related Mortgage Loans required by applicable
regulations, such access being afforded without charge but only upon reasonable
request and during normal business hours at the offices of the Servicer or the
Subservicers that are designated by these entities; provided, however, that,
unless otherwise required by law, the Indenture Trustee, the Servicer or the
Subservicer shall not be required to provide access to such documentation if the
provision thereof would violate the legal right to privacy of any Mortgagor;
provided, further, however, that the Indenture Trustee, the Bond Insurer and the
Owner Trustee shall coordinate their requests for such access so as not to
impose an unreasonable burden on, or cause an unreasonable interruption of, the
business of the Servicer or any Subservicer. The Servicer, the Subservicers and
the Indenture Trustee shall allow representatives of the above entities to
photocopy any of the documentation and shall provide equipment for that purpose
at a charge that covers their own actual out-of-pocket costs.
Section 3.10. Reserved.
Section 3.11. Maintenance of Hazard Insurance and Fidelity Coverage. (a)
The Servicer shall maintain and keep, or cause each Subservicer to maintain and
keep, with respect to each Mortgage Loan and each REO Property, in full force
and effect hazard insurance (fire insurance with extended coverage) equal to at
least the lesser of the Principal Balance of the Mortgage Loan or the current
replacement cost of the Mortgaged Property, and containing a standard mortgagee
clause, provided, however, that the amount of hazard insurance may not be less
than the amount necessary to prevent loss due to the application of any co-
insurance provision of the related policy. Unless applicable state law requires
a higher deductible, the deductible on such hazard insurance policy may be no
more than $1,500 or 1% of the applicable amount of coverage, whichever is less.
In the case of a condominium unit or a unit in a planned unit development, the
required hazard insurance shall take the form of a multi-peril policy covering
the entire condominium project or planned unit development, in an amount equal
to at least 100% of the insurable value based on replacement cost. If the
Servicer shall obtain and maintain a blanket policy consistent with its general
mortgage servicing activities from an insurer acceptable to the Bond Insurer
insuring against hazard losses on all of the Mortgage Loans, it shall
conclusively be deemed to have satisfied its obligations as set forth in this
Section 3.11(a), it being understood and agreed that such policy may contain a
deductible clause, in which case the Servicer shall, in the event that there
shall not have been maintained on the related Mortgaged Property a policy
complying with this Section 3.11(a) and there shall have been a loss which would
have been covered by such policy, deposit in the Collection Account the amount
not otherwise payable under the blanket policy because of such deductible clause
without any right of reimbursement. Any such deposit by the Servicer shall be
made on the last Business Day of the Due Period in the month in which payments
under any such policy would have been deposited in the Collection Account. In
connection with its activities as servicer of the Mortgage Loans, the Servicer
-13-
<PAGE>
agrees to present, on behalf of itself, the Issuer and the Indenture Trustee,
claims under any such blanket policy.
(b) Any amounts collected by the Servicer or a Subservicer under any such
hazard insurance policy (other than amounts to be applied to the restoration or
repair of the Mortgaged Property or amounts released to the Mortgagor in
accordance with the Servicer's or a Subservicer's normal servicing procedures,
the Mortgage Note, the Security Instrument or applicable law) shall be deposited
in the Collection Account.
(c) Any cost incurred by a Servicer or a Subservicer in maintaining any
such individual hazard insurance policies shall not be added to the amount owing
under the Mortgage Loan for the purpose of calculating monthly distributions to
Bondholders, notwithstanding that the terms of the Mortgage Loan so permit. Such
costs of maintaining individual hazard insurance policies shall be recoverable
by the Servicer or a Subservicer out of related late payments by the Mortgagor
or out of Insurance Proceeds or Liquidation Proceeds or by the Servicer from the
Repurchase Price, to the extent permitted by Section 3.07.
(d) No earthquake or other additional insurance is to be required of any
Mortgagor or maintained on property acquired with respect to a Security
Instrument other than pursuant to such applicable laws and regulations as shall
at any time be in force and shall require such additional insurance. When, at
the time of origination of the Mortgage Loan or at any subsequent time, the
Mortgaged Property is located in a federally designated special flood hazard
area, the Servicer shall use its best reasonable efforts to cause with respect
to the Mortgage Loans and each REO Property flood insurance (to the extent
available and in accordance with mortgage servicing industry practice) to be
maintained. Such flood insurance shall cover the Mortgaged Property, including
all items taken into account in arriving at the Appraised Value on which the
Mortgage Loan was based, and shall be in an amount equal to the lesser of (i)
the Principal Balance of the related Mortgage Loan and (ii) the minimum amount
required under the terms of coverage to compensate for any damage or loss on a
replacement cost basis, but not more than the maximum amount of such insurance
available for the related Mortgaged Property under either the regular or
emergency programs of the National Flood Insurance Program (assuming that the
area in which such Mortgaged Property is located is participating in such
program). Unless applicable state law requires a higher deductible, the
deductible on such flood insurance may not exceed $1,500 or 1% of the applicable
amount of coverage, whichever is less.
(e) If insurance has not been maintained complying with Subsections 3.11
(a) and (d) and there shall have been a loss which would have been covered by
such insurance had it been maintained, the Servicer shall pay, or cause the
related Subservicer to pay, for any necessary repairs without any right of
reimbursement.
(f) The Servicer shall present, or cause the related Subservicer to
present, claims under any related hazard insurance or flood insurance policy.
-14-
<PAGE>
(g) The Servicer shall obtain and maintain at its own expense, and shall
cause each Subservicer to obtain and maintain at its own expense, and for the
duration of this Servicing Agreement, a blanket fidelity bond and an errors and
omissions insurance policy covering the Servicer's and such Subservicer's
officers, employees and other persons acting on its behalf in connection with
its activities under this Servicing Agreement. The amount of coverage shall be
consistent with industry standards but in an amount not less than presently
maintained by the Servicer. The Servicer shall promptly notify the Indenture
Trustee and the Bond Insurer of any material change in the terms of such bond or
policy. The Servicer shall provide annually to the Indenture Trustee and the
Bond Insurer a certificate of insurance that such bond and policy are in effect.
If any such bond or policy ceases to be in effect, the Servicer shall, to the
extent possible, give the Indenture Trustee and the Bond Insurer ten days'
notice prior to any such cessation and shall use its reasonable best efforts to
obtain a comparable replacement bond or policy, as the case may be. Any amounts
relating to the Mortgage Loans collected under such bond or policy shall be
deposited in the Collection Account.
Section 3.12. Due-on-Sale Clauses; Assumption Agreements. (a) In any case
in which the Servicer is notified by any Mortgagor or Subservicer that a
Mortgaged Property relating to a Mortgage Loan has been or is about to be
conveyed by the Mortgagor, the Servicer shall enforce, or shall instruct such
Subservicer to enforce, any due-on-sale clause contained in the related Security
Instrument to the extent permitted under the terms of the related Mortgage Note
and by applicable law. The Servicer or the related Subservicer may repurchase a
Mortgage Loan at the Repurchase Price when the Servicer requires acceleration of
the Mortgage Loan, but only if the Servicer is satisfied, as evidenced by an
Officer's Certificate delivered to the Indenture Trustee and the Bond Insurer,
that such Mortgage Loan is in default or default is reasonably foreseeable. If
the Servicer reasonably believes that such due-on-sale clause cannot be enforced
under applicable law or if the Mortgage Loan does not contain a due-on-sale
clause, the Servicer is authorized, and may authorize any Subservicer, to
consent to a conveyance subject to the lien of the Mortgage, and to take or
enter into an assumption agreement from or with the Person to whom such property
has been or is about to be conveyed, pursuant to which such Person becomes
liable under the related Mortgage Note and unless prohibited by applicable state
law, such Mortgagor remains liable thereon, on condition, however, that the
related Mortgage Loan shall continue to be covered by a hazard policy. In
connection with any such assumption, no material term of the related Mortgage
Note may be changed. The Servicer shall notify the Indenture Trustee and the
Bond Insurer, whenever possible, before the completion of such assumption
agreement, and shall forward to the Indenture Trustee the original copy of such
assumption agreement, which copy shall be added by the Indenture Trustee to the
related Mortgage File and which shall, for all purposes, be considered a part of
such Mortgage File to the same extent as all other documents and instruments
constituting a part thereof.
(b) Notwithstanding the foregoing paragraph or any other provision of this
Servicing Agreement, the Servicer shall not be deemed to be in default, breach
or any other violation of its obligations hereunder by reason of any assumption
of a Mortgage Loan by operation of law or any conveyance by the Mortgagor of the
related Mortgaged Property or assumption of a Mortgage Loan which the Servicer
reasonably believes it may be restricted by law from preventing, for any reason
-15-
<PAGE>
whatsoever or if the exercise of such right would impair or threaten to impair
any recovery under any applicable insurance policy.
Section 3.13. Realization Upon Defaulted Mortgage Loans. (a) The
Servicer shall, or shall direct the related Subservicer to, foreclose upon or
otherwise comparably convert the ownership of properties securing any Mortgage
Loans that come into and continue in default and as to which no satisfactory
arrangements can be made for collection of delinquent payments pursuant to
Section 3.06, except that the Servicer shall not, and shall not direct the
related Subservicer to, foreclose upon or otherwise comparably convert a
Mortgaged Property if there is evidence of toxic waste or other environmental
hazards thereon unless the Servicer follows the procedures in Subsection (c)
below. In connection with such foreclosure or other conversion, the Servicer in
conjunction with the related Subservicer, if any, shall use its best reasonable
efforts to preserve REO Property and to realize upon defaulted Mortgage Loans in
such manner as to maximize the receipt of principal and interest by the
Bondholders, taking into account, among other things, the timing of foreclosure
and the considerations set forth in Subsection 3.13(b). The foregoing is subject
to the proviso that the Servicer shall not be required to expend its own funds
in connection with any foreclosure or towards the restoration of any property
unless it determines in good faith (i) that such restoration or foreclosure will
increase the proceeds of liquidation of the Mortgage Loan to Bondholders after
reimbursement to itself for such expenses and (ii) that such expenses will be
recoverable to it either through Liquidation Proceeds (respecting which it shall
have priority for purposes of reimbursements from the Collection Account
pursuant to Section 3.07) or through Insurance Proceeds (respecting which it
shall have similar priority). The Servicer shall be responsible for all costs
and expenses constituting Liquidation Expenses incurred by it in any such
proceedings; provided, however, that it shall be entitled to reimbursement
thereof (as well as its normal servicing compensation) as set forth in Section
3.07. Any income from or other funds (net of any income taxes) generated by REO
Property shall be deemed for purposes of this Servicing Agreement to be
Liquidation Proceeds.
Any subsequent collections with respect to any Liquidated Mortgage Loan
shall be deposited to the Collection Account. For purposes of determining the
amount of any Liquidation Proceeds or Insurance Proceeds, or other unscheduled
collections, the Servicer may take into account any estimated additional
Liquidation Expenses expected to be incurred in connection with the related
defaulted Mortgage Loan.
In the event that title to any Mortgaged Property is acquired in
foreclosure or by deed in lieu of foreclosure, the deed or certificate of sale
shall be issued to the Indenture Trustee, who shall hold the same on behalf of
the Issuer in accordance with the Indenture. Notwithstanding any such
acquisition of title and cancellation of the related Mortgage Loan, such
Mortgaged Property shall (except as otherwise expressly provided herein) be
considered to be an outstanding Mortgage Loan held as an asset of the Issuer
until such time as such property shall be sold.
(b) The Servicer shall not acquire any real property (or any personal
property incident to such real property) on behalf of the Trust Estate except in
connection with a default or reasonably foreseeable default of a Mortgage Loan.
In the event that the Servicer acquires any real property (or
-16-
<PAGE>
personal property incident to such real property) on behalf of the Trust Estate
in connection with a default or imminent default of a Mortgage Loan, such
property shall be disposed of by the Servicer on behalf of the Trust Estate
within two years after its acquisition on behalf of the Trust Estate.
(c) With respect to any Mortgage Loan as to which the Servicer or a
Subservicer has received notice of, or has actual knowledge of, the presence of
any toxic or hazardous substance on the Mortgaged Property, the Servicer shall
promptly notify the Indenture Trustee, the Owner Trustee and the Bond Insurer
and shall act in accordance with any such directions and instructions provided
by the Bond Insurer, or if a Bond Insurer Default exists, by the Indenture
Trustee, as pledgee of the Issuer. Notwithstanding the preceding sentence of
this Section 3.13(c), with respect to any Mortgage Loan described by such
sentence, the Servicer shall, if requested by the Bond Insurer, obtain and
deliver to the Issuer, the Indenture Trustee and the Bond Insurer an
environmental audit report prepared by a Person who regularly conducts
environmental audits using customary industry standards. The Servicer shall be
entitled to reimbursement for such report pursuant to Section 3.07. If the Bond
Insurer or Indenture Trustee, as applicable, has not provided directions and
instructions to the Servicer in connection with any such Mortgage Loan within 30
days of a request by the Servicer for such directions and instructions, then the
Servicer shall take such action as it deems to be in the best economic interest
of the Trust Estate (other than proceeding against the Mortgaged Property) and
is hereby authorized at such time as it deems appropriate to release such
Mortgaged Property from the lien of the related Mortgage. The parties hereto
acknowledge that the Servicer shall not obtain on behalf of the Issuer a deed as
a result or in lieu of foreclosure, and shall not otherwise acquire possession
of or title to, or commence any proceedings to acquire possession of or title
to, or take any other action with respect to, any Mortgaged Property, if the
Owner Trustee could reasonably be considered to be a responsible party for any
liability arising from the presence of any toxic or hazardous substance on the
Mortgaged Property, unless the Owner Trustee has been indemnified to its
reasonable satisfaction against such liability.
Section 3.14. Indenture Trustee to Cooperate; Release of Mortgage Files.
(a) Upon payment in full of any Mortgage Loan, the Servicer will immediately
notify the Indenture Trustee by a certification signed by a Servicing Officer
(which certification shall include a statement to the effect that all amounts
received in connection with such payment which are required to be deposited in
the Collection Account have been so deposited) and shall request delivery to the
Servicer or Subservicer, as the case may be, of the Mortgage File. Upon receipt
of such certification and request, the Indenture Trustee shall promptly release
the related Mortgage File to the Servicer or Subservicer and execute and deliver
to the Servicer, without recourse, the request for reconveyance, deed of
reconveyance or release or satisfaction of mortgage or such instrument releasing
the lien of the Security Instrument (furnished by the Servicer), together with
the Mortgage Note with written evidence of cancellation thereon.
(b) From time to time as is appropriate, for the servicing or foreclosure
of any Mortgage Loan or collection under an insurance policy, the Servicer may
deliver to the Indenture Trustee a Request for Release signed by a Servicing
Officer on behalf of the Servicer in substantially the form attached as Exhibit
B hereto. Upon receipt of the Request for Release, the Indenture Trustee shall
-17-
<PAGE>
deliver the Mortgage File or any document therein to the Servicer or
Subservicer, as the case may be, as bailee for the Indenture Trustee.
(c) The Servicer shall cause each Mortgage File or any document therein
released pursuant to Subsection 3.14(b) to be returned to the Indenture Trustee
when the need therefor no longer exists, and in any event within 21 days of the
Servicer's receipt thereof, unless the Mortgage Loan has become a Liquidated
Mortgage Loan and the Liquidation Proceeds relating to the Mortgage Loan have
been deposited in the Collection Account or such Mortgage File is being used to
pursue foreclosure or other legal proceedings. Prior to return of a Mortgage
File or any document to the Indenture Trustee, the Servicer, the related insurer
or Subservicer to whom such file or document was delivered shall retain such
file or document in its respective control as bailee for the Indenture Trustee
unless the Mortgage File or such document has been delivered to an attorney, or
to a public trustee or other public official as required by law, to initiate or
pursue legal action or other proceedings for the foreclosure of the Mortgaged
Property either judicially or non-judicially, and the Servicer has delivered to
the Indenture Trustee a certificate of a Servicing Officer certifying as to the
name and address of the Person to which such Mortgage File or such document was
delivered and the purpose or purposes of such delivery. If a Mortgage Loan
becomes a Liquidated Mortgage Loan, the Indenture Trustee shall deliver the
Request for Release with respect thereto to the Servicer upon deposit of the
related Liquidation Proceeds in the Collection Account.
(d) The Indenture Trustee shall execute and deliver to the Servicer any
court pleadings, requests for trustee's sale or other documents necessary to (i)
the foreclosure or trustee's sale with respect to a Mortgaged Property; (ii) any
legal action brought to obtain judgment against any Mortgagor on the Mortgage
Note or Security Instrument; (iii) obtain a deficiency judgment against the
Mortgagor; or (iv) enforce any other rights or remedies provided by the Mortgage
Note or Security Instrument or otherwise available at law or equity. Together
with such documents or pleadings the Servicer shall deliver to the Indenture
Trustee a certificate of a Servicing Officer in which it requests the Indenture
Trustee to execute the pleadings or documents. The certificate shall certify and
explain the reasons for which the pleadings or documents are required. It shall
further certify that the Indenture Trustee's execution and delivery of the
pleadings or documents will not invalidate any insurance coverage under the
insurance policies or invalidate or otherwise affect the lien of the Security
Instrument, except for the termination of such a lien upon completion of the
foreclosure or trustee's sale.
Section 3.15. Servicing Compensation. (a) As compensation for its
activities hereunder, the Servicer shall be entitled to receive the Servicing
Fee from full payments of accrued interest on each Mortgage Loan. The Servicer
shall be solely responsible for paying any and all fees with respect to a
Subservicer and the Trust Estate shall not bear any fees, expenses or other
costs directly associated with any Subservicer.
(b) The Servicer may retain additional servicing compensation in the form
of late payment charges, to the extent such charges are collected from the
related Mortgagors and investment earnings on the Collection Account. The
Servicer shall be required to pay all expenses it incurs in
-18-
<PAGE>
connection with servicing activities under this Servicing Agreement and shall
not be entitled in connection with servicing activities under this Servicing
Agreement to reimbursement except as provided in this Servicing Agreement.
Expenses to be paid by the Servicer without reimbursement under this Subsection
3.15(b) shall include payment of the expenses of the accountants retained
pursuant to Section 3.17.
Section 3.16. Annual Statements of Compliance. Within 120 days after
December 31 of each year, the Servicer at its own expense shall deliver to the
Indenture Trustee, with a copy to the Bond Insurer and the Rating Agencies, an
Officer's Certificate stating, as to the signer thereof, that (i) a review of
the activities of the Servicer during the preceding calendar year and of
performance under this Servicing Agreement has been made under such officer's
supervision, (ii) to the best of such officer's knowledge, based on such review,
the Servicer has fulfilled its obligations under this Servicing Agreement in all
material respects for such year, or, if there has been a default in the
fulfillment of any such obligation, specifying each such default known to such
officer and the nature and status thereof including the steps being taken by the
Servicer to remedy such default; (iii) a review of the activities of each
Subservicer during the Subservicer's most recently ended calendar year and its
performance under its Subservicing Agreement has been made under such officer's
supervision; and (iv) to the best of the Servicing Officer's knowledge, based on
his review and the certification of an officer of the Subservicer (unless the
Servicing Officer has reason to believe that reliance on such certification is
not justified), either each Subservicer has performed and fulfilled its duties,
responsibilities and obligations under this Servicing Agreement and its
Subservicing Agreement in all material respects throughout the year, or, if
there has been a default in performance or fulfillment of any such duties,
responsibilities or obligations, specifying the nature and status of each such
default known to the Servicing Officer. Copies of such statements shall be
provided by the Servicer to the Bondholders upon request or by the Indenture
Trustee at the expense of the Servicer should the Servicer fail to provide such
copies.
Section 3.17. Annual Independent Public Accountants' Servicing Report.
(a) Within 120 days after December 31 of each year, the Servicer, at its
expense, shall cause a firm of Independent public accountants who are members of
the American Institute of Certified Public Accountants and who are either
(or a successor thereof) or are otherwise acceptable to the Bond Insurer to
furnish a statement to the Servicer, which will be provided to the Indenture
Trustee, the Bond Insurer and the Rating Agencies, to the effect that, in
connection with the firm's examination of the Servicer's financial statements as
of the end of such calendar year, nothing came to their attention that indicated
that the Servicer was not in compliance with Sections 3.06, 3.07 and 3.08 except
for (i) such exceptions as such firm believes to be immaterial and (ii) such
other exceptions as are set forth in such statement.
(b) Within 120 days after December 31 of each year, the Servicer, at its
expense, shall, and shall cause each Subservicer to cause, a nationally
recognized firm of independent certified public accountants to furnish to the
Servicer or such Subservicer, as the case may be, a report stating that (i) it
has obtained a letter of representation regarding certain matters from the
management of the Servicer or such Subservicer, as the case may be, which
includes an assertion that the Servicer or such
-19-
<PAGE>
Subservicer, as the case may be, has complied with certain minimum mortgage loan
servicing standards identified in the Uniform Single Attestation Program for
Mortgage Bankers established by the Mortgage Bankers Association of America with
respect to the servicing of first lien conventional single family mortgage loans
during the most recently completed calendar year and (ii) on the basis of an
examination conducted by such firm in accordance with standards established by
the American Institute of Certified Public Accountants, such representation is
fairly stated in all material respects, subject to such exceptions and other
qualifications that may be appropriate. Immediately upon receipt of such report,
the Servicer shall or shall cause each Subservicer to furnish a copy of such
report to the Indenture Trustee, the Rating Agencies and the Bond Insurer.
Section 3.18. Optional Purchase of Defaulted Mortgage Loans. The Servicer
may repurchase any Mortgage Loan delinquent in payment for a period of 90 days
or longer for a price equal to the Repurchase Price. The procedure for such
repurchase shall be the same as for repurchase by the Seller under the Mortgage
Loan Purchase Agreement. Notwithstanding the foregoing, the Indenture Trustee,
whether acting as Indenture Trustee or in the capacity of successor Servicer,
shall have no obligation to repurchase any Mortgage Loan.
Section 3.19. Information Required by the Internal Revenue Service
Generally and Reports of Foreclosures and Abandonments of Mortgaged Property.
The Servicer shall prepare and deliver all federal and state information reports
when and as required by all applicable state and federal income tax laws. In
particular, with respect to the requirement under Section 6050J of the Code to
the effect that the Servicer or Subservicer shall make reports of foreclosures
and abandonments of any mortgaged property for each year beginning in 1997, the
Servicer or Subservicer shall file reports relating to each instance occurring
during the previous calendar year in which the Servicer (i) acquires an interest
in any Mortgaged Property through foreclosure or other comparable conversion in
full or partial satisfaction of a Mortgage Loan, or (ii) knows or has reason to
know that any Mortgaged Property has been abandoned. The reports from the
Servicer or Subservicer shall be in form and substance sufficient to meet the
reporting requirements imposed by Section 6050J, Section 6050H (reports relating
to mortgage interest received) and Section 6050P of the Code (reports relating
to cancellation of indebtedness).
ARTICLE IV
Remittance Reports
------------------
Section 4.01. Remittance Reports. On the second Business Day following
each Determination Date, the Servicer shall deliver to the Indenture Trustee a
report, prepared as of the close of business on the Determination Date (the
"Determination Date Report"), and shall forward to the Indenture Trustee in the
form of computer readable electromagnetic tape or disk of such report. The
Determination Date Report and any written information supplemental thereto shall
include such information with respect to the Mortgage Loans that is reasonably
available to the Servicer and that is required by the Indenture Trustee for
purposes of making the calculations and
-20-
<PAGE>
providing the reports referred to in the Indenture, as set forth in written
specifications or guidelines issued by the Indenture Trustee from time to time.
Such information shall include the aggregate amounts required to be withdrawn
from the Collection Account and deposited into the Payment Account pursuant to
Section 3.07. The Servicer agrees to cooperate with the Indenture Trustee in
providing all information as is reasonably requested by the Indenture Trustee to
prepare the reports required under the Indenture. Upon written request by the
Bond Insurer, the Servicer shall deliver the Determination Date Report to the
Bond Insurer.
The determination by the Servicer of such amounts shall, in the absence of
obvious error, be presumptively deemed to be correct for all purposes hereunder
and the Owner Trustee and Indenture Trustee shall be protected in relying upon
the same without any independent check or verification.
Section 4.02. Advances. If any Monthly Payment (together with any
advances from the Subservicers) on a Mortgage Loan that was due on the
immediately preceding Due Date and delinquent on the Determination Date is
delinquent other than as a result of application of the Relief Act, the Servicer
will deposit in the Collection Account not later than the fourth Business Day
immediately preceding the related Payment Date an amount equal to such
deficiency net of the related Servicing Fee for such Mortgage Loan, except to
the extent the Servicer determines any such advance to be nonrecoverable from
Liquidation Proceeds, Insurance Proceeds or future payments on such Mortgage
Loan. Subject to the foregoing and in the absence of such a determination, the
Servicer shall continue to make such advances through the date that the related
Mortgaged Property has, in the judgment of the Servicer, been completely
liquidated. If applicable, on the fourth Business Day preceding each Payment
Date, the Servicer shall present an Officer's Certificate to the Indenture
Trustee and the Bond Insurer (i) stating that the Servicer elects not to make an
Advance in a stated amount and (ii) detailing the reason it deems the advance to
be nonrecoverable. The Indenture Trustee shall forward a copy of such Officer's
Certificate to the Bond Insurer.
Section 4.03. Compensating Interest Payments. The Servicer shall deposit
in the Collection Account not later than the fourth Business Day preceding the
Payment Date an amount equal to the Compensating Interest related to the related
Determination Date. The Servicer shall not be entitled to any reimbursement of
any Compensating Interest payment.
ARTICLE V
The Servicer
------------
Section 5.01. Liability of the Servicer. The Servicer shall be liable in
accordance herewith only to the extent of the obligations specifically imposed
upon and undertaken by the Servicer herein.
Section 5.02. Merger or Consolidation of, or Assumption of the Obligations
of, the Servicer. Any corporation into which the Servicer may be merged or
converted or with which it may be consolidated, or any corporation resulting
from any merger, conversion or consolidation to which the
-21-
<PAGE>
Servicer shall be a party, or any corporation succeeding to the business of the
Servicer, shall be, with the consent of the Bond Insurer, the successor of the
Servicer, hereunder, without the execution or filing of any paper or any further
act on the part of any of the parties hereto, anything herein to the contrary
notwithstanding.
The Servicer may fully assign all of its rights and delegate its duties and
obligations under this Servicing Agreement; provided, that the Person accepting
such assignment or delegation shall be a Person which is reasonably satisfactory
to the Indenture Trustee (as pledgee of the Mortgage Loans), the Company and the
Bond Insurer (in its sole discretion), is willing to service the Mortgage Loans
and executes and delivers to the Indenture Trustee and the Issuer an agreement,
in form and substance reasonably satisfactory to the Bond Insurer, the Indenture
Trustee and the Issuer, which contains an assumption by such Person of the due
and punctual performance and observance of each covenant and condition to be
performed or observed by the Servicer under this Servicing Agreement; provided,
further, that each Rating Agency's rating of the Bonds in effect immediately
prior to such assignment and delegation will not be qualified, reduced, or
withdrawn as a result of such assignment and delegation (as evidenced by a
letter to such effect from each Rating Agency) without taking into account the
Bond Insurance Policy.
Section 5.03. Limitation on Liability of the Servicer and Others. Neither
the Servicer nor any of the directors or officers or employees or agents of the
Servicer shall be under any liability to the Issuer, the Owner Trustee, the
Indenture Trustee, the Bond Insurer or the Bondholders for any action taken or
for refraining from the taking of any action in good faith pursuant to this
Servicing Agreement, provided, however, that this provision shall not protect
the Servicer or any such Person against any liability which would otherwise be
imposed by reason of its willful misfeasance, bad faith or negligence in the
performance of its duties hereunder or by reason of its reckless disregard of
its obligations and duties hereunder. The Servicer and any director or officer
or employee or agent of the Servicer may rely in good faith on any document of
any kind prima facie properly executed and submitted by any Person respecting
any matters arising hereunder. The Servicer and any director or officer or
employee or agent of the Servicer shall be indemnified by the Issuer and held
harmless against any loss, liability or expense incurred in connection with any
legal action relating to this Servi cing Agreement or the Bonds, including any
amount paid to the Owner Trustee or the Indenture Trustee pursuant to Section
5.06(b), other than any loss, liability or expense related to any specific
Mortgage Loan or Mortgage Loans (except as any such loss, liability or expense
shall be otherwise reimbursable pursuant to this Servicing Agreement) and any
loss, liability or expense incurred by reason of its willful misfeasance, bad
faith or negligence in the performance of its duties hereunder or by reason of
its reckless disregard of its obligations and duties hereunder. The Servicer
shall not be under any obligation to appear in, prosecute or defend any legal
action which is not incidental to its duties to service the Mortgage Loans in
accordance with this Servicing Agreement, and which in its opinion may involve
it in any expense or liability; provided, however, that the Servicer may in its
sole discretion undertake any such action which it may deem necessary or
desirable in respect of this Servicing Agreement, and the rights and duties of
the parties hereto and the interests of the Bondholders hereunder. In such
event, the reasonable legal expenses and costs of such action and any liability
resulting therefrom shall be expenses, costs and liabilities of the Issuer, and
the Servicer
-22-
<PAGE>
shall be entitled to be reimbursed therefor. The Servicer's right to indemnity
or reimbursement pursuant to this Section 5.03 shall survive any resignation or
termination of the Servicer pursuant to Section 5.04 or 6.01 with respect to any
losses, expenses, costs or liabilities arising prior to such resignation or
termination (or arising from events that occurred prior to such resignation or
termination). Any reimbursements or indemnification to the Servicer from the
Issuer pursuant to this Section 5.03 shall be payable in the priority set forth
in Section 3.05(a)(ix) of the Indenture.
Section 5.04. Servicer Not to Resign. Subject to the provisions of
Section 5.02, the Servicer shall not resign from the obligations and duties
hereby imposed on it except (i) upon determination that the performance of its
obligations or duties hereunder are no longer permissible under applicable law
or (ii) upon satisfaction of the following conditions: (a) the Servicer has
proposed a successor servicer to the Issuer, the Bond Insurer and the Indenture
Trustee in writing and such proposed successor servicer is reasonably acceptable
to the Issuer and the Indenture Trustee; (b) each Rating Agency shall have
delivered a letter to the Issuer, the Bond Insurer and the Indenture Trustee
prior to the appointment of the successor servicer stating that the proposed
appointment of such successor servicer as Servicer hereunder will not result in
the reduction or withdrawal of the then current rating of the Bonds or the then
current rating of the Bonds without taking into account the Bond Insurance
Policy; and (c) such proposed successor servicer is acceptable to the Bond
Insurer, as evidenced by a letter to the Issuer, the Servicer and the Indenture
Trustee; provided, however, that no such resignation by the Servicer shall
become effective until such successor servicer or, in the case of (i) above, the
Indenture Trustee, as pledgee of the Mortgage Loans, shall have assumed the
Servicer's responsibilities and obligations hereunder or the Indenture Trustee,
as pledgee of the Mortgage Loans, shall have designated a successor servicer in
accordance with Section 6.02. Any such resignation shall not relieve the
Servicer of responsibility for any of the obligations specified in Sections 6.01
and 6.02 as obligations that survive the resignation or termination of the
Servicer. The Servicer shall have no claim (whether by subrogation or
otherwise) or other action against any Bondholder or the Bond Insurer for any
amounts paid by the Servicer pursuant to any provision of this Servicing
Agreement. Any such determination permitting the resignation of the Servicer
shall be evidenced by an Opinion of Counsel to such effect delivered to the
Indenture Trustee and the Bond Insurer.
Section 5.05. Delegation of Duties. In the ordinary course of business,
the Servicer at any time may delegate any of its duties hereunder to any Person,
including any of its Affiliates, who agrees to conduct such duties in accordance
with the same standards with which the Servicer complies pursuant to Section
3.01. Such delegation shall not relieve the Servicer of its liabilities and
responsibilities with respect to such duties and shall not constitute a
resignation within the meaning of Section 5.04.
Section 5.06. Servicer to Pay Indenture Trustee's and Owner Trustee's Fees
and Expenses; Indemnification. (a) The Servicer covenants and agrees to pay to
the Owner Trustee, the Indenture Trustee and any co-trustee of the Indenture
Trustee from time to time, and the Owner Trustee, the Indenture Trustee and any
such co-trustee shall be entitled to, reasonable compensation, including all
indemnification payments (which shall not be limited by any provision of law in
regard to the
-23-
<PAGE>
compensation of a trustee of an express trust) for all services rendered by each
of them in the execution of the trusts created under the Trust Agreement and the
Indenture and in the exercise and performance of any of the powers and duties
under the Trust Agreement or the Indenture, as the case may be, of the Owner
Trustee, the Indenture Trustee and any co-trustee of the Indenture Trustee, and
the Servicer will pay or reimburse the Indenture Trustee and any co-trustee upon
request for all reasonable expenses, disbursements and advances incurred or made
by the Indenture Trustee or any co-trustee of the Indenture Trustee in
accordance with any of the provisions of this Servicing Agreement except any
such expense, disbursement or advance as may arise from its negligence or bad
faith.
(b) The Servicer agrees to indemnify the Indenture Trustee and the Owner
Trustee for, and to hold the Indenture Trustee and the Owner Trustee, as the
case may be, harmless against, any claim, tax, penalty, loss, liability or
expense of any kind whatsoever, incurred without negligence or willful
misconduct on its part, arising out of, or in connection with, the failure by
the Servicer to perform its duties in compliance with this Servicing Agreement,
including the reasonable costs and expenses (including reasonable legal fees and
expenses) of defending itself against any claim in connection with the exercise
or performance of any of its powers or duties under any Basic Document, provided
that:
(i) with respect to any such claim, the Indenture Trustee or Owner
Trustee, as the case may be, shall have given the Servicer written notice
thereof promptly after the Indenture Trustee or Owner Trustee, as the case
may be, shall have actual knowledge thereof;
(ii) while maintaining control over its own defense, the Indenture
Trustee or Owner Trustee, as the case may be, shall cooperate and consult
fully with the Servicer in preparing such defense; and
(iii) notwithstanding anything in this Servicing Agreement to the
contrary, the Servicer shall not be liable for settlement of any claim by
the Indenture Trustee or the Owner Trustee, as the case may be, entered
into without the prior consent of the Servicer, which consent shall not be
unreasonably withheld.
No termination of this Servicing Agreement shall affect the obligations created
by this Section 5.06 of the Servicer to indemnify the Indenture Trustee and the
Owner Trustee under the conditions and to the extent set forth herein. This
section shall survive the termination of this Servicing Agreement. Any amounts
to be paid by the Servicer pursuant to this Subsection may not be paid from the
Trust Estate.
Notwithstanding the foregoing, the indemnification provided by the Servicer
in this Section 5.06 shall not pertain to any loss, liability or expense of the
Indenture Trustee or the Owner Trustee, including the costs and expenses of
defending itself against any claim, incurred in connection with any actions
taken by the Indenture Trustee or the Owner Trustee at the direction of the
Securityholders, as the case may be, pursuant to the terms of this Servicing
Agreement.
-24-
<PAGE>
ARTICLE VI
Default
-------
Section 6.01. Servicing Default. If any one of the following events (a
"Servicing Default") shall occur and be continuing:
(i) Any failure by the Servicer to deposit in the Collection Account
or Payment Account any deposit required to be made under the terms of this
Servicing Agreement, including any Advances and Compensating Interest,
which continues unremedied for a period of three Business Days after the
date upon which written notice of such failure shall have been given to the
Servicer by the Company, the Issuer or the Indenture Trustee or to the
Servicer, the Company, the Issuer and the Indenture Trustee by the Bond
Insurer; or
(ii) Failure on the part of the Servicer duly to observe or perform in
any material respect any other covenants or agreements of the Servicer set
forth in this Servicing Agreement, which failure, in each case, materially
and adversely affects the interests of Bondholders or the Bond Insurer or
the breach of any representation or warranty of the Servicer in this
Servicing Agreement or in the Insurance Agreement which materially and
adversely affects the interests of the Bondholders or the Bond Insurer, and
which in either case continues unremedied for a period of 30 days after the
date on which written notice of such failure, requiring the same to be
remedied, and stating that such notice is a "Notice of Default" hereunder,
shall have been given to the Servicer by the Company, the Issuer or the
Indenture Trustee or to the Servicer, the Company, the Issuer and the
Indenture Trustee by the Bond Insurer; or
(iii) The entry against the Servicer of a decree or order by a court
or agency or supervisory authority having jurisdiction in the premises for
the appointment of a trustee, conservator, receiver or liquidator in any
insolvency, conservatorship, receivership, readjustment of debt, marshaling
of assets and liabilities or similar proceedings, or for the winding up or
liquidation of its affairs, and the continuance of any such decree or order
unstayed and in effect for a period of 60 consecutive days; or
(iv) The Servicer shall voluntarily go into liquidation, consent to
the appointment of a conservator, receiver, liquidator or similar person in
any insolvency, readjustment of debt, marshalling of assets and liabilities
or similar proceedings of or relating to the Servicer or of or relating to
all or substantially all of its property, or a decree or order of a court,
agency or supervisory authority having jurisdiction in the premises for the
appointment of a conservator, receiver, liquidator or similar person in any
insolvency, readjustment of debt, marshalling of assets and liabilities or
similar proceedings, or for the winding-up or liquidation of its affairs,
shall have been entered against the Servicer and such decree or order shall
have remained in force undischarged, unbonded or unstayed for a period of
60 days; or the Servicer shall admit
-25-
<PAGE>
in writing its inability to pay its debts generally as they become due,
file a petition to take advantage of any applicable insolvency or
reorganization statute, make an assignment for the benefit of its creditors
or voluntarily suspend payment of its obligations; or
(v) Any failure by the Servicer to pay when due any amount payable by
it under the terms of the Insurance Agreement which continues unremedied
for a period of three (3) Business Days after the date upon which written
notice of such failure shall have been given to the Servicer;
(vi) Failure on the part of the Seller or the Servicer to duly perform
in any material respect any covenant or agreement set forth in the
Insurance Agreement, which failure continues unremedied for a period of 30
days after the date on which written notice of such failure, requiring the
same to be remedied, shall have been given to the Company, the Indenture
Trustee, the Seller or the Servicer, as the case may be, by the Bond
Insurer; or
(vii) So long as the Seller is an affiliate, the parent of or under
the common control with the Servicer, any failure of the Seller to
repurchase any Mortgage Loan required to be repurchased, or pay any amount
due, pursuant to the Mortgage Loan Purchase Agreement which continues
unremedied for a period of 30 days after the date upon which written notice
of such failure shall have been given to the Servicer.
(viii) (A) the Cumulative Loss Percentage for any period set forth
below exceeds the percentage set forth below.
<TABLE>
<CAPTION>
Period Cumulative Loss Percentage
------ --------------------------
<S> <C>
_____________ - ____________ 2%
_____________ - ____________ 3%
_____________ - ____________ 4%
_____________ - ____________ 5%
_____________ - ____________ 6%
For any period thereafter 7%
</TABLE>
(B) Realized Losses on the Mortgage Loans over any one twelve-month
period exceed 1.25% of the aggregate Principal Balances of the Mortgage
Loans as of the Cut-Off Date, and
(C) the Rolling Delinquency Percentage exceeds 15%;
then, (a) and in every such case, other than that set forth in (v) or (vi)
hereof, so long as a Servicing Default shall not have been remedied by the
Servicer, either the Issuer, subject to
-26-
<PAGE>
the direction of the Indenture Trustee as pledgee of the Mortgage Loans, with
the consent of the Bond Insurer, or the Bond Insurer, or if a Bond Insurer
Default exists, the holders of at least 51% of the aggregate Bond Principal
Balance of the Bonds, by notice then given in writing to the Servicer (and to
the Indenture Trustee and the Issuer if given by the Bond Insurer) or (b) in the
case of the events set forth in (v) or (vi) hereof, the Bond Insurer or, if a
Bond Insurer Default exists, the holders of at least 51% of the aggregate Bond
Principal Balance of the Bonds, may, by notice to the Servicer, terminate all of
the rights and obligations of the Servicer as servicer under this Servicing
Agreement other than its right to receive servicing compensation and expenses
for servicing the Mortgage Loans hereunder during any period prior to the date
of such termination and the Issuer, subject to the direction of the Indenture
Trustee as pledgee of the Mortgage Loans, with the consent of the Bond Insurer,
or the Bond Insurer may exercise any and all other remedies available at law or
equity. Any such notice to the Servicer shall also be given to each Rating
Agency, the Bond Insurer and the Issuer. On or after the receipt by the Servicer
of such written notice, all authority and power of the Servicer under this
Servicing Agreement, whether with respect to the Bonds or the Mortgage Loans or
otherwise, shall pass to and be vested in the Indenture Trustee, pursuant to and
under this Section 6.01; and, without limitation, the Indenture Trustee is
hereby authorized and empowered to execute and deliver, on behalf of the
Servicer, as attorney-in-fact or otherwise, any and all documents and other
instruments, and to do or accomplish all other acts or things necessary or
appropriate to effect the purposes of such notice of termination, whether to
complete the transfer and endorsement of each Mortgage Loan and related
documents, or otherwise. The Servicer agrees to cooperate with the Indenture
Trustee in effecting the termination of the responsibilities and rights of the
Servicer hereunder, including, without limitation, the transfer within one
Business Day to the Indenture Trustee for the administration by it of all cash
amounts relating to the Mortgage Loans that shall at the time be held by the
Servicer and to be deposited by it in the Collection Account, or that have been
deposited by the Servicer in the Collection Account or thereafter received by
the Servicer with respect to the Mortgage Loans. In addition, the Servicer
agrees promptly (and in any event no later than five Business Days subsequent to
such notice) to provide the Indenture Trustee with all documents and records
requested by it to enable it to assume the Servicer's functions under this
Agreement. All reasonable costs and expenses (including, but not limited to,
attorneys' fees) incurred in connection with amending this Servicing Agreement
to reflect such succession as Servicer pursuant to this Section 6.01 shall be
paid by the predecessor Servicer (or if the predecessor Servicer is the
Indenture Trustee, the Servicer succeeded by the Indenture Trustee) upon
presentation of reasonable documentation of such costs and expenses. For
purposes of this Section 6.01, the Indenture Trustee shall not be deemed to have
knowledge of a Servicer Default unless a Responsible Officer of the Trustee
assigned to and working in the Indenture Trustee's Corporate Trust Office has
actual knowledge thereof or unless written notice of any event which is in fact
such a Servicer Default is received by the Trustee and such notice references
the Bonds or this Agreement.
Notwithstanding any termination of the activities of the Servicer
hereunder, the Servicer shall be entitled to receive, out of any late collection
of a payment on a Mortgage Loan which was due
-27-
<PAGE>
prior to the notice terminating the Servicer's rights and obligations hereunder
and received after such notice, that portion to which the Servicer would have
been entitled pursuant to Sections 3.07 and 3.15 as well as its Servicing Fee in
respect thereof, and any other amounts payable to the Servicer hereunder the
entitlement to which arose prior to the termination of its activities hereunder.
The Servicer shall immediately notify the Indenture Trustee, the Bond
Insurer and the Owner Trustee in writing of any Servicing Default.
Section 6.02. Indenture Trustee to Act; Appointment of Successor. (a) On
and after the time the Servicer receives a notice of termination pursuant to
Section 6.01 or sends a notice pursuant to Section 5.04, the Indenture Trustee
on behalf of the Bondholders and the Bond Insurer shall be the successor in all
respects to the Servicer in its capacity as servicer under this Servicing
Agreement and the transactions set forth or provided for herein and shall be
subject to all the responsibilities, duties and liabilities relating thereto
placed on the Servicer by the terms and provisions hereof, including but not
limited to the provisions of Article VIII. Nothing in this Servicing Agreement
shall be construed to permit or require the Indenture Trustee to (i) be
responsible or accountable for any act or omission of the Servicer prior to the
issuance of a notice of termination hereunder, (ii) require or obligate the
Indenture Trustee, in its capacity as successor Servicer, to purchase,
repurchase or substitute any Mortgage Loan, (iii) fund any losses on any
Eligible Investment directed by any other Servicer, or (iv) be responsible for
the representations and warranties of the Servicer; provided, however, that the
Indenture Trustee, as successor Servicer, shall be required to make any required
Advances to the extent that the Servicer failed to make such Advances. As
compensation therefor, the Indenture Trustee shall be entitled to such
compensation as the Servicer would have been entitled to hereunder if no such
notice of termination had been given. Notwithstanding the above, (i) if the
Indenture Trustee is unwilling to act as successor Servicer, or (ii) if the
Indenture Trustee is legally unable so to act, the Indenture Trustee may (in the
situation described in clause (i)) or shall (in the situation described in
clause (ii)) appoint or petition a court of competent jurisdiction to appoint
any established housing and home finance institution, bank or other mortgage
loan servicer having a net worth of not less than $10,000,000 as the successor
to the Servicer hereunder in the assumption of all or any part of the
responsibilities, duties or liabilities of the Servicer hereunder; provided,
that any such successor Servicer shall be acceptable to the Bond Insurer, as
evidenced by the Bond Insurer's prior written consent and provided further that
the appointment of any such successor Servicer will not result in the
qualification, reduction or withdrawal of the ratings assigned to the Bonds by
the Rating Agencies or the ratings assigned to the Bonds without taking into
account the Bond Insurance Policy. Pending appointment of a successor to the
Servicer hereunder, unless the Indenture Trustee is prohibited by law from so
acting, the Indenture Trustee shall act in such capacity as hereinabove
provided. In connection with such appointment and assumption, the successor
shall be entitled to receive compensation out of payments on Mortgage Loans in
an amount equal to the compensation which the Servicer would otherwise have
received pursuant to Section 3.15 (or such lesser compensation as the Indenture
Trustee and such successor shall agree). The appointment of a successor Servicer
shall not affect any liability of the predecessor Servicer which may have arisen
under this Servicing Agreement prior to its termination as Servicer (including,
without limitation, the obligation to purchase Mortgage Loans pursuant to
Section 3.01, to pay any deductible under an insurance
-28-
<PAGE>
policy pursuant to Section 3.11 or to indemnify the Indenture Trustee pursuant
to Section 5.06), nor shall any successor Servicer be liable for any acts or
omissions of the predecessor Servicer or for any breach by such Servicer of any
of its representations or warranties contained herein or in any related document
or agreement. The Indenture Trustee and such successor shall take such action,
consistent with this Servicing Agreement, as shall be necessary to effectuate
any such succession.
(b) Any successor, including the Indenture Trustee on behalf of the
Bondholders, to the Servicer as servicer shall during the term of its service as
servicer continue to service and administer the Mortgage Loans for the benefit
of the Bondholders and the Bond Insurer, (ii) maintain in force a policy or
policies of insurance covering errors and omissions in the performance of its
obligations as Servicer hereunder and a fidelity bond in respect of its
officers, employees and agents to the same extent as the Servicer is so required
pursuant to Section 3.11.
(c) Any successor Servicer, including the Indenture Trustee on behalf of
the Bondholders and the Bond Insurer, shall not be deemed to be in default or to
have breached its duties hereunder if the predecessor Servicer shall fail to
deliver any required deposit to the Collection Account or otherwise cooperate
with any required servicing transfer or succession hereunder.
Section 6.03. Notification to Bondholders. Upon any termination or
appointment of a successor to the Servicer pursuant to this Article VI or
Section 5.04, the Indenture Trustee shall give prompt written notice thereof to
the Bondholders, the Bond Insurer, the Owner Trustee, the Company, the Issuer
and each Rating Agency.
Section 6.04. Waiver of Defaults. The Indenture Trustee shall transmit
by mail to all Bondholders and the Bond Insurer, within 5 days after the
occurrence of any Servicing Default known to the Indenture Trustee, unless such
Servicing Default shall have been cured, notice of each such Servicing Default
hereunder known to the Indenture Trustee. The Bond Insurer or, if a Bond Insurer
Default exists, the holders of at least 51% of the aggregate Bond Principal
Balance of the Bonds may waive any default by the Servicer in the performance of
its obligations hereunder and the consequences thereof, except a default in the
making of or the causing to be made any required distribution on the Bonds. No
such waiver shall extend to any subsequent or other default or impair any right
consequent thereon except to the extent expressly so waived. The Servicer shall
give notice of any such waiver to the Rating Agencies.
ARTICLE VII
Miscellaneous Provisions
------------------------
Section 7.01. Amendment. This Servicing Agreement may be amended from
time to time by the parties hereto with the prior written consent of the Bond
Insurer, provided that any amendment be accompanied by a letter from the Rating
Agencies to the effect that the amendment will not result
-29-
<PAGE>
in the downgrading or withdrawal of the rating then assigned to the Bonds or the
rating then assigned to the Bonds without taking into account the Bond Insurance
Policy.
Section 7.02. GOVERNING LAW. THIS SERVICING AGREEMENT SHALL BE CONSTRUED
IN ACCORDANCE WITH THE LAWS OF THE STATE OF ________ AND THE OBLIGATIONS, RIGHTS
AND REMEDIES OF THE PARTIES HEREUNDER SHALL BE DETERMINED IN ACCORDANCE WITH
SUCH LAWS.
Section 7.03. Notices. All demands, notices and communications hereunder
shall be in writing and shall be deemed to have been duly given if personally
delivered at or mailed by certified mail, return receipt requested, to:
(a) in the case of the Servicer: NovaStar Mortgage, Inc.
1900 W. 47/th/ Place
Suite 107
Westwood, Kansas 66205
Attention: Chris Miller, Senior Vice
President
(b) in the case of the Bond Insurer: __________________________
__________________________
__________________________
__________________________
Attention: _______________
(NovaStar Mortgage Funding Trust,
Series ______ Collateralized Mortgage
Obligation Bonds)
(c) in the case of Rating Agencies: __________________________
__________________________
__________________________
__________________________
Attention: _______________
__________________________
__________________________
__________________________
__________________________
Attention: _______________
-30-
<PAGE>
(d) in the case of the Owner _______________________
Trustee, the Corporate _______________________
Trust Office: _______________________
_______________________
Attention: Corporate Trust Administration
(e) in the case of the Issuer, c/o NovaStar Financial, Inc.
to NovaStar Mortgage 1900 W. 47th Place
Funding Trust, Series _____: Suite 205
Westwood, Kansas 66502
Attention: David J. Lee, Vice President
(f) in the case of the Indenture _______________________________
Trustee: _______________________________
_______________________________
_______________________________
Attention: ____________________
or, as to each party, at such other address as shall be designated by such party
in a written notice to each other party. Any notice required or permitted to be
mailed to a Bondholder shall be given by first class mail, postage prepaid, at
the address of such Bondholder as shown in the Certificate Register. Any notice
so mailed within the time prescribed in this Servicing Agreement shall be
conclusively presumed to have been duly given, whether or not the Bondholder
receives such notice. Any notice or other document required to be delivered or
mailed by the Indenture Trustee to any Rating Agency shall be given on a
reasonable efforts basis and only as a matter of courtesy and accommodation and
the Indenture Trustee shall have no liability for failure to deliver such notice
or document to any Rating Agency.
Section 7.04. Severability of Provisions. If any one or more of the
covenants, agreements, provisions or terms of this Servicing Agreement shall be
for any reason whatsoever held invalid, then such covenants, agreements,
provisions or terms shall be deemed severable from the remaining covenants,
agreements, provisions or terms of this Servicing Agreement and shall in no way
affect the validity or enforceability of the other provisions of this Servicing
Agreement or of the Bonds or the rights of the Bondholders thereof.
Section 7.05. Third-Party Beneficiaries. This Servicing Agreement will
inure to the benefit of and be binding upon the parties hereto, the Bondholders,
the Bond Insurer, the Owner Trustee, the Indenture Trustee and their respective
successors and permitted assigns. Except as otherwise provided in this
Servicing Agreement, no other Person will have any right or obligation
hereunder. The Indenture Trustee shall have the right to exercise all rights of
the Issuer under this Agreement.
-31-
<PAGE>
Section 7.06. Counterparts. This instrument may be executed in any number
of counterparts, each of which so executed shall be deemed to be an original,
but all such counterparts shall together constitute but one and the same
instrument.
Section 7.07. Effect of Headings and Table of Contents. The Article and
Section headings herein and the Table of Contents are for convenience only and
shall not affect the construction hereof.
Section 7.08. Termination. Except with respect to obligations of the
Servicer relating to any representations and warranties or indemnities made by
it in this Agreement, the respective obligations and responsibilities of the
Servicer and the Issuer created hereby shall terminate upon the satisfaction and
discharge of the Indenture pursuant to Section 4.10 thereof.
Section 7.09. No Petition. The Servicer, by entering into this Servicing
Agreement, hereby covenants and agrees that it will not at any time institute
against the Issuer, or join in any institution against the Issuer, any
bankruptcy proceedings under any United States federal or state bankruptcy or
similar law in connection with any obligations of the Issuer. This section
shall survive the termination of this Servicing Agreement by one year.
Section 7.10. No Recourse. The Servicer acknowledges that no recourse may
be had against the Issuer, except as may be expressly set forth in this
Servicing Agreement.
ARTICLE VIII
Administrative Duties of the Servicer
-------------------------------------
Section 8.01. Administrative Duties.
(a) Duties with Respect to the Indenture. The Servicer shall perform all
its duties and the duties of the Issuer under the Indenture. In addition, the
Servicer shall consult with the Owner Trustee as the Servicer deems appropriate
regarding the duties of the Issuer under the Indenture. The Servicer shall
monitor the performance of the Issuer and shall advise the Owner Trustee when
action is necessary to comply with the Issuer's duties under the Indenture. The
Servicer shall prepare for execution by the Issuer or shall cause the
preparation by other appropriate Persons of all such documents, reports,
filings, instruments, certificates and opinions as it shall be the duty of the
Issuer to prepare, file or deliver pursuant to the Indenture. In furtherance of
the foregoing, the Servicer shall take all necessary action that is the duty of
the Issuer to take pursuant to the Indenture.
(b) Duties with Respect to the Issuer.
(i) In addition to the duties of the Servicer set forth in this
Servicing Agreement or any of the Basic Documents, the Servicer shall
perform such calculations and shall prepare for execution by the Issuer or
the Owner Trustee or shall cause the preparation by other
-32-
<PAGE>
appropriate Persons of all such documents, reports, filings, instruments,
certificates and opinions as it shall be the duty of the Issuer or the
Owner Trustee to prepare, file or deliver pursuant to this Servicing
Agreement or any of the Basic Documents or under state and federal tax and
securities laws, and at the request of the Owner Trustee or the Bond
Insurer shall take all appropriate action that it is the duty of the Issuer
to take pursuant to this Servicing Agreement or any of the Basic Documents.
In accordance with the directions of the Issuer, the Bond Insurer or the
Owner Trustee, the Servicer shall administer, perform or supervise the
performance of such other activities in connection with the Bonds
(including the Basic Documents) as are not covered by any of the foregoing
provisions and as are expressly requested by the Issuer, the Bond Insurer
or the Owner Trustee and are reasonably within the capability of the
Servicer.
(ii) Notwithstanding anything in this Servicing Agreement or any of
the Basic Documents to the contrary, the Servicer shall be responsible for
promptly notifying the Owner Trustee and the Bond Insurer in the event that
any withholding tax is imposed on the Issuer's payments (or allocations of
income) to an Owner (as defined in the Trust Agreement) as contemplated in
Section 5.03 of the Trust Agreement. Any such notice shall be in writing
and specify the amount of any withholding tax required to be withheld by
the Owner Trustee pursuant to such provision.
(iii) In carrying out the foregoing duties or any of its other
obligations under this Servicing Agreement, the Servicer may enter into
transactions with or otherwise deal with any of its Affiliates; provided,
however, that the terms of any such transactions or dealings shall be in
accordance with any directions received from the Issuer and shall be, in
the Servicer's opinion, no less favorable to the Issuer in any material
respect than with terms made available to unrelated third-parties.
(c) Tax Matters. The Servicer shall provide such services as are
reasonably necessary to assist the Issuer, the Indenture Trustee or the Owner
Trustee, as applicable, in the preparation of tax returns and information
reports as provided in Section 5.03 of the Trust Agreement.
(d) Non-Ministerial Matters. With respect to matters that in the
reasonable judgment of the Servicer are non-ministerial, the Servicer shall not
take any action pursuant to this Article VIII unless within a reasonable time
before the taking of such action, the Servicer shall have notified the Owner
Trustee, the Bond Insurer and the Indenture Trustee of the proposed action and
the Owner Trustee, the Bond Insurer and, with respect to items (A), (B), (C) and
(D) below, the Indenture Trustee shall not have withheld consent or provided an
alternative direction. For the purpose of the preceding sentence, "non-
ministerial matters" shall include:
(A) the amendment of or any supplement to the Indenture;
-33-
<PAGE>
(B) the initiation of any claim or lawsuit by the Issuer and the
compromise of any action, claim or lawsuit brought by or against the Issuer
(other than in connection with the collection of the Mortgage Loans);
(C) the amendment, change or modification of this Agreement or any of
the Basic Documents;
(D) the appointment of successor Certificate Paying Agents and
successor Indenture Trustees pursuant to the Indenture or the appointment
of successor Servicers or the consent to the assignment by the Certificate
Registrar, Paying Agent or Trustee of its obligations under the Indenture;
and
(E) the removal of the Indenture Trustee.
Section 8.02. Records. The Servicer shall maintain appropriate books of
account and records relating to services performed under this Servicing
Agreement, which books of account and records shall be accessible for inspection
by the Issuer and the Bond Insurer upon reasonable request and at any time
during normal business hours.
Section 8.03. Additional Information to be Furnished. The Servicer shall
furnish to the Issuer and the Bond Insurer from time to time such additional
information regarding the Bonds as the Issuer or the Bond Insurer shall
reasonably request.
IN WITNESS WHEREOF, the Servicer, the Indenture Trustee and the Issuer have
caused this Servicing Agreement to be duly executed by their respective officers
or representatives all as of the day and year first above written.
NOVASTAR MORTGAGE, INC.,
as Servicer
By:_____________________________
Name:
Title:
-34-
<PAGE>
NOVASTAR MORTGAGE FUNDING TRUST,
SERIES ______, as Issuer
By _____________________________, not in its
individual capacity but solely as Owner Trustee
By:_____________________________
Name:
Title:
[INDENTURE TRUSTEE],
not in its individual capacity but solely as
Indenture Trustee
By:_____________________________
Name:
Title:
-35-
<PAGE>
EXHIBIT A
MORTGAGE LOAN SCHEDULE
A-1
<PAGE>
EXHIBIT B
FORM OF REQUEST FOR RELEASE
DATE:
TO:
RE: REQUEST FOR RELEASE OF DOCUMENTS
In connection with your administration of the Mortgage Loans, we request the
release of the Mortgage File described below.
Servicing Agreement Dated:
Series #:
Account #:
Pool #:
Loan #:
Borrower Name(s):
Reason for Document Request: (circle one) Mortgage Loan
Prepaid in Full
Mortgage Loan Repurchased
"We hereby certify that all amounts received or to be received in connection
with such payments which are required to be deposited have been or will be so
deposited as provided in the Servicing Agreement."
_____________________________________
[Name of Servicer]
Authorized Signature
*******************************************************************************
TO CUSTODIAN/Indenture Trustee: Please acknowledge this request, and check off
documents being enclosed with a copy of this form. You should retain this form
for your files in accordance with the terms of the Servicing Agreement.
Enclosed Documents: [ ] Promissory Note
[ ] Mortgage or Deed of Trust
[ ] Assignment(s) of Mortgage or Deed of Trust
[ ] Title Insurance Policy
[ ] Other: ___________________________
______________________________
Name
______________________________
Title
______________________________
Date
B-1
<PAGE>
EXHIBIT C
FORM OF LIQUIDATION REPORT
Customer Name:
Account Number:
Original Principal Balance:
1. Type of Liquidation (REO disposition/charge-off/short pay-off)
Date last paid
Date of foreclosure
Date of REO
Date of REO Disposition
Property Sale Price/Estimated Market Value at disposition
2. Liquidation Proceeds
Principal Prepayment $____________
Property Sale Proceeds ____________
Insurance Proceeds ____________
Other (itemize) ____________
Total Proceeds $____________
3. Liquidation Expenses
Servicing Advances ____________
Delinquency Advances ____________
Monthly Advances ____________
Servicing Fees ____________
Other Servicing Compensation ____________
Total Advances $____________
4. Net Liquidation Proceeds $____________
(Item 2 minus Item 3)
5. Principal Balance of Mortgage Loan $____________
6. Loss, if any (Item 5 minus Item 4) $____________
C-1
<PAGE>
EXHIBIT 4.2
================================================================================
NOVASTAR MORTGAGE FUNDING CORPORATION
as Company
and
____________________________
as Owner Trustee
_________________________________________
AMENDED AND RESTATED
TRUST AGREEMENT
Dated as of _______________
__________________________________________
NOVASTAR MORTGAGE FUNDING TRUST SERIES _______
COLLATERALIZED MORTGAGE OBLIGATION BONDS
================================================================================
<PAGE>
<TABLE>
<CAPTION>
Table of Contents
Section Page
- ------- ----
<C> <S> <C>
ARTICLE I
Definitions.................................................................................1
1.01. Definitions......................................................................1
1.02. Other Definitional Provisions....................................................1
ARTICLE II
Organization................................................................................2
2.01. Name.............................................................................2
2.02. Office...........................................................................2
2.03. Purposes and Powers..............................................................2
2.04. Appointment of Owner Trustee.....................................................3
2.05. Initial Capital Contribution of Owner Trust Estate...............................3
2.06. Declaration of Trust.............................................................3
2.07. Liability of the Holders of the Certificates.....................................4
2.08. Title to Trust Property..........................................................4
2.09. Situs of Trust...................................................................4
2.10. Representations and Warranties of the Company....................................4
2.11. Payment of Trust Fees............................................................5
2.12. Investment Company...............................................................5
ARTICLE III
Conveyance of the Initial Mortgage Loans; Certificates......................................5
3.01. Conveyance of the Mortgage Loans.................................................5
3.02. Initial Ownership................................................................6
3.03. The Certificates.................................................................6
3.04. Authentication of Certificates...................................................6
3.05. Registration of and Limitations on Transfer and Exchange of Certificates.........7
3.06. Mutilated, Destroyed, Lost or Stolen Certificates...............................10
3.07. Persons Deemed Certificateholders...............................................10
3.08. Access to List of Certificateholders' Names and Addresses.......................10
3.09. Maintenance of Office or Agency.................................................10
3.10. Certificate Paying Agent........................................................11
3.11. Pre-Funding Amount and Interest Coverage Amount.................................12
3.12. Purchase of Subsequent Mortgage Loans...........................................12
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Section Page
- ------- ----
<C> <S> <C>
ARTICLE IV
Authority and Duties of Owner Trustee........................................................13
4.01. General Authority.................................................................13
4.02. General Duties....................................................................13
4.03. Action upon Instruction...........................................................13
4.04. No Duties Except as Specified under Specified Documents or in Instructions........14
4.05. Restrictions......................................................................14
4.06. Prior Notice to Certificateholders with Respect to Certain Matters................15
4.07. Action by Certificateholders with Respect to Certain Matters......................16
4.08. Action by Certificateholders with Respect to Bankruptcy...........................16
4.09. Restrictions on Certificateholders' Power.........................................17
4.10. Majority Control..................................................................17
4.11. Optional Redemption...............................................................17
ARTICLE V
Application of Trust Funds...................................................................17
5.01. Distributions.....................................................................17
5.02. Method of Payment.................................................................18
5.03. Tax Returns.......................................................................18
5.04. Statements to Certificateholders..................................................18
ARTICLE VI
Concerning the Owner Trustee.................................................................19
6.01. Acceptance of Trusts and Duties...................................................19
6.02. Furnishing of Documents...........................................................20
6.03. Representations and Warranties....................................................20
6.04. Reliance; Advice of Counsel.......................................................21
6.05. Not Acting in Individual Capacity.................................................21
6.06. Owner Trustee Not Liable for Certificates or Related Documents....................22
6.07. Owner Trustee May Own Certificates and Bonds......................................22
6.08. Payments from Owner Trust Estate..................................................22
6.09. Doing Business in Other Jurisdictions.............................................22
6.10. Liability of Certificate Registrar and Certificate Paying Agent...................23
ARTICLE VII
Compensation of Owner Trustee................................................................23
7.01. Owner Trustee's Fees and Expenses.................................................23
7.02. Indemnification...................................................................23
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Section Page
- ------- ----
<C> <S> <C>
ARTICLE VIII
Termination of Trust Agreement.............................................................24
8.01. Termination of Trust Agreement..................................................24
ARTICLE IX
Successor Owner Trustees and Additional Owner Trustees.....................................25
9.01. Eligibility Requirements for Owner Trustee......................................25
9.02. Replacement of Owner Trustee....................................................26
9.03. Successor Owner Trustee.........................................................26
9.04. Merger or Consolidation of Owner Trustee........................................27
9.05. Appointment of Co-Trustee or Separate Trustee...................................27
ARTICLE X
Miscellaneous..............................................................................28
10.01. Amendments......................................................................28
10.02. No Legal Title to Owner Trust Estate............................................30
10.03. Limitations on Rights of Others.................................................30
10.04. Notices.........................................................................30
10.05. Severability....................................................................31
10.06. Separate Counterparts...........................................................31
10.07. Successors and Assigns..........................................................31
10.08. No Petition.....................................................................31
10.09. No Recourse.....................................................................31
10.10. Headings........................................................................32
10.11. GOVERNING LAW...................................................................32
10.12. Integration.....................................................................32
10.13. Third Party Beneficiary.........................................................32
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Section Page
- ------- ----
<S> <C>
EXHIBIT
Exhibit A - Form of Certificate.................................................A-1
Exhibit B - Certificate of Trust of NovaStar Home Equity Loan Trust.............B-1
Exhibit C - Form of Rule 144A Investment Representation.........................C-1
Exhibit D - Form of Investor Representation Letter..............................D-1
Exhibit E - Form of Transferor Representation Letter............................E-1
Exhibit F - Form of Certificate of Non-Foreign Status...........................F-1
Exhibit G - Form of ERISA Representation Letter.................................G-1
Exhibit H - Form of Representation Letter.......................................H-1
Exhibit I - Initial Trust Agreement.............................................I-1
</TABLE>
<PAGE>
This Amended and Restated Trust Agreement (which amends and restates the
Trust Agreement, dated _______________, between NovaStar Mortgage Funding
Corporation, as company (the "Company"), and ______________ , a Delaware banking
corporation, as owner trustee (the "Owner Trustee"), which is attached hereto as
Exhibit I), dated as of ______________ (as amended from time to time, this
"Trust Agreement"), between the Company and the Owner Trustee,
WITNESSETH THAT:
In consideration of the mutual agreements herein contained, the Company and
the Owner Trustee agree as follows:
ARTICLE I
Definitions
-----------
Section 1.01. Definitions. For all purposes of this Trust Agreement,
except as otherwise expressly provided herein or unless the context otherwise
requires, capitalized terms not otherwise defined herein shall have the meanings
assigned to such terms in Appendix A to the Indenture, dated _________________,
between NovaStar Mortgage Funding Trust Series ________ Collateralized Mortgage
Obligation Bonds, as Issuer, and ____________________, as Indenture Trustee,
which is incorporated by referenced herein. All other capitalized terms used
herein shall have the meanings specified herein.
Section 1.02. Other Definitional Provisions.
(a) All terms defined in this Trust Agreement shall have the defined
meanings when used in any certificate or other document made or delivered
pursuant hereto unless otherwise defined therein.
(b) As used in this Trust Agreement and in any certificate or other
document made or delivered pursuant hereto or thereto, accounting terms not
defined in this Trust Agreement or in any such certificate or other document,
and accounting terms partly defined in this Trust Agreement or in any such
certificate or other document to the extent not defined, shall have the
respective meanings given to them under generally accepted accounting
principles. To the extent that the definitions of accounting terms in this
Trust Agreement or in any such certificate or other document are inconsistent
with the meanings of such terms under generally accepted accounting principles,
the definitions contained in this Trust Agreement or in any such certificate
or other document shall control.
(c) The words "hereof," "herein," "hereunder" and words of similar import
when used in this Trust Agreement shall refer to this Trust Agreement as a whole
and not to any particular provision of this Trust Agreement; Article, Section
and Exhibit references contained in this Trust Agreement are references to
Articles, Sections and Exhibits in or to this Trust Agreement unless otherwise
specified; and the term "including" shall mean "including without limitation".
<PAGE>
-2-
(d) The definitions contained in this Trust Agreement are applicable to
the singular as well as the plural forms of such terms and to the masculine as
well as to the feminine and neuter genders of such terms.
(e) Any agreement, instrument or statute defined or referred to herein or
in any instrument or certificate delivered in connection herewith means such
agreement, instrument or statute as from time to time amended, modified or
supplemented and includes (in the case of agreements or instruments) references
to all attachments thereto and instruments incorporated therein; references to a
Person are also to its permitted successors and assigns.
ARTICLE II
Organization
------------
Section 2.01. Name. The trust created hereby (the "Trust") shall be
known as "NovaStar Mortgage Funding Trust Series _______", in which name the
Owner Trustee may conduct the business of the Trust, make and execute contracts
and other instruments on behalf of the Trust and sue and be sued.
Section 2.02. Office. The office of the Trust shall be in care of the
Owner Trustee at the Corporate Trust Office or at such other address in Delaware
as the Owner Trustee may designate by written notice to the Certificateholders
and the Company.
Section 2.03. Purposes and Powers. The purpose of the Trust is to engage
in the following activities:
(i) to issue the Bonds pursuant to the Indenture and the
Certificates pursuant to this Trust Agreement and to sell the Bonds and the
Certificates;
(ii) to pay the organizational, start-up and transactional expenses
of the Trust;
(iii) to hold, assign, grant, transfer, pledge and convey the
Mortgage Loans pursuant to the Indenture and to hold, manage and distribute
to the Certificateholders pursuant to Section 5.01 any portion of the
Mortgage Loans released from the Lien of, and remitted to the Trust
pursuant to the Indenture;
(iv) to purchase and hold the Initial Mortgage Loans pursuant to
this Trust Agreement and to purchase and hold the Subsequent Mortgage Loans
pursuant to the Mortgage Loan Purchase Agreement;
(v) to enter into and perform its obligations under the Basic
Documents to which it is to be a party;
<PAGE>
-3-
(vi) if directed by holders of Certificates representing more than
50% of the beneficial interests in the Trust, sell the Trust Estate
subsequent to the discharge of the Indenture, all for the benefit of the
holders of the Certificates;
(vii) to engage in those activities, including entering into
agreements, that are necessary, suitable or convenient to accomplish the
foregoing or are incidental thereto or connected therewith; and
(viii) subject to compliance with the Basic Documents, to engage in
such other activities as may be required in connection with conservation of
the Owner Trust Estate and the making of distributions to the
Certificateholder and the Bondholders.
The Trust is hereby authorized to engage in the foregoing activities. The Trust
shall not engage in any activity other than in connection with the foregoing or
other than as required or authorized by the terms of this Trust Agreement or the
Basic Documents.
Section 2.04. Appointment of Owner Trustee. The Company hereby appoints the
Owner Trustee as trustee of the Trust effective as of the date hereof, to have
all the rights, powers and duties set forth herein.
Section 2.05. Initial Capital Contribution of Owner Trust Estate. The
Company hereby sells, assigns, transfers, conveys and sets over to the Trust, as
of the date hereof, the sum of $1. The Owner Trustee hereby acknowledges receipt
in trust from the Company, as of the date hereof, of the foregoing contribution,
which shall constitute the initial corpus of the Trust and shall be deposited in
the Certificate Distribution Account. The Owner Trustee also acknowledges on
behalf of the Trust the receipt in trust of the Mortgage Loans and the rights
with respect to the representations and warranties made by the Seller under the
Mortgage Loan Purchase Agreement and all other amounts constituting part of the
Trust Estate (such items plus all other amounts or items included in the Trust
Estate from time to time, the "Owner Trust Estate").
Section 2.06. Declaration of Trust. The Owner Trustee hereby declares that
it shall hold the Owner Trust Estate in trust upon and subject to the conditions
set forth herein for the use and benefit of the Certificateholders, subject to
the obligations of the Trust under the Basic Documents. It is the intention of
the parties hereto that the Trust constitute a "business trust" under the
Business Trust Statute and that this Trust Agreement constitute the governing
instrument of such business trust. It is the intention of the parties hereto
that, for federal and state income and state and local franchise tax purposes,
the Trust shall not be treated as (i) an association subject separately to
taxation as a corporation, (ii) a "publicly traded partnership" as defined in
Treasury Regulation Section 1.7704-1 or (iii) a "taxable mortgage pool" as
defined in Section 7701(i) of the Code, and that the Bonds shall be debt, and
the provisions of this Trust Agreement shall be interpreted to further this
intention. Except as otherwise provided in this Trust Agreement, the rights of
the Certificateholders will be those of equity owners of the Trust. Effective as
of the date hereof, the Owner Trustee shall have all rights, powers and duties
set forth herein and in the Business Trust Statute with respect to accomplishing
the purposes of the Trust.
<PAGE>
-4-
Section 2.07. Liability of the Holders of the Certificates. The Holders of
the Certificates shall be jointly and severally liable directly to and shall
indemnify the Trust and the Owner Trustee for all losses, claims, damages,
liabilities and expenses of the Trust and the Owner Trustee (including Expenses,
to the extent not paid by the Servicer pursuant to Section 2.11 or out of the
Owner Trust Estate); provided, however, that the Holders of the Certificates
shall not be liable for payments required to be made on the Bonds or the
Certificates, or for any losses incurred by a Certificateholder in the capacity
of an investor in the Certificates or a Bondholder in the capacity of an
investor in the Bonds. The Holders of the Certificates shall be liable for and
shall promptly pay any entity level taxes imposed on the Trust. In addition, any
third party creditors of the Trust, including the Bond Insurer (other than in
connection with the obligations described in the second preceding sentence for
which the Holders of the Certificates shall not be liable) shall be deemed third
party beneficiaries of this paragraph. The obligations of the Holders of the
Certificates under this paragraph shall be evidenced by the Certificates.
Section 2.08. Title to Trust Property. Except with respect to the Mortgage
Loans, which will be assigned of record to the Indenture Trustee pursuant to the
Indenture, legal title to the Owner Trust Estate shall be vested at all times in
the Trust as a separate legal entity except where applicable law in any
jurisdiction requires title to any part of the Owner Trust Estate to be vested
in a trustee or trustees, in which case title shall be deemed to be vested in
the Owner Trustee, a co-trustee and/or a separate trustee, as the case may be.
Section 2.09. Situs of Trust. The Trust will be located and administered in
the State of Delaware. All bank accounts maintained by the Owner Trustee on
behalf of the Trust shall be located in the State of Delaware. The Trust shall
not have any employees in any state other than Delaware; provided, however, that
nothing herein shall restrict or prohibit the Owner Trustee from having
employees within or without the State of Delaware or taking actions outside the
State of Delaware in order to comply with Section 2.03. Payments will be
received by the Trust only in Delaware or New York, and payments will be made by
the Trust only from Delaware or New York. The only office of the Trust will be
at the Corporate Trust Office in Delaware.
Section 2.10. Representations and Warranties of the Company. The Company
hereby represents and warrants to the Owner Trustee and the Bond Insurer that:
(i) The Company is duly organized and validly existing as a
corporation in good standing under the laws of the State of Delaware, with
power and authority to own its properties and to conduct its business as
such properties are currently owned and such business is presently
conducted.
(ii) The Company is duly qualified to do business as a foreign
corporation in good standing and has obtained all necessary licenses and
approvals in all jurisdictions in which the ownership or lease of its
property or the conduct of its business shall require such qualifications
and in which the failure to so qualify would have a material adverse effect
on the business, properties, assets or condition (financial or other) of
the Company.
<PAGE>
-5-
(iii) The Company has the power and authority to execute and
deliver this Trust Agreement and to carry out its terms; the Company has
full power and authority to convey and assign the property to be conveyed
and assigned to and deposited with the Trust as part of the Owner Trust
Estate and the Company has duly authorized such conveyance and assignment
and deposit to the Trust by all necessary corporate action; and the
execution, delivery and performance of this Trust Agreement have been duly
authorized by the Company by all necessary corporate action.
(iv) The consummation of the transactions contemplated by this
Trust Agreement and the fulfillment of the terms hereof do not conflict
with, result in any breach of any of the terms and provisions of, or
constitute (with or without notice or lapse of time) a default under, the
articles of incorporation or bylaws of the Company, or any indenture,
agreement or other instrument to which the Company is a party or by which
it is bound; nor result in the creation or imposition of any Lien upon any
of its properties pursuant to the terms of any such indenture, agreement or
other instrument (other than pursuant to the Basic Documents); nor violate
any law or, to the best of the Company's knowledge, any order, rule or
regulation applicable to the Company of any court or of any federal or
state regulatory body, administrative agency or other governmental
instrumentality having jurisdiction over the Company or its properties.
(v) The Trust is not required to register as an investment
company under the Investment Company Act and is not under the control of a
Person required to so register.
Section 2.11. Payment of Trust Fees. The Servicer shall pay the Owner
Trustee Fee pursuant to Section 3.07 of the Servicing Agreement and shall pay
the Trust's expenses (including expenses of the Owner Trustee and the Indenture
Trustee) incurred with respect to the performance of the Trust's duties under
the Indenture pursuant to Section 5.06 of the Servicing Agreement, or, if such
amounts are insufficient, the Owner Trustee shall be paid pursuant to Section
5.01 hereof.
Section 2.12. Investment Company. Neither the Company nor any holder of a
Certificate shall take any action which would cause the Trust to become an
"investment company" which would be required to register under the Investment
Company Act.
ARTICLE III
Conveyance of the Initial Mortgage Loans;
Certificates
Section 3.01. Conveyance of the Mortgage Loans. The Company, concurrently
with the execution and delivery hereof, does hereby Grant to the Trust, without
recourse, all its right, title and interest in and to the Initial Mortgage
Loans, including all interest and principal received on or with respect to the
Initial Mortgage Loans after the Cut-off Date (other than payments of principal
and interest due on the Mortgage Loans on or before the Cut-off Date) the
proceeds thereof and all rights
<PAGE>
-6-
under the Related Documents (including the related Mortgage Files). In addition,
the Company hereby Grants to the Trust all of its right, title, and interest in,
to, and under the Mortgage Loan Purchase Agreement and the Mortgage Loan Sale
Agreement.
The conveyance of the Initial Mortgage Loans by the Company to the Trust
hereunder is intended to facilitate the simultaneous issuance of the Bonds under
the Indenture and issuance of the Certificates hereunder. The parties hereto
intend that the conveyance of the Initial Mortgage Loans by the Company to the
Trust hereunder constitute a sale by the Company to the Trust of all of the
Company's right, title and interest in and to the Initial Mortgage Loans.
However, if the transactions contemplated by this Trust Agreement are determined
to constitute a financing, the Company hereby Grants to the Trust a security
interest in the Owner Trust Estate and all distributions thereon and proceeds
thereof, and this Trust Agreement shall constitute a security agreement under
applicable law, and in such event, the parties hereto acknowledge that the
Indenture Trustee, in addition to holding the Initial Mortgage Loans for the
benefit of the Bondholders and the Bond Insurer, holds the Mortgage Loans as
designee of the Trust.
Section 3.02. Initial Ownership. Upon the formation of the Trust by the
contribution by the Company pursuant to Section 2.05 and until the conveyance of
the Initial Mortgage Loans pursuant to Section 3.01 and the issuance of the
Certificates, and thereafter except as otherwise permitted hereunder, the
Company shall be the sole Certificateholder.
Section 3.03. The Certificates. The Certificates shall be issued in the
form of one or more Certificates each representing not less than a 10%
Certificate Percentage Interest. The Certificates shall initially be registered
in the name of NovaStar Certificates Financing Corporation ("NCFC"). The
Certificates shall be executed on behalf of the Trust by manual or facsimile
signature of an authorized officer of the Owner Trustee and authenticated in the
manner provided in Section 3.04. Certificates bearing the manual or facsimile
signatures of individuals who were, at the time when such signatures shall have
been affixed, authorized to sign on behalf of the Trust, shall be validly issued
and entitled to the benefit of this Trust Agreement, notwithstanding that such
individuals or any of them shall have ceased to be so authorized prior to the
authentication and delivery of such Certificates or did not hold such offices at
the date of authentication and delivery of such Certificates. A Person shall
become a Certificateholder and shall be entitled to the rights and subject to
the obligations of a Certificateholder hereunder upon such Person's acceptance
of a Certificate duly registered in such Person's name, pursuant to Section
3.05.
A transferee of a Certificate shall become a Certificateholder and shall be
entitled to the rights and subject to the obligations of a Certificateholder
hereunder upon such transferee's acceptance of a Certificate duly registered in
such transferee's name pursuant to and upon satisfaction of the conditions set
forth in Section 3.05.
Section 3.04. Authentication of Certificates. The Owner Trustee shall
cause all Certificates issued hereunder to be executed and authenticated on
behalf of the Trust, authenticated and delivered to or upon the written order of
the Company, signed by its chairman of the board, its president or any vice
president, without further corporate action by the Company, in authorized
denominations. No
<PAGE>
-7-
Certificate shall entitle its holder to any benefit under this Trust Agreement
or be valid for any purpose unless there shall appear on such Certificate a
certificate of authentication substantially in the form set forth in Exhibit A,
executed by the Owner Trustee or the Certificate Registrar by manual signature;
such authentication shall constitute conclusive evidence that such Certificate
shall have been duly authenticated and delivered hereunder. All Certificates
shall be dated the date of their authentication.
Section 3.05. Registration of and Limitations on Transfer and Exchange of
Certificates. The Certificate Registrar shall keep or cause to be kept, a
Certificate Register in which, subject to such reasonable regulations as it may
prescribe, the Certificate Registrar shall provide for the registration of
Certificates and of transfers and exchanges of Certificates as herein
provided._________________________ shall be the initial Certificate Registrar.
If the Certificate Registrar resigns or is removed, the Owner Trustee shall
appoint a successor Certificate Registrar.
Subject to satisfaction of the conditions set forth below with respect to
the Certificate, upon surrender for registration of transfer of any Certificate
at the office or agency maintained pursuant to Section 3.09, the Owner Trustee
or the Certificate Registrar shall execute, authenticate and deliver in the name
of the designated transferee or transferees, one or more new Certificates in
authorized denominations of a like aggregate amount dated the date of
authentication by the Owner Trustee or the Certificate Registrar. At the option
of a Holder, Certificates may be exchanged for other Certificates of authorized
denominations of a like aggregate amount upon surrender of the Certificates to
be exchanged at the office or agency maintained pursuant to Section 3.09.
Every Certificate presented or surrendered for registration of transfer or
exchange shall be accompanied by a written instrument of transfer in form
satisfactory to the Certificate Registrar duly executed by the Holder or such
Holder's attorney duly authorized in writing. Each Certificate surrendered for
registration of transfer or exchange shall be canceled and subsequently disposed
of by the Certificate Registrar in accordance with its customary practice.
No service charge shall be made for any registration of transfer or
exchange of Certificates, but the Owner Trustee or the Certificate Registrar may
require payment of a sum sufficient to cover any tax or governmental charge that
may be imposed in connection with any transfer or exchange of Certificates.
No Person shall become a Certificateholder until it shall establish its
non-foreign status by submitting to the Certificate Paying Agent an IRS Form
W-9 and the Certificate of Non-Foreign Status set forth in Exhibit F hereto.
No transfer, sale, pledge or other disposition of a Certificate shall be
made unless such transfer, sale, pledge or other disposition is exempt from the
registration requirements of the Securities Act and any applicable state
securities laws or is made in accordance with said Act and laws. In the event of
any such transfer, the Certificate Registrar or the Company shall prior to such
transfer require the transferee to execute (a) either (i) an investment letter
in substantially the form attached hereto as Exhibit C (or in such form and
substance reasonably satisfactory to the Certificate
<PAGE>
-8-
Registrar and the Company) which investment letter shall not be an expense of
the Trust, the Owner Trustee, the Certificate Registrar, the Servicer, the Bond
Insurer or the Company and which investment letter states that, among other
things, such transferee (A) is a "qualified institutional buyer" as defined
under Rule 144A, acting for its own account or the accounts of other "qualified
institutional buyers" as defined under Rule 144A and (B) is aware that the
proposed transferor intends to rely on the exemption from registration
requirements under the Securities Act of 1933, as amended, provided by Rule 144A
or (ii) (A) a written Opinion of Counsel acceptable to and in form and substance
satisfactory to the Certificate Registrar, the Company and the Bond Insurer that
such transfer may be made pursuant to an exemption, describing the applicable
exemption and the basis therefor, from said Act and laws or is being made
pursuant to said Act and laws, which Opinion of Counsel shall not be an expense
of the Trust, the Owner Trustee, the Certificate Registrar, the Servicer, the
Bond Insurer or the Company and (B) the transferee executes a representation
letter, substantially in the form of Exhibit D hereto, and the transferor
executes a representation letter, substantially in the form of Exhibit E hereto,
each acceptable to and in form and substance satisfactory to the Certificate
Registrar and the Company certifying the facts surrounding such transfer, which
representation letters shall not be an expense of the Trust, the Owner Trustee,
the Certificate Registrar, the Servicer, the Bond Insurer or the Company and (b)
the Certificate of Non-Foreign Status (in substantially the form attached hereto
as Exhibit F) acceptable to and in form and substance reasonably satisfactory to
the Certificate Registrar and the Company, which certificate shall not be an
expense of the Trust, the Owner Trustee, the Certificate Registrar, the
Servicer, the Bond Insurer or the Company. If the Certificateholder is unable to
provide a Certificate of Non-Foreign Status, the Certificateholder must provide
an Opinion of Counsel as described above in this paragraph. The
Certificateholder desiring to effect such transfer shall, and does hereby agree
to, indemnify the Trust, the Owner Trustee, the Certificate Registrar, the
Servicer, the Bond Insurer and the Company against any liability that may result
if the transfer is not so exempt or is not made in accordance with such federal
and state laws. Neither an Opinion of Counsel nor a certification set forth in
clause (a) of this paragraph will be required in connection with the initial
transfer of any such Certificate by the Purchaser to NCFC pursuant to the
Certificates Sale Agreement or the pledge of any such Certificate by NCFC to
________________________ ("Broker") and the certification set forth in clause
(b) of this paragraph will not be required in connection with the pledge of any
such Certificate by NCFC to Broker.
No transfer of a Certificate or any interest therein shall be made to any
employee benefit plan or certain other retirement plans and arrangements,
including individual retirement accounts and annuities, Keogh plans and bank
collective investment funds and insurance company general or separate accounts
in which such plans, accounts or arrangements are invested, that are subject to
ERISA, or Section 4975 of the Code (collectively, "Plan"), any Person acting,
directly or indirectly, on behalf of any such Plan or any Person acquiring such
Certificates with "plan assets" of a Plan within the meaning of the Department
of Labor regulation promulgated at 29 C.F.R. (S)2510.3-101 ("Plan Assets")
unless the Company, the Owner Trustee, the Certificate Registrar and the
Servicer are provided with an Opinion of Counsel which establishes to the
satisfaction of the Company, the Owner Trustee, the Certificate Registrar and
the Servicer that the purchase of Certificates is permissible under applicable
law, will not constitute or result in any prohibited transaction under ERISA or
Section 4975 of the Code and will not subject the Company, the Owner Trustee,
the
<PAGE>
-9-
Certificate Registrar or the Servicer to any obligation or liability (including
obligations or liabilities under ERISA or Section 4975 of the Code) in addition
to those undertaken in this Trust Agreement, which Opinion of Counsel shall not
be an expense of the Company, the Owner Trustee, the Certificate Registrar, the
Bond Insurer or the Servicer. In lieu of such Opinion of Counsel, a Plan, any
Person acting, directly or indirectly, on behalf of any such Plan or any Person
acquiring such Certificates with Plan Assets of a Plan may provide a
certification in the form of Exhibit G to this Trust Agreement, which the
Company, the Owner Trustee, the Certificate Registrar and the Servicer may rely
upon without further inquiry or investigation. Neither an Opinion of Counsel nor
a certification will be required in connection with the initial transfer or
pledge of any such Certificate by the Company to an affiliate of the Company (in
which case, the Company or any affiliate thereof shall have deemed to have
represented that such affiliate is not a Plan or a Person investing Plan Assets
of any Plan) and the Owner Trustee shall be entitled to conclusively rely upon a
representation (which, upon the request of the Owner Trustee, shall be a written
representation) from the Company of the status of such transferee as an
affiliate of the Company.
In addition, no transfer, sale, assignment, pledge or other disposition of
a Certificate shall be made unless the proposed transferee executes a
representation letter substantially in the form of Exhibit D, or substantially
in the form of Exhibit H hereto, that (1) the transferee is acquiring the
Certificate for its own behalf and is not acting as agent or custodian for any
other person or entity in connection with such acquisition and (2) if the
transferee is a partnership, grantor trust or S corporation for federal income
tax purposes, the Certificates are not more than 50% of the assets of the
partnership, grantor trust or S corporation.
No offer, sale, transfer, pledge, hypothecation or other disposition
(including any pledge, sale or transfer under a repurchase transaction or
securities loan) of any Certificate shall be made to any transferee unless,
prior to such disposition, the proposed transferor delivers to the Owner Trustee
an Opinion of Counsel, rendered by a law firm generally recognized to be
qualified to opine concerning the tax aspects of asset securitization, to the
effect that such transfer (including any disposition permitted following any
default under any pledge or repurchase transaction) will not cause the Trust to
be (i) treated as an association taxable as a corporation for federal income tax
purposes, (ii) taxable as a taxable mortgage pool as defined in Section 7701(i)
of the Code or (iii) taxable as a "publicly traded partnership" as defined in
Treasury Regulation section 1.7704-1. Notwithstanding the foregoing, the
provisions of this paragraph shall not apply to the initial transfer of the
Certificates by the Company to the Purchaser pursuant to the Ownership Transfer
Agreement and by the Purchaser to NCFC pursuant to the Certificates Sale
Agreement.
Notwithstanding any other provisions of this Section 3.05 to the contrary,
(i) on the Closing Date, the Company may transfer the Certificates to the Seller
pursuant to the Mortgage Loan Purchase Agreement and the Seller may transfer the
Certificates to NCFC pursuant to the Certificates Sale Agreement and (ii) on or
after the Closing Date, NCFC may pledge the Certificates to secure its
obligations to Broker; provided, however, that Broker may not become the
registered owner of any of the Certificates without complying with the foregoing
provisions of this Section 3.05, as applicable.
<PAGE>
-10-
Section 3.06. Mutilated, Destroyed, Lost or Stolen Certificates. If (a)
any mutilated Certificate shall be surrendered to the Certificate Registrar, or
if the Certificate Registrar shall receive evidence to its satisfaction of the
destruction, loss or theft of any Certificate and (b) there shall be delivered
to the Certificate Registrar and the Owner Trustee such security or indemnity as
may be required by them to save each of them harmless, then in the absence of
notice to the Certificate Registrar or the Owner Trustee that such Certificate
has been acquired by a bona fide purchaser, the Owner Trustee shall execute on
behalf of the Trust and the Owner Trustee or the Certificate Registrar, shall
authenticate and deliver, in exchange for or in lieu of any such mutilated,
destroyed, lost or stolen Certificate, a new Certificate of like tenor and
denomination. In connection with the issuance of any new Certificate under this
Section 3.06, the Owner Trustee or the Certificate Registrar may require the
payment of a sum sufficient to cover any expenses of the Owner Trustee or the
Certificate Registrar (including fees and expenses of counsel) and any tax or
other governmental charge that may be imposed in connection therewith. Any
duplicate Certificate issued pursuant to this Section 3.06 shall constitute
conclusive evidence of ownership in the Trust, as if originally issued, whether
or not the lost, stolen or destroyed Certificate shall be found at any time.
Section 3.07. Persons Deemed Certificateholders. Prior to due presentation
of a Certificate for registration of transfer, the Owner Trustee, the
Certificate Registrar or any Certificate Paying Agent may treat the Person in
whose name any Certificate is registered in the Certificate Register as the
owner of such Certificate for the purpose of receiving distributions pursuant to
Section 5.02 and for all other purposes whatsoever, and none of the Trust, the
Owner Trustee, the Certificate Registrar or any Paying Agent shall be bound by
any notice to the contrary.
Section 3.08. Access to List of Certificateholders' Names and Addresses.
The Certificate Registrar shall furnish or cause to be furnished to the Company
or the Owner Trustee, within 15 days after receipt by the Certificate Registrar
of a written request therefor from the Company or the Owner Trustee, a list, in
such form as the Company or the Owner Trustee, as the case may be, may
reasonably require, of the names and addresses of the Certificateholders as of
the most recent Record Date. Each Holder, by receiving and holding a
Certificate, shall be deemed to have agreed not to hold any of the Trust, the
Company, the Certificate Registrar or the Owner Trustee accountable by reason of
the disclosure of its name and address, regardless of the source from which such
information was derived.
Section 3.09. Maintenance of Office or Agency. The Owner Trustee on behalf
of the Trust, shall maintain in Wilmington, Delaware, an office or offices or
agency or agencies where Certificates may be surrendered for registration of
transfer or exchange and where notices and demands to or upon the Owner Trustee
in respect of the Certificates and the Basic Documents may be served. The Owner
Trustee initially designates the Corporate Trust Office as its office for such
purposes. The Owner Trustee shall give prompt written notice to the Company and
the Certificateholders of any change in the location of the Certificate Register
or any such office or agency.
Section 3.10. Certificate Paying Agent. (a) The Certificate Paying Agent
shall make distributions to Certificateholders from the Certificate Distribution
Account on behalf of the Trust in accordance with the provisions of the
Certificates and Section 5.01 hereof from payments remitted
<PAGE>
-11-
to the Certificate Paying Agent by the Indenture Trustee pursuant to Section
3.05 of the Indenture. The Trust hereby appoints _________________________ as
Certificate Paying Agent and __________________________ hereby accepts such
appointment and further agrees that it will be bound by the provisions of this
Trust Agreement relating to the Certificate Paying Agent and shall:
(i) hold all sums held by it for the payment of amounts due with
respect to the Certificates in trust for the benefit of the Persons
entitled thereto until such sums shall be paid to such Persons or otherwise
disposed of as herein provided;
(ii) give the Owner Trustee notice of any default by the Trust of
which it has actual knowledge in the making of any payment required to be
made with respect to the Certificates;
(iii) at any time during the continuance of any such default,
upon the written request of the Owner Trustee forthwith pay to the Owner
Trustee on behalf of the Trust all sums so held in Trust by such
Certificate Paying Agent;
(iv) immediately resign as Certificate Paying Agent and forthwith
pay to the Owner Trustee on behalf of the Trust all sums held by it in
trust for the payment of Certificates if at any time it ceases to meet the
standards under this Section 3.10 required to be met by the Certificate
Paying Agent at the time of its appointment;
(v) comply with all requirements of the Code with respect to the
withholding from any payments made by it on any Certificates of any
applicable withholding taxes imposed thereon and with respect to any
applicable reporting requirements in connection therewith;
(vi) deliver to the Owner Trustee a copy of the report to
Certificateholders prepared with respect to each Payment Date by the
Servicer pursuant to Section 4.01 of the Servicing Agreement; and
(vii) not institute bankruptcy proceedings against the Issuer in
connection with this Trust Agreement.
(b) The Trust may revoke such power and remove the Certificate Paying
Agent if it determines in its sole discretion that the Certificate Paying Agent
shall have failed to perform its obligations under this Trust Agreement in any
material respect. _______________________ shall be permitted to resign as
Certificate Paying Agent upon 30 days written notice to the Owner Trustee and
the Bond Insurer; provided__________________________ is also resigning as Paying
Agent under the Indenture at such time. In the event that ___________________
shall no longer be the Certificate Paying Agent under this Trust Agreement and
Paying Agent under the Indenture, the Owner Trustee shall appoint a successor to
act as Certificate Paying Agent (which shall be a bank or trust company) and
which shall also be the successor Paying Agent under the Indenture. The Owner
Trustee shall cause such successor Certificate Paying Agent or any additional
Certificate Paying Agent appointed by the Owner Trustee to execute and deliver
to the Owner Trustee an
<PAGE>
-12-
instrument accepting the terms of this Section 3.10 as it relates to the
Certificate Paying Agent. The Certificate Paying Agent shall return all
unclaimed funds to the Trust and upon removal of a Certificate Paying Agent such
Certificate Paying Agent shall also return all funds in its possession to the
Trust. The provisions of Sections 6.01, 6.03, 6.04 and 7.01 shall apply to the
Certificate Paying Agent to the extent applicable. Any reference in this Trust
Agreement to the Certificate Paying Agent shall include any co-paying agent
unless the context requires otherwise.
(c) The Certificate Paying Agent shall establish and maintain with itself
a trust account (the "Certificate Distribution Account") in which the
Certificate Paying Agent shall deposit, on the same day as it is received from
the Indenture Trustee, each remittance received by the Certificate Paying Agent
with respect to payments made pursuant to the Indenture. The Certificate Paying
Agent shall make all distributions to Certificates, from moneys on deposit in
the Certificate Distribution Account.
(d) The Certificate Paying Agent shall be paid by the Indenture Trustee
from sources other than the Trust Estate.
Section 3.11. Pre-Funding Amount and Interest Coverage Amount. On the
Closing Date, (i) proceeds of the offering of the Bonds in an amount equal to
the Original Pre-Funded Amount shall be deposited into the Pre-Funding Account
as contemplated by Section 8.08 of the Indenture; (ii) proceeds of the offering
of the Bonds in an amount equal to the Interest Coverage Amount shall be
deposited into the Interest Coverage Account as contemplated by Section 8.09 of
the Indenture; (iii) the Original Pre-Funded Amount and the Interest Coverage
Amount shall become part of the Owner Trust Estate under this Trust Agreement;
and (iv) the Original Pre-Funded Amount and the Interest Coverage Amount shall
become part of the Trust Estate and the Collateral under the Indenture.
Section 3.12. Purchase of Subsequent Mortgage Loans. On each Subsequent
Transfer Date, (i) the Trust shall purchase, and the Seller shall sell, the
Subsequent Mortgage Loans, as contemplated by and subject to the conditions set
forth in Section 2.2 of the Home Equity Loan Purchase Agreement; (ii) in
consideration for the Purchase of the Subsequent Mortgage Loans, the Trust shall
instruct the Indenture Trustee to transfer funds in the Pre-Funding Account to
the Seller as contemplated by and subject to the conditions set forth in Section
8.08 of the Indenture, (iii) the Subsequent Mortgage Loan shall become part of
the Owner Trust Estate under this Trust Agreement and (iv) the Subsequent
Mortgage Loans shall become part of the Trust Estate and the Collateral under
the Indenture.
ARTICLE IV
Authority and Duties of Owner Trustee
-------------------------------------
Section 4.01. General Authority. The Owner Trustee is authorized and
directed to execute and deliver the Basic Documents to which the Trust is to be
a party and each certificate or other document attached as an exhibit to or
contemplated by the Basic Documents to which the Trust is to be a party and any
amendment or other agreement or instrument described herein, as evidenced
<PAGE>
-13-
conclusively by the Owner Trustee's execution thereof. In addition to the
foregoing, the Owner Trustee is authorized, but shall not be obligated, except
as otherwise provided in this Trust Agreement, to take all actions required of
the Trust pursuant to the Basic Documents.
Section 4.02. General Duties. It shall be the duty of the Owner Trustee to
discharge (or cause to be discharged) all of its responsibilities pursuant to
the terms of this Trust Agreement and the Basic Documents to which the Trust is
a party and to administer the Trust in the interest of the Certificateholders,
subject to the Basic Documents and in accordance with the provisions of this
Trust Agreement.
Section 4.03. Action upon Instruction. (a) Subject to this Article IV and
in accordance with the terms of the Basic Documents, the Certificateholders may
by written instruction direct the Owner Trustee in the management of the Trust.
Such direction may be exercised at any time by written instruction of the
Certificateholders pursuant to this Article IV.
(b) Notwithstanding the foregoing, the Owner Trustee shall not be required
to take any action hereunder or under any Basic Document if the Owner Trustee
shall have reasonably determined, or shall have been advised by counsel, that
such action is likely to result in liability on the part of the Owner Trustee or
is contrary to the terms hereof or of any Basic Document or is otherwise
contrary to law.
(c) Whenever the Owner Trustee is required to decide between alternative
courses of action permitted or required by the terms of this Trust Agreement or
under any Basic Document, or in the event that the Owner Trustee is unsure as to
the application of any provision of this Trust Agreement or any Basic Document
or any such provision is ambiguous as to its application, or is, or appears to
be, in conflict with any other applicable provision, or in the event that this
Trust Agreement permits any determination by the Owner Trustee or is silent or
is incomplete as to the course of action that the Owner Trustee is required to
take with respect to a particular set of facts, the Owner Trustee shall promptly
give notice (in such form as shall be appropriate under the circumstances) to
the Certificateholders (with a copy to the Bond Insurer) requesting instruction
as to the course of action to be adopted, and to the extent the Owner Trustee
acts in good faith in accordance with any written instruction of the
Certificateholders (with the consent of the Bond Insurer), the Owner Trustee
shall not be liable on account of such action to any Person. If the Owner
Trustee shall not have received appropriate instruction within 10 days of such
notice (or within such shorter period of time as reasonably may be specified in
such notice or may be necessary under the circumstances) it may, but shall be
under no duty to, take or refrain from taking such action not inconsistent with
this Trust Agreement or the Basic Documents, as it shall deem to be in the best
interests of the Certificateholders, the Bondholders and the Bond Insurer, and
the Owner Trustee shall have no liability to any Person for such action or
inaction.
Section 4.04. No Duties Except as Specified under Specified Documents or
in Instructions. The Owner Trustee shall not have any duty or obligation to
manage, make any payment with respect to, register, record, sell, dispose of, or
otherwise deal with the Owner Trust Estate, or to otherwise take or refrain from
taking any action under, or in connection with, any document contemplated
<PAGE>
-14-
hereby to which the Owner Trustee is a party, except as expressly provided (a)
in accordance with the powers granted to and the authority conferred upon the
Owner Trustee pursuant to this Trust Agreement, (b) in accordance with the Basic
Documents and (c) in accordance with any document or instruction delivered to
the Owner Trustee pursuant to Section 4.03; and no implied duties or obligations
shall be read into this Trust Agreement or any Basic Document against the Owner
Trustee. The Owner Trustee shall have no responsibility (i) to file any
financing or continuation statement in any public office at any time, (ii) to
otherwise perfect or maintain the perfection of any security interest or lien
granted to it hereunder, (iii) to record this Trust Agreement or any Basic
Document or (iv) to prepare or file any Securities and Exchange Commission
filing for the Trust. The Owner Trustee nevertheless agrees that it will, at its
own cost and expense, promptly take all action as may be necessary to discharge
any liens on any part of the Owner Trust Estate that result from actions by, or
claims against, the Owner Trustee that are not related to the ownership or the
administration of the Owner Trust Estate.
Section 4.05. Restrictions. (a) The Owner Trustee or the Company (or an
Affiliate thereof) shall not take any action (i) that is inconsistent with the
purposes of the Trust set forth in Section 2.03 or (ii) that, to the actual
knowledge of the Owner Trustee based on an Opinion of Counsel rendered by a law
firm generally recognized to be qualified to opine concerning the tax aspects of
asset securitization, would result in the Trust becoming taxable as a
corporation for federal income tax purposes or (iii) would result in the
amendment or modification of the Basic Documents or this Trust Agreement without
the prior written consent of the Bond Insurer. The Certificateholders shall not
direct the Owner Trustee to take action that would violate the provisions of
this Section 4.05.
(b) The Owner Trustee shall not convey or transfer any of the Trust's
properties or assets, including those included in the Trust Estate, to any
person unless (i) it shall have received an Opinion of Counsel rendered by a law
firm generally recognized to be qualified to opine concerning the tax aspects of
asset securitization to the effect that such transaction will not have any
material adverse tax consequence to the Trust or any Certificateholder and (ii)
such conveyance or transfer shall not violate the provisions of Section 3.16(b)
of the Indenture.
(c) The Trust shall not commingle its assets with those of any other
entity. The Trust shall maintain its financial and accounting books and records
separate from those of any other entity. Except as expressly set forth herein,
the Trust shall pay its indebtedness, operating expenses and liabilities from
its own funds, and the Trust shall not pay the indebtedness, operating expenses
and liabilities of any other entity. The Trust shall maintain appropriate
minutes or other records of all appropriate actions and shall maintain its
office separate from the offices of the Company.
Section 4.06. Prior Notice to Certificateholders with Respect to Certain
Matters. With respect to the following matters, the Owner Trustee shall not take
action unless at least 30 days before the taking of such action, the Owner
Trustee shall have notified the Certificateholders and the Bond Insurer in
writing of the proposed action and the Certificateholders and the Bond Insurer
shall
<PAGE>
-15-
not have notified the Owner Trustee in writing prior to the 30th day after such
notice is given that such Certificateholders and the Bond Insurer have withheld
consent or provided alternative direction (provided, however, that any direction
by the Certificateholders shall require the prior consent of the Bond Insurer):
(a) the initiation of any claim or lawsuit by the Trust (except claims or
lawsuits brought in connection with the collection of cash distributions due and
owing under the Mortgage Loans) and the compromise of any action, claim or
lawsuit brought by or against the Trust (except with respect to the
aforementioned claims or lawsuits for collection of cash distributions due and
owing under the Mortgage Loans);
(b) the election by the Trust to file an amendment to the Certificate of
Trust (unless such amendment is required to be filed under the Business Trust
Statute);
(c) the amendment or other change to this Trust Agreement or any Basic
Document in circumstances where the consent of any Bondholder or the Bond
Insurer is required;
(d) the amendment or other change to this Trust Agreement or any Basic
Document in circumstances where the consent of any Bondholder or the Bond
Insurer is not required and such amendment materially adversely affects the
interest of the Certificateholders;
(e) the appointment pursuant to the Indenture of a successor Bond
Registrar, Paying Agent or Indenture Trustee or, pursuant to this Trust
Agreement, of a successor Certificate Registrar or Certificate Paying Agent or
the consent to the assignment by the Bond Registrar, Paying Agent, Indenture
Trustee, Certificate Registrar or Certificate Paying Agent of its obligations
under the Indenture or this Trust Agreement, as applicable;
(f) the consent to the calling or waiver of any default under any Basic
Document;
(g) the consent to the assignment by the Indenture Trustee or Servicer of
their respective obligations under any Basic Document;
(h) except as provided in Article VIII hereof, dissolve, terminate or
liquidate the Trust in whole or in part;
(i) merge or consolidate the Trust with or into any other entity, or
convey or transfer all or substantially all of the Trust's assets to any other
entity;
(j) cause the Trust to incur, assume or guaranty any indebtedness other
than as set forth in this Trust Agreement;
(k) perform any act that conflicts with any other Basic Document;
<PAGE>
-16-
(l) perform any act which would make it impossible to carry on the
ordinary business of the Trust as described in Section 2.03 hereof;
(m) confess a judgment against the Trust;
(n) possess Trust assets or assign the Trust's right to property for other
than a Trust purpose;
(o) cause the Trust to lend any funds to any entity; or
(p) change the Trust's purpose and powers from those enumerated in this
Trust Agreement.
Section 4.07. Action by Certificateholders with Respect to Certain
Matters. The Owner Trustee shall not have the power, except upon the direction
of the Certificateholders, and with the consent of the Bond Insurer, to (a)
remove or replace the Servicer under the Servicing Agreement pursuant to
Sections 6.01 and 6.02 thereof or to remove or replace the Indenture Trustee
under the Indenture pursuant to Section 6.08 thereof, (b) except as expressly
provided in the Basic Documents, sell the Mortgage Loans after the termination
of the Indenture, (c) institute proceedings to have the Trust declared or
adjudicated to be bankrupt or insolvent, (d) consent to the institution of
bankruptcy or insolvency proceedings against the Trust, (e) file a petition or
consent to a petition seeking reorganization or relief on behalf of the Trust
under any applicable federal or state law relating to bankruptcy, (f) consent to
the appointment of a receiver, liquidator, assignee, trustee, sequestrator (or
any similar official) of the Trust or a substantial portion of the property of
the Trust, (g) make any assignment for the benefit of the Trust's creditors, (h)
cause the Trust to admit in writing its inability to pay its debts generally as
they become due, (i) take any action or cause the Trust to take any action, in
furtherance of any of the foregoing clauses (c) through (i) (any of such
clauses, a "Bankruptcy Action"). So long as the Indenture and the Insurance
Agreement remain in effect and no Bond Insurer Default exists, no
Certificateholder shall have the power to take, and shall not take, any
Bankruptcy Action with respect to the Trust or the Company or direct the Owner
Trustee to take any Bankruptcy Action with respect to the Trust or the Company.
The Owner Trustee shall take the actions referred to in the preceding sentence
only upon written instructions signed by the Certificateholders and with the
consent of the Bond Insurer.
Section 4.08. Action by Certificateholders with Respect to Bankruptcy. The
Owner Trustee shall not have the power to commence a voluntary proceeding in
bankruptcy relating to the Trust without the unanimous prior approval of all
Certificateholders and the consent of the Bond Insurer, the Bondholders and the
Owner Trustee and the delivery to the Owner Trustee by each such
Certificateholder of a certificate certifying that such Certificateholder
reasonably believes that the Trust is insolvent. This paragraph shall survive
for one year and one day following termination of this Trust Agreement.
Section 4.09. Restrictions on Certificateholders' Power. The
Certificateholders shall not direct the Owner Trustee to take or to refrain from
taking any action if such action or inaction would
<PAGE>
-17-
be contrary to any obligation of the Trust or the Owner Trustee under this Trust
Agreement or any of the Basic Documents or would be contrary to Section 2.03,
nor shall the Owner Trustee be obligated to follow any such direction, if given.
Section 4.10. Majority Control. Except as expressly provided herein, any
action that may be taken by the Certificateholders under this Trust Agreement
may be taken by the Holders of Certificates evidencing not less than a majority
of the outstanding Certificate Percentage Interests of the Certificates. Except
as expressly provided herein, any written notice of the Certificateholders
delivered pursuant to this Trust Agreement shall be effective if signed by
Holders of Certificates evidencing not less than a majority of the outstanding
Certificate Principal Balance of the Certificates at the time of the delivery of
such notice.
Section 4.11. Optional Redemption. Upon receipt of written instructions
provided to the Owner Trustee by the Holder or Holders of 100% of the
Certificates, the Owner Trustee shall cause the Issuer to redeem the Bonds in
accordance with Section 8.07 of the Indenture and shall provide all necessary
notices on behalf of the Issuer to effect the foregoing, provided that such
Holder or Holders shall deposit with the Indenture Trustee an amount equal to
the aggregate redemption price specified under Section 8.07 of the Indenture,
which shall be applied by the Indenture Trustee solely to make such redemption
payments. The Owner Trustee shall not have the power to exercise the right of
the Issuer to redeem the Bonds pursuant to Section 7.05 of the Indenture, except
as provided above.
ARTICLE V
Application of Trust Funds
--------------------------
Section 5.01. Distributions. (a) On each Payment Date, the Certificate
Paying Agent shall distribute to the Certificateholders, on a pro rata basis
based on the Certificate Percentage Interests thereof, all funds on deposit in
the Certificate Distribution Account and available therefor (as provided in
Section 3.05 of the Indenture) for such Payment Date as reduced by any amount
owing to the Owner Trustee hereunder and any Expenses of the Trust remaining
unpaid.
(b) In the event that any withholding tax is imposed on the distributions
(or allocations of income) to a Certificateholder, such tax shall reduce the
amount otherwise distributable to such Certificateholder in accordance with this
Section 5.01. The Certificate Paying Agent is hereby authorized and directed to
retain or cause to be retained from amounts otherwise distributable to the
Certificateholders sufficient funds for the payment of any tax that is legally
owed by the Trust (but such authorization shall not prevent the Owner Trustee
from contesting any such tax in appropriate proceedings, and withholding payment
of such tax, if permitted by law, pending the outcome of such proceedings). The
amount of any withholding tax imposed with respect to a Certificateholder shall
be treated as cash distributed to such Certificateholder at the time it is
withheld by the Certificate Paying Agent and remitted to the appropriate taxing
authority. If there is a possibility that withholding tax is payable with
respect to a distribution (such as a distribution to a non-U.S.
<PAGE>
-18-
Certificateholder), the Certificate Paying Agent may in its sole discretion
withhold such amounts in accordance with this paragraph (b).
(c) Distributions to Certificateholders shall be subordinated to the
creditors of the Trust, including the Bondholders and the Bond Insurer.
Section 5.02. Method of Payment. Subject to Section 8.01(c), distributions
required to be made to Certificateholders on any Payment Date as provided in
Section 5.01 shall be made to each Certificateholder of record on the preceding
Record Date either by, in the case of any Certificateholder owning Certificates
having a Certificate Percentage Interest of 100%, wire transfer, in immediately
available funds, to the account of such Holder at a bank or other entity having
appropriate facilities therefor, if such Certificateholder shall have provided
to the Certificate Registrar appropriate written instructions at least five
Business Days prior to such Record Date or, if not, by check mailed to such
Certificateholder at the address of such Holder appearing in the Certificate
Register.
Section 5.03. Tax Returns. The Indenture Trustee shall (a) maintain (or
cause to be maintained) the books of the Trust on a calendar year basis using
the accrual method of accounting, (b) deliver (or cause to be delivered) to each
Certificateholder as may be required by the Code and applicable Treasury
Regulations, such information as may be required to enable each
Certificateholder to prepare its federal and state income tax returns, (c)
prepare and file or cause to be prepared and filed such tax returns relating to
the Trust as may be required by the Code and applicable Treasury Regulations
(making such elections as may from time to time be required or appropriate under
any applicable state or federal statutes, rules or regulations) and (d) collect
or cause to be collected any withholding tax as described in and in accordance
with Section 5.01 of this Trust Agreement with respect to income or
distributions to Certificateholders and prepare or cause to be prepared the
appropriate forms relating thereto.
Section 5.04. Statements to Certificateholders. On each Payment Date, the
Certificate Paying Agent shall send to each Certificateholder the statement or
statements provided to the Owner Trustee and the Certificate Paying Agent by the
Indenture Trustee pursuant to Section 7.05 of the Indenture with respect to such
Payment Date.
ARTICLE VI
Concerning the Owner Trustee
----------------------------
Section 6.01. Acceptance of Trusts and Duties. The Owner Trustee accepts
the trusts hereby created and agrees to perform its duties hereunder with
respect to such trusts but only upon the terms of this Trust Agreement. Each of
the Owner Trustee and the Certificate Paying Agent also agrees to disburse all
moneys actually received by it constituting part of the Owner Trust Estate upon
the terms of the Basic Documents and this Trust Agreement. The Owner Trustee
shall not be answerable or accountable hereunder or under any Basic Document
under any circumstances, except
<PAGE>
-19-
(i) for its own willful misconduct, gross negligence or bad faith or grossly
negligent failure to act or (ii) in the case of the inaccuracy of any
representation or warranty contained in Section 6.03 expressly made by the Owner
Trustee. In particular, but not by way of limitation (and subject to the
exceptions set forth in the preceding sentence):
(a) The Owner Trustee shall not be liable with respect to any action taken
or omitted to be taken by it in accordance with the instructions of the
Certificateholders permitted under this Trust Agreement;
(b) No provision of this Trust Agreement or any Basic Document shall
require the Owner Trustee to expend or risk funds or otherwise incur any
financial liability in the performance of any of its rights, duties or powers
hereunder or under any Basic Document if the Owner Trustee shall have reasonable
grounds for believing that repayment of such funds or adequate indemnity against
such risk or liability is not reasonably assured or provided to it;
(c) Under no circumstances shall the Owner Trustee be liable for
indebtedness evidenced by or arising under any of the Basic Documents, including
the principal of and interest on the Bonds;
(d) The Owner Trustee shall not be responsible for or in respect of the
validity or sufficiency of this Trust Agreement or for the due execution hereof
by the Company or for the form, character, genuineness, sufficiency, value or
validity of any of the Owner Trust Estate, or for or in respect of the validity
or sufficiency of the Basic Documents, the Bonds, the Certificates, other than
the certificate of authentication on the Certificates, if executed by the Owner
Trustee and the Owner Trustee shall in no event assume or incur any liability,
duty, or obligation to any Bondholder or to any Certificateholder, other than as
expressly provided for herein or expressly agreed to in the Basic Documents;
(e) The Owner Trustee shall not be liable for the default or misconduct of
the Company, Indenture Trustee, Certificate Registrar or the Servicer under any
of the Basic Documents or otherwise and the Owner Trustee shall have no
obligation or liability to perform the obligations of the Trust under this Trust
Agreement or the Basic Documents that are required to be performed by the
Indenture Trustee under the Indenture or the Seller under the Home Equity Loan
Purchase Agreement; and
(f) The Owner Trustee shall be under no obligation to exercise any of the
rights or powers vested in it or duties imposed by this Trust Agreement, or to
institute, conduct or defend any litigation under this Trust Agreement or
otherwise or in relation to this Trust Agreement or any Basic Document, at the
request, order or direction of any of the Certificateholders, unless such
Certificateholders have offered to the Owner Trustee security or indemnity
satisfactory to it against the costs, expenses and liabilities that may be
incurred by the Owner Trustee therein or thereby. The right of the Owner Trustee
to perform any discretionary act enumerated in this Trust Agreement or in any
Basic Document shall not be construed as a duty.
<PAGE>
-20-
Section 6.02. Furnishing of Documents. The Owner Trustee shall furnish to
the Securityholders promptly upon receipt of a written reasonable request
therefor, duplicates or copies of all reports, notices, requests, demands,
certificates, financial statements and any other instruments furnished to the
Trust under the Basic Documents.
Section 6.03. Representations and Warranties. The Owner Trustee, in its
individual capacity, hereby represents and warrants to the Company, for the
benefit of the Certificateholders and the Bond Insurer that:
(a) It is a banking corporation duly organized and validly existing in
good standing under the laws of the State of Delaware. It has all requisite
corporate power and authority to execute, deliver and perform its obligations
under this Trust Agreement;
(b) It has taken all corporate action necessary to authorize the execution
and delivery by it of this Trust Agreement, and this Trust Agreement will be
executed and delivered by one of its officers who is duly authorized to execute
and deliver this Trust Agreement on its behalf;
(c) The execution, delivery, authentication and performance by it of this
Trust Agreement will not require the authorization, consent or approval of, the
giving of notice to, the filing or registration with, or the taking of any other
action with respect to, any governmental authority or agency;
(d) Neither the execution nor the delivery by it of this Trust Agreement,
nor the consummation by it of the transactions contemplated hereby nor
compliance by it with any of the terms or provisions hereof will contravene any
federal or Delaware law, governmental rule or regulation governing the banking
or trust powers of the Owner Trustee or any judgment or order binding on it, or
constitute any default under its charter documents or bylaws or any indenture,
mortgage, contract, agreement or instrument to which it is a party or by which
any of its properties may be bound;
(e) This Trust Agreement, assuming due authorization, execution and
delivery by the Company, constitutes a valid, legal and binding obligation of
the Owner Trustee, enforceable against it in accordance with the terms hereof
subject to applicable bankruptcy, insolvency, reorganization, moratorium and
other laws affecting the enforcement of creditors' rights generally and to
general principles of equity, regardless of whether such enforcement is
considered in a proceeding in equity or at law;
(f) The Owner Trustee is not in default with respect to any order or
decree of any court or any order, regulation or demand of any Federal, state,
municipal or governmental agency, which default might have consequences that
would materially and adversely affect the condition (financial or other) or
operations of the Owner Trustee or its properties or might have consequences
that would materially adversely affect its performance hereunder; and
<PAGE>
-21-
(g) No litigation is pending or, to the best of the Owner Trustee's
knowledge, threatened against the Owner Trustee which would prohibit its
entering into this Trust Agreement or performing its obligations under this
Trust Agreement.
Section 6.04. Reliance; Advice of Counsel. (a) The Owner Trustee shall
incur no liability to anyone in acting upon any signature, instrument, notice,
resolution, request, consent, order, certificate, report, opinion, Bond, or
other document or paper believed by it to be genuine and believed by it to be
signed by the proper party or parties. The Owner Trustee may accept a certified
copy of a resolution of the board of directors or other governing body of any
corporate party as conclusive evidence that such resolution has been duly
adopted by such body and that the same is in full force and effect. As to any
fact or matter the method of determination of which is not specifically
prescribed herein, the Owner Trustee may for all purposes hereof rely on a
certificate, signed by the president or any vice president or by the treasurer
or other authorized officers of the relevant party, as to such fact or matter
and such certificate shall constitute full protection to the Owner Trustee for
any action taken or omitted to be taken by it in good faith in reliance thereon.
(b) In the exercise or administration of the Trust hereunder and in the
performance of its duties and obligations under this Trust Agreement or the
Basic Documents, the Owner Trustee (i) may act directly or through its agents,
attorneys, custodians or nominees (including persons acting under a power of
attorney) pursuant to agreements entered into with any of them, and the Owner
Trustee shall not be liable for the conduct or misconduct of such agents,
attorneys, custodians or nominees (including persons acting under a power of
attorney) if such persons have been selected by the Owner Trustee with
reasonable care and (ii) may consult with counsel, accountants and other skilled
persons to be selected with reasonable care and employed by it. The Owner
Trustee shall not be liable for anything done, suffered or omitted in good faith
by it in accordance with the written opinion or advice of any such counsel,
accountants or other such Persons and not contrary to this Trust Agreement or
any Basic Document.
Section 6.05. Not Acting in Individual Capacity. Except as provided in this
Article VI, in accepting the trusts hereby created Wilmington Trust Company acts
solely as Owner Trustee here under and not in its individual capacity, and all
Persons having any claim against the Owner Trustee by reason of the transactions
contemplated by this Trust Agreement or any Basic Document shall look only to
the Owner Trust Estate for payment or satisfaction thereof.
Section 6.06. Owner Trustee Not Liable for Certificates or Related
Documents. The recitals contained herein and in the Certificates (other than the
signatures of the Owner Trustee on the Certificates) shall be taken as the
statements of the Company, and the Owner Trustee assumes no responsibility for
the correctness thereof. The Owner Trustee makes no representations as to the
validity or sufficiency of this Trust Agreement, of any Basic Document or of the
Certificates (other than the signatures of the Owner Trustee on the
Certificates) or the Bonds, or of any Related Documents. The Owner Trustee shall
at no time have any responsibility or liability with respect to the sufficiency
of the Owner Trust Estate or its ability to generate the payments to be
distributed to Certificateholders under this Trust Agreement or the Bondholders
under the Indenture, including compliance by the Company or the Seller with any
warranty or representation made under any Basic
<PAGE>
-22-
Document or in any related document or the accuracy of any such warranty or
representation, or any action of the Certificate Paying Agent, the Certificate
Registrar or the Indenture Trustee taken in the name of the Owner Trustee.
Section 6.07. Owner Trustee May Own Certificates and Bonds. The Owner
Trustee in its individual or any other capacity may, subject to Section 3.05,
become the owner or pledgee of Certificates or Bonds and may deal with the
Company, the Seller, the Certificate Paying Agent, the Certificate Registrar and
the Indenture Trustee in transactions with the same rights as it would have if
it were not Owner Trustee.
Section 6.08. Payments from Owner Trust Estate. All payments to be made by
the Owner Trustee under this Trust Agreement or any of the Basic Documents to
which the Owner Trustee is a party shall be made only from the income and
proceeds of the Owner Trust Estate or from other amounts required to be provided
by the Certificateholders and only to the extent that the Owner Trust shall have
received income or proceeds from the Owner Trust Estate or the
Certificateholders to make such payments in accordance with the terms hereof.
Wilmington Trust Company, in its individual capacity, shall not be liable for
any amounts payable under this Trust Agreement or any of the Basic Documents to
which the Owner Trustee is a party.
Section 6.09. Doing Business in Other Jurisdictions. Notwithstanding
anything contained herein to the contrary, neither___________________ nor the
Owner Trustee shall be required to take any action in any jurisdiction other
than in the State of Delaware if the taking of such action will, even after the
appointment of a co-trustee or separate trustee in accordance with Section 9.05
hereof, (i) require the consent or approval or authorization or order of or the
giving of notice to, or the registration with or the taking of any other action
in respect of, any state or other governmental authority or agency of any
jurisdiction other than the State of Delaware; (ii) result in any fee, tax or
other governmental charge under the laws of the State of Delaware becoming
payable by Wilmington Trust Company; or (iii) subject___________________ to
personal jurisdiction in any jurisdiction other than the State of Delaware for
causes of action arising from acts unrelated to the consummation of the
transactions by Wilmington Trust Company or the Owner Trustee, as the case may
be, contemplated hereby.
Section 6.10. Liability of Certificate Registrar and Certificate Paying
Agent. All provisions affording protection to or limiting the liability of the
Owner Trustee shall inure as well to the Certificate Registrar and Certificate
Paying Agent.
ARTICLE VII
Compensation of Owner Trustee
-----------------------------
Section 7.01. Owner Trustee's Fees and Expenses. The Owner Trustee shall
receive as compensation for its services hereunder such fees as have been
separately agreed upon before the date hereof and as set forth in Appendix A to
the Indenture, and the Owner Trustee shall be reimbursed
<PAGE>
-23-
by the Company or the Servicer for its reasonable expenses hereunder and under
the Basic Documents, including the reasonable compensation, expenses and
disbursements of such agents, representatives, experts and counsel as the Owner
Trustee may reasonably employ in connection with the exercise and performance of
its rights and its duties hereunder and under the Basic Documents. The amount of
the Owner Trustee Fee shall be paid by the Servicer to the Owner Trustee
pursuant to Section 3.07(a)(viii) of the Servicing Agreement.
Section 7.02. Indemnification. The Company shall indemnify, defend and hold
harmless the Owner Trustee and its successors, assigns, agents and servants
(collectively, the "Indemnified Parties") from and against, any and all
liabilities, obligations, losses, damages, taxes, claims, actions and suits, and
any and all reasonable costs, expenses and disbursements (including reasonable
legal fees and expenses) of any kind and nature whatsoever (collectively,
"Expenses") which may at any time be imposed on, incurred by, or asserted
against the Owner Trustee or any Indemnified Party in any way relating to or
arising out of this Trust Agreement, the Basic Documents, the Owner Trust
Estate, the administration of the Owner Trust Estate or the action or inaction
of the Owner Trustee hereunder, provided, that:
(i) the Company shall not be liable for or required to indemnify
an Indemnified Party from and against Expenses arising or resulting from
the Owner Trustee's willful misconduct, gross negligence or bad faith or as
a result of any inaccuracy of a representation or warranty contained in
Section 6.03 expressly made by the Owner Trustee;
(ii) with respect to any such claim, the Indemnified Party shall
have given the Company written notice thereof promptly after the
Indemnified Party shall have actual knowledge thereof;
(iii) while maintaining control over its own defense, the Company
shall consult with the Indemnified Party in preparing such defense; and
(iv) notwithstanding anything in this Trust Agreement to the
contrary, the Company shall not be liable for settlement of any claim by an
Indemnified Party entered into without the prior consent of the Company
which consent shall not be unreasonably withheld.
The indemnities contained in this Section shall survive the resignation or
termination of the Owner Trustee or the termination of this Trust Agreement. In
the event of any claim, action or proceeding for which indemnity will be sought
pursuant to this Section 7.02, the Owner Trustee's choice of legal counsel, if
other than the legal counsel retained by the Owner Trustee in connection with
the execution and delivery of this Trust Agreement, shall be subject to the
approval of the Company, which approval shall not be unreasonably withheld. In
addition, upon written notice to the Owner Trustee and with the consent of the
Owner Trustee which consent shall not be unreasonably withheld, the Company has
the right to assume the defense of any claim, action or proceeding against the
Owner Trustee.
<PAGE>
-24-
ARTICLE VIII
Termination of Trust Agreement
------------------------------
Section 8.01. Termination of Trust Agreement. (a) This Trust Agreement
(other than Article VII) and the Trust shall terminate and be of no further
force or effect upon the earliest of (i) the final distribution of all moneys or
other property or proceeds of the Owner Trust Estate in accordance with the
terms of the Indenture and this Trust Agreement, (ii) the Payment Date in
______________, or (iii) the distribution of all of the assets of the Owner
Trust Estate, in accordance with written instructions provided to the Owner
Trustee by Holders of a majority of the Certificates, following the optional
redemption of the Bonds by the Issuer pursuant to Section 8.07 of the Indenture;
provided in each case that all amounts owing to the Bondholders and the Bond
Insurer to the extent payable from the Owner Trust Estate or proceeds thereof
have been paid in full and that all obligations under the Indenture have been
discharged. The bankruptcy, liquidation, dissolution, death or incapacity of any
Certificateholder shall not (x) operate to terminate this Trust Agreement or the
Trust or (y) entitle such Certificateholder's legal representatives or heirs to
claim an accounting or to take any action or proceeding in any court for a
partition or winding up of all or any part of the Trust or the Owner Trust
Estate or (z) otherwise affect the rights, obligations and liabilities of the
parties hereto.
(b) Except as provided in Section 8.01(a), neither the Company nor any
Certificateholder shall be entitled to revoke or terminate the Trust.
(c) Notice of any termination of the Trust, specifying the Payment Date
upon which Certificateholders shall surrender their Certificates to the
Certificate Paying Agent for payment of the final distribution and cancellation,
shall be given by the Certificate Paying Agent by letter to Certificateholders
and the Bond Insurer mailed within five Business Days of receipt of notice of
the final payment on the Bonds from the Indenture Trustee, stating (i) the
Payment Date upon or with respect to which final payment of the Certificates
shall be made upon presentation and surrender of the Certificates at the office
of the Certificate Paying Agent therein designated, (ii) the amount of any such
final payment and (iii) that the Record Date otherwise applicable to such
Payment Date is not applicable, payments being made only upon presentation and
surrender of the Certificates at the office of the Certificate Payment Agent
therein specified. The Certificate Paying Agent shall give such notice to the
Owner Trustee and the Certificate Registrar at the time such notice is given to
Certificateholders. Upon presentation and surrender of the Certificates, the
Certificate Paying Agent shall cause to be distributed to Certificateholders
amounts distributable on such Payment Date pursuant to Section 5.01.
In the event that all of the Certificateholders shall not surrender their
Certificates for cancellation within six months after the date specified in the
above mentioned written notice, the Certificate Paying Agent shall give a second
written notice to the remaining Certificateholders to surrender their
Certificates for cancellation and receive the final distribution with respect
thereto. Subject to applicable laws with respect to escheat of funds, if within
one year following the Payment Date on which final payment of the Certificates
was to have been made pursuant to Section 3.05 of
<PAGE>
-25-
the Indenture, all the Certificates shall not have been surrendered for
cancellation, the Certificate Paying Agent may take appropriate steps, or may
appoint an agent to take appropriate steps, to contact the remaining
Certificateholders concerning surrender of their Certificates, and the cost
thereof shall be paid out of the funds and other assets that shall remain
subject to this Trust Agree ment. Any funds remaining in the Certificate
Distribution Account after exhaustion of such remedies shall be distributed by
the Certificate Paying Agent to the Holder of the Certificate.
(d) Upon the winding up of the Trust and its termination, the Owner Trustee
shall cause the Certificate of Trust to be canceled by filing a certificate of
cancellation with the Secretary of State in accordance with the provisions of
Section 3810(d) of the Business Trust Statute.
ARTICLE IX
Successor Owner Trustees and Additional Owner Trustees
------------------------------------------------------
Section 9.01. Eligibility Requirements for Owner Trustee. The Owner Trustee
shall at all times be a corporation reasonably acceptable to the Bond Insurer
and satisfying the provisions of Section 3807(a) of the Business Trust Statute;
authorized to exercise corporate trust powers; having a combined capital and
surplus of at least $50,000,000 and subject to supervision or examination by
federal or state authorities; and having (or having a parent that has) a rating
of at least Baa3 or is otherwise acceptable to the Bond Insurer, Moody's and
Standard & Poor's. If such corporation shall publish reports of condition at
least annually pursuant to law or to the requirements of the aforesaid
supervising or examining authority, then for the purpose of this Section, the
combined capital and surplus of such corporation shall be deemed to be its
combined capital and surplus as set forth in its most recent report of condition
so published. In case at any time the Owner Trustee shall cease to be eligible
in accordance with the provisions of this Section 9.01, the Owner Trustee shall
resign immediately in the manner and with the effect specified in Section 9.02.
Section 9.02. Replacement of Owner Trustee. The Owner Trustee may at any
time resign and be discharged from the trusts hereby created by giving 30 days
prior written notice thereof to the Bond Insurer and the Company. Upon receiving
such notice of resignation, the Company shall promptly appoint a successor Owner
Trustee with the consent of the Bond Insurer which will not be unreasonably
withheld, by written instrument, in duplicate, one copy of which instrument
shall be delivered to the resigning Owner Trustee and to the successor Owner
Trustee. If no successor Owner Trustee shall have been so appointed and have
accepted appointment within 30 days after the giving of such notice of
resignation, the resigning Owner Trustee may petition any court of competent
jurisdiction for the appointment of a successor Owner Trustee reasonably
acceptable to the Certificateholders and the Bond Insurer.
If at any time the Owner Trustee shall cease to be eligible in accordance
with the provisions of Section 9.01 and shall fail to resign after written
request therefor by the Company or the Bond Insurer, or if at any time the Owner
Trustee shall be legally unable to act, or shall be adjudged bankrupt or
insolvent, or a receiver of the Owner Trustee or of its property shall be
appointed, or any
<PAGE>
-26-
public officer shall take charge or control of the Owner Trustee or of its
property or affairs for the purpose of rehabilitation, conservation or
liquidation, then the Company may remove the Owner Trustee with the consent of
the Bond Insurer and shall remove the Owner Trustee at the direction of the Bond
Insurer.
Any resignation or removal of the Owner Trustee and appointment of a
successor Owner Trustee pursuant to any of the provisions of this Section shall
not become effective until acceptance of appointment by the successor Owner
Trustee pursuant to Section 9.03 and payment of all fees and expenses owed to
the outgoing Owner Trustee. The Servicer shall provide notice of such
resignation or removal of the Owner Trustee to each of the Rating Agencies and
the Bond Insurer.
Section 9.03. Successor Owner Trustee. Any successor Owner Trustee
appointed pursuant to Section 9.02 shall execute, acknowledge and deliver to the
Indenture Trustee and to its predecessor Owner Trustee an instrument accepting
such appointment under this Trust Agreement, and thereupon the resignation or
removal of the predecessor Owner Trustee shall become effective, and such
successor Owner Trustee, without any further act, deed or conveyance, shall
become fully vested with all the rights, powers, duties and obligations of its
predecessor under this Trust Agreement, with like effect as if originally named
as Owner Trustee. The predecessor Owner Trustee shall upon payment of its fees
and expenses deliver to the successor Owner Trustee all documents and statements
and monies held by it under this Trust Agreement; and the predecessor Owner
Trustee shall execute and deliver such instruments and do such other things as
may reasonably be required for fully and certainly vesting and confirming in the
successor Owner Trustee all such rights, powers, duties and obligations.
No successor Owner Trustee shall accept appointment as provided in this
Section 9.03 unless at the time of such acceptance such successor Owner Trustee
shall be eligible pursuant to Section 9.01.
Upon acceptance of appointment by a successor Owner Trustee pursuant to
this Section 9.03, the Owner Trustee shall mail notice thereof to all
Certificateholders, the Indenture Trustee, the Bondholders, the Bond Insurer and
the Rating Agencies.
Section 9.04. Merger or Consolidation of Owner Trustee. Any Person into
which the Owner Trustee may be merged or converted or with which it may be
consolidated, or any Person resulting from any merger, conversion or
consolidation to which the Owner Trustee shall be a party, or any Person
succeeding to all or substantially all of the corporate trust business of the
Owner Trustee, shall be the successor of the Owner Trustee hereunder, without
the execution or filing of any instrument or any further act on the part of any
of the parties hereto, anything herein to the contrary notwithstanding;
provided, that such Person shall be eligible pursuant to Section 9.01 and,
provided, further, that the Owner Trustee shall mail notice of such merger or
consolidation to the Rating Agencies and the Bond Insurer.
Section 9.05. Appointment of Co-Trustee or Separate Trustee.
Notwithstanding any other provisions of this Trust Agreement, at any time, for
the purpose of meeting any legal requirements
<PAGE>
-27-
of any jurisdiction in which any part of the Owner Trust Estate may at the time
be located, the Owner Trustee shall have the power and shall execute and deliver
all instruments to appoint one or more Persons to act as co-trustee, jointly
with the Owner Trustee, or as separate trustee or trustees, of all or any part
of the Owner Trust Estate, and to vest in such Person, in such capacity, such
title to the Trust or any part thereof and, subject to the other provisions of
this Section, such powers, duties, obligations, rights and trusts as the Owner
Trustee or the Bond Insurer may consider necessary or desirable. No co-trustee
or separate trustee under this Trust Agreement shall be required to meet the
terms of eligibility as a successor Owner Trustee pursuant to Section 9.01 and
no notice of the appointment of any co-trustee or separate trustee shall be
required pursuant to Section 9.03, except that notice to, and the consent of,
the Bond Insurer shall be required for appointment of a co-trustee.
Each separate trustee and co-trustee shall, to the extent permitted by law,
be appointed and act subject to the following provisions and conditions:
(a) All rights, powers, duties and obligations conferred or imposed upon
the Owner Trustee shall be conferred upon and exercised or performed by the
Owner Trustee and such separate trustee or co-trustee jointly (it being
understood that such separate trustee or co-trustee is not authorized to act
separately without the Owner Trustee joining in such act), except to the extent
that under any law of any jurisdiction in which any particular act or acts are
to be performed, the Owner Trustee shall be incompetent or unqualified to
perform such act or acts, in which event such rights, powers, duties and
obligations (including the holding of title to the Owner Trust Estate or any
portion thereof in any such jurisdiction) shall be exercised and performed
singly by such separate trustee or co-trustee, but solely at the direction of
the Owner Trustee;
(b) No trustee under this Trust Agreement shall be personally liable by
reason of any act or omission of any other trustee under this Trust Agreement;
and
(c) The Owner Trustee may at any time accept the resignation of or remove
any separate trustee or co-trustee.
Any notice, request or other writing given to the Owner Trustee shall be
deemed to have been given to each of the then separate trustees and co-trustees,
as effectively as if given to each of them. Every instrument appointing any
separate trustee or co-trustee shall refer to this Trust Agreement and the
conditions of this Article IX. Each separate trustee and co-trustee, upon its
acceptance of the trusts conferred, shall be vested with the estates or property
specified in its instrument of appointment, either jointly with the Owner
Trustee or separately, as may be provided therein, subject to all the provisions
of this Trust Agreement, specifically including every provision of this Trust
Agreement relating to the conduct of, affecting the liability of, or affording
protection to, the Owner Trustee. Each such instrument shall be filed with the
Owner Trustee.
Any separate trustee or co-trustee may at any time appoint the Owner
Trustee as its agent or attorney-in-fact with full power and authority, to the
extent not prohibited by law, to do any lawful act under or in respect of this
Trust Agreement on its behalf and in its name. If any separate trustee or co-
trustee shall die, become incapable of acting, resign or be removed, all of its
estates, properties,
<PAGE>
-28-
rights, remedies and trusts shall vest in and be exercised by the Owner Trustee,
to the extent permitted by law, without the appointment of a new or successor
co-trustee or separate trustee.
ARTICLE X
Miscellaneous
-------------
Section 10.01. Amendments. (a) This Trust Agreement may be amended from
time to time by the parties hereto (with the prior written consent of the Bond
Insurer and with prior notice to the Rating Agencies) as specified in this
Section, provided that any amendment, except as provided in subparagraph (e)
below, shall be accompanied by an Opinion of Counsel addressed to the Owner
Trustee and obtained by the Servicer to the effect that such amendment (i)
complies with the provisions of this Section and (ii) would not cause the Trust
(if NCFC was not the Holder of 100% of the Certificates or if the Bond Insurance
Policy is outstanding) to be subject to an entity level tax for federal income
tax purposes.
(b) If the purpose of the amendment (as detailed therein) is to correct
any mistake, eliminate any inconsistency, cure any ambiguity or deal with any
matter not covered (i.e. to give effect to the intent of the parties and, if
applicable, to the expectations of the Holders), it shall not be necessary to
obtain the consent of any Holders, but the Owner Trustee shall be furnished with
(i) a letter from each of the Rating Agencies that the amendment will not result
in the downgrading or withdrawal of the rating then assigned to any Bond or the
rating then assigned to any Bond without taking into account the Bond Insurance
Policy or (ii) an Opinion of Counsel obtained by the Servicer to the effect that
such action will not adversely affect in any material respect the interests of
any Holders or the Bond Insurer, and the consent of the Bond Insurer shall be
obtained.
(c) If the purpose of the amendment is to prevent the imposition of any
federal or state taxes at any time that any Security is outstanding, it shall
not be necessary to obtain the consent of any Holder, but the Owner Trustee and
the Bond Insurer shall be furnished with an Opinion of Counsel obtained by the
Servicer that such amendment is necessary or helpful to prevent the imposition
of such taxes and is not materially adverse to any Holder or the Bond Insurer
and the consent of the Bond Insurer shall be obtained.
(d) If the purpose of the amendment is to add or eliminate or change any
provision of the Trust Agreement other than as contemplated in (b) and (c)
above, the amendment shall require (i) an Opinion of Counsel obtained by the
Servicer to the effect that such action will not adversely affect in any
material respect the interests of any Holders or the Bond Insurer, (ii) the
consent of the Bond Insurer and (iii) either (A) a letter from each of the
Rating Agencies that the amendment will not result in the downgrading or
withdrawal of the rating then assigned to any Bond or the rating then assigned
to any Bond without taking into account the Bond Insurance Policy or (B) the
consent of the Indenture Trustee and the Holders of Certificates evidencing a
majority of the Certificate Principal Balance of the Certificates; provided,
however, that no such amendment shall (1) reduce in any manner the amount of, or
delay the timing of, payments received that are required to be distributed
<PAGE>
-29-
on any Certificate without the consent of the related Certificateholder and the
Bond Insurer, or (2) reduce the aforesaid percentage of Certificates the Holders
of which are required to consent to any such amendment, without the consent of
the Holders of all such Certificates then outstanding.
(e) If the purpose of the amendment is to provide for the holding of any
of the Certificates in book-entry form, it shall require the consent of Holders
of all such Certificates then outstanding; provided, that the Opinion of Counsel
specified in subparagraph (a) above shall not be required.
(f) If the purpose of the amendment is to provide for the issuance of
additional certificates representing an interest in the Trust, it shall not be
necessary to obtain the consent of any Holder, but the Owner Trustee shall be
furnished with (i) an Opinion of Counsel obtained by the Servicer to the effect
that such action will not adversely affect in any material respect the interests
of any Holders or the Bond Insurer and (ii) a letter from the each of the Rating
Agencies that the amendment will not result in the downgrading or withdrawal of
the rating then assigned to any Bonds or the rating then assigned to the Bonds
without taking into account the Bond Insurance Policy and the consent of the
Bond Insurer shall be obtained.
(g) Promptly after the execution of any such amendment or consent, the
Servicer shall furnish written notification of the substance of such amendment
or consent to each Certificateholder, the Indenture Trustee, the Bond Insurer
and each of the Rating Agencies. It shall not be necessary for the consent of
Certificateholders or the Indenture Trustee pursuant to this Section 10.01 to
approve the particular form of any proposed amendment or consent, but it shall
be sufficient if such consent shall approve the substance thereof. The manner of
obtaining such consents (and any other consents of Certificateholders provided
for in this Trust Agreement or in any other Basic Document) and of evidencing
the authorization of the execution thereof by Certificateholders shall be
subject to such reasonable requirements as the Owner Trustee may prescribe.
(h) In connection with the execution of any amendment to any agreement to
which the Trust is a party, other than this Trust Agreement, the Owner Trustee
shall be entitled to receive and conclusively rely upon an Opinion of Counsel to
the effect that such amendment is authorized or permitted by the documents
subject to such amendment and that all conditions precedent in the Basic
Documents for the execution and delivery thereof by the Trust or the Owner
Trustee, as the case may be, have been satisfied.
Promptly after the execution of any amendment to the Certificate of Trust,
the Owner Trustee shall cause the filing of such amendment with the Secretary of
State of the State of Delaware.
Section 10.02. No Legal Title to Owner Trust Estate. The Certificateholders
shall not have legal title to any part of the Owner Trust Estate solely by
virtue of their status as Certificateholders. The Certificateholders shall be
entitled to receive distributions with respect to their undivided beneficial
interests therein only in accordance with Articles V and VIII. No transfer, by
operation of law or otherwise, of any right, title or interest of the
Certificateholders to and in their ownership interest in the Owner Trust Estate
shall operate to terminate this Trust Agreement or the trusts
<PAGE>
-30-
hereunder or entitle any transferee to an accounting or to the transfer to it of
legal title to any part of the Owner Trust Estate
Section 10.03. Limitations on Rights of Others. Except for Section 2.07,
the provisions of this Trust Agreement are solely for the benefit of the Owner
Trustee, the Company, the Certificateholders, the Bond Insurer and, to the
extent expressly provided herein, the Indenture Trustee and the Bondholders, and
nothing in this Trust Agreement (other than Section 2.07), whether express or
implied, shall be construed to give to any other Person any legal or equitable
right, remedy or claim in the Owner Trust Estate or under or in respect of this
Trust Agreement or any covenants, conditions or provisions contained herein.
Section 10.04. Notices. (a) Unless otherwise expressly specified or
permitted by the terms hereof, all notices shall be in writing and shall be
deemed given upon receipt, to the Owner Trustee at: _________ ; Attention:
Corporate Trust Administration; to the Company at: NovaStar Mortgage Funding
Corporation, 1900 West 47th Place, Suite 205, Westwood, Kansas 66205, Attention:
David Lee; to the Indenture Trustee at:________________________________________
_________________________________________________________; to the Bond Insurer
at:________________________________________________________________________;
to [Rating Agency] at:___________________________, Attention:_______________; to
[Rating Agency] at ___________________________________________________ or, as to
each party, at such other address as shall be designated by such party in a
written notice to each other party.
(b) Any notice required or permitted to be given to a Certificateholder
shall be given by first-class mail, postage prepaid, at the address of such
Holder as shown in the Certificate Register. Any notice so mailed within the
time prescribed in this Trust Agreement shall be conclusively presumed to have
been duly given, whether or not the Certificateholder receives such notice.
(c) A copy of any notice delivered to the Owner Trustee or the Trust shall
also be delivered to the Company.
Section 10.05. Severability. Any provision of this Trust Agreement that is
prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction,
be ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof, and any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction.
Section 10.06. Separate Counterparts. This Trust Agreement may be executed
by the parties hereto in separate counterparts, each of which when so executed
and delivered shall be an original, but all such counterparts shall together
constitute but one and the same instrument.
Section 10.07. Successors and Assigns. All representations, warranties,
covenants and agreements contained herein shall be binding upon, and inure to
the benefit of, each of the Company, the Bond Insurer, the Owner Trustee and its
successors and each Certificateholder and its successors
<PAGE>
-31-
and permitted assigns, all as herein provided. Any request, notice, direction,
consent, waiver or other instrument or action by a Certificateholder shall bind
the successors and assigns of such Certificateholder.
Section 10.08. No Petition. The Owner Trustee, by entering into this Trust
Agreement and each Certificateholder, by accepting a Certificate, hereby
covenant and agree that they will not at any time institute against the Company
or the Trust, or join in any institution against the Company or the Trust of,
any bankruptcy proceedings under any United States federal or state bankruptcy
or similar law in connection with any obligations to the Certificates, the
Bonds, this Trust Agreement or any of the Basic Documents. This Section shall
survive for one year following the termination of this Trust Agreement.
Section 10.09. No Recourse. Each Certificateholder by accepting a
Certificate acknowledges that such Certificateholder's Certificates represent
beneficial interests in the Trust only and do not represent interests in or
obligations of the Company, the Seller, the Owner Trustee, the Indenture Trustee
or any Affiliate thereof and no recourse may be had against such parties or
their assets, except as may be expressly set forth or contemplated in this Trust
Agreement, the Certificates or the Basic Documents.
Section 10.10. Headings. The headings of the various Articles and Sections
herein are for convenience of reference only and shall not define or limit any
of the terms or provisions hereof.
Section 10.11. GOVERNING LAW. THIS TRUST AGREEMENT SHALL BE CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE, WITHOUT REFERENCE TO ITS
CONFLICT OF LAW PROVISIONS, AND THE OBLIGATIONS, RIGHTS AND REMEDIES OF THE
PARTIES HEREUNDER SHALL BE DETERMINED IN ACCORDANCE WITH SUCH LAWS.
Section 10.12. Integration. This Trust Agreement constitutes the entire
agreement among the parties hereto pertaining to the subject matter hereof and
supersedes all prior agreements and understanding pertaining thereto.
Section 10.13. Third Party Beneficiary. The Bond Insurer shall be a third
party beneficiary hereof and shall be entitled to enforce the provisions hereof
as if a party hereto. This provision shall not be construed to limit or modify
in any way the fiduciary obligation of the Owner Trustee to the beneficial
owners of the Trust.
<PAGE>
IN WITNESS WHEREOF, the Company and the Owner Trustee have caused their names
to be signed hereto by their respective officers thereunto duly authorized, all
as of the day and year first above written.
NOVASTAR MORTGAGE FUNDING CORPORATION, as Company,
By: __________________________________
Name:__________________
Title:_________________
__________________________________, as Owner Trustee,
By: __________________________________
Name:__________________
Title:_________________
Acknowledged and Agreed:
______________________________,
as Certificate Registrar
and Certificate Paying Agent
By:____________________________
Name:
Title:
<PAGE>
EXHIBIT A
[Form of Certificate]
[Face]
THIS CERTIFICATE HAS NOT BEEN AND WILL NOT BE REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED, OR THE SECURITIES LAWS OF ANY STATE AND MAY NOT BE
RESOLD OR TRANSFERRED UNLESS IT IS REGISTERED PURSUANT TO SUCH ACT AND LAWS OR
IS SOLD OR TRANSFERRED IN TRANSACTIONS WHICH ARE EXEMPT FROM REGISTRATION UNDER
SUCH ACT AND UNDER APPLICABLE STATE LAW AND IS TRANSFERRED IN ACCORDANCE WITH
THE PROVISIONS OF SECTION 3.05 OF THE TRUST AGREEMENT REFERRED TO HEREIN.
NO TRANSFER OF THIS CERTIFICATE SHALL BE MADE UNLESS THE CERTIFICATE REGISTRAR
SHALL HAVE RECEIVED EITHER (i) A REPRESENTATION LETTER FROM THE TRANSFEREE OF
THIS CERTIFICATE TO THE EFFECT THAT SUCH TRANSFEREE IS NOT AN EMPLOYEE BENEFIT
PLAN SUBJECT TO THE FIDUCIARY RESPONSIBILITY PROVISIONS OF THE EMPLOYEE
RETIREMENT INCOME SECURITY ACT OF 1974, AS AMENDED ("ERISA"), OR SECTION 4975 OF
THE INTERNAL REVENUE CODE OF 1986, AS AMENDED (THE "CODE"), OR A PERSON ACTING
ON BEHALF OF ANY SUCH PLAN OR USING THE ASSETS OF ANY SUCH PLAN, OR (ii) IF THIS
CERTIFICATE IS PRESENTED FOR REGISTRATION IN THE NAME OF A PLAN SUBJECT TO THE
FIDUCIARY RESPONSIBILITY PROVISIONS OF ERISA, OR SECTION 4975 OF THE CODE (OR
COMPARABLE PROVISIONS OF ANY SUBSEQUENT ENACTMENTS), OR A TRUSTEE OF ANY SUCH
PLAN, OR ANY OTHER PERSON WHO IS USING THE ASSETS OF ANY SUCH PLAN TO EFFECT
SUCH ACQUISITION, AN OPINION OF COUNSEL TO THE EFFECT THAT THE PURCHASE OR
HOLDING OF THIS CERTIFICATE WILL NOT RESULT IN THE ASSETS OF THE OWNER TRUST
ESTATE BEING DEEMED TO BE "PLAN ASSETS" AND SUBJECT TO THE FIDUCIARY
RESPONSIBILITY PROVISIONS OF ERISA OR THE PROHIBITED TRANSACTION PROVISIONS OF
THE CODE, WILL NOT CONSTITUTE OR RESULT IN A PROHIBITED TRANSACTION WITHIN THE
MEANING OF SECTION 406 OR SECTION 407 OF ERISA OR SECTION 4975 OF THE CODE, AND
WILL NOT SUBJECT THE OWNER TRUSTEE OR THE COMPANY TO ANY OBLIGATION OR
LIABILITY.
NO TRANSFER OF THIS CERTIFICATE SHALL BE MADE UNLESS THE CERTIFICATE REGISTRAR
SHALL HAVE RECEIVED A CERTIFICATE OF NON-FOREIGN STATUS CERTIFYING AS TO THE
TRANSFEREE'S STATUS AS A U.S. PERSON OR CORPORATION UNDER U.S. LAW.
THIS CERTIFICATE DOES NOT REPRESENT AN INTEREST IN OR OBLIGATION OF THE SELLER,
THE COMPANY, THE SERVICER, THE INDENTURE TRUSTEE, OR THE
<PAGE>
A-2
OWNER TRUSTEE OR ANY OF THEIR RESPECTIVE AFFILIATES, EXCEPT AS EXPRESSLY
PROVIDED IN THE TRUST AGREEMENT OR THE BASIC DOCUMENTS.
<PAGE>
A-3
Certificate No. ______________________
Certificate Percentage Interest of this Certificate: _______%
Cut-off Date: __________________
First Payment Date ________________
CUSIP NO.: __________________________
NOVASTAR MORTGAGE FUNDING TRUST, SERIES _________
COLLATERALIZED MORTGAGE OBLIGATION CERTIFICATES
Evidencing a fractional undivided equity interest in the Owner Trust
Estate, the property of which consists primarily of the Mortgage Loans in
NovaStar Mortgage Funding Trust Series ________ (the "Trust"), a Delaware
business trust formed by
NOVASTAR MORTGAGE FUNDING CORPORATION, as Company, pursuant to the
Trust Agreement referred to below.
This certifies that [name of Holder] is the registered owner of the
Certificate Percentage Interest represented hereby.
The Trust was created pursuant to a Trust Agreement, dated as of
_______________, as amended and restated by the Amended and Restated Trust
Agreement, dated as of _______________ (as amended and supplemented from time to
time, the "Trust Agreement"), between the Company and ______________, as owner
trustee (as amended and supplemented from time to time, the "Owner Trustee",
which term includes any successor entity under the Trust Agreement), a summary
of certain of the pertinent provisions of which is set forth hereinafter. This
Certificate is issued under and is subject to the terms, provisions and
conditions of the Trust Agreement, to which Trust Agreement the Holder of this
Certificate by virtue of the acceptance hereof assents and by which such Holder
is bound.
This Certificate is one of a duly authorized issue of NovaStar Mortgage
Funding Trust, Series _________ Collateralized Mortgage Obligation Certificates
(herein called the "Certificates") issued under the Trust Agreement to which
reference is hereby made for a statement of the respective rights thereunder of
the Company, the Owner Trustee and the Holders of the Certificates and the terms
upon which the Certificates are executed and delivered. All terms used in this
Certificate which are defined in the Trust Agreement shall have the meanings
assigned to them in the Trust Agreement. The Owner Trust Estate consists of the
Mortgage Loans in the NovaStar Mortgage Funding Trust Series ________ and a Bond
Insurance Policy. The rights of the Holders of the Certificates are subordinated
to the rights of the Holders of the Bonds, as set forth in the Indenture.
<PAGE>
A-4
There will be distributed on the _____ day of each month or, if such _____
day is not a Business Day, the next Business Day (each, a "Payment Date"),
commencing in ________________, to the Person in whose name this Certificate is
registered (i) with respect to the first Payment Date, on the Closing Date and
(ii) with respect to every other Payment Date, at the close of business on the
last Business Day of the month preceding the month of such Payment Date (the
"Record Date"), such Certificateholder's Certificate Percentage Interest in the
amount to be distributed to Certificateholders on such Payment Date.
The Certificateholder, by its acceptance of this Certificate, agrees that
it will look solely to the funds on deposit in the Payment Account that have
been released from the Lien of the Indenture for payment hereunder and that
neither the Owner Trustee in its individual capacity nor the Company is
personally liable to the Certificateholders for any amount payable under this
Certificate or the Trust Agreement or, except as expressly provided in the Trust
Agreement, subject to any liability under the Trust Agreement.
The Holder of this Certificate acknowledges and agrees that its rights to
receive distributions in respect of this Certificate are subordinated to the
rights of the Bondholders as described in the Indenture, dated as of
______________, between the Trust and ___________________________, as Indenture
Trustee (the "Indenture").
The Company and each Certificateholder, by acceptance of a Certificate,
agree to treat, and to take no action inconsistent with the treatment of, the
Certificates for federal, state and local income tax purposes as an equity
interest in the Trust.
Each Certificateholder, by its acceptance of a Certificate, covenants and
agrees that such Certificateholder will not at any time institute against the
Company, or join in any institution against the Company or the Trust of, any
bankruptcy, reorganization, arrangement, insolvency or liquidation proceedings,
or other proceedings under any United States federal or state bankruptcy or
similar law in connection with any obligations relating to the Certificates, the
Bonds, the Trust Agreement or any of the Basic Documents.
Distributions on this Certificate will be made as provided in the Trust
Agreement by the Certificate Paying Agent by wire transfer or check mailed to
the Certificateholder of record in the Certificate Register without the
presentation or surrender of this Certificate or the making of any notation
hereon. Except as otherwise provided in the Trust Agreement and notwithstanding
the above, the final distribution on this Certificate will be made after due
notice by the Certificate Paying Agent of the pendency of such distribution and
only upon presentation and surrender of this Certificate at the office or agency
maintained by the Certificate Registrar for that purpose by the Trust in the
Borough of Manhattan, The City of New York.
Reference is hereby made to the further provisions of this Certificate set
forth on the reverse hereof, which further provisions shall for all purposes
have the same effect as if set forth at this place.
<PAGE>
A-5
Unless the certificate of authentication hereon shall have been executed by
an authorized officer of the Owner Trustee, or an authenticating agent by manual
signature, this Certificate shall not entitle the Holder hereof to any benefit
under the Trust Agreement or be valid for any purpose.
THIS CERTIFICATE SHALL BE CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE
STATE OF DELAWARE, WITHOUT REFERENCE TO ITS CONFLICT OF LAW PROVISIONS, AND THE
OBLIGATIONS, RIGHTS AND REMEDIES OF THE PARTIES HEREUNDER SHALL BE DETERMINED IN
ACCORDANCE WITH SUCH LAWS.
<PAGE>
A-6
IN WITNESS WHEREOF, the Owner Trustee, on behalf of the Trust and not in
its individual capacity, has caused this Certificate to be duly executed.
___________________________, not in its individual capacity
but solely as Owner Trustee
Dated: By: _______________________
Authorized Signatory
CERTIFICATE OF AUTHENTICATION
This is one of the Certificates referred to in the within-mentioned Trust
Agreement.
___________________________, not in its individual capacity
but solely as Owner Trustee
By: _______________________
Authorized Signatory
or: _________________________________________
As Authenticating Agent of the Trustee
By: _________________________________________
Authorized Signatory
<PAGE>
A-7
[REVERSE OF CERTIFICATE]
The Certificates do not represent an obligation of, or an interest in, the
Company, the Seller, the Servicer, the Indenture Trustee, the Owner Trustee or
any Affiliates of any of them and no recourse may be had against such parties or
their assets, except as expressly set forth or contemplated herein or in the
Trust Agreement or the Basic Documents. In addition, this Certificate is not
guaranteed by any governmental agency or instrumentality and is limited in right
of payment to certain collections and recoveries with respect to the Mortgage
Loans, all as more specifically set forth herein and in the Trust Agreement. A
copy of the Trust Agreement may be examined by any Certificateholder upon
written request during normal business hours at the principal office of the
Company and at such other places, if any, designated by the Company.
The Trust Agreement permits the amendment thereof as specified below,
provided that any amendment be accompanied by the consent of the Bond Insurer
and an Opinion of Counsel to the Owner Trustee to the effect that such amendment
complies with the provisions of the Trust Agreement and, if NovaStar
Certificates Funding Corporation was not the Holder of 100% of the Certificates,
would not cause the Trust to be subject to an entity level tax. If the purpose
of the amendment is to correct any mistake, eliminate any inconsistency, cure
any ambiguity or deal with any matter not covered, it shall not be necessary to
obtain the consent of any Holder, but the Owner Trustee shall be furnished with
(A) a letter from each of the Rating Agencies that the amendment will not result
in the downgrading or withdrawal of the rating then assigned to any Bond or the
rating then assigned to any Bond without taking into account the Bond Insurance
Policy or (B) an Opinion of Counsel to the effect that such action will not
adversely affect in any material respect the interests of any Holders, and the
consent of the Bond Insurer shall be obtained. If the purpose of the amendment
is to prevent the imposition of any federal or state taxes at any time that any
Security is outstanding, it shall not be necessary to obtain the consent of the
any Holder, but the Owner Trustee shall be furnished with an Opinion of Counsel
that such amendment is necessary or helpful to prevent the imposition of such
taxes and is not materially adverse to any Holder and the consent of the Bond
Insurer shall be obtained. If the purpose of the amendment is to add or
eliminate or change any provision of the Trust Agreement, other than as
specified in the preceding two sentences, the amendment shall require (A) an
Opinion of Counsel to the effect that such action will not adversely affect in
any material respect the interests of any Holders, (B) the consent of the Bond
Insurer and (C) either (a) a letter from each of the Rating Agencies that the
amendment will not result in the downgrading or withdrawal of the rating then
assigned to any Bond or the rating then assigned to any Bond without taking into
account the Bond Insurance Policy or (b) the consent of the Indenture Trustee
and the Holders of the Certificates evidencing a majority of the Certificate
Principal Balance of the Certificates; provided, however, that no such amendment
shall (i) reduce in any manner the amount of, or delay the timing of, payments
received that are required to be distributed on any Certificate without the
consent of the related Certificateholder and the Bond Insurer, or (ii) reduce
the aforesaid percentage of Certificates the Holders of which are required to
consent to any such amendment without the consent of the Holders of all such
Certificates then outstanding.
<PAGE>
A-8
As provided in the Trust Agreement and subject to certain limitations
therein set forth, the transfer of this Certificate is registerable in the
Certificate Register upon surrender of this Certificate for registration of
transfer at the offices or agencies of the Certificate Registrar maintained by
the Trust in the Borough of Manhattan, The City of New York, accompanied by a
written instrument of transfer in form satisfactory to the Certificate Registrar
duly executed by the Holder hereof or such Holder's attorney duly authorized in
writing, and thereupon one or more new Certificates of authorized denominations
evidencing the same aggregate interest in the Trust will be issued to the
designated transferee. The initial Certificate Registrar appointed under the
Trust Agreement is _____________________________.
Except as provided in the Trust Agreement, the Certificates are issuable
only in a minimum Certificate Percentage Interest of 10%. As provided in the
Trust Agreement and subject to certain limitations therein set forth,
Certificates are exchangeable for new Certificates of authorized denominations
evidencing the same aggregate denomination, as requested by the Holder
surrendering the same. No service charge will be made for any such registration
of transfer or exchange, but the Owner Trustee or the Certificate Registrar may
require payment of a sum sufficient to cover any tax or governmental charge
payable in connection therewith.
The Owner Trustee, the Certificate Paying Agent, the Certificate Registrar
and any agent of the Owner Trustee, the Certificate Paying Agent, or the
Certificate Registrar may treat the Person in whose name this Certificate is
registered as the owner hereof for all purposes, and none of the Owner Trustee,
the Certificate Paying Agent, the Certificate Registrar or any such agent shall
be affected by any notice to the contrary.
The obligations and responsibilities created by the Trust Agreement and the
Trust created thereby shall terminate as and when provided in accordance with
the terms of the Trust Agreement.
<PAGE>
A-9
ASSIGNMENT
FOR VALUE RECEIVED the undersigned hereby sells, assigns and transfers unto
PLEASE INSERT SOCIAL SECURITY OR
OTHER IDENTIFYING NUMBER OF ASSIGNEE
_______________________________________________________________________________
(Please print or type name and address, including postal zip code, of assignee)
_______________________________________________________________________________
the within Certificate, and all rights thereunder, hereby irrevocably
constituting and appointing
_______________________________________________________________________________
to transfer said Certificate on the books of the Certificate Registrar, with
full power of substitution in the premises.
Dated:
___________________________________________*/
Signature Guaranteed:
____________________________*/
_________________
*/ NOTICE: The signature to this assignment must correspond with the name as
it appears upon the face of the within Certificate in every particular, without
alteration, enlargement or any change whatever. Such signature must be
guaranteed by a member firm of the New York Stock Exchange or a commercial bank
or trust company.
<PAGE>
A-10
DISTRIBUTION INSTRUCTIONS
The assignee should include the following for the information of the
Certificate Paying Agent:
Distribution shall be made by wire transfer in immediately available funds to
______________________________________________
_________________________________________________________________
for the account of ________________________________________, account number
______________, or, if mailed by check, to ______________.
Applicable statements should be mailed to__________________.
______________________________
Signature of assignee or agent
(for authorization of wire
transfer only)
<PAGE>
EXHIBIT B
TO THE TRUST AGREEMENT
CERTIFICATE OF TRUST OF
NovaStar Mortgage Funding Trust Series ________
-----------------------------------------------
THIS Certificate of Trust of NovaStar Mortgage Funding Trust Series
________ (the "Trust"), dated ________________, is being duly executed and filed
by ______________________, a Delaware banking corporation, as trustee, to form a
business trust under the Delaware Business Trust Act (12 Del. Code, (S) 3801 et
seq.).
1. Name. The name of the business trust formed hereby is NovaStar Mortgage
Funding Trust Series_____________.
2. Delaware Trustee. The name and business address of the trustee of the
Trust in the State of Delaware is ______________________, __________________,
__________, ______________, Attention: ______________________________.
IN WITNESS WHEREOF, the undersigned, being the sole trustee of the Trust,
has executed this Certificate of Trust as of the date first above written.
______________________,
not in its individual capacity but solely as
owner trustee under a Trust Agreement dated
as of _____________________
By:
________________________
Name:
Title:
<PAGE>
EXHIBIT C
[FORM OF RULE 144A INVESTMENT REPRESENTATION]
Description of Rule 144A Securities, including numbers:
_______________________________________________
_______________________________________________
_______________________________________________
_______________________________________________
The undersigned seller, as registered holder (the "Seller"), intends to
transfer the Rule 144A Securities described above to the undersigned buyer (the
"Buyer").
1. In connection with such transfer and in accordance with the agreements
pursuant to which the Rule 144A Securities were issued, the Seller hereby
certifies the following facts: Neither the Seller nor anyone acting on its
behalf has offered, transferred, pledged, sold or otherwise disposed of the Rule
144A Securities, any interest in the Rule 144A Securities or any other similar
security to, or solicited any offer to buy or accept a transfer, pledge or other
disposition of the Rule 144A Securities, any interest in the Rule 144A
Securities or any other similar security from, or otherwise approached or
negotiated with respect to the Rule 144A Securities, any interest in the Rule
144A Securities or any other similar security with, any person in any manner, or
made any general solicitation by means of general advertising or in any other
manner, or taken any other action, that would constitute a distribution of the
Rule 144A Securities under the Securities Act of 1933, as amended (the "1933
Act"), or that would render the disposition of the Rule 144A Securities a
violation of Section 5 of the 1933 Act or require registration pursuant thereto,
and that the Seller has not offered the Rule 144A Securities to any person other
than the Buyer or another "qualified institutional buyer" as defined in Rule
144A under the 1933 Act.
2. The Buyer warrants and represents to, and covenants with, the Owner
Trustee and the Company (each as defined in the Amended and Restated Trust
Agreement (the "Agreement"), dated as of ______________, between NovaStar
Mortgage Funding Corporation, as Company, and _____________, as Owner Trustee)
pursuant to Section 3.05 of the Agreement and __________________________________
as indenture trustee, as follows:
a. The Buyer understands that the Rule 144A Securities have not been
registered under the 1933 Act or the securities laws of any state.
b. The Buyer considers itself a substantial, sophisticated
institutional investor having such knowledge and experience in financial
and business matters that it is capable of evaluating the merits and risks
of investment in the Rule 144A Securities.
<PAGE>
C-2
c. The Buyer has been furnished with all information regarding the
Rule 144A Securities that it has requested from the Seller, the Indenture
Trustee, the Owner Trustee or the Servicer.
d. Neither the Buyer nor anyone acting on its behalf has offered,
transferred, pledged, sold or otherwise disposed of the Rule 144A
Securities, any interest in the Rule 144A Securities or any other similar
security to, or solicited any offer to buy or accept a transfer, pledge or
other disposition of the Rule 144A Securities, any interest in the Rule
144A Securities or any other similar security from, or otherwise approached
or negotiated with respect to the Rule 144A Securities, any interest in the
Rule 144A Securities or any other similar security with, any person in any
manner, or made any general solicitation by means of general advertising or
in any other manner, or taken any other action, that would constitute a
distribution of the Rule 144A Securities under the 1933 Act or that would
render the disposition of the Rule 144A Securities a violation of Section 5
of the 1933 Act or require registration pursuant thereto, nor will it act,
nor has it authorized or will it authorize any person to act, in such
manner with respect to the Rule 144A Securities.
e. The Buyer is a "qualified institutional buyer" as that term is
defined in Rule 144A under the 1933 Act and has completed either of the
forms of certification to that effect attached hereto as Annex 1 or Annex
2. The Buyer is aware that the sale to it is being made in reliance on Rule
144A. The Buyer is acquiring the Rule 144A Securities for its own account
or the accounts of other qualified institutional buyers, understands that
such Rule 144A Securities may be resold, pledged or transferred only (i) to
a person reasonably believed to be a qualified institutional buyer that
purchases for its own account or for the account of a qualified
institutional buyer to whom notice is given that the resale, pledge or
transfer is being made in reliance on Rule 144A, or (ii) pursuant to
another exemption from registration under the 1933 Act.
[3. The Buyer warrants and represents to, and covenants with, the
Seller, the Indenture Trustee, Owner Trustee, Servicer and the Company that
either (1) the Buyer is (A) not an employee benefit plan (within the meaning of
Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended
("ERISA")), or a plan (within the meaning of Section 4975(e)(1) of the Internal
Revenue Code of 1986 ("Code")), which (in either case) is subject to ERISA or
Section 4975 of the Code (both a "Plan"), and (B) is not directly or indirectly
purchasing the Rule 144A Securities on behalf of, as investment manager of, as
named fiduciary of, as trustee of, or with "plan assets" of a Plan, or (2) the
Buyer understands that registration of transfer of any Rule 144A Securities to
any Plan, or to any Person acting on behalf of any Plan, will not be made unless
such Plan delivers an opinion of its counsel, addressed and satisfactory to the
Certificate Registrar and the Company, to the effect that the purchase and
holding of the Rule 144A Securities by, on behalf of or with "plan assets" of
any Plan would not constitute or result in a prohibited transaction under
Section 406 of ERISA or Section 4975 of the Code, and would not subject the
Company, the Servicer, the Indenture Trustee or the Trust to any obligation or
liability (including liabilities under ERISA or Section 4975 of the Code) in
addition to those undertaken in the Agreement or any other liability.]
<PAGE>
C-3
4. This document may be executed in one or more counterparts and by
the different parties hereto on separate counterparts, each of which, when so
executed, shall be deemed to be an original; such counterparts, together, shall
constitute one and the same document.
Capitalized terms used herein and not otherwise defined herein have
the meanings assigned to them in the Agreement.
IN WITNESS WHEREOF, each of the parties has executed this document as
of the date set forth below.
__________________________ __________________________
Print Name of Seller Print Name of Buyer
By:_______________________ By:_________________________
Name: Name:
Title: Title:
Taxpayer Identification: Taxpayer Identification:
No._______________________ No._________________________
Date:_____________________ Date:_______________________
<PAGE>
C-4
ANNEX 1 TO EXHIBIT C
--------------------
QUALIFIED INSTITUTIONAL BUYER STATUS UNDER SEC RULE 144A
--------------------------------------------------------
[For Buyers Other Than Registered Investment Companies]
The undersigned hereby certifies as follows in connection with the Rule
144A Investment Representation to which this Certification is attached:
1. As indicated below, the undersigned is the President, Chief Financial
Officer, Senior Vice President or other executive officer of the Buyer.
2. In connection with purchases by the Buyer, the Buyer is a "qualified
institutional buyer" as that term is defined in Rule 144A under the Securities
Act of 1933 ("Rule 144A") because (i) the Buyer owned and/or invested on a
discretionary basis $______________________/1/ in securities (except for the
excluded securities referred to below) as of the end of the Buyer's most recent
fiscal year (such amount being calculated in accordance with Rule 144A) and (ii)
the Buyer satisfies the criteria in the category marked below.
___ Corporation, etc. The Buyer is a corporation (other than a bank, savings
and loan association or similar institution), Massachusetts or similar
business trust, partnership, or charitable organization described in
Section 501(c)(3) of the Internal Revenue Code.
___ Bank. The Buyer (a) is a national bank or banking institution organized
under the laws of any State, territory or the District of Columbia, the
business of which is substantially confined to banking and is supervised
by the State or territorial banking commission or similar official or is
a foreign bank or equivalent institution, and (b) has an audited net
worth of at least $25,000,000 as demonstrated in its latest annual
financial statements, a copy of which is attached hereto.
- ----------------------
/1/ Buyer must own and/or invest on a discretionary basis at least $100,000,000
in securities unless Buyer is a dealer, and, in that case, Buyer must own and/or
invest on a discretionary basis at least $10,000,000 in securities.
<PAGE>
C-5
___ Savings and Loan. The Buyer (a) is a savings and loan association,
building and loan association, cooperative bank, homestead association
or similar institution, which is supervised and examined by a State or
Federal authority having supervision over any such institutions or is a
foreign savings and loan association or equivalent institution and (b)
has an audited net worth of at least $25,000,000 as demonstrated in its
latest annual financial statements.
___ Broker-Dealer. The Buyer is a dealer registered pursuant to Section 15
of the Securities Exchange Act of 1934.
___ Insurance Company. The Buyer is an insurance company whose primary and
predominant business activity is the writing of insurance or the
reinsuring of risks underwritten by insurance companies and which is
subject to supervision by the insurance commissioner or a similar
official or agency of a State or territory or the District of Columbia.
___ State or Local Plan. The Buyer is a plan established and maintained by
a State, its political subdivisions, or any agency or instrumentality
of the State or its political subdivisions, for the benefit of its
employees.
___ ERISA Plan. The Buyer is an employee benefit plan within the meaning
of Title I of the Employee Retirement Income Security Act of 1974.
___ Investment Adviser. The Buyer is an investment adviser registered
under the Investment Advisers Act of 1940.
___ SBIC. The Buyer is a Small Business Investment Company licensed by the
U.S. Small Business Administration under Section 301(c) or (d) of the
Small Business Investment Act of 1958.
___ Business Development Company. The Buyer is a business development
company as defined in Section 202(a)(22) of the Investment Advisers Act
of 1940.
___ Trust Fund. The Buyer is a trust fund whose trustee is a bank or trust
company and whose participants are exclusively (a) plans established
and maintained by a State, its political subdivisions, or any agency or
instrumentality of the State or its political subdivisions, for the
benefit of its employees, or (b) employee benefit plans within the
meaning of Title I of the Employee Retirement Income Security Act of
1974, but is not a trust fund that includes as participants individual
retirement accounts or H.R. 10 plans.
3. The term "securities" as used herein does not include (i) securities
of issuers that are affiliated with the Buyer, (ii) securities that are part of
an unsold allotment to or subscription by the Buyer, if the Buyer is a dealer,
(iii) bank deposit notes and certificates of deposit, (iv) loan participations,
(v) repurchase agreements, (vi) securities owned but subject to a repurchase
agreement and (vii) currency, interest rate and commodity swaps.
<PAGE>
C-6
4. For purposes of determining the aggregate amount of securities owned
and/or invested on a discretionary basis by the Buyer, the Buyer used the cost
of such securities to the Buyer and did not include any of the securities
referred to in the preceding paragraph. Further, in determining such aggregate
amount, the Buyer may have included securities owned by subsidiaries of the
Buyer, but only if such subsidiaries are consolidated with the Buyer in its
financial statements prepared in accordance with generally accepted accounting
principles and if the investments of such subsidiaries are managed under the
Buyer's direction. However, such securities were not included if the Buyer is a
majority-owned, consolidated subsidiary of another enterprise and the Buyer is
not itself a reporting company under the Securities Exchange Act of 1934.
5. The Buyer acknowledges that it is familiar with Rule 144A and
understands that the seller to it and other parties related to the Certificates
are relying and will continue to rely on the statements made herein because one
or more sales to the Buyer may be in reliance on Rule 144A.
___ ___ Will the Buyer be purchasing the Rule 144A
Yes No Securities only for the Buyer's own account?
6. If the answer to the foregoing question is "no", the Buyer agrees that,
in connection with any purchase of securities sold to the Buyer for the account
of a third party (including any separate account) in reliance on Rule 144A, the
Buyer will only purchase for the account of a third party that at the time is a
"qualified institutional buyer" within the meaning of Rule 144A. In addition,
the Buyer agrees that the Buyer will not purchase securities for a third party
unless the Buyer has obtained a current representation letter from such third
party or taken other appropriate steps contemplated by Rule 144A to conclude
that such third party independently meets the definition of "qualified
institutional buyer" set forth in Rule 144A.
7. The Buyer will notify each of the parties to which this certification is
made of any changes in the information and conclusions herein. Until such
notice is given, the Buyer's purchase of Rule 144A Securities will constitute a
reaffirmation of this certification as of the date of such purchase.
_______________________________________
Print Name of Buyer
By: __________________________________
Name:
Title:
Date:__________________________________
<PAGE>
C-7
ANNEX 2 TO EXHIBIT C
--------------------
QUALIFIED INSTITUTIONAL BUYER STATUS UNDER SEC RULE 144A
--------------------------------------------------------
[For Buyers That Are Registered Investment Companies]
The undersigned hereby certifies as follows in connection with the
Rule 144A Investment Representation to which this Certification is attached:
1. As indicated below, the undersigned is the President, Chief
Financial Officer or Senior Vice President of the Buyer or, if the Buyer is a
"qualified institutional buyer" as that term is defined in Rule 144A under the
Securities Act of 1933 ("Rule 144A") because Buyer is part of a Family of
Investment Companies (as defined below), is such an officer of the Adviser.
2. In connection with purchases by Buyer, the Buyer is a "qualified
institutional buyer" as defined in SEC Rule 144A because (i) the Buyer is an
investment company registered under the Investment Company Act of 1940, and (ii)
as marked below, the Buyer alone, or the Buyer's Family of Investment Companies,
owned at least $100,000,000 in securities (other than the excluded securities
referred to below) as of the end of the Buyer's most recent fiscal year. For
purposes of determining the amount of securities owned by the Buyer or the
Buyer's Family of Investment Companies, the cost of such securities was used.
____ The Buyer owned $___________________ in securities (other than the
excluded securities referred to below) as of the end of the Buyer's
most recent fiscal year (such amount being calculated in accordance
with Rule 144A).
____ The Buyer is part of a Family of Investment Companies which owned in
the aggregate $______________ in securities (other than the excluded
securities referred to below) as of the end of the Buyer's most recent
fiscal year (such amount being calculated in accordance with Rule
144A).
3. The term "Family of Investment Companies" as used herein means
two or more registered investment companies (or series thereof) that have the
same investment adviser or investment advisers that are affiliated (by virtue of
being majority owned subsidiaries of the same parent or because one investment
adviser is a majority owned subsidiary of the other).
4. The term "securities" as used herein does not include (i)
securities of issuers that are affiliated with the Buyer or are part of the
Buyer's Family of Investment Companies, (ii) bank deposit notes and certificates
of deposit, (iii) loan participations, (iv) repurchase agreements, (v)
securities owned but subject to a repurchase agreement and (vi) currency,
interest rate and commodity swaps.
<PAGE>
C-8
5. The Buyer is familiar with Rule 144A and understands that each of
the parties to which this certification is made are relying and will continue to
rely on the statements made herein because one or more sales to the Buyer will
be in reliance on Rule 144A. In addition, the Buyer will only purchase for the
Buyer's own account.
6. The undersigned will notify each of the parties to which this
certification is made of any changes in the information and conclusions herein.
Until such notice, the Buyer's purchase of Rule 144A Securities will constitute
a reaffirmation of this certification by the undersigned as of the date of such
purchase.
____________________________________
Print Name of Buyer
By:_________________________________
Name:____________________________
Title:___________________________
IF AN ADVISER:
____________________________________
Print Name of Buyer
Date:_______________________________
<PAGE>
EXHIBIT D
FORM OF INVESTOR REPRESENTATION LETTER
, 19
NovaStar Mortgage Funding Corporation
_________________________________
_________________________________
_________________________________
_________________________________
_________________________________
_________________________________
Attention: Corporate Trust Administration
Re: NovaStar Mortgage Funding Trust Series 1997-2
Collateralized Mortgage Obligation Certificates
(the "Certificates")
--------------------
Ladies and Gentlemen:
___________________ (the "Purchaser") intends to purchase from
_____________________ (the "Seller") $___________ of the above-captioned
Certificates, issued pursuant to the Amended and Restated Trust Agreement (the
"Trust Agreement"), dated as of ___________________, between NovaStar Mortgage
Funding Corporation, as company (the "Company"), and _________________, as
owner trustee (the "Owner Trustee"), as acknowledged and agreed by
_____________________________ as Certificate Registrar. All terms used herein
and not otherwise defined shall have the meanings set forth in the Trust
Agreement. The Purchaser hereby certifies, represents and warrants to, and
covenants with, the Company and the Certificate Registrar that:
1. The Purchaser understands that (a) the Certificates have not
been and will not be registered or qualified under the Securities Act of
1933, as amended (the "Act") or any state securities law, (b) the Company
is not required to so register or qualify the Certificates, (c) the
Certificates may be resold only if registered and qualified pursuant to the
provisions of the Act or any state securities law, or if an exemption from
such registration and qualification is available, (d) the Trust Agreement
contains restrictions regarding the transfer of the Certificates and (e)
the Certificates will bear a legend to the foregoing effect.
<PAGE>
D-2
2. The Purchaser is acquiring the Certificates for its own account
for investment only and not with a view to or for sale in connection with
any distribution thereof in any manner that would violate the Act or any
applicable state securities laws.
3. The Purchaser is (a) a substantial, sophisticated institutional
investor having such knowledge and experience in financial and business
matters, and, in particular, in such matters related to securities similar
to the Certificates, such that it is capable of evaluating the merits and
risks of investment in the Certificates, (b) able to bear the economic
risks of such an investment and (c) an "accredited investor" within the
meaning of Rule 501(a) promulgated pursuant to the Act.
4. The Purchaser has been furnished with, and has had an opportunity
to review (a) a copy of the Trust Agreement and (b) such other information
concerning the Certificates, the Mortgage Loans and the Company as has been
requested by the Purchaser from the Company or the Seller and is relevant
to the Purchaser's decision to purchase the Certificates. The Purchaser has
had any questions arising from such review answered by the Company or the
Seller to the satisfaction of the Purchaser.
5. The Purchaser has not and will not nor has it authorized or will
it authorize any person to (a) offer, pledge, sell, dispose of or otherwise
transfer any Certificate, any interest in any Certificate or any other
similar security to any person in any manner, (b) solicit any offer to buy
or to accept a pledge, disposition of other transfer of any Certificate,
any interest in any Certificate or any other similar security from any
person in any manner, (c) otherwise approach or negotiate with respect to
any Certificate, any interest in any Certificate or any other similar
security with any person in any manner, (d) make any general solicitation
by means of general advertising or in any other manner or (e) take any
other action, that (as to any of (a) through (e) above) would constitute a
distribution of any Certificate under the Act, that would render the
disposition of any Certificate a violation of Section 5 of the Act or any
state securities law, or that would require registration or qualification
pursuant thereto. The Purchaser will not sell or otherwise transfer any of
the Certificates, except in compliance with the provisions of the Trust
Agreement.
6. The Purchaser represents:
(i) that either (a) or (b) is satisfied, as marked below:
____ a. The Purchaser is not any employee benefit plan subject to
the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), or
the Internal Revenue Code of 1986 (the "Code"), a Person acting, directly or
indirectly, on behalf of any such plan or any Person acquiring such Certificates
with "plan assets" of a Plan within the meaning of the Department of Labor
regulation promulgated at 29 C.F.R. (S)2510.3-101; or
<PAGE>
D-3
____ b. The Purchaser will provide the Company, the Owner Trustee,
the Certificate Registrar and the Servicer with either: (x) an opinion of
counsel, satisfactory to the Company, the Owner Trustee, the Certificate
Registrar and the Servicer, to the effect that the purchase and holding of a
Certificate by or on behalf of the Purchaser is permissible under applicable
law, will not constitute or result in a prohibited transaction under Section 406
of ERISA or Section 4975 of the Code (or comparable provisions of any subsequent
enactments) and will not subject the Company, the Owner Trustee, the Trust, the
Certificate Registrar or the Servicer to any obligation or liability (including
liabilities under ERISA or Section 4975 of the Code) in addition to those
undertaken in the Trust Agreement, which opinion of counsel shall not be an
expense of the Company, the Owner Trustee, the Trust, the Certificate Registrar
or the Servicer; or (y) in lieu of such opinion of counsel, a certification in
the form of Exhibit G to the Trust Agreement; and
(ii) the Purchaser is familiar with the prohibited transaction restrictions and
fiduciary responsibility requirements of Sections 406 and 407 of ERISA and
Section 4975 of the Code and understands that each of the parties to which this
certification is made is relying and will continue to rely on the statements
made in this paragraph 6.
7. The Purchaser is not a non-United States person.
Very truly yours,
By:
Name:
Title:
<PAGE>
EXHIBIT E
FORM OF TRANSFEROR REPRESENTATION LETTER
______________, 19___
NovaStar Mortgage Funding Corporation
_________________________________
_________________________________
_________________________________
_________________________________
_________________________________
_________________________________
Attention: Corporate Trust Administration
Re: NovaStar Mortgage Funding Trust Series ________
Collateralized Mortgage Obligation Certificates
the "Certificates")
-------------------
Ladies and Gentlemen:
________________________________ (the "Purchaser") intends to purchase
from ______________________(the "Seller") a ___% Certificate Percentage Interest
of NovaStar Mortgage Funding Trust, Series ________ Collateralized Mortgage
Obligation Certificates (the "Certificates"), issued pursuant to the Amended and
Restated Trust Agreement (the "Trust Agreement"), dated as of ________________
between _____________________________, as company (the "Company"), and _________
_______, as owner trustee (the "Owner Trustee"), as acknowledged and agreed by
__________________________, as Certificate Registrar. All terms used herein and
not otherwise defined shall have the meanings set forth in the Trust Agreement.
The Seller hereby certifies, represents and warrants to, and covenants with, the
Company and the Certificate Registrar that:
Neither the Seller nor anyone acting on its behalf has (a) offered,
pledged, sold, disposed of or otherwise transferred any Certificate, any
interest in any Certificate or any other similar security to any person in any
manner, (b) has solicited any offer to buy or to accept a pledge, disposition or
other transfer of any Certificate, any interest in any Certificate or any other
similar security from any person in any manner, (c) has otherwise approached or
negotiated with respect to
<PAGE>
E-2
any Certificate, any interest in any Certificate or any other similar security
with any person in any manner, (d) has made any general solicitation by means of
general advertising or in any other manner, or (e) has taken any other action,
that (as to any of (a) through (e) above) would constitute a distribution of the
Certificates under the Securities Act of 1933 (the "Act"), that would render the
disposition of any Certificate a violation of Section 5 of the Act or any state
securities law, or that would require registration or qualification pursuant
thereto. The Seller will not act, in any manner set forth in the foregoing
sentence with respect to any Certificate. The Seller has not and will not sell
or otherwise transfer any of the Certificates, except in compliance with the
provisions of the Trust Agreement.
Very truly yours,
(Seller)
By:
Name:
Title:
<PAGE>
EXHIBIT F
CERTIFICATE OF NON-FOREIGN STATUS
This Certificate of Non-Foreign Status ("certificate") is delivered
pursuant to Section 3.05 of the Amended and Restated Trust Agreement, dated as
of _____________________ (the "Trust Agreement"), between NovaStar Mortgage
Funding Corporation, as Company, and ___ _____________________, as Owner
Trustee, in connection with the acquisition of, transfer to or possession by the
undersigned, whether as beneficial owner (the "Beneficial Owner"), or nominee on
behalf of the Beneficial Owner of the NovaStar Mortgage Funding Trust, Series
_______ Collateralized Mortgage Obligation Certificates (the "Certificate").
Capitalized terms used but not defined in this certificate have the respective
meanings given them in the Trust Agreement.
Each holder must complete Part I, Part II (if the holder is a nominee), and in
all cases sign and otherwise complete Part III.
In addition, each holder shall submit with the Certificate an IRS Form W-9
relating to such holder.
To confirm to the Trust that the provisions of Sections 871, 881 or 1446 of the
Internal Revenue Code (relating to withholding tax on foreign partners) do not
apply in respect of the Certificate held by the undersigned, the undersigned
hereby certifies:
Part I - Complete Either A or B
A. Individual as Beneficial Owner
1. I am (The Beneficial Owner is ) not a non-resident alien for
purposes of U.S. income taxation;
2. My (The Beneficial Owner's) name and home address are:
; and
3. My (The Beneficial Owner's) U.S. taxpayer identification
number (Social Security Number) is
.
B. Corporate, Partnership or Other Entity as Beneficial Owner
1. (Name of the Beneficial Owner) is not a
foreign corporation, foreign partnership, foreign trust or
foreign estate (as those terms are defined in the Code and
Treasury Regulations;
<PAGE>
F-2
2. The Beneficial Owner's office address and place of
incorporation (if applicable) is
; and
3. The Beneficial Owner's U.S. employer identification number
is .
Part II - Nominees
If the undersigned is the nominee for the Beneficial Owner, the undersigned
certifies that this certificate has been made in reliance upon information
contained in:
an IRS Form W-9
a form such as this or substantially similar
provided to the undersigned by an appropriate person and (i) the undersigned
agrees to notify the Trust at least thirty (30) days prior to the date that the
form relied upon becomes obsolete, and (ii) in connection with change in
Beneficial Owners, the undersigned agrees to submit a new Certificate of Non-
Foreign Status to the Trust promptly after such change.
Part III - Declaration
The undersigned, as the Beneficial Owner or a nominee thereof, agrees to
notify the Trust within sixty (60) days of the date that the Beneficial Owner
becomes a foreign person. The undersigned understands that this certificate may
be disclosed to the Internal Revenue Service by the Trust and any false
statement contained therein could be punishable by fines, imprisonment or both.
<PAGE>
F-3
Under penalties of perjury, I declare that I have examined this certificate
and to the best of my knowledge and belief it is true, correct and complete and
will further declare that I will inform the Trust of any change in the
information provided above, and, if applicable, I further declare that I have
the authority* to sign this document.
Name
Title (if applicable)
Signature and Date
*NOTE: If signed pursuant to a power of attorney, the power of attorney must
accompany this certificate.
<PAGE>
EXHIBIT G
FORM OF ERISA REPRESENTATION LETTER
_____________, 199__
NovaStar Mortgage Funding Corporation
_________________________________
_________________________________
_________________________________
______________________________, as Owner Trustee
______________________________
______________________________
______________________________
________________________________, as Certificate Registrar
________________________________
________________________________
Re: NovaStar Mortgage Funding Trust, Series ________
Collateralized Mortgage Obligation Certificates
Dear Sirs:
__________________________________ (the "Transferee") intends to
acquire from _____________________ (the "Transferor") a ____% Certificate
Percentage Interest of NovaStar Mortgage Funding Trust, Series ________,
Collaterlized Mortgage Obligation Certificates (the "Certificates"), issued
pursuant to an Amended and Restated Trust Agreement (the "Trust Agreement"),
dated as of _______________, between NovaStar Mortgage Funding Corporation, as
company (the "Company"), and ________________, as trustee (the "Owner Trustee").
Capitalized terms used herein and not otherwise defined shall have the meanings
assigned thereto in the Trust Agreement.
The Transferee hereby certifies, represents and warrants to, and covenants
with, the Company, the Owner Trustee, the Certificate Registrar and the Servicer
that either:
(1) The Certificates (i) are not being acquired by, and will not be
transferred to, any employee benefit plan within the meaning of section
3(3) of the Employee Retirement Income Security Act of 1974, as amended
("ERISA") or other retirement arrangement, including individual retirement
accounts and annuities, Keogh plans and bank collective investment funds
and insurance company general or separate accounts in which such plans,
accounts or arrangements are invested, that is subject to Section 406 of
ERISA or Section 4975 of the Internal Revenue Code of 1986 (the "Code")
(any of the foregoing, a "Plan"), (ii)
<PAGE>
G-2
are not being acquired with "plan assets" of a Plan within the meaning of
the Department of Labor ("DOL") regulation, 29 C.F.R. (S) 2510.3-101, and
(iii) will not be transferred to any entity that is deemed to be investing
in plan assets within the meaning of the DOL regulation, 29 C.F.R. (S)
2510.3-101; or
(2) The purchase of the Certificates is permissible under applicable
law, will not constitute or result in any prohibited transaction under
ERISA or Section 4975 of the Code, will not subject the Company or the
Trustee to any obligation in addition to those undertaken in the Trust
Agreement and, with respect to each source of funds being used by the
Transferee to acquire the Certificates (each being referred to as a
"Source") and the following statements in either (a) or (b):
(a) the Transferee is an insurance company and (i) the Source is
assets of its "general account," (ii) the conditions set forth in PTCE
95-60 issued by the DOL have been satisfied and the purchase and
holding of Certificates by or on behalf of the Transferee are exempt
under PTCE 95-60 and (iii) the amount of reserves and liabilities for
such general account contracts held by or on behalf of any Plan do not
exceed 10% of the total reserves and liabilities of such general
account plus surplus as of the date hereof (for purposes of this
clause, all Plans maintained by the same employer (or affiliate
thereof) or employee organization are deemed to be a single Plan) in
connection with its purchase and holding of such Certificates; or
(b) the Transferee is an insurance company and (i) the Source is
assets of its "general account," (ii) the requirements of Section
401(c) of ERISA and the DOL regulations to be promulgated thereunder
("401(c) Regulations") have been satisfied and will continue to be
satisfied and (iii) the Transferee represents that it understands that
the operation of the general account after December 31, 1998 may
affect its ability to continue to hold the Certificates after the date
which is 18 months after the 401(c) Regulations become final and
unless a class exemption issued by the DOL or an exception under
Section 401(c) of ERISA is then available for the continued holding of
Certificates, if the assets of the general account constitute Plan
Assets, it will dispose of the Certificates prior to the date which is
18 months after the 401(c) Regulations become final.
(3) The Transferee is familiar with the prohibited transaction
restrictions and fiduciary responsibility requirements of Sections 406 and
407 of ERISA and Section 4975 of the Code and understands that each of the
parties to which this certification is made is relying and will continue to
rely on the statements made herein.
Very truly yours,
By:
Name:
Title:
<PAGE>
EXHIBIT H
FORM OF REPRESENTATION LETTER
_____________, 199__
NovaStar Mortgage Funding Corporation
_________________________________
_________________________________
_________________________________
______________________________, as Owner Trustee
______________________________
______________________________
______________________________
_________________________________, as Certificate Registrar
_________________________________
_________________________________
Re: NovaStar Mortgage Funding Trust, Series ______
Collateralized Mortgage Obligation Certificates
Dear Sirs:
__________________________________ (the "Transferee") intends to
acquire from _____________________ (the "Transferor") a ___% Certificate
Percentage Interest of NovaStar Mortgage Funding Trust, Series _______
Collateralized Mortgage Obligation Certificates (the "Certificates"), issued
pursuant to an Amended and Restated Trust Agreement (the "Trust Agreement"),
dated as of ________________ among NovaStar Mortgage Funding Corporation, as
company (the "Company"), and _______________, as trustee (the "Owner Trustee").
Capitalized terms used herein and not otherwise defined shall have the meanings
assigned thereto in the Trust Agreement.
The Transferee hereby certifies, represents and warrants to, and
covenants with, the Company, the Owner Trustee, the Certificate Registrar and
the Servicer that:
(1) the Transferee is acquiring the Certificate for its own behalf and
is not acting as agent or custodian for any other person or entity in
connection with such acquisition; and
(2) the Transferee is not a partnership, grantor trust or S
corporation for federal income tax purposes, or, if the Transferee is a
partnership, grantor trust or S corporation for federal income tax
purposes, the Certificates are not more than 50% of the assets of the
partnership, grantor trust or S corporation.
<PAGE>
H-2
Very truly yours,
By:
Name:
Title:
<PAGE>
EXHIBIT I
INITIAL TRUST AGREEMENT
<PAGE>
EXHIBIT 4.3
================================================================================
NOVASTAR MORTGAGE FUNDING TRUST SERIES ______
Issuer
and
[NAME OF INDENTURE TRUSTEE]
Indenture Trustee
_________________________________________
INDENTURE
Dated as of ______________
__________________________________________
Relating to
NOVASTAR MORTGAGE FUNDING TRUST SERIES __________
COLLATERALIZED MORTGAGE OBLIGATION BONDS
================================================================================
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Section Page
- ------- ----
<S> <C>
Table of Contents will generate here
</TABLE>
<PAGE>
This Indenture, dated as of _________________, between NovaStar
Mortgage Funding Trust Series ___________, a Delaware business trust, as Issuer
(the "Issuer"), and ________________________________________, as Indenture
Trustee (the "Indenture Trustee"),
WITNESSETH THAT:
Each party hereto agrees as follows for the benefit of the other party
and for the equal and ratable benefit of the Holders of the NovaStar Mortgage
Funding Asset-Backed Bonds, Series _________ Collateralized Mortgage Obligation
Bonds (the "Bonds") and the Bond Insurer.
GRANTING CLAUSE
The Issuer hereby Grants to the Indenture Trustee at the Closing Date,
as trustee for the benefit of the Holders of the Bonds and the Bond Insurer, all
of the Issuer's right, title and interest in and to whether now existing or
hereafter created by (a) the Initial Mortgage Loans, the Subsequent Mortgage
Loans, the Eligible Substitute Mortgage Loans and the proceeds thereof and all
rights under the Related Documents (including the related Mortgage Files); (b)
all funds on deposit from time to time in the Collection Account allocable to
the Mortgage Loans excluding any investment income from such funds; (c) all
funds on deposit from time to time in the Payment Account and in all proceeds
thereof, including any income on funds deposited in, or investments made with
funds deposited in, the Payment Account, which income shall belong to, and be
for the account of, the Indenture Trustee; (d) all funds on deposit from time to
time in the Interest Coverage Account and the Pre-Funding Account in each case
including any income on funds deposited in, or investments made with funds
deposited in such accounts, which income shall belong to, and be for the account
of, the Indenture Trustee; (e) all rights under the (i) Mortgage Loan Purchase
Agreement as assigned to the Issuer, (ii) the Servicing Agreement and any
Subservicing Agreements and (iii) any title and hazard insurance policies with
respect to the Mortgaged Properties; and (f) all present and future claims,
demands, causes and choses in action in respect of any or all of the foregoing
and all payments on or under, and all proceeds of every kind and nature
whatsoever in respect of, any or all of the foregoing and all payments on or
under, and all proceeds of every kind and nature whatsoever in the conversion
thereof, voluntary or involuntary, into cash or other liquid property, all cash
proceeds, accounts, accounts receivable, notes, drafts, acceptances, checks,
deposit accounts, rights to payment of any and every kind, and other forms of
obligations and receivables, instruments and other property which at any time
constitute all or part of or are included in the proceeds of any of the
foregoing (collectively, the "Trust Estate" or the "Collateral").
The foregoing Grant is made in trust to secure (i) the payment of
principal of and interest on, and any other amounts owing in respect of, the
Bonds, equally and ratably without prejudice, priority or distinction, (ii) the
payment of all other amounts payable under this Indenture and (iii) compliance
with the provisions of this Indenture, all as provided in this Indenture.
The Indenture Trustee, as trustee on behalf of the Holders of the
Bonds and the Bond Insurer, acknowledges such Grant, accepts the trust under
this Indenture in accordance with the provisions hereof and agrees to perform
its duties as Indenture Trustee as required herein. The Indenture Trustee agrees
that it will hold the Bond Insurance Policy in trust and that it will hold any
proceeds of any claim made upon the Bond Insurance Policy solely for the use and
benefit of the
<PAGE>
Holders of the Bonds in accordance with the terms hereof and the terms of the
Bond Insurance Policy.
The Indenture Trustee further acknowledges that in the event (i) the
transfer of the Mortgage Loans from the Seller to NovaStar Assets pursuant to
the Mortgage Loan Purchase Agreement is determined to be a financing; (ii) the
transfer of the Initial Mortgage Loans from the Company to the Issuer pursuant
to the Trust Agreement is determined to be a financing; and/or (iii) the
transfer of the Subsequent Mortgage Loans by the Seller to the Issuer pursuant
to the Mortgage Loan Purchase Agreement is determined to constitute a financing,
then in each case the Indenture Trustee holds the Mortgage Loans as the designee
and bailee of NovaStar Assets, the Company and the Issuer, respectively, subject
however, in each case, to a prior lien in favor of the Bondholders and the Bond
Insurer pursuant to the terms of this Indenture.
2
<PAGE>
ARTICLE I
Definitions
Section 1.01. Definitions. For all purposes of this Indenture, except as
otherwise expressly provided herein or unless the context otherwise requires,
capitalized terms not otherwise defined herein shall have the meanings assigned
to such terms in the Definitions attached hereto as Appendix A, which is
incorporated by reference herein. All other capitalized terms used herein shall
have the meanings specified herein.
Section 1.02. Incorporation by Reference of Trust Indenture Act. Whenever
this Indenture refers to a provision of the Trust Indenture Act (the "TIA"), the
provision is incorporated by reference in and made a part of this Indenture. The
following TIA terms used in this Indenture have the following meanings:
"Commission" means the Securities and Exchange Commission.
"indenture securities" means the Bonds.
"indenture security holder" means a Bondholder.
"indenture to be qualified" means this Indenture.
"indenture trustee" or "institutional trustee" means the Indenture
Trustee.
"obligor" on the indenture securities means the Issuer and any other
obligor on the indenture securities.
All other TIA terms used in this Indenture that are defined by the TIA,
defined by TIA by reference to another statute or defined by Commission rules,
have the meanings assigned to them by such definitions.
Section 1.03. Rules of Construction. Unless the context otherwise
requires:
(i) a term has the meaning assigned to it;
(ii) an accounting term not otherwise defined has the meaning
assigned to it in accordance with generally accepted accounting principles
as in effect from time to time;
(iii) "or" is not exclusive;
(iv) "including" means including without limitation;
(v) words in the singular include the plural and words in the
plural include the singular; and
3
<PAGE>
(vi) any agreement, instrument or statute defined or referred to
herein or in any instrument or certificate delivered in connection herewith
means such agreement, instrument or statute as from time to time amended,
modified or supplemented and includes (in the case of agreements or
instruments) references to all attachments thereto and instruments
incorporated therein; references to a Person are also to its permitted
successors and assigns.
4
<PAGE>
ARTICLE II
Original Issuance of Bonds
Section 2.01. Form. The Bonds, together with the Indenture Trustee's
certificate of authentication, shall be in substantially the form set forth in
Exhibit A, with such appropriate insertions, omissions, substitutions and other
variations as are required or permitted by this Indenture.
The Bonds shall be typewritten, printed, lithographed or engraved or
produced by any combination of these methods (with or without steel engraved
borders).
The terms of the Bonds set forth in Exhibit A are part of the terms of this
Indenture.
Section 2.02. Execution, Authentication and Delivery. The Bonds shall be
executed on behalf of the Issuer by any of its Authorized Officers. The
signature of any such Authorized Officer on the Bonds may be manual or
facsimile.
Bonds bearing the manual or facsimile signature of individuals who were at
any time Authorized Officers of the Issuer shall bind the Issuer,
notwithstanding that such individuals or any of them have ceased to hold such
offices prior to the authentication and delivery of such Bonds or did not hold
such offices at the date of such Bonds.
The Indenture Trustee shall upon Issuer Request authenticate and deliver
Bonds for original issue in an aggregate initial principal amount of
[$_____________].
Each Bond shall be dated the date of its authentication. The Bonds shall be
issuable as registered Bonds and the Bonds shall be issuable in the minimum
initial Bond Principal Balances of $25,000 and in integral multiples of $1,000
in excess thereof.
No Bond shall be entitled to any benefit under this Indenture or be valid
or obligatory for any purpose, unless there appears on such Bond a certificate
of authentication substantially in the form provided for herein executed by the
Indenture Trustee by the manual signature of one of its authorized signatories,
and such certificate upon any Bond shall be conclusive evidence, and the only
evidence, that such Bond has been duly authenticated and delivered hereunder.
Section 2.03. Acceptance of Mortgage Loans by Indenture Trustee. (a) The
Indenture Trustee acknowledges receipt of, subject to the review described below
and any exceptions it notes pursuant to the procedures described below, the
documents (or certified copies thereof) referred to in Section 2.1(b) of the
Mortgage Loan Purchase Agreement and declares that it holds and will continue to
hold those documents and any amendments, replacements or supplements thereto and
all other assets of the Trust Estate as Indenture Trustee in trust for the use
and benefit of all present and future Holders of the Bonds and the Bond Insurer.
No later than 45 days after the Closing Date and each Subsequent Transfer Date
(or, with respect to any Eligible Substitute Mortgage Loan, within 5 Business
Days after the receipt by the Indenture Trustee thereof and, with respect to any
documents received beyond 45 days after the Closing Date, promptly thereafter),
the Indenture Trustee agrees, for the benefit of the Bondholders and the Bond
Insurer, to review each Mortgage File delivered to
5
<PAGE>
it and to execute and deliver, or cause to be executed and delivered, to the
Seller and the Bond Insurer an initial certification in the form annexed hereto
as Exhibit B. In conducting such review, the Trustee will ascertain whether all
required documents described in Section 2.1(b) of the Mortgage Loan Purchase
Agreement have been executed and received and whether those documents relate,
determined on the basis of the Mortgagor name, original principal balance and
loan number, to the Mortgage Loans it has received, as identified in Exhibit D
to this Indenture, as supplemented (provided, however, that with respect to
those documents described in subclause (b)(vi) of such section, the Indenture
Trustee's obligations shall extend only to documents actually delivered pursuant
to such subclause). In performing any such review, the Indenture Trustee may
conclusively rely on the purported due execution and genuineness of any such
document and on the purported genuineness of any signature thereon. If the
Indenture Trustee finds that any document constituting part of the Mortgage File
not to have been executed or received, or to be unrelated to the Mortgage Loans
identified in Exhibit D or Attachment B to Exhibit 2 of the Mortgage Loan
Purchase Agreement or to appear to be defective on its face, the Indenture
Trustee shall promptly notify the Seller and the Bond Insurer of such finding
and the Seller's obligation to cure such defect or repurchase or substitute for
the related Mortgage Loan.
Pursuant to Section 5.11 of this Indenture, the Bond Insurer, so long as no
Bond Insurer Default exists, has the right to exercise any trust or power
conferred on the Indenture Trustee. In connection with the acceptance of the
Subsequent Mortgage Loans by the Indenture Trustee, the Bond Insurer has
provided a Certificate (the "MBIA Certificate") stating that the Subsequent
Mortgage Loans are acceptable to the Bond Insurer. Since the Bond Insurer is
acting on behalf of the Bondholders, the MBIA Certificate will be binding upon
those Bondholders. The Indenture Trustee shall not agree to any transfer of
Subsequent Mortgage Loans to it without (i) receipt of the MBIA Certificate and
(ii) confirmation from the Rating Agencies that the purchase of such Subsequent
Mortgage Loans will not result in a downgrade, withdrawal or qualification of
the ratings then in effect for the Outstanding Bonds (without regard to the Bond
Insurance Policy).
(b) No later than 180 days after the Closing Date, the Indenture Trustee
will review, for the benefit of the Bondholders and the Bond Insurer, the
Mortgage Files and will execute and deliver or cause to be executed and
delivered to the Seller and the Bond Insurer, a final certification in the form
annexed hereto as Exhibit C. In conducting such review, the Indenture Trustee
will ascertain whether an original of each document described in subclauses
(b)(ii)-(iv) of Section 2.1 of the Mortgage Loan Purchase Agreement required to
be recorded has been returned from the recording office with evidence of
recording thereon or a certified copy has been obtained from the recording
office. If the Indenture Trustee finds any document constituting part of the
Mortgage File has not been received, or to be unrelated, determined on the basis
of the Mortgagor name, original principal balance and loan number, to the
Mortgage Loans identified in Exhibit D or Attachment B to Exhibit 2 of the
Mortgage Loan Purchase Agreement or to appear defective on its face, the
Indenture Trustee shall promptly notify the Seller and the Bond Insurer of such
finding and the Seller's obligation to cure such defect or repurchase or
substitute for the related Mortgage Loan.
(c) Upon deposit of the Repurchase Price in the Payment Account, the
Indenture Trustee shall release to the Seller the related Mortgage File and
shall execute and deliver all instruments of transfer or assignment, without
recourse, furnished to it by the Seller as are necessary to vest in the Seller
title to and rights under the related Mortgage Loan. Such purchase shall be
deemed to have
6
<PAGE>
occurred on the date on which certification of the deposit of the Repurchase
Price in the Payment Account was received by the Indenture Trustee. The
Indenture Trustee shall amend the applicable Mortgage Loan Schedule to reflect
such repurchase and shall promptly notify the Servicer, the Bond Insurer and the
Rating Agencies of such amendment.
7
<PAGE>
ARTICLE III
Covenants
Section 3.01. Collection of Payments with respect to the Mortgage Loans.
The Indenture Trustee shall establish and maintain an Eligible Account (the
"Payment Account"), held in trust for the benefit of the Bondholders and the
Bond Insurer. The Indenture Trustee shall, subject to the terms of this
paragraph, deposit in the Payment Account, (i) on the date of receipt (if
received prior to 3:00 p.m. Eastern Standard Time, and if not, then on the
Business Day following receipt) from the Servicer, each remittance received by
the Indenture Trustee with respect to the Mortgage Loans and (ii) amounts
transferred from the Pre-Funding Account and the Interest Coverage Account
pursuant to Section 8.08 and 8.09 hereof. The Indenture Trustee shall make all
payments of principal of and interest on the Bonds, subject to Section 3.03, as
provided in Section 3.05 from monies on deposit in the Payment Account.
Section 3.02. Maintenance of Office or Agency. The Issuer will maintain
within the United States of America, an office or agency where, subject to
satisfaction of conditions set forth herein, Bonds may be surrendered for
registration of transfer or exchange, and where notices and demands to or upon
the Issuer in respect of the Bonds and this Indenture may be served. The Issuer
hereby initially appoints the Indenture Trustee to serve as its agent for the
foregoing purposes. If at any time the Issuer shall fail to maintain any such
office or agency or shall fail to furnish the Indenture Trustee with the address
thereof, such surrenders, notices and demands may be made or served at the
Corporate Trust Office of the Indenture Trustee, and the Issuer hereby appoints
the Indenture Trustee as its agent to receive all such surrenders, notices and
demands.
Section 3.03. Money for Payments To Be Held in Trust; Paying Agent. (a) As
provided in Section 3.01, all payments of amounts due and payable with respect
to any Bonds that are to be made from amounts withdrawn from the Payment Account
pursuant to Section 3.01 shall be made on behalf of the Issuer by the Indenture
Trustee or by the Paying Agent, and no amounts so withdrawn from the Payment
Account for payments of Bonds shall be paid over to the Issuer except as
provided in this Section 3.03.
The Issuer will cause each Paying Agent other than the Indenture Trustee to
execute and deliver to the Indenture Trustee an instrument in which such Paying
Agent shall agree with the Indenture Trustee (and if the Indenture Trustee acts
as Paying Agent it hereby so agrees), subject to the provisions of this Section
3.03, that such Paying Agent will:
(i) hold all sums held by it for the payment of amounts due with
respect to the Bonds in trust for the benefit of the Persons entitled
thereto until such sums shall be paid to such Persons or otherwise disposed
of as herein provided and pay such sums to such Persons as herein provided;
(ii) give the Indenture Trustee and the Bond Insurer notice of
any default by the Issuer of which it has actual knowledge in the making of
any payment required to be made with respect to the Bonds;
8
<PAGE>
(iii) at any time during the continuance of any such default,
upon the written request of the Indenture Trustee, forthwith pay to the
Indenture Trustee all sums so held in trust by such Paying Agent;
(iv) immediately resign as Paying Agent and forthwith pay to the
Indenture Trustee all sums held by it in trust for the payment of Bonds if
at any time it ceases to meet the standards required to be met by a Paying
Agent at the time of its appointment;
(v) comply with all requirements of the Code with respect to the
withholding from any payments made by it on any Bonds of any applicable
withholding taxes imposed thereon and with respect to any applicable
reporting requirements in connection therewith; and
(vi) not commence a bankruptcy proceeding against the Issuer in
connection with this Indenture.
The Issuer may at any time, for the purpose of obtaining the satisfaction
and discharge of this Indenture or for any other purpose, by Issuer Request
direct any Paying Agent to pay to the Indenture Trustee all sums held in trust
by such Paying Agent, such sums to be held by the Indenture Trustee upon the
same trusts as those upon which the sums were held by such Paying Agent; and
upon such payment by any Paying Agent to the Indenture Trustee, such Paying
Agent shall be released from all further liability with respect to such money.
Subject to applicable laws with respect to escheat of funds, any money held
by the Indenture Trustee or any Paying Agent in trust for the payment of any
amount due with respect to any Bond (other than amounts paid under the Bond
Insurance Policy) and remaining unclaimed for one year after such amount has
become due and payable shall be discharged from such trust and be paid to the
Issuer upon receipt of an Issuer Request; and the Holder of such Bond shall
thereafter, as an unsecured general creditor, look only to the Issuer for
payment thereof (but only to the extent of the amounts so paid to the Issuer),
and all liability of the Indenture Trustee or such Paying Agent with respect to
such trust money shall thereupon cease; provided, however, that the Indenture
Trustee or such Paying Agent, before being required to make any such repayment,
shall at the expense and direction of the Issuer cause to be published once, in
an Authorized Newspaper, notice that such money remains unclaimed and that,
after a date specified therein, which shall not be less than 30 days from the
date of such publication, any unclaimed balance of such money then remaining
will be repaid to the Issuer. The Indenture Trustee with the consent of the
Bond Insurer, so long as no Bond Insurer Default exists, may also adopt and
employ, at the expense and direction of the Issuer, any other reasonable means
of notification of such repayment (including, but not limited to, mailing notice
of such repayment to Holders whose Bonds have been called but have not been
surrendered for redemption or whose right to or interest in monies due and
payable but not claimed is determinable from the records of the Indenture
Trustee or of any Paying Agent, at the last address of record for each such
Holder).
Section 3.04. Existence. The Issuer will keep in full effect its
existence, rights and franchises as a business trust under the laws of the State
of Delaware (unless it becomes, or any successor Issuer hereunder is or becomes,
organized under the laws of any other state or of the United States of
9
<PAGE>
America, in which case the Issuer will keep in full effect its existence, rights
and franchises under the laws of such other jurisdiction) and will obtain and
preserve its qualification to do business in each jurisdiction in which such
qualification is or shall be necessary to protect the validity and
enforceability of this Indenture, the Bonds, the Mortgage Loans and each other
instrument or agreement included in the Trust Estate.
Section 3.05. Payment of Principal and Interest. (a) On each Payment Date
from amounts on deposit in the Payment Account in accordance with Section 8.02
hereof, the Indenture Trustee shall pay to the Bondholders and to other Persons
the amounts to which they are entitled as set forth below; provided, however,
that any amounts representing payments from the Bond Insurer shall only be used
to pay interest and principal to the Bondholders pursuant to clauses (iii) and
(iv):
(i) to the Indenture Trustee, the Indenture Trustee Fee;
(ii) to the Bond Insurer, the Bond Insurance Premium;
(iii) to the Bondholders, the Interest Payment Amount with
respect to such Payment Date;
(iv) to the Bondholders, as principal on the Bonds, the Principal
Payment Amount with respect to such Payment Date;
(v) to the Bond Insurer, the sum of (a) all payments previously
paid by the Bond Insurer under the Bond Insurance Policy which have not
previously been reimbursed, (b) any other amounts due to the Bond Insurer
pursuant to the Insurance Agreement, to the extent not previously paid or
reimbursed and (c) interest on the foregoing as set forth in the Insurance
Agreement from the date such amounts become due until paid in full;
(vi) to the Bondholders, as principal on the Bonds, the
Subordination Increase Amount for such Payment Date;
(vii) to the Bondholders, any Carry-Forward Amount for such
Payment Date;
(viii) to the Indenture Trustee, any amounts owing to the
Indenture Trustee under any Basic Documents remaining unpaid;
(ix) to the Servicer, any amounts owing to the Servicer pursuant
to Section 5.03 of the Servicing Agreement in connection with the indemnity
by the Issuer thereunder; and
(x) any remaining amount, to the Issuer or the Certificate Paying
Agent as its designee, on behalf of the Certificateholders.
On each Payment Date, the Certificate Paying Agent shall deposit in the
Certificate Distribution Account all amounts it received pursuant to this
Section 3.05 for the purpose of distributing such funds to the
Certificateholders after payment of trust expenses to the Owner Trustee or the
Indenture Trustee pursuant to the Trust Agreement.
10
<PAGE>
Interest will accrue on the Bonds during an Interest Period on the basis of
the actual number of days in such Interest Period and a year assumed to consist
of 360 days.
Any installment of interest or principal, if any, payable on any Bond that
is punctually paid or duly provided for by the Issuer on the applicable Payment
Date shall, so long as the Bonds are Book-Entry Bonds registered in the name of
the Depository or its nominee, be paid by wire transfer to the Depository or its
nominee; otherwise if such Holder shall have so requested at least five Business
Days prior to the related Record Date and such Holder holds Bonds of an
aggregate initial Bond Principal Balance of at least $5,000,000, such
installment shall be paid on such Payment Date to each Holder of record on the
preceding Record Date, by wire transfer to an account specified in writing by
such Holder reasonably satisfactory to the Indenture Trustee as of the preceding
Record Date, and in all other cases or if no such instructions have been
delivered to the Indenture Trustee, by check to such Bondholder mailed to such
Holder's address as it appears in the Bond Register in the amount required to be
distributed to such Holder on such Payment Date; provided, however, that the
Indenture Trustee shall not pay to such Holders any amount required to be
withheld from a payment to such Holder by the Code. The Indenture Trustee may
deduct a reasonable wire transfer fee from any payment made by wire transfer.
(b) The principal of each Bond shall be due and payable in full on the
Final Scheduled Payment Date for such Bond as provided in the form of Bond set
forth in Exhibit A. All principal payments on the Bonds shall be made to the
Bondholders entitled thereto in accordance with the Percentage Interests
represented by such Bonds. Upon notice to the Indenture Trustee by the Issuer,
the Indenture Trustee shall notify the Person in whose name a Bond is registered
at the close of business on the Record Date preceding the Final Scheduled
Payment Date or other final Payment Date (including any final Payment Date
resulting from any redemption pursuant to Section 8.07 hereof). Such notice
shall to the extent practicable be mailed no later than five Business Days prior
to such Final Scheduled Payment Date or other final Payment Date and shall
specify that payment of the principal amount and any interest due with respect
to such Bond at the Final Scheduled Payment Date or other final Payment Date
will be payable only upon presentation and surrender of such Bond and shall
specify the place where such Bond may be presented and surrendered for such
final payment. No interest shall accrue on the Bonds on or after the Final
Scheduled Payment Date or any such other final Payment Date.
Section 3.06. Protection of Trust Estate. (a) The Issuer will from time to
time prepare, execute and deliver all such supplements and amendments hereto and
all such financing statements, continuation statements, instruments of further
assurance and other instruments, and will take such other action necessary or
advisable to:
(i) maintain or preserve the lien and security interest (and the
priority thereof) of this Indenture or carry out more effectively the
purposes hereof;
(ii) perfect, publish notice of or protect the validity of any
Grant made or to be made by this Indenture;
(iii) cause the Issuer or the Servicer to enforce any of their
rights with respect to the Mortgage Loans; and
11
<PAGE>
(iv) preserve and defend title to the Trust Estate and the rights
of the Indenture Trustee, the Bond Insurer and the Bondholders in such
Trust Estate against the claims of all persons and parties.
(b) Except as otherwise provided in this Indenture, the Indenture Trustee
shall not remove any portion of the Trust Estate that consists of money or is
evidenced by an instrument, certificate or other writing from the jurisdiction
in which it was held at the date of the most recent Opinion of Counsel delivered
pursuant to Section 3.07 hereof, unless the Indenture Trustee shall have first
received an Opinion of Counsel to the effect that the lien and security interest
created by this Indenture with respect to such property will continue to be
maintained after giving effect to such action or actions.
The Issuer hereby designates the Indenture Trustee its agent and attorney-
in-fact to sign any financing statement, continuation statement or other
instrument required to be signed pursuant to this Section 3.06 upon the Issuer's
preparation thereof and delivery to the Indenture Trustee.
Section 3.07. Opinions as to Trust Estate. (a) On the Closing Date, the
Issuer shall furnish to the Indenture Trustee, the Bond Insurer and the Owner
Trustee an Opinion of Counsel either stating that, in the opinion of such
counsel, such action has been taken with respect to the recording and filing of
this Indenture, any indentures supplemental hereto, and any other requisite
documents, and with respect to the execution and filing of any financing
statements and continuation statements, as are necessary to perfect and make
effective the lien and first priority security interest in the Collateral and
reciting the details of such action, or stating that, in the opinion of such
counsel, no such action is necessary to make such lien and first priority
security interest effective.
(b) On or before September 1 in each calendar year, beginning in 1998,
the Issuer shall furnish to the Indenture Trustee and the Bond Insurer an
Opinion of Counsel at the expense of the Issuer either stating that, in the
opinion of such counsel, such action has been taken with respect to the
recording, filing, re-recording and refiling of this Indenture, any indentures
supplemental hereto and any other requisite documents and with respect to the
execution and filing of any financing statements and continuation statements as
is necessary to maintain the lien and first priority security interest in the
Collateral and reciting the details of such action or stating that in the
opinion of such counsel no such action is necessary to maintain such lien and
security interest. Such Opinion of Counsel shall also describe the recording,
filing, re-recording and refiling of this Indenture, any indentures supplemental
hereto and any other requisite documents and the execution and filing of any
financing statements and continuation statements that will, in the opinion of
such counsel, be required to maintain the lien and security interest in the
Collateral until December 31 in the following calendar year.
Section 3.08. Performance of Obligations. (a) The Issuer will punctually
perform and observe all of its obligations and agreements contained in this
Indenture, the Basic Documents and in the instruments and agreements included in
the Trust Estate.
(b) The Issuer, with the consent of the Bond Insurer so long as no Bond
Insurer Default exists, may contract with other Persons to assist it in
performing its duties under this Indenture, and
12
<PAGE>
any performance of such duties by a Person identified to the Indenture Trustee
in an Officer's Certificate of the Issuer shall be deemed to be action taken by
the Issuer.
(c) The Issuer will not take any action or permit any action to be taken by
others which would release any Person from any of such Person's covenants or
obligations under any of the documents relating to the Mortgage Loans or under
any instrument included in the Trust Estate, or which would result in the
amendment, hypothecation, subordination, termination or discharge of, or impair
the validity or effectiveness of, any of the documents relating to the Mortgage
Loans or any such instrument, except such actions as the Servicer is expressly
permitted to take in the Servicing Agreement. The Indenture Trustee, as pledgee
of the Mortgage Loans, shall with the consent of, or direction of, the Bond
Insurer, so long as no Bond Insurer Default exists, be able to exercise the
rights of the Issuer to direct the actions of the Servicer pursuant to the
Servicing Agreement.
Section 3.09. Negative Covenants. So long as any Bonds are Outstanding,
the Issuer shall not:
(i) except as expressly permitted by this Indenture, sell,
transfer, exchange or otherwise dispose of the Trust Estate, unless
directed to do so by the Bond Insurer or the Indenture Trustee with the
consent of the Bond Insurer, so long as no Bond Insurer Default exists;
(ii) claim any credit on, or make any deduction from the
principal or interest payable in respect of, the Bonds (other than amounts
properly withheld from such payments under the Code) or assert any claim
against any present or former Bondholder by reason of the payment of the
taxes levied or assessed upon any part of the Trust Estate;
(iii) (A) permit the validity or effectiveness of this Indenture
to be impaired, or permit the lien of this Indenture to be amended,
hypothecated, subordinated, terminated or discharged, or permit any Person
to be released from any covenants or obligations with respect to the Bonds
under this Indenture except as may be expressly permitted hereby, (B)
permit any lien, charge, excise, claim, security interest, mortgage or
other encumbrance (other than the lien of this Indenture) to be created on
or extend to or otherwise arise upon or burden the Trust Estate or any part
thereof or any interest therein or the proceeds thereof or (C) permit the
lien of this Indenture not to constitute a valid first priority security
interest in the Trust Estate; or
(iv) waive or impair, or fail to assert rights under, the
Mortgage Loans, or impair or cause to be impaired the Issuer's interest in
the Mortgage Loans, the Mortgage Loan Purchase Agreement or any other Basic
Document, if any such action would materially and adversely affect the
interests of the Bondholders or the Bond Insurer.
Section 3.10. Annual Statement as to Compliance. The Issuer will deliver
to the Indenture Trustee and the Bond Insurer, within 120 days after the end of
each fiscal year of the Issuer
13
<PAGE>
(commencing with the fiscal year 1998), an Officer's Certificate stating, as to
the Authorized Officer signing such Officer's Certificate, that:
(i) a review of the activities of the Issuer during such year and
of its performance under this Indenture has been made under such Authorized
Officer's supervision; and
(ii) to the best of such Authorized Officer's knowledge, based on
such review, the Issuer has complied with all conditions and covenants
under this Indenture throughout such year, or, if there has been a default
in its compliance with any such condition or covenant, specifying each such
default known to such Authorized Officer and the nature and status thereof.
Section 3.11. [Reserved].
Section 3.12. Representations and Warranties Concerning the Mortgage
Loans. The Indenture Trustee, as pledgee of the Mortgage Loans, has the benefit
of the representations and warranties made by the Seller in the Mortgage Loan
Purchase Agreement concerning the Seller and the Mortgage Loans and the right to
enforce the remedies against the Seller provided in such Mortgage Loan Purchase
Agreement to the same extent as though such representations and warranties were
made directly to the Indenture Trustee. If the Indenture Trustee has actual
knowledge of any breach of any representation or warranty made by the Seller in
the Mortgage Loan Purchase Agreement, the Indenture Trustee shall promptly
notify the Seller and the Bond Insurer of such finding and the Seller's
obligation to cure such breach or repurchase or substitute for the related
Mortgage Loan.
Section 3.13. Amendments to Servicing Agreement. The Issuer covenants
with the Indenture Trustee and the Bond Insurer that it will not enter into any
amendment or supplement to the Servicing Agreement without the prior written
consent of the Indenture Trustee and the Bond Insurer. The Indenture Trustee,
as pledgee of the Mortgage Loans, may, with the consent of the Bond Insurer so
long as no Bond Insurer Default exists, decline to enter into or consent to any
such supplement or amendment if the Bond Insurer's or Bondholders' rights,
duties or immunities would be materially and adversely affected thereby. The
Indenture Trustee may, but shall not be obligated to, enter into any amendment
or supplement to the Servicing Agreement that affects the Indenture Trustee's
own rights, duties, liabilities or immunities under this Indenture or otherwise.
Section 3.14. Servicer as Agent and Bailee of the Indenture Trustee.
Solely for purposes of perfection under Section 9-305 of the Uniform Commercial
Code or other similar applicable law, rule or regulation of the state in which
such property is held by the Servicer, the Issuer and the Indenture Trustee
hereby acknowledge that the Servicer is acting as agent and bailee of the
Indenture Trustee in holding amounts on deposit in the Collection Account, as
well as its agent and bailee in holding any Related Documents released to the
Servicer, and any other items constituting a part of the Trust Estate which from
time to time come into the possession of the Servicer. It is intended that, by
the Servicer's acceptance of such agency, the Indenture Trustee, as a secured
party of the Mortgage Loans, will be deemed to have possession of such Related
Documents, such monies and such other items for purposes of Section 9-305 of the
Uniform Commercial Code of the state in which such property is held by the
Servicer.
14
<PAGE>
Section 3.15. Investment Company Act. The Issuer shall not become an
"investment company" or under the "control" of an "investment company" as such
terms are defined in the Investment Company Act of 1940, as amended (or any
successor or amendatory statute), and the rules and regulations thereunder
(taking into account not only the general definition of the term "investment
company" but also any available exceptions to such general definition);
provided, however, that the Issuer shall be in compliance with this Section 3.15
if it shall have obtained an order exempting it from regulation as an
"investment company" so long as it is in compliance with the conditions imposed
in such order.
Section 3.16. Issuer May Consolidate, etc. (a) The Issuer shall not
consolidate or merge with or into any other Person, unless:
(i) the Person (if other than the Issuer) formed by or surviving
such consolidation or merger shall be a Person organized and existing under
the laws of the United States of America or any state or the District of
Columbia and shall expressly assume, by an indenture supplemental hereto,
executed and delivered to the Indenture Trustee, in form reasonably
satisfactory to the Indenture Trustee and the Bond Insurer, the due and
punctual payment of the principal of and interest on all Bonds and to the
Certificate Paying Agent, on behalf of the Certificateholders, and the
payment of the Bond Insurance Premium and all other amounts payable to the
Bond Insurer and the performance or observance of every agreement and
covenant of this Indenture on the part of the Issuer to be performed or
observed, all as provided herein;
(ii) immediately after giving effect to such transaction, no
Event of Default shall have occurred and be continuing;
(iii) the Rating Agencies shall have notified the Issuer that
such transaction shall not cause the rating of the Bonds to be reduced,
suspended or withdrawn or to be considered by either Rating Agency to be
below investment grade without taking into account the Bond Insurance
Policy;
(iv) the Issuer and the Bond Insurer shall have received an
Opinion of Counsel (and shall have delivered a copy thereof to the
Indenture Trustee) to the effect that such transaction will not (A)
adversely affect the status of the Bonds as indebtedness for federal income
tax purposes, or (B) cause the Trust to be subject to an entity level tax
for federal income tax purposes;
(v) any action that is necessary to maintain the lien and
security interest created by this Indenture shall have been taken;
(vi) the Issuer shall have delivered to the Indenture Trustee and
the Bond Insurer an Officer's Certificate and an Opinion of Counsel each
stating that such consolidation or merger and such supplemental indenture
comply with this Article III and that all conditions precedent herein
provided for relating to such transaction have been complied with
(including any filing required by the Exchange Act); and
15
<PAGE>
(vii) the Bond Insurer, so long as no Bond Insurer Default
exists, shall have given its prior written consent.
(b) The Issuer shall not convey or transfer any of its properties or
assets, including those included in the Trust Estate, to any Person, unless:
(i) the Person that acquires by conveyance or transfer the
properties and assets of the Issuer the conveyance or transfer of which is
hereby restricted shall (A) be a United States citizen or a Person
organized and existing under the laws of the United States of America or
any state, (B) expressly assume, by an indenture supplemental hereto,
executed and delivered to the Indenture Trustee, in form satisfactory to
the Indenture Trustee, the due and punctual payment of the principal of and
interest on all Bonds and to the Certificate Paying Agent, on behalf of the
Certificateholders, and the payment of the Bond Insurance Premium and all
other amounts payable to the Bond Insurer and the performance or observance
of every agreement and covenant of this Indenture on the part of the Issuer
to be performed or observed, all as provided herein, (C) expressly agree by
means of such supplemental indenture that all right, title and interest so
conveyed or transferred shall be subject and subordinate to the rights of
the Holders of the Bonds and the Bond Insurer, (D) unless otherwise
provided in such supplemental indenture, expressly agree to indemnify,
defend and hold harmless the Issuer, the Indenture Trustee and the Bond
Insurer against and from any loss, liability or expense arising under or
related to this Indenture and the Bonds and (E) expressly agree by means of
such supplemental indenture that such Person (or if a group of Persons,
then one specified Person) shall make all filings with the Commission (and
any other appropriate Person) required by the Exchange Act in connection
with the Bonds;
(ii) immediately after giving effect to such transaction, no
Default or Event of Default shall have occurred and be continuing;
(iii) the Rating Agencies shall have notified the Issuer that
such transaction shall not cause the rating of the Bonds or the rating of
the Bonds without taking into account the Bond Insurance Policy to be
reduced, suspended or withdrawn;
(iv) the Issuer and the Bond Insurer shall have received an
Opinion of Counsel (and shall have delivered a copy thereof to the
Indenture Trustee) to the effect that such transaction will not (A)
adversely affect the status of the Bonds as indebtedness for federal income
tax purposes, or (B) cause the Trust to be subject to an entity level tax
for federal income tax purposes;
(v) any action that is necessary to maintain the lien and
security interest created by this Indenture shall have been taken;
(vi) the Issuer shall have delivered to the Indenture Trustee and
the Bond Insurer an Officer's Certificate and an Opinion of Counsel each
stating that such conveyance or transfer and such supplemental indenture
comply with this Article III and that all conditions precedent herein
provided for relating to such transaction have been complied with
(including any filing required by the Exchange Act); and
16
<PAGE>
(vii) the Bond Insurer, so long as no Bond Insurer Default
exists, shall have given its prior written consent.
Section 3.17. Successor or Transferee. (a) Upon any consolidation or
merger of the Issuer in accordance with Section 3.16(a), the Person formed by or
surviving such consolidation or merger (if other than the Issuer) shall succeed
to, and be substituted for, and may exercise every right and power of, the
Issuer under this Indenture with the same effect as if such Person had been
named as the Issuer herein.
(b) Upon a conveyance or transfer of all the assets and properties of the
Issuer pursuant to Section 3.16(b), the Issuer will be released from every
covenant and agreement of this Indenture to be observed or performed on the part
of the Issuer with respect to the Bonds immediately upon the delivery of written
notice to the Indenture Trustee and the Bond Insurer of such conveyance or
transfer and approval of such transaction given by the Bond Insurer to the
Indenture Trustee.
Section 3.18. No Other Business. The Issuer shall not engage in any
business other than financing, purchasing, owning, selling and managing the
Mortgage Loans and the issuance of the Bonds and Certificates in the manner
contemplated by this Indenture and the Basic Documents and all activities
incidental thereto.
Section 3.19. No Borrowing. The Issuer shall not issue, incur, assume,
guarantee or otherwise become liable, directly or indirectly, for any
indebtedness except for the Bonds and amounts due to the Bond Insurer under this
Indenture and the Insurance Agreement.
Section 3.20. Guarantees, Loans, Advances and Other Liabilities. Except
as contemplated by this Indenture or the Basic Documents, the Issuer shall not
make any loan or advance or credit to, or guarantee (directly or indirectly or
by an instrument having the effect of assuring another's payment or performance
on any obligation or capability of so doing or otherwise), endorse or otherwise
become contingently liable, directly or indirectly, in connection with the
obligations, stocks or dividends of, or own, purchase, repurchase or acquire (or
agree contingently to do so) any stock, obligations, assets or securities of, or
any other interest in, or make any capital contribution to, any other Person.
Section 3.21. Capital Expenditures. The Issuer shall not make any
expenditure (by long-term or operating lease or otherwise) for capital assets
(either realty or personalty).
Section 3.22. [Reserved]
Section 3.23. Restricted Payments. The Issuer shall not, directly or
indirectly, (i) pay any dividend or make any distribution (by reduction of
capital or otherwise), whether in cash, property, securities or a combination
thereof, to the Owner Trustee or any owner of a beneficial interest in the
Issuer or otherwise with respect to any ownership or equity interest or security
in or of the Issuer, (ii) redeem, purchase, retire or otherwise acquire for
value any such ownership or equity interest or security or (iii) set aside or
otherwise segregate any amounts for any such purpose; provided, however, that
the Issuer may make, or cause to be made, (x) distributions to the Owner Trustee
and the Certificateholders as contemplated by, and to the extent funds are
available for such purpose
17
<PAGE>
under this Indenture and the Trust Agreement and (y) payments to the Servicer
pursuant to the terms of the Servicing Agreement. The Issuer will not, directly
or indirectly, make payments to or distributions from the Collection Account
except in accordance with this Indenture and the Basic Documents.
Section 3.24. Notice of Events of Default. The Issuer shall give the
Indenture Trustee, the Bond Insurer and the Rating Agencies prompt written
notice of each Event of Default hereunder and under the Trust Agreement.
Section 3.25. Further Instruments and Acts. Upon request of the
Indenture Trustee or the Bond Insurer, the Issuer will execute and deliver such
further instruments and do such further acts as may be reasonably necessary or
proper to carry out more effectively the purpose of this Indenture.
Section 3.26. Statements to Bondholders. On each Payment Date, the
Indenture Trustee and the Certificate Registrar shall forward by mail to each
Bondholder and Certificateholder, respectively, the statement prepared pursuant
to Section 7.05 of this Indenture. The Indenture Trustee shall have no
responsibility to (i) verify information provided by the Servicer to be included
in such statement or (ii) include any information required to be included in
such statement if the Servicer has failed to timely produce such information to
the Indenture Trustee as required pursuant to the Servicing Agreement.
Section 3.27. Determination of Bond Interest Rate. On the second LIBOR
Business Day immediately preceding each Payment Date, the Indenture Trustee
shall determine One-Month LIBOR and the Bond Interest Rate for the following
Interest Period and shall inform the Issuer, the Servicer and the Company at
their respective facsimile numbers given to the Indenture Trustee in writing
thereof.
Section 3.28. Payments under the Bond Insurance Policy. (a) On the
second Business Day immediately preceding any Payment Date, the Indenture
Trustee on behalf of the Bondholders shall file a notice of claim to the Bond
Insurer in an amount, if any, equal to the Deficiency Amount.
(b) If the Indenture Trustee determines that a Deficiency Amount will
exist for the following Payment Date, then the Indenture Trustee shall submit a
Notice (as defined in the Bond Insurance Policy) for payment in the amount of
the Deficiency Amount to the Bond Insurer no later than 12:00 Noon, New York
City time, on the second Business Day prior to the applicable Payment Date.
Upon receipt of such Deficiency Amount in accordance with the terms of the Bond
Insurance Policy, the Indenture Trustee shall deposit such Deficiency Amount in
the Payment Account for distribution to Bondholders pursuant to Section 3.05
hereof or with respect to an acceleration pursuant to Section 6.02 hereof. All
amounts received by the Indenture Trustee under the Bond Insurance Policy shall
remain uninvested.
In addition, a claim may be made under the Bond Insurance Policy in respect
of any Preference Amount (as defined in and pursuant to the terms and conditions
of the Bond Insurance Policy) and the Indenture Trustee shall submit a Notice
(as defined in the Bond Insurance Policy) for payment with respect thereto
together with the other documents required to be delivered to the Bond Insurer
pursuant to the Bond Insurance Policy in connection with a claim in respect of
any Preference Amount.
18
<PAGE>
ARTICLE IV
The Bonds; Satisfaction and Discharge of Indenture
Section 4.01. The Bonds. The Bonds shall be registered in the name of a
nominee designated by the Depository. Beneficial Owners will hold interests in
the Bonds through the book-entry facilities of the Depository in minimum initial
Bond Principal Balances of $25,000 and integral multiples of $1,000 in excess
thereof.
Subject to the last sentence of Section 4.12, the Indenture Trustee may
for all purposes (including the making of payments due on the Bonds) deal with
the Depository as the authorized representative of the Beneficial Owners with
respect to the Bonds for the purposes of exercising the rights of Holders of
Bonds hereunder. In addition, subject to the last sentence of Section 4.12,
except as provided in the next succeeding paragraph of this Section 4.01, the
rights of Beneficial Owners with respect to the Bonds shall be limited to those
established by law and agreements between such Beneficial Owners and the
Depository and Depository Participants. Except as provided in Section 4.08
hereof, Beneficial Owners shall not be entitled to definitive certificates for
the Bonds as to which they are the Beneficial Owners. Requests and directions
from, and votes of, the Depository as Holder of the Bonds shall not be deemed
inconsistent if they are made with respect to different Beneficial Owners. The
Indenture Trustee may establish a reasonable record date in connection with
solicitations of consents from or voting by Bondholders and give notice to the
Depository of such record date. Without the consent of the Issuer and the
Indenture Trustee, no Bond may be transferred by the Depository except to a
successor Depository that agrees to hold such Bond for the account of the
Beneficial Owners.
In the event The Depository Trust Company resigns or is removed as
Depository, the Indenture Trustee with the approval of the Issuer may appoint a
successor Depository. If no successor Depository has been appointed within 30
days of the effective date of the Depository's resignation or removal, each
Beneficial Owner shall be entitled to certificates representing the Bonds it
beneficially owns in the manner prescribed in Section 4.08.
The Bonds shall, on original issue, be executed on behalf of the Issuer by
the Owner Trustee, not in its individual capacity but solely as Owner Trustee,
authenticated by the Indenture Trustee and delivered by the Indenture Trustee to
or upon the order of the Issuer.
Section 4.02. Registration of and Limitations on Transfer and Exchange of
Bonds; Appointment of Certificate Registrar. The Issuer shall cause the
Indenture Trustee, as Bond Registrar, to keep at the Corporate Trust Office a
Bond Register in which, subject to such reasonable regulations as it may
prescribe, the Bond Registrar shall provide for the registration of Bonds and of
transfers and exchanges of Bonds as herein provided.
Subject to the restrictions and limitations set forth below, upon surrender
for registration of transfer of any Bond at the Corporate Trust Office, the
Issuer shall execute and the Indenture Trustee shall authenticate and deliver,
in the name of the designated transferee or transferees, one or more new Bonds
in authorized initial Bond Principal Balances evidencing the same aggregate
Percentage Interests.
19
<PAGE>
Subject to the foregoing, at the option of the Bondholders, Bonds may be
exchanged for other Bonds of like tenor and in authorized initial Bond Principal
Balances evidencing the same aggregate Percentage Interests upon surrender of
the Bonds to be exchanged at the Corporate Trust Office of the Bond Registrar.
Whenever any Bonds are so surrendered for exchange, the Issuer shall execute and
the Indenture Trustee shall authenticate and deliver the Bonds which the
Bondholder making the exchange is entitled to receive. Each Bond presented or
surrendered for registration of transfer or exchange shall (if so required by
the Bond Registrar) be duly endorsed by, or be accompanied by a written
instrument of transfer in form reasonably satisfactory to the Bond Registrar
duly executed by the Holder thereof or his attorney duly authorized in writing
with such signature guaranteed by a commercial bank or trust company located or
having a correspondent located in the City of New York or the city in which any
Corporate Trust Office is located. Bonds delivered upon any such transfer or
exchange will evidence the same obligations, and will be entitled to the same
rights and privileges, as the Bonds surrendered.
No service charge shall be made for any registration of transfer or
exchange of Bonds, but the Bond Registrar shall require payment of a sum
sufficient to cover any tax or governmental charge that may be imposed in
connection with any registration of transfer or exchange of Bonds.
The Issuer hereby appoints the Indenture Trustee as Certificate Registrar
to keep at its Corporate Trust Office a Certificate Register pursuant to Section
3.09 of the Trust Agreement in which, subject to such reasonable regulations as
it may prescribe, the Certificate Registrar shall provide for the registration
of Certificates and of transfers and exchanges thereof pursuant to Section 3.05
of the Trust Agreement. The Indenture Trustee hereby accepts such appointment.
Section 4.03. Mutilated, Destroyed, Lost or Stolen Bonds. If (i) any
mutilated Bond is surrendered to the Indenture Trustee, or the Indenture Trustee
receives evidence to its satisfaction of the destruction, loss or theft of any
Bond, and (ii) there is delivered to the Indenture Trustee such security or
indemnity as may be required by it to hold the Issuer, the Bond Insurer and the
Indenture Trustee harmless, then, in the absence of notice to the Issuer, the
Bond Registrar or the Indenture Trustee that such Bond has been acquired by a
bona fide purchaser, and provided that the requirements of Section 8-405 of the
UCC are met, the Issuer shall execute, and upon its request the Indenture
Trustee shall authenticate and deliver, in exchange for or in lieu of any such
mutilated, destroyed, lost or stolen Bond, a replacement Bond; provided,
however, that if any such destroyed, lost or stolen Bond, but not a mutilated
Bond, shall have become or within seven days shall be due and payable, instead
of issuing a replacement Bond, the Issuer may pay such destroyed, lost or stolen
Bond when so due or payable without surrender thereof. If, after the delivery
of such replacement Bond or payment of a destroyed, lost or stolen Bond pursuant
to the proviso to the preceding sentence, a bona fide purchaser of the original
Bond in lieu of which such replacement Bond was issued presents for payment such
original Bond, the Issuer, the Bond Insurer and the Indenture Trustee shall be
entitled to recover such replacement Bond (or such payment) from the Person to
whom it was delivered or any Person taking such replacement Bond from such
Person to whom such replacement Bond was delivered or any assignee of such
Person, except a bona fide purchaser, and shall be entitled to recover upon the
security or indemnity provided therefor to the extent of any loss, damage, cost
or expense incurred by the Issuer, the Bond Insurer or the Indenture Trustee in
connection therewith.
20
<PAGE>
Upon the issuance of any replacement Bond under this Section 4.03, the
Issuer may require the payment by the Holder of such Bond of a sum sufficient to
cover any tax or other governmental charge that may be imposed in relation
thereto and any other reasonable expenses (including the fees and expenses of
the Indenture Trustee) connected therewith.
Every replacement Bond issued pursuant to this Section 4.03 in replacement
of any mutilated, destroyed, lost or stolen Bond shall constitute an original
additional contractual obligation of the Issuer, whether or not the mutilated,
destroyed, lost or stolen Bond shall be at any time enforceable by anyone, and
shall be entitled to all the benefits of this Indenture equally and
proportionately with any and all other Bonds duly issued hereunder.
The provisions of this Section 4.03 are exclusive and shall preclude (to
the extent lawful) all other rights and remedies with respect to the replacement
or payment of mutilated, destroyed, lost or stolen Bonds.
Section 4.04. Persons Deemed Owners. Prior to due presentment for
registration of transfer of any Bond, the Issuer, the Bond Insurer, the
Indenture Trustee and any agent of the Issuer, the Bond Insurer, or the
Indenture Trustee may treat the Person in whose name any Bond is registered (as
of the day of determination) as the owner of such Bond for the purpose of
receiving payments of principal of and interest, if any, on such Bond and for
all other purposes whatsoever, whether or not such Bond be overdue, and neither
the Issuer, the Bond Insurer, the Indenture Trustee nor any agent of the Issuer,
the Bond Insurer or the Indenture Trustee shall be affected by notice to the
contrary.
Section 4.05. Cancellation. All Bonds surrendered for payment,
registration of transfer, exchange or redemption shall, if surrendered to any
Person other than the Indenture Trustee, be delivered to the Indenture Trustee
and shall be promptly canceled by the Indenture Trustee. The Issuer may at any
time deliver to the Indenture Trustee for cancellation any Bonds previously
authenticated and delivered hereunder which the Issuer may have acquired in any
manner whatsoever, and all Bonds so delivered shall be promptly canceled by the
Indenture Trustee. No Bonds shall be authenticated in lieu of or in exchange
for any Bonds canceled as provided in this Section 4.05, except as expressly
permitted by this Indenture. All canceled Bonds may be held or disposed of by
the Indenture Trustee in accordance with its standard retention or disposal
policy as in effect at the time unless the Issuer shall direct by an Issuer
Request that they be destroyed or returned to it; provided, however, that such
Issuer Request is timely and the Bonds have not been previously disposed of by
the Indenture Trustee.
Section 4.06. Book-Entry Bonds. The Bonds, upon original issuance, will
be issued in the form of definitive Bonds representing the Book-Entry Bonds, to
be delivered to The Depository Trust Company, the initial Depository, by, or on
behalf of, the Issuer. Such Bonds shall initially be registered on the Bond
Register in the name of Cede & Co., the nominee of the initial Depository, and
no Beneficial Owner will receive a Definitive Bond representing such Beneficial
Owner's interest in such Bond, except as provided in Section 4.08. Unless and
until definitive, fully registered Bonds (the "Definitive Bonds") have been
issued to Beneficial Owners pursuant to Section 4.08:
(i) the provisions of this Section 4.06 shall be in full force
and effect;
21
<PAGE>
(ii) the Bond Registrar, the Bond Insurer and the Indenture
Trustee shall be entitled to deal with the Depository for all purposes of
this Indenture (including the payment of principal of and interest on the
Bonds and the giving of instructions or directions hereunder) as the sole
holder of the Bonds, and shall have no obligation to the Beneficial Owners
of Bonds;
(iii) to the extent that the provisions of this Section 4.06
conflict with any other provisions of this Indenture, the provisions of
this Section 4.06 shall control;
(iv) subject to the last sentence of Section 4.12, the rights of
Beneficial Owners shall be exercised only through the Depository and shall
be limited to those established by law and agreements between such
Beneficial Owners of Bonds and the Depository and/or the Depository
Participants. Unless and until Definitive Bonds are issued pursuant to
Section 4.08, the initial Depository will make book-entry transfers among
the Depository Participants and receive and transmit payments of principal
of and interest on the Bonds to such Depository Participants; and
(v) subject to the last sentence of Section 4.12, whenever this
Indenture requires or permits actions to be taken based upon instructions
or directions of Holders of Bonds evidencing a specified percentage of the
Bond Principal Balances of the Bonds, the Depository shall be deemed to
represent such percentage only to the extent that it has received
instructions to such effect from Beneficial Owners and/or Depository
Participants owning or representing, respectively, such required percentage
of the beneficial interest in the Bonds and has delivered such instructions
to the Indenture Trustee.
Section 4.07. Notices to Depository. Whenever a notice or other
communication to the Bondholders is required under this Indenture, unless and
until Definitive Bonds shall have been issued to Beneficial Owners pursuant to
Section 4.08, the Indenture Trustee shall give all such notices and
communications specified herein to be given to Holders of the Bonds to the
Depository, and shall have no obligation to the Beneficial Owners.
Section 4.08. Definitive Bonds. If (i) the Indenture Trustee determines
that the Depository is no longer willing or able to properly discharge its
responsibilities with respect to the Bonds and the Indenture Trustee is unable
to locate a qualified successor, (ii) the Indenture Trustee elects to terminate
the book-entry system through the Depository or (iii) after the occurrence of an
Event of Default, Beneficial Owners of Bonds representing beneficial interests
aggregating at least a majority of the Bond Principal Balances of the Bonds
advise the Depository in writing that the continuation of a book-entry system
through the Depository is no longer in the best interests of the Beneficial
Owners, then the Depository shall notify all Beneficial Owners and the Indenture
Trustee of the occurrence of any such event and of the availability of
Definitive Bonds to Beneficial Owners requesting the same. Upon surrender to
the Indenture Trustee of the typewritten Bonds representing the Book-Entry Bonds
by the Depository, accompanied by registration instructions, the Issuer shall
execute and the Indenture Trustee shall authenticate the Definitive Bonds in
accordance with the instructions of the Depository. None of the Issuer, the
Bond Registrar or the Indenture Trustee shall be liable for any delay in
delivery of such instructions and may conclusively rely on, and shall be
protected in relying on, such instructions. Upon the issuance of Definitive
Bonds, the Indenture
22
<PAGE>
Trustee shall recognize the Holders of the Definitive Bonds as Bondholders. The
Indenture Trustee shall notify the Bond Insurer upon the issuance of Definitive
Bonds.
Section 4.09. Tax Treatment. The Issuer has entered into this Indenture,
and the Bonds will be issued, with the intention that, for federal, state and
local income, single business and franchise tax purposes, the Bonds will qualify
as indebtedness. The Issuer, by entering into this Indenture, and each
Bondholder, by its acceptance of its Bond (and each Beneficial Owner by its
acceptance of an interest in the applicable Book-Entry Bond), agree to treat the
Bonds for federal, state and local income, single business and franchise tax
purposes as indebtedness.
Section 4.10. Satisfaction and Discharge of Indenture. This Indenture
shall cease to be of further effect with respect to the Bonds, except as to (i)
rights of registration of transfer and exchange, (ii) substitution of mutilated,
destroyed, lost or stolen Bonds, (iii) rights of Bondholders (and the Bond
Insurer, as subrogee of the Bondholders) to receive payments of principal
thereof and interest thereon, (iv) Sections 3.03, 3.04, 3.06, 3.09, 3.16, 3.18
and 3.19, (v) the rights, obligations and immunities of the Indenture Trustee
hereunder (including the rights of the Indenture Trustee under Section 6.07 and
the obligations of the Indenture Trustee under Section 4.11) and (vi) the rights
of Bondholders as beneficiaries hereof with respect to the property so deposited
with the Indenture Trustee payable to all or any of them, and the Indenture
Trustee, on demand of and at the expense of the Issuer, shall execute proper
instruments acknowledging satisfaction and discharge of this Indenture with
respect to the Bonds and shall release and deliver the Collateral to or upon the
order of the Issuer, when
(A) either
(1) all Bonds theretofore authenticated and delivered (other than (i)
Bonds that have been destroyed, lost or stolen and that have been replaced
or paid as provided in Section 4.03 hereof and (ii) Bonds for whose payment
money has theretofore been deposited in trust or segregated and held in
trust by the Issuer and thereafter repaid to the Issuer or discharged from
such trust, as provided in Section 3.03) have been delivered to the
Indenture Trustee for cancellation; or
(2) all Bonds not theretofore delivered to the Indenture Trustee for
cancellation
a. have become due and payable,
b. will become due and payable at the Final Scheduled Payment
Date within one year, or
c. have been called for early redemption pursuant to Section
8.07 hereof,
and the Issuer, in the case of a. or b. above, has irrevocably deposited or
caused to be irrevocably deposited with the Indenture Trustee cash or
direct obligations of or obligations guaranteed by the United States of
America (which will mature prior to the date such amounts are payable), in
trust for such purpose, in an amount sufficient to pay and discharge the
entire indebtedness on such Bonds then outstanding not theretofore
delivered to the
23
<PAGE>
Indenture Trustee for cancellation when due on the Final Scheduled Payment
Date or other final Payment Date and has delivered to the Indenture Trustee
and the Bond Insurer a verification report from a nationally recognized
accounting firm certifying that the amounts deposited with the Indenture
Trustee are sufficient to pay and discharge the entire indebtedness of such
Bonds, or, in the case of c. above, the Issuer shall have complied with all
requirements of Section 8.07 hereof;
(B) the Issuer has paid or caused to be paid all other sums payable
hereunder and under the Insurance Agreement by the Issuer as evidenced by
the written consent of the Bond Insurer; and
(C) the Issuer has delivered to the Indenture Trustee and the Bond
Insurer an Officer's Certificate and an Opinion of Counsel, each meeting
the applicable requirements of Section 10.01 hereof, each stating that all
conditions precedent herein provided for relating to the satisfaction and
discharge of this Indenture have been complied with and, if the Opinion of
Counsel relates to a deposit made in connection with Section 4.10(A)(2)b.
above, such opinion shall further be to the effect that such deposit will
constitute an "in-substance defeasance" within the meaning of Revenue
Ruling 85-42, 1985-1 C.B. 36, and in accordance therewith, the Issuer will
be the owner of the assets deposited in trust for federal income tax
purposes.
Section 4.11. Application of Trust Money. All monies deposited with the
Indenture Trustee pursuant to Section 4.10 hereof shall be held in trust and
applied by it, in accordance with the provisions of the Bonds and this
Indenture, to the payment, either directly or through any Paying Agent or the
Issuer, Certificate Paying Agent as designee of the Issuer or the Bond Insurer,
as applicable, as the Indenture Trustee may determine, to the Holders of Bonds,
of all sums due and to become due thereon for principal and interest or
otherwise; but such monies need not be segregated from other funds except to the
extent required herein or required by law.
Section 4.12. Subrogation and Cooperation. (a) The Issuer and the
Indenture Trustee acknowledge (and each Bondholder by acceptance of its Bond
hereby agrees) that (i) to the extent the Bond Insurer makes payments under the
Bond Insurance Policy on account of principal of or interest on the Bonds, the
Bond Insurer will be fully subrogated to the rights of such Holders to receive
such principal and interest from the Issuer, and (ii) the Bond Insurer shall be
paid such principal and interest but only from the sources and in the manner
provided herein and in the Insurance Agreement for the payment of such principal
and interest.
Insured Payments disbursed by the Indenture Trustee from proceeds of the
Bond Insurance Policy shall not be considered payment by the Issuer with respect
to the Bonds, nor shall such disbursement of such Insured Payments discharge the
obligations of the Issuer with respect to the amounts thereof, and the Bond
Insurer shall become the owner of such amounts as the deemed subrogee of such
Bondholders.
So long as no Bond Insurer Default exists, the Indenture Trustee shall
cooperate in all respects with any reasonable request by the Bond Insurer for
action to preserve or enforce the Bond Insurer's rights or interest under this
Indenture or the Insurance Agreement, consistent with this
24
<PAGE>
Indenture and without limiting the rights of the Bondholders as otherwise set
forth in the Indenture, including, without limitation, upon the occurrence and
continuance of a default under the Insurance Agreement, a request to take any
one or more of the following actions:
(i) institute Proceedings for the collection of all amounts then
payable on the Bonds, or under this Indenture in respect to the Bonds and
all amounts payable under the Insurance Agreement, enforce any judgment
obtained and collect from the Issuer monies adjudged due;
(ii) sell the Trust Estate or any portion thereof or rights or
interest therein, at one or more public or private Sales called and
conducted in any manner permitted by law;
(iii) file or record all Assignments of Mortgage that have not
previously been recorded;
(iv) institute Proceedings from time to time for the complete or
partial foreclosure of this Indenture; and
(v) exercise any remedies of a secured party under the UCC and
take any other appropriate action to protect and enforce the rights and
remedies of the Bond Insurer hereunder;
provided, however, action shall be taken pursuant to this Section 4.12 by the
Indenture Trustee to preserve the Bond Insurer's rights or interest under this
Agreement or the Insurance Agreement only to the extent such action is available
to the Bondholders or the Bond Insurer under other provisions of this Indenture.
Notwithstanding any provision of this Indenture to the contrary, so long as
no Bond Insurer Default exists, the Bond Insurer shall at all times be treated
as if it were the exclusive Bondholder for the purposes of all approvals,
consents, waivers and the institution of any action and the direction of all
remedies hereunder, and the Indenture Trustee shall act in accordance with the
directions of the Bond Insurer so long as it is indemnified therefor to its
reasonable satisfaction; provided, however, that the provisions of the first
paragraph of Section 5.06 shall not apply to the Bond Insurer when the Bond
Insurer is exercising the rights of the Bondholders pursuant to this paragraph.
Section 4.13. Repayment of Monies Held by Paying Agent. In connection
with the satisfaction and discharge of this Indenture with respect to the Bonds,
all monies then held by any Person other than the Indenture Trustee under the
provisions of this Indenture with respect to such Bonds shall, upon demand of
the Issuer, be paid to the Indenture Trustee to be held and applied according to
Section 3.05 and thereupon such Person shall be released from all further
liability with respect to such monies.
Section 4.14. Temporary Bonds. Pending the preparation of any Definitive
Bonds, the Issuer may execute and upon its written direction, the Indenture
Trustee may authenticate and make available for delivery, temporary Bonds that
are printed, lithographed, typewritten, photocopied or otherwise produced, in
any denomination, substantially of the tenor of the Definitive Bonds in lieu
25
<PAGE>
of which they are issued and with such appropriate insertions, omissions,
substitutions and other variations as the officers executing such Bonds may
reasonably determine, as evidenced by their execution of such Bonds.
If temporary Bonds are issued, the Issuer will cause Definitive Bonds to be
prepared without unreasonable delay. After the preparation of the Definitive
Bonds, the temporary Bonds shall be exchangeable for Definitive Bonds upon
surrender of the temporary Bonds at the office or agency of the Indenture
Trustee, without charge to the Holder. Upon surrender for cancellation of any
one or more temporary Bonds, the Issuer shall execute and the Indenture Trustee
shall authenticate and make available for delivery, in exchange therefor,
Definitive Bonds of authorized denominations and of like tenor and aggregate
principal amount. Until so exchanged, such temporary Bonds shall in all
respects be entitled to the same benefits under this Indenture as Definitive
Bonds.
26
<PAGE>
ARTICLE V
Default and Remedies
--------------------
Section 5.01. Events of Default. The Issuer shall deliver to the
Indenture Trustee and the Bond Insurer, within five days after learning of the
occurrence of a Default or an Event of Default, written notice in the form of an
Officer's Certificate of the occurrence of such Default or Event of Default, its
status and what action the Issuer is taking or proposes to take with respect
thereto.
Section 5.02. Acceleration of Maturity; Rescission and Annulment. If an
Event of Default should occur and be continuing, then and in every such case the
Indenture Trustee may (with the prior written consent of the Bond Insurer), and,
at the written direction of the Bond Insurer (which such written direction shall
include a statement to the effect that such acceleration is at the sole option
of the Bond Insurer and that an amount equal to the excess, if any, of the sum
of the unpaid Bond Principal Balance of the Bonds together with accrued and
unpaid interest thereon through the date of payment of such accelerated Bonds,
over Available Funds for such date of payment, would constitute a Deficiency
Amount pursuant to the terms of the Bond Insurance Policy and will be paid by
the Bond Insurer in connection with the acceleration in accordance with the
terms of the Bond Insurance Policy), or if a Bond Insurer Default exists, the
Holders of Bonds representing not less than a majority of the Bond Principal
Balances of all Bonds, shall, declare the Bonds to be immediately due and
payable, by a notice in writing to the Issuer (and to the Indenture Trustee if
given by Bondholders), and upon any such declaration the unpaid Bond Principal
Balance of the Bonds, together with accrued and unpaid interest thereon through
the date of acceleration, shall become immediately due and payable.
At any time after such declaration of acceleration of maturity with respect
to an Event of Default has been made and before a judgment or decree for payment
of the money due has been obtained by the Indenture Trustee as hereinafter in
this Article V provided, the Bond Insurer or, if a Bond Insurer Default exists,
the Holders of Bonds representing a majority of the Bond Principal Balances of
all Bonds, by written notice to the Issuer and the Indenture Trustee, may waive
the related Event of Default and rescind and annul such declaration and its
consequences if:
(i) the Issuer or the Bond Insurer has paid or deposited with the
Indenture Trustee a sum sufficient to pay:
(A) all payments of principal of and interest on the Bonds and
all other amounts that would then be due hereunder or upon the Bonds
if the Event of Default giving rise to such acceleration had not
occurred; and
(B) all sums reasonably paid or advanced by the Indenture Trustee
hereunder and the reasonable compensation, expenses, disbursements and
advances of the Indenture Trustee and its agents and counsel; and
(ii) all Events of Default, other than the nonpayment of the
principal of the Bonds that has become due solely by such acceleration,
have been cured or waived as provided in Section 5.12.
27
<PAGE>
provided, however, the Bond Insurer, so long as no Bond Insurer Default exists,
may waive an Event of Default regardless of Section 5.02(i) or (ii) above.
No such rescission shall affect any subsequent default or impair any right
consequent thereto.
Section 5.03. Collection of Indebtedness and Suits for Enforcement by
Indenture Trustee.
(a) The Issuer covenants that if (i) default is made in the payment of any
interest (including the Interest Payment Amount) on any Bond when the same
becomes due and payable, and such default continues for a period of five days,
or (ii) default is made in the payment of the principal (including the Principal
Payment Amount and the Subordination Increase Amount) of or any installment of
the principal of any Bond when the same becomes due and payable, the Issuer
shall, upon demand of the Indenture Trustee, at the direction of the Bond
Insurer, so long as no Bond Insurer Default exists, pay to the Indenture
Trustee, for the benefit of the Holders of Bonds and of the Bond Insurer, the
whole amount then due and payable on the Bonds for principal and interest, with
interest at the Bond Interest Rate upon the overdue principal, and in addition
thereto such further amount as shall be sufficient to cover the reasonable costs
and expenses of collection, including the reasonable compensation, expenses,
disbursements and advances of the Indenture Trustee and its agents and counsel.
(b) In case the Issuer shall fail forthwith to pay such amounts upon such
demand, the Indenture Trustee, in its own name and as trustee of an express
trust, and at the direction of the Bond Insurer, so long as no Bond Insurer
Default exists, subject to the provisions of Section 10.16 hereof, may institute
a Proceeding for the collection of the sums so due and unpaid, and may prosecute
such Proceeding to judgment or final decree, and may enforce the same against
the Issuer or other obligor upon the Bonds and collect in the manner provided by
law out of the property of the Issuer or other obligor the Bonds, wherever
situated, the monies adjudged or decreed to be payable.
(c) If an Event of Default occurs and is continuing, the Indenture
Trustee, at the direction of the Bond Insurer, so long as no Bond Insurer
Default exists, subject to the provisions of Section 10.16 hereof may, as more
particularly provided in Section 5.04 hereof, in its discretion, proceed to
protect and enforce its rights and the rights of the Bondholders and the Bond
Insurer, by such appropriate Proceedings as the Indenture Trustee, at the
direction of the Bond Insurer, so long as no Bond Insurer Default exists, shall
deem most effective to protect and enforce any such rights, whether for the
specific enforcement of any covenant or agreement in this Indenture or in aid of
the exercise of any power granted herein, or to enforce any other proper remedy
or legal or equitable right vested in the Indenture Trustee by this Indenture or
by law.
(d) In case there shall be pending, relative to the Issuer or any other
obligor upon the Bonds or any Person having or claiming an ownership interest in
the Trust Estate, Proceedings under Title 11 of the United States Code or any
other applicable federal or state bankruptcy, insolvency or other similar law,
or in case a receiver, assignee or trustee in bankruptcy or reorganization,
liquidator, sequestrator or similar official shall have been appointed for or
taken possession of the Issuer or its property or such other obligor or Person,
or in case of any other comparable judicial Proceedings relative to the Issuer
or other obligor upon the Bonds, or to the creditors or property of the Issuer
or such other obligor, the Indenture Trustee, at the direction of the Bond
Insurer, so long as no Bond Insurer Default exists, irrespective of whether the
principal of any Bonds shall then be due and
28
<PAGE>
payable as therein expressed or by declaration or otherwise and irrespective of
whether the Indenture Trustee shall have made any demand pursuant to the
provisions of this Section, shall be entitled and empowered, by intervention in
such Proceedings or otherwise:
(i) to file and prove a claim or claims for the whole amount of
principal and interest owing and unpaid in respect of the Bonds and to file
such other papers or documents as may be necessary or advisable in order to
have the claims of the Indenture Trustee (including any claim for
reasonable compensation to the Indenture Trustee and each predecessor
Indenture Trustee, and their respective agents, attorneys and counsel, and
for reimbursement of all reasonable expenses and liabilities incurred, and
all advances made, by the Indenture Trustee and each predecessor Indenture
Trustee, except as a result of negligence or bad faith), the Bond Insurer
and of the Bondholders allowed in such Proceedings;
(ii) unless prohibited by applicable law and regulations, to vote
on behalf of the Holders of Bonds in any election of a trustee, a standby
trustee or Person performing similar functions in any such Proceedings;
(iii) to collect and receive any monies or other property payable
or deliverable on any such claims and to distribute all amounts received
with respect to the claims of the Bondholders, the Bond Insurer and of the
Indenture Trustee on their behalf; and
(iv) to file such proofs of claim and other papers or documents
as may be necessary or advisable in order to have the claims of the
Indenture Trustee, the Bond Insurer or the Holders of Bonds allowed in any
judicial proceedings relative to the Issuer, its creditors and its
property;
and any trustee, receiver, liquidator, custodian or other similar official in
any such Proceeding is hereby authorized by each of such Bondholders to make
payments to the Indenture Trustee, and, in the event that the Indenture Trustee,
with the consent of the Bond Insurer, so long as no Bond Insurer Default exists,
shall consent to the making of payments directly to such Bondholders, to pay to
the Indenture Trustee such amounts as shall be sufficient to cover reasonable
compensation to the Indenture Trustee, each predecessor Indenture Trustee and
their respective agents, attorneys and counsel, all other reasonable expenses
and liabilities incurred, all advances made, by the Indenture Trustee and each
predecessor Indenture Trustee, except as a result of negligence or bad faith,
and all amounts due to the Bond Insurer.
(e) Nothing herein contained shall be deemed to authorize the Indenture
Trustee to authorize or consent to or vote for or accept or adopt on behalf of
any Bondholder any plan of reorganization, arrangement, adjustment or
composition affecting the Bonds or the rights of any Holder thereof or to
authorize the Indenture Trustee to vote in respect of the claim of any
Bondholder in any such proceeding except, as aforesaid, to vote for the election
of a trustee in bankruptcy or similar Person.
(f) All rights of action and of asserting claims under this Indenture, or
under any of the Bonds, may be enforced by the Indenture Trustee without the
possession of any of the Bonds or the production thereof in any trial or other
Proceedings relative thereto, and any such action or
29
<PAGE>
proceedings instituted by the Indenture Trustee shall be brought in its own name
as trustee of an express trust, and any recovery of judgment, subject to the
payment of the reasonable expenses, disbursements and compensation of the
Indenture Trustee, each predecessor Indenture Trustee and their respective
agents and attorneys, shall be for the ratable benefit of the Holders of the
Bonds and the Bond Insurer, subject to Section 5.05 hereof.
(g) In any Proceedings brought by the Indenture Trustee with the consent
of the Bond Insurer, so long as no Bond Insurer Default exists (and also any
Proceedings involving the interpretation of any provision of this Indenture to
which the Indenture Trustee shall be a party), the Indenture Trustee shall be
held to represent all the Holders of the Bonds, and it shall not be necessary to
make any Bondholder a party to any such Proceedings.
Section 5.04. Remedies; Priorities. (a) If an Event of Default shall have
occurred and be continuing and if an acceleration has been declared and not
rescinded pursuant to Section 5.02 hereof, the Indenture Trustee, subject to the
provisions of Section 10.16 hereof and with the consent of the Bond Insurer so
long as no Bond Insurer Default exists, may and, at the direction of the Bond
Insurer so long as no Bond Insurer Default exists, shall, do one or more of the
following (subject to Section 5.05 hereof):
(i) institute Proceedings in its own name and as trustee of an
express trust for the collection of all amounts then payable on the Bonds
or under this Indenture with respect thereto, whether by declaration or
otherwise, and all amounts payable under the Insurance Agreement, enforce
any judgment obtained, and collect from the Issuer and any other obligor
upon such Bonds monies adjudged due;
(ii) institute Proceedings from time to time for the complete or
partial foreclosure of this Indenture with respect to the Trust Estate;
(iii) exercise any remedies of a secured party under the UCC and
take any other appropriate action to protect and enforce the rights and
remedies of the Indenture Trustee, the Holders of the Bonds and the Bond
Insurer; and
(iv) sell the Trust Estate or any portion thereof or rights or
interest therein, at one or more public or private sales called and
conducted in any manner permitted by law;
provided, however, that so long as a Bond Insurer Default exists, the Indenture
Trustee may not sell or otherwise liquidate the Trust Estate following an Event
of Default, unless (A) the Indenture Trustee obtains the consent of the Holders
of 100% of the aggregate Bond Principal Balance, (B) the proceeds of such sale
or liquidation distributable to the Holders of the Bonds are sufficient to
discharge in full all amounts then due and unpaid upon the Bonds for principal
and interest and to reimburse the Bond Insurer for any amounts drawn under the
Bond Insurance Policy and any other amounts due to the Bond Insurer under the
Insurance Agreement or (C) the Indenture Trustee determines that the Mortgage
Loans will not continue to provide sufficient funds for the payment of principal
of and interest on the Bonds as they would have become due if the Bonds had not
been declared due and payable, and the Indenture Trustee obtains the consent of
the Holders of a majority of the aggregate Bond Principal Balance. In
determining such sufficiency or insufficiency with
30
<PAGE>
respect to clause (B) and (C), the Indenture Trustee may, but need not, obtain
and rely upon an opinion of an Independent investment banking or accounting firm
of national reputation as to the feasibility of such proposed action and as to
the sufficiency of the Trust Estate for such purpose.
(b) If the Indenture Trustee collects any money or property pursuant to
this Article V, it shall pay out the money or property in the following order;
provided, however, that any amounts representing payments from the Bond Insurer
shall only be used to pay interest and principal to the Bondholders pursuant to
clauses THIRD and FOURTH below:
FIRST: to the Indenture Trustee for amounts due under Section 6.07
hereof;
SECOND: to the Bond Insurer, provided no Bond Insurer Default exists,
with respect to any Bond Insurance Premium then due;
THIRD: to the Bondholders for amounts due and unpaid on the Bonds
with respect to interest, ratably, without preference or priority of
any kind, according to the amounts due and payable on the Bonds for
interest (including the Interest Payment Amount but not including any
Prepayment Interest Shortfalls, any Relief Act Shortfalls and the
Carry-Forward Amount) from amounts available in the Trust Estate for
the Bondholders;
FOURTH: to Bondholders for amounts due and unpaid on the Bonds with
respect to principal (including, but not limited to, any Principal
Payment Amount), from amounts available in the Trust Estate for the
Bondholders, and to each Bondholder ratably, without preference or
priority of any kind, according to the amounts due and payable on the
Bonds for principal, until the Bond Principal Balance is reduced to
zero;
FIFTH: to the Bond Insurer, the sum of (a) all payments previously
paid by the Bond Insurer under the Bond Insurance Policy which have
not previously been reimbursed, (b) any other amounts due to the Bond
Insurer pursuant to the Insurance Agreement, to the extent not
previously paid or reimbursed and (c) interest on the foregoing as set
forth in the Insurance Agreement from the date such amounts become due
until paid in full (including any Bond Insurance Premium not paid
pursuant to clause SECOND above);
SIXTH: to the Bondholders for amounts due and unpaid on the Bonds
with respect to the Carry-Forward Amount, ratably, without preference
or priority of any kind, according to the amounts due and payable on
the Bonds with respect thereto, from amounts available in the Trust
Estate for the Bondholders; and
SEVENTH: to the payment of the remainder, if any, to the Issuer or
any other person legally entitled thereto.
The Indenture Trustee may fix a record date and payment date for any payment
to Bondholders pursuant to this Section 5.04. With respect to any acceleration
at the direction of the
31
<PAGE>
Bond Insurer, the first payment date after the acceleration shall be the first
Payment Date after the acceleration. At least 15 days before such record date,
the Indenture Trustee shall mail to each Bondholder a notice that states the
record date, the payment date and the amount to be paid.
Section 5.05. Optional Preservation of the Trust Estate. If the Bonds have
been declared to be due and payable under Section 5.02 following an Event of
Default and such declaration and its consequences have not been rescinded and
annulled, the Indenture Trustee may, with the consent of the Bond Insurer, and
shall, at the direction of the Bond Insurer, so long as no Bond Insurer Default
exists, elect to take and maintain possession of the Trust Estate. It is the
desire of the parties hereto and the Bondholders that there be at all times
sufficient funds for the payment of principal of and interest on the Bonds and
other obligations of the Issuer including payment to the Bond Insurer, and the
Indenture Trustee shall take such desire into account when determining whether
or not to take and maintain possession of the Trust Estate. In determining
whether to take and maintain possession of the Trust Estate, the Indenture
Trustee may, but need not, obtain and rely upon an opinion of an Independent
investment banking or accounting firm of national reputation as to the
feasibility of such proposed action and as to the sufficiency of the Trust
Estate for such purpose.
Section 5.06. Limitation of Suits. No Holder of any Bond shall have any
right to institute any Proceeding, judicial or otherwise, with respect to this
Indenture, or for the appointment of a receiver or trustee, or for any other
remedy hereunder, unless subject to the provisions of Section 10.16 hereof:
(i) such Holder has previously given written notice to the
Indenture Trustee of a continuing Event of Default;
(ii) the Holders of not less than 25% of the Bond Principal
Balances of the Bonds have made a written request to the Indenture Trustee
to institute such Proceeding in respect of such Event of Default in its own
name as Indenture Trustee hereunder;
(iii) such Holder or Holders have offered to the Indenture
Trustee reasonable indemnity against the costs, expenses and liabilities to
be incurred in complying with such request;
(iv) the Indenture Trustee for 60 days after its receipt of such
notice of request and offer of indemnity has failed to institute such
Proceedings;
(v) no direction inconsistent with such written request has been
given to the Indenture Trustee during such 60-day period by the Holders of
a majority of the Bond Principal Balances of the Bonds; and
(vi) such Holder or Holders have the consent of the Bond Insurer,
unless a Bond Insurer Default exists.
It is understood and intended that no one or more Holders of Bonds shall have
any right in any manner whatever by virtue of, or by availing of, any provision
of this Indenture to affect, disturb or prejudice the rights of any other
Holders of Bonds or to obtain or to seek to obtain priority or
32
<PAGE>
preference over any other Holders or to enforce any right under this Indenture,
except in the manner herein provided.
Subject to the last paragraph of Section 4.12 herein, in the event the
Indenture Trustee shall receive conflicting or inconsistent requests and
indemnity from two or more groups of Holders of Bonds, each representing less
than a majority of the Bond Principal Balances of the Bonds, the Indenture
Trustee in its sole discretion may determine what action, if any, shall be
taken, notwithstanding any other provisions of this Indenture.
Section 5.07. Unconditional Rights of Bondholders To Receive Principal and
Interest. Notwithstanding any other provisions in this Indenture, the Holder of
any Bond shall have the right, which is absolute and unconditional, to receive
payment of the principal of and interest, if any, on such Bond on or after the
respective due dates thereof expressed in such Bond or in this Indenture and to
institute suit for the enforcement of any such payment, and such right shall not
be impaired without the consent of such Holder.
Section 5.08. Restoration of Rights and Remedies. If the Indenture Trustee
or any Bondholder has instituted any Proceeding to enforce any right or remedy
under this Indenture and such Proceeding has been discontinued or abandoned for
any reason or has been determined adversely to the Indenture Trustee, the Bond
Insurer or to such Bondholder, then and in every such case the Issuer, the
Indenture Trustee, the Bond Insurer and the Bondholders shall, subject to any
determination in such Proceeding, be restored severally and respectively to
their former positions hereunder, and thereafter all rights and remedies of the
Indenture Trustee, the Bond Insurer and the Bondholders shall continue as though
no such Proceeding had been instituted.
Section 5.09. Rights and Remedies Cumulative. No right or remedy herein
conferred upon or reserved to the Indenture Trustee, the Bond Insurer or to the
Bondholders is intended to be exclusive of any other right or remedy, and every
right and remedy shall, to the extent permitted by law, be cumulative and in
addition to every other right and remedy given hereunder or now or hereafter
existing at law or in equity or otherwise. The assertion or employment of any
right or remedy hereunder, or otherwise, shall not prevent the concurrent
assertion or employment of any other appropriate right or remedy.
Section 5.10. Delay or Omission Not a Waiver. No delay or omission of the
Indenture Trustee, the Bond Insurer or any Holder of any Bond to exercise any
right or remedy accruing upon any Event of Default shall impair any such right
or remedy or constitute a waiver of any such Event of Default or an acquiescence
therein. Every right and remedy given by this Article V or by law to the
Indenture Trustee, the Bond Insurer or to the Bondholders may be exercised from
time to time, and as often as may be deemed expedient, by the Indenture Trustee,
the Bond Insurer or by the Bondholders, as the case may be.
Section 5.11. Control by Bond Insurer. The Bond Insurer, or if a Bond
Insurer Default exists, the Holders of a majority of the Bond Principal Balances
of Bonds shall have the right (subject to the provisions of Section 5.06) to
direct the time, method and place of conducting any Proceeding for any remedy
available to the Indenture Trustee with respect to the Bonds or exercising any
trust or power conferred on the Indenture Trustee; provided that:
33
<PAGE>
(i) such direction shall not be in conflict with any rule of law
or with this Indenture;
(ii) if a Bond Insurer Default exists, subject to the express
terms of Section 5.04, any direction to the Indenture Trustee to sell or
liquidate the Trust Estate shall be by Holders of Bonds representing 100%
of the Bond Principal Balances of the Bonds;
(iii) if the conditions set forth in Section 5.05 hereof have
been satisfied and the Indenture Trustee, with the consent of the Bond
Insurer, so long as no Bond Insurer Default exists, elects to retain the
Trust Estate pursuant to such Section, then any direction to the Indenture
Trustee by Holders of Bonds (other than with respect to the Bond Insurer
exercising the rights of Bondholders pursuant to the last sentence of
Section 4.12) to sell or liquidate the Trust Estate shall be of no force
and effect; and
(iv) if a Bond Insurer Default exists, the Indenture Trustee may
take any other action deemed proper by the Indenture Trustee that is not
inconsistent with such direction.
Notwithstanding the rights of Bondholders set forth in this Section, subject to
Section 6.01, the Indenture Trustee need not take any action that it determines
might involve it in liability or, if a Bond Insurer Default exists, might
materially adversely affect the rights of any Bondholders not consenting to such
action.
Section 5.12. Waiver of Past Defaults. Prior to the declaration of the
acceleration of the maturity of the Bonds as provided in Section 5.02 hereof,
the Bond Insurer, or if a Bond Insurer Default exists, the Holders of Bonds of
not less than a majority of the Bond Principal Balances of the Bonds, may waive
any past Event of Default and its consequences except an Event of Default (a)
with respect to payment of principal of or interest on any of the Bonds or (b)
in respect of a covenant or provision hereof which cannot be modified or amended
without the consent of the Holder of each Bond or (c) the waiver of which would
materially and adversely affect the interests of the Bond Insurer or modify its
obligation under the Bond Insurance Policy. In the case of any such waiver, the
Issuer, the Indenture Trustee and the Holders of the Bonds shall be restored to
their former positions and rights hereunder, respectively; but no such waiver
shall extend to any subsequent or other Event of Default or impair any right
consequent thereto.
Upon any such waiver, any Event of Default arising therefrom shall be deemed
to have been cured and not to have occurred, for every purpose of this
Indenture; but no such waiver shall extend to any subsequent or other Event of
Default or impair any right consequent thereto.
Section 5.13. Undertaking for Costs. All parties to this Indenture agree,
and each Holder of any Bond by such Holder's acceptance thereof shall be deemed
to have agreed, that any court may in its discretion require, in any suit for
the enforcement of any right or remedy under this Indenture, or in any suit
against the Indenture Trustee for any action taken, suffered or omitted by it as
Indenture Trustee, the filing by any party litigant in such suit of an
undertaking to pay the costs of such suit, and that such court may in its
discretion assess reasonable costs, including reasonable attorneys' fees,
against any party litigant in such suit, having due regard to the merits and
good faith of the claims or defenses made by such party litigant; but the
provisions of this Section 5.13 shall not apply to (a) any
34
<PAGE>
suit instituted by the Indenture Trustee or the Bond Insurer, (b) any suit
instituted by any Bondholder, or group of Bondholders, in each case holding in
the aggregate more than 10% of the Bond Principal Balances of the Bonds or (c)
any suit instituted by any Bondholder for the enforcement of the payment of
principal of or interest on any Bond on or after the respective due dates
expressed in such Bond and in this Indenture.
Section 5.14. Waiver of Stay or Extension Laws. The Issuer covenants (to the
extent that it may lawfully do so) that it will not at any time insist upon, or
plead or in any manner whatsoever, claim or take the benefit or advantage of,
any stay or extension law wherever enacted, now or at any time hereafter in
force, that may affect the covenants or the performance of this Indenture; and
the Issuer (to the extent that it may lawfully do so) hereby expressly waives
all benefit or advantage of any such law, and covenants that it shall not
hinder, delay or impede the execution of any power herein granted to the
Indenture Trustee, but will suffer and permit the execution of every such power
as though no such law had been enacted.
Section 5.15. Sale of Trust Estate. (a) The power to effect any sale or
other disposition (a "Sale") of any portion of the Trust Estate pursuant to
Section 5.04 hereof is expressly subject to the provisions of Section 5.05
hereof and this Section 5.15. The power to effect any such Sale shall not be
exhausted by any one or more Sales as to any portion of the Trust Estate
remaining unsold, but shall continue unimpaired until the entire Trust Estate
shall have been sold or all amounts payable on the Bonds and under this
Indenture and under the Insurance Agreement shall have been paid. The Indenture
Trustee with the consent of the Bond Insurer, so long as no Bond Insurer Default
exists, may from time to time postpone any public Sale by public announcement
made at the time and place of such Sale. The Indenture Trustee hereby expressly
waives its right to any amount fixed by law as compensation for any Sale.
(b) The Indenture Trustee shall not in any private Sale sell the Trust
Estate, or any portion thereof, unless
(1) the Bond Insurer or, if a Bond Insurer Default exists, the Holders
of all Bonds, consent to or direct the Indenture Trustee to make, such Sale, or
(2) unless the Bond Insurer otherwise consents, the proceeds of such
Sale would be not less than the entire amount which would be payable to the
Bondholders under the Bonds and the Bond Insurer in respect of amounts drawn
under the Bond Insurance Policy and any other amounts due to the Bond Insurer
under the Insurance Agreement, in full payment thereof in accordance with
Section 5.02 hereof, on the Payment Date next succeeding the date of such Sale,
or
(3) The Indenture Trustee determines with the consent of the Bond
Insurer, so long as no Bond Insurer Default exists, that the conditions for
retention of the Trust Estate set forth in Section 5.05 hereof cannot be
satisfied (in making any such determination, the Indenture Trustee may rely upon
an opinion of an Independent investment banking firm obtained and delivered as
provided in Section 5.05 hereof), and the Bond Insurer consents to such Sale, or
if a Bond Insurer Default exists, the Holders of Bonds representing at least 66-
2/3% of the Bond Principal Balances of the Bonds consent to such Sale.
35
<PAGE>
The purchase by the Indenture Trustee of all or any portion of the Trust Estate
at a private Sale shall not be deemed a Sale or other disposition thereof for
purposes of this Section 5.15(b).
(c) Unless the Bond Insurer or, if a Bond Insurer Default exists, the
Holders of Bonds representing at least 66-2/3% of the Bond Principal Balances of
the Bonds have otherwise consented or directed the Indenture Trustee, at any
public Sale of all or any portion of the Trust Estate at which a minimum bid
equal to or greater than the amount described in paragraph (2) of subsection (b)
of this Section 5.15 has not been established by the Indenture Trustee and no
Person bids an amount equal to or greater than such amount, the Indenture
Trustee shall bid an amount at least $1.00 more than the highest other bid.
(d) In connection with a Sale of all or any portion of the Trust Estate,
(1) any Holder or Holders of Bonds may bid for and with the consent of
the Bond Insurer purchase the property offered for Sale, and upon compliance
with the terms of sale may hold, retain and possess and dispose of such
property, without further accountability, and may, in paying the purchase money
therefor, deliver any Bonds or claims for interest thereon in lieu of cash up to
the amount which shall, upon distribution of the net proceeds of such sale, be
payable thereon, and such Bonds, in case the amounts so payable thereon shall be
less than the amount due thereon, shall be returned to the Holders thereof after
being appropriately stamped to show such partial payment;
(2) the Indenture Trustee, with the consent of the Bond Insurer, so long
as no Bond Insurer Default exists, may bid for and acquire the property offered
for Sale in connection with any Sale thereof, and, subject to any requirements
of, and to the extent permitted by, applicable law in connection therewith, may
purchase all or any portion of the Trust Estate in a private sale, and, in lieu
of paying cash therefor, may make settlement for the purchase price by crediting
the gross Sale price against the sum of (A) the amount which would be
distributable to the Holders of the Bonds and Holders of Certificates and
amounts owing to the Bond Insurer as a result of such Sale in accordance with
Section 5.04(b) hereof on the Payment Date next succeeding the date of such Sale
and (B) the reasonable expenses of the Sale and of any Proceedings in connection
therewith which are reimbursable to it, without being required to produce the
Bonds in order to complete any such Sale or in order for the net Sale price to
be credited against such Bonds, and any property so acquired by the Indenture
Trustee shall be held and dealt with by it in accordance with the provisions of
this Indenture;
(3) the Indenture Trustee shall execute and deliver an appropriate
instrument of conveyance transferring its interest in any portion of the Trust
Estate in connection with a Sale there of;
(4) the Indenture Trustee is hereby irrevocably appointed the agent and
attorney-in-fact of the Issuer to transfer and convey its interest in any
portion of the Trust Estate in connection with a Sale thereof, and to take all
action necessary to effect such Sale; and
(5) no purchaser or transferee at such a Sale shall be bound to
ascertain the Indenture Trustee's authority, inquire into the satisfaction of
any conditions precedent or see to the application of any monies.
36
<PAGE>
Section 5.16. Action on Bonds. The Indenture Trustee's right to seek and
recover judgment on the Bonds or under this Indenture shall not be affected by
the seeking, obtaining or application of any other relief under or with respect
to this Indenture. Neither the lien of this Indenture nor any rights or remedies
of the Indenture Trustee, the Bond Insurer or the Bondholders shall be impaired
by the recovery of any judgment by the Indenture Trustee against the Issuer or
by the levy of any execution under such judgment upon any portion of the Trust
Estate or upon any of the assets of the Issuer. Any money or property collected
by the Indenture Trustee shall be applied in accordance with Section 5.04(b)
hereof.
Section 5.17. Performance and Enforcement of Certain Obligations. (a)
Promptly following a request from the Indenture Trustee to do so, the Issuer, in
its capacity as holder of the Mortgage Loans, shall take all such lawful action
as the Indenture Trustee or the Bond Insurer may request to cause the Issuer to
compel or secure the performance and observance by the Seller and the Servicer,
as applicable, of each of their obligations to the Issuer under or in connection
with the Mortgage Loan Purchase Agreement and the Servicing Agreement, and to
exercise any and all rights, remedies, powers and privileges lawfully available
to the Issuer under or in connection with the Mortgage Loan Purchase Agreement
and the Servicing Agreement to the extent and in the manner directed by the
Indenture Trustee, with the consent of the Bond Insurer, so long as no Bond
Insurer Default exists, as pledgee of the Mortgage Loans, including the
transmission of notices of default on the part of the Seller or the Servicer
thereunder and the institution of legal or administrative actions or proceedings
to compel or secure performance by the Seller or the Servicer of each of their
obligations under the Mortgage Loan Purchase Agreement and the Servicing
Agreement. So long as no Bond Insurer Default exists, the Bond Insurer shall
have the right to approve or reject any proposed successor to the Servicer
(other than the Indenture Trustee) under the Servicing Agreement.
(b) The Indenture Trustee, as pledgee of the Mortgage Loans, subject to the
rights of the Bond Insurer under this Agreement and the Servicing Agreement may,
and at the direction (which direction shall be in writing or by telephone
(confirmed in writing promptly thereafter)) of the Bond Insurer or, if a Bond
Insurer Default exists, the Holders of 66-2/3% of the Bond Principal Balances of
the Bonds, shall exercise all rights, remedies, powers, privileges and claims of
the Issuer against the Seller or the Servicer under or in connection with the
Mortgage Loan Purchase Agreement and the Servicing Agreement, including the
right or power to take any action to compel or secure performance or observance
by the Seller or the Servicer, as the case may be, of each of their obligations
to the Issuer thereunder and to give any consent, request, notice, direction,
approval, extension or waiver under the Mortgage Loan Purchase Agreement and the
Servicing Agreement, as the case may be, and any right of the Issuer to take
such action shall not be suspended.
37
<PAGE>
ARTICLE VI
The Indenture Trustee
---------------------
Section 6.01. Duties of Indenture Trustee. (a) If an Event of Default
has occurred and is continuing, the Indenture Trustee shall exercise the rights
and powers vested in it by this Indenture and use the same degree of care and
skill in their exercise as a prudent person would exercise or use under the
circumstances in the conduct of such person's own affairs.
(b) Except during the continuance of an Event of Default:
(i) the Indenture Trustee undertakes to perform such duties and
only such duties as are specifically set forth in this Indenture and no
implied covenants or obligations shall be read into this Indenture against
the Indenture Trustee; and
(ii) in the absence of bad faith on its part, the Indenture
Trustee may conclusively rely, as to the truth of the statements and the
correctness of the opinions expressed therein, upon certificates or
opinions furnished to the Indenture Trustee and conforming to the
requirements of this Indenture; however, the Indenture Trustee shall
examine the certificates and opinions to determine whether or not they
conform to the requirements of this Indenture.
(c) The Indenture Trustee may not be relieved from liability for its own
negligent action, its own negligent failure to act or its own willful
misconduct, except that:
(i) this paragraph does not limit the effect of paragraph (b) of
this Section 6.01;
(ii) the Indenture Trustee shall not be liable for any error of
judgment made in good faith by a Responsible Officer unless it is proved
that the Indenture Trustee was negligent in ascertaining the pertinent
facts; and
(iii) the Indenture Trustee shall not be liable with respect to
any action it takes or omits to take in good faith in accordance with a
direction received by it (A) pursuant to Sections 5.11 or 5.15 or (B) from
the Bond Insurer, which it is entitled to give under any of the Basic
Documents.
(d) The Indenture Trustee shall not be liable for interest on any money
received by it except as the Indenture Trustee may agree in writing with the
Issuer.
(e) Money held in trust by the Indenture Trustee need not be segregated
from other trust funds except to the extent required by law or the terms of this
Indenture or the Trust Agreement.
(f) No provision of this Indenture shall require the Indenture Trustee to
expend or risk its own funds or otherwise incur financial liability in the
performance of any of its duties hereunder or in the exercise of any of its
rights or powers, if it shall have reasonable grounds to believe that repayment
of such funds or adequate indemnity against such risk or liability is not
reasonably assured to it.
38
<PAGE>
(g) Every provision of this Indenture relating to the conduct or affecting
the liability of or affording protection to the Indenture Trustee shall be
subject to the provisions of this Section and to the provisions of the TIA.
(h) The Indenture Trustee shall act in accordance with Sections 6.03 and
6.04 of the Servicing Agreement and shall act as successor to the Servicer in
accordance with Section 6.02 of the Servicing Agreement.
(i) For all purposes under this Indenture, the Indenture Trustee shall not
be deemed to have notice or knowledge of any Default or Event of Default unless
a Responsible Officer assigned to and working in the Indenture Trustee's
corporate trust department has actual knowledge thereof or unless written notice
of any event which is in fact such an Event of Default or Default is received by
the Indenture Trustee at the Corporate Trust Office, and such notice references
the Bonds generally, the Issuer, the Trust Estate or this Indenture.
The Indenture Trustee is hereby authorized to execute and shall execute the
Servicing Agreement and the Mortgage Loan Purchase Agreement and shall perform
its duties and satisfy its obligations thereunder. Every provision of this
Indenture relating to the conduct or affecting the liability of or affording
protection to the Indenture Trustee shall apply to the Indenture Trustee's
execution of the Servicing Agreement and the Mortgage Loan Purchase Agreement
and the performance of its duties and satisfaction of its obligations
thereunder.
Section 6.02. Rights of Indenture Trustee. (a) The Indenture Trustee may
rely on any document believed by it to be genuine and to have been signed or
presented by the proper person. The Indenture Trustee need not investigate any
fact or matter stated in the document.
(b) Before the Indenture Trustee acts or refrains from acting, it may
require an Officer's Certificate or an Opinion of Counsel reasonably
satisfactory in form and substance to the Indenture Trustee, which Officer's
Certificate or Opinion of Counsel shall not be at the expense of the Indenture
Trustee or the Trust Estate (except in the priority set forth in Section
3.05(a)(viii)). The Indenture Trustee shall not be liable for any action it
takes or omits to take in good faith in reliance on an Officer's Certificate or
Opinion of Counsel.
(c) The Indenture Trustee may execute any of the trusts or powers hereunder
or perform any duties hereunder either directly or by or through agents or
attorneys or a custodian or nominee.
(d) The Indenture Trustee shall not be liable for any action it takes or
omits to take in good faith which it believes to be authorized or within its
rights or powers; provided, however, that the Indenture Trustee's conduct does
not constitute willful misconduct, negligence or bad faith.
(e) The Indenture Trustee may consult with counsel chosen by it with due
care, and the advice or opinion of counsel with respect to legal matters
relating to this Indenture and the Bonds shall be full and complete
authorization and protection from liability in respect to any action taken,
omitted or suffered by it hereunder in good faith and in accordance with the
advice or opinion of such counsel.
39
<PAGE>
Section 6.03. Individual Rights of Indenture Trustee. The Indenture
Trustee in its individual or any other capacity may become the owner or pledgee
of Bonds and may otherwise deal with the Issuer or its Affiliates with the same
rights it would have if it were not Indenture Trustee. Any Bond Registrar, co-
registrar or co-paying agent may do the same with like rights. However, the
Indenture Trustee must comply with Section 6.11 hereof.
Section 6.04. Indenture Trustee's Disclaimer. The Indenture Trustee shall
not be responsible for and makes no representation as to the validity or
adequacy of this Indenture or the Bonds, it shall not be accountable for the
Issuer's use of the proceeds from the Bonds, and it shall not be responsible for
any statement of the Issuer in the Indenture or in any document issued in
connection with the sale of the Bonds or in the Bonds other than the Indenture
Trustee's certificate of authentication.
Section 6.05. Notice of Event of Default. If an Event of Default occurs
and is continuing and if it is known to a Responsible Officer of the Indenture
Trustee, the Indenture Trustee shall give notice thereof to the Bond Insurer.
The Trustee shall mail to each Bondholder notice of the Event of Default within
10 days after a Responsible Officer has actual knowledge thereof unless such
Event of Default shall have been waived or cured. Except in the case of an
Event of Default in payment of principal of or interest on any Bond, the
Indenture Trustee may withhold the notice if and so long as a committee of its
Responsible Officers in good faith determines that withholding the notice is in
the interests of Bondholders.
Section 6.06. Tax Administration of the Issuer. The Indenture Trustee,
based solely on information timely provided by the Servicer, shall prepare and
file (or cause to be prepared and filed), on behalf of the Owner Trustee, all
tax returns and information reports, tax elections and such annual or other
reports of the Issuer as are necessary for preparation of tax returns and
information reports as provided in Section 5.03 of the Trust Agreement,
including without limitation Form 1099. All tax returns and information reports
shall be signed by the Owner Trustee as provided in Section 5.03 of the Trust
Agreement.
Section 6.07. Compensation and Indemnity. The Issuer shall pay to the
Indenture Trustee on each Payment Date reasonable compensation for its services.
The amount of the Indenture Trustee Fee shall be paid to the Indenture Trustee
on each Payment Date pursuant to Section 3.05(a)(i) of this Indenture, and all
amounts owing to the Indenture Trustee hereunder in excess of such amount shall
be paid solely as provided in Section 3.05(a)(viii) hereof and Section 5.06 of
the Servicing Agreement. The Indenture Trustee's compensation shall not be
limited by any law on compensation of a trustee of an express trust. The Issuer
shall reimburse the Indenture Trustee for all reasonable out-of-pocket expenses
incurred or made by it, including costs of collection, in addition to
compensation for its services subject to the priorities established by Sections
3.05(a)(viii) and 5.04(b) of this Indenture. Such expenses shall include
reasonable compensation and expenses, disbursements and advances of the
Indenture Trustee's agents, counsel, accountants and experts. Subject to the
priorities established in Section 3.05(a)(viii) and Section 5.04(b) of this
Indenture, the Issuer shall indemnify the Indenture Trustee against any and all
loss, liability or expense (including reasonable attorneys' fees) incurred by it
in connection with the administration of this Trust Estate and the performance
of its duties hereunder. The Indenture Trustee shall notify the Issuer promptly
of any claim for which it may seek indemnity. Failure by the Indenture Trustee
to so notify the Issuer shall not relieve the Issuer of its obligations
hereunder. The Issuer shall defend any such claim, and
40
<PAGE>
the Indenture Trustee may have separate counsel and the Issuer shall pay the
reasonable fees and expenses of such counsel. The Issuer is not obligated to
reimburse any expense or indemnify against any loss, liability or expense
incurred by the Indenture Trustee through the Indenture Trustee's own willful
misconduct, negligence or bad faith.
The Issuer's payment obligations to the Indenture Trustee pursuant to this
Section 6.07 shall survive the discharge of this Indenture. When the Indenture
Trustee incurs expenses after the occurrence of an Event of Default with respect
to the Issuer, the expenses are intended to constitute expenses of
administration under Title 11 of the United States Code or any other applicable
federal or state bankruptcy, insolvency or similar law.
Section 6.08. Replacement of Indenture Trustee. No resignation or removal
of the Indenture Trustee and no appointment of a successor Indenture Trustee
shall become effective until the acceptance of appointment by the successor
Indenture Trustee pursuant to this Section 6.08. The Indenture Trustee may
resign at any time by so notifying the Issuer and the Bond Insurer. The Bond
Insurer or, if a Bond Insurer Default exists, the Holders of a majority of Bond
Principal Balances of the Bonds may remove the Indenture Trustee by so notifying
the Issuer and the Indenture Trustee and the Bond Insurer and may appoint a
successor Indenture Trustee. The Issuer shall, with the consent of the Bond
Insurer, so long as no Bond Insurer Default exists, remove the Indenture Trustee
if:
(i) the Indenture Trustee fails to comply with Section 6.11
hereof;
(ii) the Indenture Trustee is adjudged a bankrupt or insolvent;
(iii) a receiver or other public officer takes charge of the
Indenture Trustee or its property; or
(iv) the Indenture Trustee otherwise becomes incapable of acting.
If the Indenture Trustee resigns or is removed or if a vacancy exists in
the office of the Indenture Trustee for any reason (the Indenture Trustee in
such event being referred to herein as the retiring Indenture Trustee), the
Issuer shall, with the consent of the Bond Insurer, so long as no Bond Insurer
Default exists, promptly appoint a successor Indenture Trustee reasonably
acceptable to the Bond Insurer.
A successor Indenture Trustee shall deliver a written acceptance of its
appointment to the retiring Indenture Trustee, the Bond Insurer and to the
Issuer. Thereupon, the resignation or removal of the retiring Indenture Trustee
shall become effective, and the successor Indenture Trustee shall have all the
rights, powers and duties of the Indenture Trustee under this Indenture. The
successor Indenture Trustee shall mail a notice of its succession to the
Bondholders. The retiring Indenture Trustee shall promptly transfer all
property held by it as Indenture Trustee to the successor Indenture Trustee.
If a successor Indenture Trustee does not take office within 60 days after
the retiring Indenture Trustee resigns or is removed, the retiring Indenture
Trustee, the Issuer, the Bond Insurer
41
<PAGE>
or the Holders of a majority of Bond Principal Balances of the Bonds may
petition any court of competent jurisdiction for the appointment of a successor
Indenture Trustee.
Notwithstanding the replacement of the Indenture Trustee pursuant to this
Section, the Issuer's obligations under Section 6.07 shall continue for the
benefit of the retiring Indenture Trustee.
Section 6.09. Successor Indenture Trustee by Merger. If the Indenture
Trustee consolidates with, merges or converts into, or transfers all or
substantially all of its corporate trust business or assets to, another
corporation or banking association, the resulting, surviving or transferee
corporation, without any further act, shall be the successor Indenture Trustee;
provided, that such corporation or banking association shall be otherwise
qualified and eligible under Section 6.11 hereof. The Indenture Trustee shall
provide the Issuer, the Rating Agencies and the Bond Insurer with prior written
notice of any such transaction.
If at the time such successor or successors by merger, conversion or
consolidation to the Indenture Trustee shall succeed to the trusts created by
this Indenture and any of the Bonds shall have been authenticated but not
delivered, any such successor to the Indenture Trustee may adopt the certificate
of authentication of any predecessor trustee and deliver such Bonds so
authenticated; and if at that time any of the Bonds shall not have been
authenticated, any successor to the Indenture Trustee may authenticate such
Bonds either in the name of any predecessor hereunder or in the name of the
successor to the Indenture Trustee; and in all such cases such certificates
shall have the full force which it is in the Bonds or in this Indenture provided
that the certificate of the Indenture Trustee shall have.
Section 6.10. Appointment of Co-Indenture Trustee or Separate Indenture
Trustee. (a) Notwithstanding any other provisions of this Indenture, at any
time, for the purpose of meeting any legal requirement of any jurisdiction in
which any part of the Trust Estate may at the time be located, the Indenture
Trustee shall have the power and may execute and deliver all instruments to
appoint one or more Persons to act as a co-trustee or co-trustees, or separate
trustee or separate trustees, of all or any part of the Trust Estate, and to
vest in such Person or Persons, in such capacity and for the benefit of the
Bondholders and the Bond Insurer, such title to the Trust Estate, or any part
hereof, and, subject to the other provisions of this Section, such powers,
duties, obligations, rights and trusts as the Indenture Trustee or the Bond
Insurer may consider necessary or desirable. No co-trustee or separate trustee
hereunder shall be required to meet the terms of eligibility as a successor
trustee under Section 6.11 hereof and notice to, and the consent of, the Bond
Insurer (but not the Bondholders) of the appointment of any co-trustee or
separate trustee shall be required.
(b) Every separate trustee and co-trustee shall, to the extent permitted by
law, be appointed and act subject to the following provisions and conditions:
(i) all rights, powers, duties and obligations conferred or
imposed upon the Indenture Trustee shall be conferred or imposed upon and
exercised or performed by the Indenture Trustee and such separate trustee
or co-trustee jointly (it being understood that such separate trustee or
co-trustee is not authorized to act separately without the Indenture
Trustee joining in such act), except to the extent that under any law of
any jurisdiction in which any particular act or acts are to be performed
the Indenture Trustee shall be
42
<PAGE>
incompetent or unqualified to perform such act or acts, in which event such
rights, powers, duties and obligations (including the holding of title to
the Trust Estate or any portion thereof in any such jurisdiction) shall be
exercised and performed singly by such separate trustee or co-trustee, but
solely at the direction of the Indenture Trustee;
(ii) no trustee hereunder shall be personally liable by reason of
any act or omission of any other trustee hereunder; and
(iii) the Indenture Trustee may at any time accept the
resignation of or remove any separate trustee or co-trustee.
(c) Any notice, request or other writing given to the Indenture Trustee
shall be deemed to have been given to each of the then separate trustees and co-
trustees, as effectively as if given to each of them. Every instrument
appointing any separate trustee or co-trustee shall refer to this Agreement and
the conditions of this Article VI. Each separate trustee and co-trustee, upon
its acceptance of the trusts conferred, shall be vested with the estates or
property specified in its instrument of appointment, either jointly with the
Indenture Trustee or separately, as may be provided therein, subject to all the
provisions of this Indenture, specifically including every provision of this
Indenture relating to the conduct of, affecting the liability of, or affording
protection to, the Indenture Trustee. Every such instrument shall be filed with
the Indenture Trustee.
(d) Any separate trustee or co-trustee may at any time constitute the
Indenture Trustee, its agent or attorney-in-fact with full power and authority,
to the extent not prohibited by law, to do any lawful act under or in respect of
this Agreement on its behalf and in its name. If any separate trustee or co-
trustee shall die, become incapable of acting, resign or be removed, all of its
estates, properties, rights, remedies and trusts shall vest in and be exercised
by the Indenture Trustee, to the extent permitted by law, without the
appointment of a new or successor trustee.
Section 6.11. Eligibility; Disqualification. The Indenture Trustee shall
at all times be reasonably acceptable to the Bond Insurer and authorized to
exercise corporate trust powers. The Indenture Trustee shall also satisfy the
requirements of TIA (S)310(a) and have a combined capital and surplus of at
least $50,000,000 as set forth in its most recent published annual report of
condition and it or its parent shall have a long-term debt rating of Baa3 or
better by Moody's and BBB or better by Standard & Poor's. The Indenture Trustee
shall comply with TIA (S) 310(b), including the optional provision permitted by
the second sentence of TIA (S) 310(b)(9); provided, however, that there shall
be excluded from the operation of TIA (S) 310(b)(1) any indenture or indentures
under which other securities of the Issuer are outstanding if the requirements
for such exclusion set forth in TIA (S) 310(b)(1) are met. If at any time the
Indenture Trustee shall cease to be eligible in accordance with the provisions
of this Section, it shall resign immediately in the manner and with the effect
specified in Section 6.08 hereof.
Section 6.12. Preferential Collection of Claims Against Issuer. The
Indenture Trustee shall comply with TIA (S) 311(a), excluding any creditor
relationship listed in TIA (S) 311(b). An Indenture Trustee who has resigned or
been removed shall be subject to TIA (S) 311(a) to the extent indicated.
Section 6.13. Representations and Warranties. The Indenture Trustee
hereby represents that:
43
<PAGE>
(i) The Indenture Trustee is duly organized and validly existing
as a national banking association in good standing under the laws of the
United States with power and authority to own its properties and to conduct
its business as such properties are currently owned and such business is
presently conducted;
(ii) The Indenture Trustee has the power and authority to execute
and deliver this Indenture and to carry out its terms; and the execution,
delivery and performance of this Indenture have been duly authorized by the
Indenture Trustee by all necessary corporate action;
(iii) The consummation of the transactions contemplated by this
Indenture and the fulfillment of the terms hereof do not conflict with,
result in any breach of any of the terms and provisions of, or constitute
(with or without notice or lapse of time) a default under, the articles of
organization or bylaws of the Indenture Trustee or any agreement or other
instrument to which the Indenture Trustee is a party or by which it is
bound; and
(iv) To the Indenture Trustee's best knowledge, there are no
proceedings or investigations pending or threatened before any court,
regulatory body, administrative agency or other governmental
instrumentality having jurisdiction over the Indenture Trustee or its
properties: (A) asserting the invalidity of this Indenture, (B) seeking to
prevent the consummation of any of the transactions contemplated by this
Indenture or (C) seeking any determination or ruling that might materially
and adversely affect the performance by the Indenture Trustee of its
obligations under, or the validity or enforceability of, this Indenture.
Section 6.14. Directions to Indenture Trustee. The Indenture Trustee is
hereby directed:
(a) to accept the pledge of the Mortgage Loans and hold the assets of the
Owner Trust Estate in trust for the Bondholders and the Bond Insurer;
(b) to authenticate and deliver the Bonds substantially in the form
prescribed by Exhibit A in accordance with the terms of this Indenture; and
(c) to take all other actions as shall be required to be taken by the terms
of this Indenture.
Section 6.15. The Agents. The provisions of this Indenture relating to
the limitations of the Indenture Trustee's liability and to its indemnity shall
inure also to the Paying Agent, the Bond Registrar, the Certificate Paying Agent
and the Certificate Registrar.
44
<PAGE>
ARTICLE VII
Bondholders' Lists and Reports
------------------------------
Section 7.01. Issuer To Furnish Indenture Trustee Names and Addresses of
Bondholders. The Issuer will furnish or cause to be furnished to the Indenture
Trustee (a) not more than five days after each Record Date, a list, in such form
as the Indenture Trustee may reasonably require, of the names and addresses of
the Holders of Bonds as of such Record Date, (b) at such other times as the
Indenture Trustee and the Bond Insurer may request in writing, within 30 days
after receipt by the Issuer of any such request, a list of similar form and
content as of a date not more than 10 days prior to the time such list is
furnished; provided, however, that so long as the Indenture Trustee is the Bond
Registrar, no such list shall be required to be furnished.
Section 7.02. Preservation of Information; Communications to Bondholders.
(a) The Indenture Trustee shall preserve, in as current a form as is reasonably
practicable, the names and addresses of the Holders of Bonds contained in the
most recent list furnished to the Indenture Trustee as provided in Section 7.01
hereof and the names and addresses of Holders of Bonds received by the Indenture
Trustee in its capacity as Bond Registrar. The Indenture Trustee may destroy
any list furnished to it as provided in such Section 7.01 upon receipt of a new
list so furnished.
(b) Bondholders may communicate pursuant to TIA (S)312(b) with other
Bondholders with respect to their rights under this Indenture or under the
Bonds.
(c) The Issuer, the Indenture Trustee and the Bond Registrar shall have the
protection of TIA (S) 312(c).
Section 7.03. Reports by [the Indenture Trustee]; Issuer Fiscal Year. (a)
The [Indenture Trustee] shall:
(i) file with the Company and the Bond Insurer, within 15 days
after the Issuer is required to file the same with the Commission, copies
of the annual reports and of the information, documents and other reports
(or copies of such portions of any of the foregoing as the Commission may
from time to time by rules and regulations prescribe) that the Issuer may
be required to file with the Commission pursuant to Section 13 or 15(d) of
the Exchange Act. Such filings shall be as follows: within 15 days after
each Payment Date, the Indenture Trustee shall file with the Commission via
the Electronic Data Gathering and Retrieval System, a Form 8-K with a copy
of the statement to Bondholders for such Payment Date as an exhibit
thereto. Prior to January 30, 1998, the Indenture Trustee shall file a
Form 15 Suspension Notification with respect to the Trust Fund, if
applicable. Prior to March 30, 1998, the Indenture Trustee shall file a
Form 10-K, in substance conforming to industry standards, with respect to
the Trust Fund. The Company hereby grants to the Indenture Trustee a
limited power of attorney to execute and file each such document on behalf
of the Company. Such power of attorney shall continue until the earlier of
(i) receipt by the Trustee from the Company of written termination of such
power of attorney and (ii) the termination of the Trust Fund. At least
three Business Days prior to filing any Form 8-K or Form 10-K
45
<PAGE>
pursuant to this Section 7.03, the Indenture Trustee shall deliver a copy
of such Form 8-K or Form 10-K, as the case may be, to the Company.
(ii) file with the Company, the Bond Insurer and the Commission
in accordance with rules and regulations prescribed from time to time by
the Commission such additional information, documents and reports with
respect to compliance by the Issuer with the conditions and covenants of
this Indenture as may be required from time to time by such rules and
regulations; and
(iii) supply to the Company and the Bond Insurer (and the
Indenture Trustee shall transmit by mail to all Bondholders described in
TIA (S) 313(c)) such summaries of any information, documents and reports
required to be filed by the Issuer pursuant to clauses (i) and (ii) of this
Section 7.03(a) and by rules and regulations prescribed from time to time
by the Commission.
(b) Unless the Issuer otherwise determines, the fiscal year of the Issuer
shall end on December 31 of each year.
Section 7.04. Reports by Indenture Trustee. If required by TIA (S)
313(a), within 60 days after each January 1 beginning with January 1, 1998, the
Indenture Trustee shall mail to each Bondholder as required by TIA (S) 313(c)
and to the Bond Insurer a brief report dated as of such date that complies with
TIA (S) 313(a). The Indenture Trustee also shall comply with TIA (S) 313(b).
A copy of each report at the time of its mailing to Bondholders shall be
filed by the Indenture Trustee with the Commission and each stock exchange, if
any, on which the Bonds are listed. The Issuer shall notify the Indenture
Trustee and the Bond Insurer if and when the Bonds are listed on any stock
exchange.
Section 7.05. Statements to Bondholders. (a) Subject to Section 3.26 of
this Indenture, with respect to each Payment Date, the Indenture Trustee shall
deliver to each Certificateholder and Bondholder, the Bond Insurer, the Company,
the Owner Trustee, the Certificate Paying Agent and each Rating Agency, a
statement setting forth the following information as to the Bonds, to the extent
applicable:
(i) the aggregate amount of collections with respect to the
Mortgage Loans with respect to such Payment Date;
(ii) the Interest Payment Amount, Principal Payment Amount and
Subordination Increase Amount payable to the Bondholders for such Payment Date,
the Guaranteed Interest Payment Amount and the Carry-Forward Amount for such
Payment Date and the aggregate unpaid Carry-Forward Amount for all prior Payment
Dates;
(iii) the amount of the aggregate distribution to the Bondholders
for such Payment Date;
46
<PAGE>
(iv) the Insured Payments, if any, paid by the Bond Insurer under
the Bond Insurance Policy for such Payment Date and the aggregate Insured
Payments for all prior Payment Dates paid by the Bond Insurer under the Bond
Insurance Policy and not yet reimbursed;
(v) the aggregate Principal Balance of the Mortgage Loans as of
the end of the preceding Due Period;
(vi) the number and aggregate Principal Balances of Mortgage
Loans (a) as to which the Monthly Payment is delinquent for 30-59 days, 60-89
days and 90 or more days (excluding any Mortgage Loans in foreclosure or that
have become REO Property), respectively, (b) in foreclosure and (c) that have
become REO Property, in each case as of the end of the preceding Due Period;
provided, however, that such information will not be provided on the statements
relating to the first Payment Date;
(vii) the Weighted Average Net Mortgage Rate for the related
Payment Date;
(viii) the Required Subordination Amount, Subordination Amount,
Net Monthly Excess Cashflow and Subordination Reduction Amount for such Payment
Date;
(ix) the amount of any Advances and Compensating Interest
Payments for such Payment Date;
(x) the aggregate Realized Losses with respect to the related
Payment Date and cumulative Realized Losses since the Closing Date;
(xi) the amount of any unpaid accrued interest on the Bonds after
such Payment Date;
(xii) the aggregate Bond Principal Balance of the Bonds after
giving effect to the distribution of principal on such Payment Date;
(xiii) the Maximum Bond Interest Rate and Bond Interest Rate for
such Payment Date;
(xiv) the number and aggregate Principal Balance of Mortgage
Loans repurchased pursuant to the Mortgage Loan Purchase Agreement for the
related Payment Date and cumulatively since the Closing Date;
(xv) the Cumulative Loss Percentage, Delinquency Percentage,
Delinquency Amount and Rolling Delinquency Percentage for such Payment Date;
(xvi) the amount of any Prepayment Interest Shortfalls or Relief
Act Shortfalls for such Payment Date;
47
<PAGE>
(xvii) the aggregate Principal Balance of Mortgage Loans
purchased pursuant to Section 3.18 of the Servicing Agreement for the related
Payment Date and cumulatively since the Closing Date; and
(xviii) the aggregate amount collected with respect to any
prepayment penalties on the Mortgage Loans.
Items (iii) and (xii) above shall be presented on the basis of a Bond
having a $1,000 denomination. In addition, by January 31 of each calendar year
following any year during which the Bonds are outstanding, the Indenture Trustee
shall furnish a report to each Bondholder of record if so requested in writing
at any time during each calendar year as to the aggregate of amounts reported
pursuant to (iii) and (xii) with respect to the Bonds for such calendar year.
The Indenture Trustee in the absence of manifest error may conclusively
rely upon the Determination Date Report provided by the Servicer pursuant to
Section 4.01 of the Servicing Agreement in its preparation of its Statement to
the Bondholders pursuant to this Section 7.04.
Section 7.06. Books and Records.
The Issuer hereby covenants with the Indenture Trustee and the Bond Insurer
that, so long as any of the Bonds remain Outstanding, it shall:
(a) at all times cause to be kept proper books of account and allow the
Indenture Trustee and the Bond Insurer and any person appointed by it, to whom
the Issuer shall have no reasonable objection, access to the books of account of
the Issuer at all reasonable times, on reasonable prior notice and during normal
business hours;
(b) at all times conduct and continue to conduct business in its own
corporate name;
(c) at all times act and continue to act through its duly authorized
officers and agents; and
(d) so far as permitted by law, at all times cause to be given to the
Indenture Trustee and the Bond Insurer such information as it shall reasonably
require for the purpose of the discharge of the duties, powers, trusts,
authorities and discretions vested in it by this Indenture or by operation of
law.
48
<PAGE>
ARTICLE VIII
Accounts, Disbursements and Releases
------------------------------------
Section 8.01. Collection of Money. Except as otherwise expressly provided
herein, the Indenture Trustee may demand payment or delivery of, and shall
receive and collect, directly and without intervention or assistance of any
fiscal agent or other intermediary, all money and other property payable to or
receivable by the Indenture Trustee pursuant to this Indenture. The Indenture
Trustee shall apply all such money received by it as provided in this Indenture.
Except as otherwise expressly provided in this Indenture, if any default occurs
in the making of any payment or performance under any agreement or instrument
that is part of the Trust Estate, the Indenture Trustee may take such action as
may be appropriate to enforce such payment or performance, including the
institution and prosecution of appropriate Proceedings. Any such action shall be
without prejudice to any right to claim a Default or Event of Default under this
Indenture and any right to proceed thereafter as provided in Article V.
Section 8.02. Trust Accounts. (a) On or prior to the Closing Date, the
Issuer shall cause the Indenture Trustee to establish and maintain, in the name
of the Indenture Trustee, for the benefit of the Bondholders and the Bond
Insurer, the Payment Account as provided in Section 3.01 hereof.
(b) All monies deposited from time to time in the Payment Account (other
than investments made with such monies including all income or other gain from
such investments pursuant to this Indenture), including assumption fees and
prepayment penalties, and all deposits therein pursuant to this Indenture are
for the benefit of the Bondholders and the Bond Insurer.
On each Payment Date, the Indenture Trustee shall distribute all amounts on
deposit in the Payment Account to Bondholders in respect of the Bonds and to
such other persons in the order of priority set forth in Section 3.05 hereof
(except as otherwise provided in Section 5.04(b) hereof).
The Indenture Trustee may invest any funds in the Payment Account (other
than the proceeds of the Bond Insurance Policy) in Eligible Investments, in its
discretion, maturing no later than the Business Day preceding each Payment Date
(provided, however, that with respect to Eligible Investments that consist of
obligations of the Indenture Trustee or its affiliates, such Eligible
Investments may mature on the related Payment Date) and such Eligible
Investments shall not be sold or disposed of prior to their maturity. All
income or other gain from such investments may be released from the Payment
Account and paid to the Indenture Trustee from time to time as part of its
compensation for acting as Indenture Trustee.
Section 8.03. Officer's Certificate. The Indenture Trustee shall receive
at least seven days' notice when requested by the Issuer to take any action
pursuant to Section 8.05(a) hereof, accompanied by copies of any instruments to
be executed, and the Indenture Trustee shall also require, as a condition to
such action, an Officer's Certificate, in form and substance reasonably
satisfactory to the Indenture Trustee, stating the legal effect of any such
action, outlining the steps required to complete such action, and concluding
that all conditions precedent to the taking of such action have been complied
with.
49
<PAGE>
Section 8.04. Termination Upon Distribution to Bondholders. This
Indenture and the respective obligations and responsibilities of the Issuer and
the Indenture Trustee created hereby shall terminate upon the distribution to
Bondholders, the Bond Insurer, the Certificate Paying Agent on behalf of the
Certificateholders and the Indenture Trustee of all amounts required to be
distributed pursuant to Article III; provided, however, that in no event shall
the trust created hereby continue beyond the expiration of 21 years from the
death of the survivor of the descendants of Joseph P. Kennedy, the late
ambassador of the United States to the Court of St. James, living on the date
hereof.
Section 8.05. Release of Trust Estate. (a) Subject to the payment of its
reasonable fees and expenses, the Indenture Trustee may, and when required by
the provisions of this Indenture shall, execute instruments to release property
from the lien of this Indenture, or convey the Indenture Trustee's interest in
the same, in a manner and under circumstances that are not inconsistent with the
provisions of this Indenture.
(b) The Indenture Trustee shall, at such time as (i) there are no Bonds
Outstanding, (ii) all sums due to the Indenture Trustee pursuant to this
Indenture have been paid, and (iii) all sums due to the Bond Insurer have been
paid, release any remaining portion of the Trust Estate that secured the Bonds
from the lien of this Indenture.
(c) The Indenture Trustee shall release property from the lien of this
Indenture pursuant to this Section 8.05 only upon receipt of a request from the
Issuer accompanied by an Officers' Certificate and an Opinion of Counsel stating
that all applicable requirements have been satisfied, and a letter from the Bond
Insurer stating that the Bond Insurer has no objection to such request from the
Issuer.
Section 8.06. Surrender of Bonds Upon Final Payment. By acceptance of any
Bond, the Holder thereof agrees to surrender such Bond to the Indenture Trustee
promptly, prior to such Bondholder's receipt of the final payment thereon.
Section 8.07. Optional Redemption of the Bonds. (a) The Issuer shall have
the option to redeem the Bonds in whole, but not in part, on any Payment Date on
or after the earlier of (i) the Payment Date on which the aggregate Principal
Balance of the Initial Mortgage Loans is less than or equal to 25% of the sum of
the aggregate Principal Balance of the Initial Mortgage Loans as of the Cut-Off
Date and the Original Pre-Funded Amount or (ii) the Payment Date occurring in
_______________. The aggregate redemption price for the Bonds will be equal to
the unpaid Bond Principal Balance of the Bonds as of the Payment Date on which
the proposed redemption will take place in accordance with the foregoing,
together with accrued and unpaid interest thereon at the Bond Interest Rate
through such Payment Date (including any Carry-Forward Amount), plus an amount
sufficient to pay in full all amounts owing to the Bond Insurer and the
Indenture Trustee under this Indenture and the Insurance Agreement (which
amounts shall be specified in writing upon request of the Issuer by the
Indenture Trustee and the Bond Insurer).
(b) In order to exercise the foregoing option, the Issuer shall, not less
than 15 days prior to the proposed Payment Date on which such redemption is to
be made, deposit the aggregate redemption price specified in (a) above with the
Indenture Trustee (and the Indenture Trustee shall
50
<PAGE>
deposit such funds in the Payment Account), and shall provide written notice of
its exercise of such option to the Indenture Trustee, the Bond Insurer, the
Owner Trustee and the Servicer. Following receipt of the notice and the
aggregate redemption price, calculated as specified in Section 8.07(a) hereof,
pursuant to the foregoing, the Indenture Trustee shall provide notice to the
Bondholders of the final payment on the Bonds and shall apply such funds to make
final payments of principal and interest on the Bonds in accordance with Section
3.05(a) hereof, and this Indenture shall be discharged, subject to the
provisions of Section 4.10 hereof. If for any reason the amount deposited by
the Issuer is not sufficient to make such redemption or such redemption cannot
be completed for any reason, the amount so deposited by the Issuer with the
Indenture Trustee shall be immediately returned to the Issuer in full and shall
not be used for any other purpose or be deemed to be part of the Trust Estate.
Section 8.08. Pre-Funding Account.
(a) No later than the Closing Date, the Indenture Trustee shall establish
and maintain in the name of the Indenture Trustee one or more segregated trust
accounts that are Eligible Accounts, which shall be titled "Pre-Funding Account,
_____________________, as indenture trustee for the registered Bondholders of
NovaStar Mortgage Funding Trust Series ______" (the "Pre-Funding Account"). On
the Closing Date, the Original Pre-Funded Amount shall be deposited in the Pre-
Funding Account from the proceeds of the sale of the Bonds and retained therein.
Funds deposited in the Pre-Funding Account shall be held in trust by the
Indenture Trustee for the Holders of the Bonds and the Bond Insurer for the uses
and purposes set forth in the Indenture and the Mortgage Loan Purchase
Agreement. If the Indenture Trustee shall not have received an investment
direction from the Issuer, the Indenture Trustee will invest funds deposited in
the Pre-Funding Account in Eligible Investments of the kind described in clause
(vii) of the definition of Eligible Investments. The Issuer shall be the owner
of the Pre-Funding Account and shall report all items of income, deduction, gain
or loss arising therefrom. All income and gain realized from investment of funds
deposited in the Pre-Funding Account shall be transferred to the Interest
Coverage Account on each Payment Date.
(ii) Amounts on deposit in the Pre-Funding Account shall be withdrawn
by the Indenture Trustee as follows:
(A) On any Subsequent Transfer Date, the Indenture Trustee shall
withdraw from the Pre-Funding Account an amount equal to 100% of the
Principal Balances of the Subsequent Mortgage Loans transferred and
assigned to the Indenture Trustee on such Subsequent Transfer Date and pay
such amount to or upon the order of the Seller upon satisfaction of the
conditions set forth in Section 2.2 of the Mortgage Loan Purchase Agreement
with respect to such transfer and assignment; and
(B) If the Pre-Funded Amount has not been reduced to zero during the
Funding Period, on the Payment Date following the end of the Funding
Period, the Indenture Trustee shall deposit into the Payment Account any
amounts remaining in the Pre-Funding Account.
51
<PAGE>
Section 8.09. Interest Coverage Account.
(a) No later than the Closing Date, the Indenture Trustee shall establish
and maintain on behalf of itself one or more segregated trust accounts, which
shall be Eligible Accounts, titled "Interest Coverage Account, First Union
National Bank, as indenture trustee for the registered Bondholders of NovaStar
Mortgage Funding Trust, Series ______" (the "Interest Coverage Account"). On the
Closing Date, the Interest Coverage Amount shall be deposited into the Interest
Coverage Account and retained therein. In addition, the Indenture Trustee shall
deposit into the Interest Coverage Account all income and gain on investments in
the Pre-Funding Account pursuant to Section 8.08. Funds deposited in the
Interest Coverage Account shall be held in trust by the Indenture Trustee for
the Holders of the Bonds and the Bond Insurer for the uses and purposes set
forth herein. The Issuer shall be the owner of the Interest Coverage Account and
shall report all items of income, deduction, gain or loss arising therefrom.
(b) On each Payment Date during the Funding Period, the Indenture Trustee
shall withdraw from the Interest Coverage Account and deposit into the Payment
Account the applicable Interest Coverage Addition.
(c) Upon the earlier of (i) termination of the Trust Fund in accordance
with Section 8.01 of the Trust Agreement and (ii) the Payment Date following the
end of the Funding Period, any amount remaining on deposit in the Interest
Coverage Account shall be withdrawn by the Indenture Trustee and deposited in
the Payment Account.
52
<PAGE>
ARTICLE IX
Supplemental Indentures
-----------------------
Section 9.01. Supplemental Indentures Without Consent of Bondholders. (a)
Without the consent of the Holders of any Bonds but with the prior written
consent of the Bond Insurer and prior notice to the Rating Agencies, the Issuer
and the Indenture Trustee, when authorized by an Issuer Request, at any time and
from time to time, may enter into one or more indentures supplemental hereto
(which shall conform to the provisions of the TIA as in force at the date of the
execution thereof), in form reasonably satisfactory to the Indenture Trustee and
the Bond Insurer, for any of the following purposes:
(i) to correct or amplify the description of any property at any time
subject to the lien of this Indenture, or better to assure, convey and
confirm unto the Indenture Trustee any property subject or required to be
subjected to the lien of this Indenture, or to subject to the lien of this
Indenture additional property;
(ii) to evidence the succession, in compliance with the applicable
provisions hereof, of another person to the Issuer, and the assumption by
any such successor of the covenants of the Issuer herein and in the Bonds
contained;
(iii) to add to the covenants of the Issuer, for the benefit of the
Holders of the Bonds, or to surrender any right or power herein conferred
upon the Issuer;
(iv) to convey, transfer, assign, mortgage or pledge any property to
or with the Indenture Trustee;
(v) to cure any ambiguity or to correct or supplement any provision
herein or in any supplemental indenture that may be inconsistent with any
other provision herein or in any supplemental indenture;
(vi) to make any other provisions with respect to matters or questions
arising under this Indenture or in any supplemental indenture; provided,
that such action shall not materially and adversely affect the interests of
the Holders of the Bonds;
(vii) to evidence and provide for the acceptance of the appointment
hereunder by a successor Indenture Trustee with respect to the Bonds and to
add to or change any of the provisions of this Indenture as shall be
necessary to facilitate the administration of the trusts hereunder by more
than one trustee, pursuant to the requirements of Article VI hereof; or
(viii) to modify, eliminate or add to the provisions of this Indenture
to such extent as shall be necessary to effect the qualification of this
Indenture under the TIA or under any similar federal statute hereafter
enacted and to add to this Indenture such other provisions as may be
expressly required by the TIA;
53
<PAGE>
provided, however, that no such supplemental indenture shall be entered into
unless the Indenture Trustee shall have received an Opinion of Counsel that
entering into such supplemental indenture will not (A) result in a "substantial
modification" of the Bonds under Treasury Regulation Section 1.1001.3 or
adversely affect the status of the Bonds as indebtedness for federal income tax
purposes or (B) cause the Trust to be subject to an entity level tax.
The Indenture Trustee is hereby authorized to join in the execution of any
such supplemental indenture and to make any further appropriate agreements and
stipulations that may be therein contained.
(b) The Issuer and the Indenture Trustee, when authorized by an Issuer
Request, may, also without the consent of any of the Holders of the Bonds but
with the prior written consent of the Bond Insurer and prior notice to the
Rating Agencies, enter into an indenture or indentures supplemental hereto for
the purpose of adding any provisions to, or changing in any manner or
eliminating any of the provisions of, this Indenture or of modifying in any
manner the rights of the Holders of the Bonds under this Indenture; provided,
however, that such action shall not, as evidenced by an Opinion of Counsel (or,
in the alternative, with respect to clause (i), as evidenced by a rating letter
confirming the existing ratings on the Bonds (without taking into account the
Bond Insurance Policy)) (i) adversely affect in any material respect the
interests of any Bondholder or (ii) if 100% of the Certificates are not owned by
NovaStar Financial, Inc. or if the Bond Insurance Policy is outstanding, cause
the Issuer to be subject to an entity level tax for federal income tax purposes.
Section 9.02. Supplemental Indentures With Consent of Bondholders. The
Issuer and the Indenture Trustee, when authorized by an Issuer Request, also
may, with prior notice to the Rating Agencies and with the prior written consent
of the Bond Insurer and the consent of the Holders of not less than a majority
of the Bond Principal Balances of the Bonds affected thereby, by Act (as defined
in Section 10.03 hereof) of such Holders delivered to the Issuer and the
Indenture Trustee, enter into an indenture or indentures supplemental hereto for
the purpose of adding any provisions to, or changing in any manner or
eliminating any of the provisions of, this Indenture or of modifying in any
manner the rights of the Holders of the Bonds under this Indenture; provided,
however, that no such supplemental indenture shall, without the consent of the
Holder of each Bond affected thereby:
(i) change the date of payment of any installment of principal of or
interest on any Bond, or reduce the principal amount thereof or the
interest rate thereon, change the provisions of this Indenture relating to
the application of collections on, or the proceeds of the sale of, the
Trust Estate to payment of principal of or interest on the Bonds, or change
any place of payment where, or the coin or currency in which, any Bond or
the interest thereon is payable, or impair the right to institute suit for
the enforcement of the provisions of this Indenture requiring the
application of funds available therefor, as provided in Article V, to the
payment of any such amount due on the Bonds on or after the respective due
dates thereof;
(ii) reduce the percentage of the Bond Principal Balances of the
Bonds, the consent of the Holders of which is required for any such
supplemental indenture, or the consent of the Holders of which is required
for any waiver of compliance with certain provisions of this Indenture or
certain defaults hereunder and their consequences provided for in this
Indenture;
54
<PAGE>
(iii) modify or alter the provisions of the proviso to the definition
of the term "Outstanding" or modify or alter the exception in the
definition of the term "Bondholder";
(iv) reduce the percentage of the Bond Principal Balances of the Bonds
required to direct the Indenture Trustee to direct the Issuer to sell or
liquidate the Trust Estate pursuant to Section 5.04 hereof;
(v) modify any provision of this Section 9.02 except to increase any
percentage specified herein or to provide that certain additional
provisions of this Indenture or the Basic Documents cannot be modified or
waived without the consent of the Holder of each Bond affected thereby;
(vi) modify any of the provisions of this Indenture in such manner as
to affect the calculation of the amount of any payment of interest or
principal due on any Bond on any Payment Date (including the calculation of
any of the individual components of such calculation); or
(vii) permit the creation of any lien ranking prior to or on a parity
with the lien of this Indenture with respect to any part of the Trust
Estate or, except as otherwise permitted or contemplated herein, terminate
the lien of this Indenture on any property at any time subject hereto or
deprive the Holder of any Bond of the security provided by the lien of this
Indenture; and provided, further, that such action shall not, as evidenced
by an Opinion of Counsel, cause the Issuer to be subject to an entity level
tax.
The Indenture Trustee may, with the consent of the Bond Insurer, so long as
no Bond Insurer Default exists, in its discretion determine whether or not any
Bonds would be affected by any supplemental indenture and any such determination
shall be conclusive upon the Holders of all Bonds, whether theretofore or
thereafter authenticated and delivered hereunder. The Indenture Trustee shall
not be liable for any such determination made in good faith.
It shall not be necessary for any Act of Bondholders under this Section
9.02 to approve the particular form of any proposed supplemental indenture, but
it shall be sufficient if such Act shall approve the substance thereof.
Promptly after the execution by the Issuer and the Indenture Trustee of any
supplemental indenture pursuant to this Section 9.02, the Indenture Trustee
shall mail to the Holders of the Bonds to which such amendment or supplemental
indenture relates a notice setting forth in general terms the substance of such
supplemental indenture. Any failure of the Indenture Trustee to mail such
notice, or any defect therein, shall not, however, in any way impair or affect
the validity of any such supplemental indenture.
Section 9.03. Execution of Supplemental Indentures. In executing, or
permitting the additional trusts created by, any supplemental indenture
permitted by this Article IX or the modification thereby of the trusts created
by this Indenture, the Indenture Trustee shall be entitled to receive, and
subject to Sections 6.01 and 6.02 hereof, shall be fully protected in relying
upon, an Opinion of Counsel stating that the execution of such supplemental
indenture is authorized or
55
<PAGE>
permitted by this Indenture. The Indenture Trustee may, but shall not be
obligated to, enter into any such supplemental indenture that affects the
Indenture Trustee's own rights, duties, liabilities or immunities under this
Indenture or otherwise.
Section 9.04. Effect of Supplemental Indenture. Upon the execution of any
supplemental indenture pursuant to the provisions hereof, this Indenture shall
be and shall be deemed to be modified and amended in accordance therewith with
respect to the Bonds affected thereby, and the respective rights, limitations of
rights, obligations, duties, liabilities and immunities under this Indenture of
the Indenture Trustee, the Issuer and the Holders of the Bonds shall thereafter
be determined, exercised and enforced hereunder subject in all respects to such
modifications and amendments, and all the terms and conditions of any such
supplemental indenture shall be and be deemed to be part of the terms and
conditions of this Indenture for any and all purposes.
Section 9.05. Conformity with Trust Indenture Act. Every amendment of
this Indenture and every supplemental indenture executed pursuant to this
Article IX shall conform to the requirements of the Trust Indenture Act as then
in effect so long as this Indenture shall then be qualified under the Trust
Indenture Act.
Section 9.06. Reference in Bonds to Supplemental Indentures. Bonds
authenticated and delivered after the execution of any supplemental indenture
pursuant to this Article IX may, and if required by the Indenture Trustee shall,
bear a notation in form approved by the Indenture Trustee as to any matter
provided for in such supplemental indenture. If the Issuer or the Indenture
Trustee shall so determine, new Bonds so modified as to conform, in the opinion
of the Indenture Trustee and the Issuer, to any such supplemental indenture may
be prepared and executed by the Issuer and authenticated and delivered by the
Indenture Trustee in exchange for Outstanding Bonds.
56
<PAGE>
ARTICLE X
Miscellaneous
-------------
Section 10.01. Compliance Certificates and Opinions, etc. (a) Upon any
application or request by the Issuer to the Indenture Trustee to take any action
under any provision of this Indenture, the Issuer shall furnish to the Indenture
Trustee and to the Bond Insurer (i) an Officer's Certificate stating that all
conditions precedent, if any, provided for in this Indenture relating to the
proposed action have been complied with and (ii) an Opinion of Counsel stating
that in the opinion of such counsel all such conditions precedent, if any, have
been complied with, except that, in the case of any such application or request
as to which the furnishing of such documents is specifically required by any
provision of this Indenture, no additional certificate or opinion need be
furnished.
Every certificate or opinion with respect to compliance with a condition or
covenant provided for in this Indenture shall include:
(1) a statement that each signatory of such certificate or
opinion has read or has caused to be read such covenant or condition and
the definitions herein relating thereto;
(2) a brief statement as to the nature and scope of the
examination or investigation upon which the statements or opinions
contained in such certificate or opinion are based;
(3) a statement that, in the opinion of each such signatory, such
signatory has made such examination or investigation as is necessary to
enable such signatory to express an informed opinion as to whether or not
such covenant or condition has been complied with;
(4) a statement as to whether, in the opinion of each such
signatory, such condition or covenant has been complied with; and
(5) if the signatory of such certificate or opinion is required
to be Independent, the statement required by the definition of the term
"Independent".
(b) (i) Except with respect to the substitution of Mortgage Loans pursuant
to Section 2.1 of the Mortgage Loan Purchase Agreement, prior to the deposit of
any Collateral or other property or securities with the Indenture Trustee that
is to be made the basis for the release of any property or securities subject to
the lien of this Indenture, the Issuer shall, in addition to any obligation
imposed in Section 10.01(a) or elsewhere in this Indenture, furnish to the
Indenture Trustee and the Bond Insurer an Officer's Certificate certifying or
stating the opinion of each person signing such certificate as to the fair value
(within 90 days of such deposit) to the Issuer of the Collateral or other
property or securities to be so deposited and a report from a nationally
recognized accounting firm verifying such value.
(ii) Whenever the Issuer is required to furnish to the Indenture
Trustee and the Bond Insurer an Officer's Certificate certifying or stating the
opinion of any signer thereof as to
57
<PAGE>
the matters described in clause (i) above, the Issuer shall also deliver to the
Indenture Trustee an Independent Certificate from a nationally recognized
accounting firm as to the same matters, if the fair value to the Issuer of the
securities to be so deposited and of all other such securities made the basis of
any such withdrawal or release since the commencement of the then-current fiscal
year of the Issuer, as set forth in the certificates delivered pursuant to
clause (i) above and this clause (ii), is 10% or more of the Bond Principal
Balances of the Bonds, but such a certificate need not be furnished with respect
to any securities so deposited, if the fair value thereof to the Issuer as set
forth in the related Officer's Certificate is less than $25,000 or less than one
percent of the Bond Principal Balances of the Bonds.
(iii) Except with respect to the substitution of Mortgage Loans
pursuant to Section 2.1 of the Mortgage Loan Purchase Agreement, whenever any
property or securities are to be released from the lien of this Indenture, the
Issuer shall also furnish to the Indenture Trustee and the Bond Insurer an
Officer's Certificate certifying or stating the opinion of each person signing
such certificate as to the fair value (within 90 days of such release) of the
property or securities proposed to be released and stating that in the opinion
of such person the proposed release will not impair the security under this
Indenture in contravention of the provisions hereof.
(iv) Whenever the Issuer is required to furnish to the Indenture
Trustee and the Bond Insurer an Officer's Certificate certifying or stating the
opinion of any signer thereof as to the matters described in clause (iii) above,
the Issuer shall also furnish to the Indenture Trustee an Independent
Certificate as to the same matters if the fair value of the property or
securities and of all other property, other than securities released from the
lien of this Indenture since the commencement of the then-current calendar year,
as set forth in the certificates required by clause (iii) above and this clause
(iv), equals 10% or more of the Bond Principal Balances of the Bonds, but such
certificate need not be furnished in the case of any release of property or
securities if the fair value thereof as set forth in the related Officer's
Certificate is less than $25,000 or less than one percent of the then Bond
Principal Balances of the Bonds.
Section 10.02. Form of Documents Delivered to Indenture Trustee. In any
case where several matters are required to be certified by, or covered by an
opinion of, any specified Person, it is not necessary that all such matters be
certified by, or covered by the opinion of, only one such Person, or that they
be so certified or covered by only one document, but one such Person may certify
or give an opinion with respect to some matters and one or more other such
Persons as to other matters, and any such Person may certify or give an opinion
as to such matters in one or several documents.
Any certificate or opinion of an Authorized Officer of the Issuer may be
based, insofar as it relates to legal matters, upon a certificate or opinion of,
or representations by, counsel, unless such officer knows, or in the exercise of
reasonable care should know, that the certificate or opinion or representations
with respect to the matters upon which his certificate or opinion is based are
erroneous. Any such certificate of an Authorized Officer or Opinion of Counsel
may be based, insofar as it relates to factual matters, upon a certificate or
opinion of, or representations by, an officer or officers of the Seller or the
Issuer, stating that the information with respect to such factual matters is in
the possession of the Seller or the Issuer, unless such counsel knows, or in the
exercise
58
<PAGE>
of reasonable care should know, that the certificate or opinion or
representations with respect to such matters are erroneous.
Where any Person is required to make, give or execute two or more
applications, requests, consents, certificates, statements, opinions or other
instruments under this Indenture, they may, but need not, be consolidated and
form one instrument.
Whenever in this Indenture, in connection with any application or
certificate or report to the Indenture Trustee, it is provided that the Issuer
shall deliver any document as a condition of the granting of such application,
or as evidence of the Issuer's compliance with any term hereof, it is intended
that the truth and accuracy, at the time of the granting of such application or
at the effective date of such certificate or report (as the case may be), of the
facts and opinions stated in such document shall in such case be conditions
precedent to the right of the Issuer to have such application granted or to the
sufficiency of such certificate or report. The foregoing shall not, however, be
construed to affect the Indenture Trustee's right to rely upon the truth and
accuracy of any statement or opinion contained in any such document as provided
in Article VI.
Section 10.03. Acts of Bondholders. (a) Any request, demand,
authorization, direction, notice, consent, waiver or other action provided by
this Indenture to be given or taken by Bondholders may be embodied in and
evidenced by one or more instruments of substantially similar tenor signed by
such Bondholders in person or by agents duly appointed in writing; and except as
herein otherwise expressly provided, such action shall become effective when
such instrument or instruments are delivered to the Indenture Trustee, and,
where it is hereby expressly required, to the Issuer. Such instrument or
instruments (and the action embodied therein and evidenced thereby) are herein
sometimes referred to as the "Act" of the Bondholders signing such instrument or
instruments. Proof of execution of any such instrument or of a writing
appointing any such agent shall be sufficient for any purpose of this Indenture
and (subject to Section 6.01 hereof) conclusive in favor of the Indenture
Trustee and the Issuer, if made in the manner provided in this Section 10.03.
(b) The fact and date of the execution by any person of any such
instrument or writing may be proved in any manner that the Indenture Trustee
deems sufficient.
(c) The ownership of Bonds shall be proved by the Bond Registrar.
(d) Any request, demand, authorization, direction, notice, consent, waiver
or other action by the Holder of any Bonds shall bind the Holder of every Bond
issued upon the registration thereof or in exchange therefor or in lieu thereof,
in respect of anything done, omitted or suffered to be done by the Indenture
Trustee or the Issuer in reliance thereon, whether or not notation of such
action is made upon such Bond.
Section 10.04. Notices, etc., to Indenture Trustee, Issuer, Bond Insurer
and Rating Agencies. Any request, demand, authorization, direction, notice,
consent, waiver or Act of Bond-
59
<PAGE>
holders or other documents provided or permitted by this Indenture shall be in
writing and if such request, demand, authorization, direction, notice, consent,
waiver or Act of Bondholders is to be made upon, given or furnished to or filed
with:
(i) the Indenture Trustee by any Bondholder or by the Issuer or
the Bond Insurer shall be sufficient for every purpose hereunder if made,
given, furnished or filed in writing to or with the Indenture Trustee at
the Corporate Trust Office. The Indenture Trustee shall promptly transmit
any notice received by it from the Bondholders to the Issuer; or
(ii) the Issuer by the Indenture Trustee or by any Bondholder or
the Bond Insurer shall be sufficient for every purpose hereunder if in
writing and mailed first-class, postage prepaid, to the Issuer addressed
to: NovaStar Mortgage Funding Trust Series ______, in care of ____________
____________________________________________________________________,
Attention: Corporate Trust Administration (telecopy number , or at any
other address previously furnished in writing to the Indenture Trustee by
the Issuer. The Issuer shall promptly transmit any notice received by it
from the Bondholders to the Indenture Trustee; or
(iii) the Company by the Indenture Trustee or by any Bondholder
or the Bond Insurer shall be sufficient for every purpose hereunder if in
writing and mailed first-class, postage prepaid, to the Company addressed
to: NovaStar Mortgage Funding Corporation, 1900 West 47th Place, Suite 205,
Westwood, Kansas, Attention: David Lee (telecopy number (913) 362-1011), or
at any other address previously furnished in writing to the Indenture
Trustee by the Company. The Company shall promptly transmit any notice
received by it from the Bondholders to the Indenture Trustee; or
(iv) the Seller by the Indenture Trustee or by any Bondholder or
the Bond Insurer shall be sufficient for every purpose hereunder if in
writing and mailed first-class, postage prepaid, to the Issuer addressed
to: NovaStar Financial, Inc., 1900 West 47th Place, Suite 205, Westwood,
Kansas, Attention: Scott F. Hartman (telecopy number (913) 362-1011), or at
any other address previously furnished in writing to the Indenture Trustee
by the Seller. The Seller shall promptly transmit any notice received by it
from the Bondholders to the Indenture Trustee; or
(v) the Bond Insurer by the Issuer, the Indenture Trustee or by
any Bondholders shall be sufficient for every purpose hereunder if in
writing and mailed, first-class, postage pre-paid, or personally delivered
or telecopied to: ________________________________________________________
______________________________________________.
Notices required to be given to the Rating Agencies by the Issuer, the
Indenture Trustee or the Owner Trustee shall be in writing, personally delivered
or mailed first-class postage pre-paid, to (i) in the case of [Rating Agency],
at the following address: _____________________________________________________
__________________________________ and (ii) in the case of [Rating Agency], at
the following address: __________________________________________________
60
<PAGE>
________________________________________________________; or as to each of the
foregoing, at such other address as shall be designated by written notice to the
other parties.
Section 10.05. Notices to Bondholders; Waiver. Where this Indenture
provides for notice to Bondholders of any event, such notice shall be
sufficiently given (unless otherwise herein expressly provided) if in writing
and mailed first-class, postage prepaid, to each Bondholder affected by such
event, at such Person's address as it appears on the Bond Register, not later
than the latest date, and not earlier than the earliest date, prescribed for the
giving of such notice. In any case where notice to Bondholders is given by mail,
neither the failure to mail such notice nor any defect in any notice so mailed
to any particular Bondholder shall affect the sufficiency of such notice with
respect to other Bondholders, and any notice that is mailed in the manner herein
provided shall conclusively be presumed to have been duly given regardless of
whether such notice is in fact actually received.
Where this Indenture provides for notice in any manner, such notice may be
waived in writing by any Person entitled to receive such notice, either before
or after the event, and such waiver shall be the equivalent of such notice.
Waivers of notice by Bondholders shall be filed with the Indenture Trustee but
such filing shall not be a condition precedent to the validity of any action
taken in reliance upon such a waiver.
In case, by reason of the suspension of regular mail service as a result of
a strike, work stoppage or similar activity, it shall be impractical to mail
notice of any event to Bondholders when such notice is required to be given
pursuant to any provision of this Indenture, then any manner of giving such
notice as shall be satisfactory to the Indenture Trustee shall be deemed to be a
sufficient giving of such notice.
Where this Indenture provides for notice to the Rating Agencies, failure
to give such notice shall not affect any other rights or obligations created
hereunder, and shall not under any circumstance constitute an Event of Default.
Section 10.06. Conflict with Trust Indenture Act. If any provision hereof
limits, qualifies or conflicts with another provision hereof that is required to
be included in this Indenture by any of the provisions of the Trust Indenture
Act, such r equired provision shall control.
The provisions of TIA (S)(S) 310 through 317 that impose duties on any
Person (including the provisions automatically deemed included herein unless
expressly excluded by this Indenture) are a part of and govern this Indenture,
whether or not physically contained herein.
Section 10.07. Effect of Headings. The Article and Section headings herein
are for convenience only and shall not affect the construction hereof.
Section 10.08. Successors and Assigns. All covenants and agreements in
this Indenture and the Bonds by the Issuer shall bind its successors and
assigns, whether so expressed or not. All agreements of the Indenture Trustee in
this Indenture shall bind its successors, co-trustees and agents.
61
<PAGE>
Section 10.09. Separability. In case any provision in this Indenture or in
the Bonds shall be invalid, illegal or unenforceable, the validity, legality,
and enforceability of the remaining provisions shall not in any way be affected
or impaired thereby.
Section 10.10. Benefits of Indenture. The Bond Insurer and its successors
and assigns shall be a third-party beneficiary to the provisions of this
Indenture. To the extent that this Indenture confers upon or gives or grants to
the Bond Insurer any right, remedy or claim under or by reason of this
Indenture, the Bond Insurer may enforce any such right, remedy or claim
conferred, given or granted hereunder. Nothing in this Indenture or in the
Bonds, express or implied, shall give to any Person, other than the parties
hereto and their successors hereunder, and the Bondholders and the Bond Insurer,
any benefit or any legal or equitable right, remedy or claim under this
Indenture.
Section 10.11. Legal Holidays. In any case where the date on which any
payment is due shall not be a Business Day, then (notwithstanding any other
provision of the Bonds or this Indenture) payment need not be made on such date,
but may be made on the next succeeding Business Day with the same force and
effect as if made on the date on which nominally due, and no interest shall
accrue for the period from and after any such nominal date.
Section 10.12. GOVERNING LAW. THIS INDENTURE SHALL BE CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT REFERENCE TO ITS
CONFLICT OF LAW PROVISIONS, AND THE OBLIGATIONS, RIGHTS AND REMEDIES OF THE
PARTIES HEREUNDER SHALL BE DETERMINED IN ACCORDANCE WITH SUCH LAWS.
Section 10.13. Counterparts. This Indenture may be executed in any number
of counterparts, each of which so executed shall be deemed to be an original,
but all such counterparts shall together constitute but one and the same
instrument.
Section 10.14. Recording of Indenture. If this Indenture is subject to
recording in any appropriate public recording offices, such recording is to be
effected by the Issuer and at its expense accompanied by an Opinion of Counsel
(which may be counsel to the Indenture Trustee or any other counsel reasonably
acceptable to the Indenture Trustee) to the effect that such recording is
necessary either for the protection of the Bondholders or any other Person
secured hereunder or for the enforcement of any right or remedy granted to the
Indenture Trustee under this Indenture.
Section 10.15. Issuer Obligation. No recourse may be taken, directly or
indirectly, with respect to the obligations of the Issuer, the Owner Trustee or
the Indenture Trustee on the Bonds or under this Indenture or any certificate or
other writing delivered in connection herewith or therewith, against (i) the
Indenture Trustee or the Owner Trustee in its individual capacity, (ii) any
owner of a beneficial interest in the Issuer or (iii) any partner, owner,
beneficiary, agent, officer, director, employee or agent of the Indenture
Trustee or the Owner Trustee in its individual capacity, any holder of a
beneficial interest in the Issuer, the Owner Trustee or the Indenture Trustee or
of any successor or assign of the Indenture Trustee or the Owner Trustee in its
individual capacity, except as any such Person may have expressly agreed (it
being understood that the Indenture Trustee and the Owner Trustee have no such
obligations in their individual capacity) and except that any such partner,
owner or beneficiary shall be fully liable, to the extent provided by applicable
law, for any
62
<PAGE>
unpaid consideration for stock, unpaid capital contribution or failure to pay
any installment or call owing to such entity. For all purposes of this
Indenture, in the performance of any duties or obligations of the Issuer
hereunder, the Owner Trustee shall be subject to, and entitled to the benefits
of, the terms and provisions of Article VI, VII and VIII of the Trust Agreement.
Section 10.16. No Petition. The Indenture Trustee, by entering into this
Indenture, and each Bondholder, by accepting a Bond, hereby covenant and agree
that they will not at any time institute against NovaStar Assets, the Company or
the Issuer, or join in any institution against NovaStar Assets, the Company or
the Issuer of, any bankruptcy, reorganization, arrangement, insolvency or
liquidation proceedings, or other proceedings under any United States federal or
state bankruptcy or similar law in connection with any obligations relating to
the Bonds, this Indenture or any of the Basic Documents. This Section 10.16 will
survive for one year and one day following the termination of this Indenture.
Section 10.17. Inspection. The Issuer agrees that, on reasonable prior
notice, it shall permit any representative of the Indenture Trustee and the Bond
Insurer, during the Issuer's normal business hours, to examine all the books of
account, records, reports and other papers of the Issuer, to make copies and
extracts therefrom, to cause such books to be audited by Independent certified
public accountants, and to discuss the Issuer's affairs, finances and accounts
with the Issuer's officers, employees, and Independent certified public
accountants, all at such reasonable times and as often as may be reasonably
requested. The Indenture Trustee and the Bond Insurer shall cause their
representatives to hold in confidence all such information except to the extent
disclosure may be required by law (and all reasonable applications for
confidential treatment are unavailing) and except to the extent that the
Indenture Trustee may reasonably determine that such disclosure is necessary to
perform its obligations hereunder.
63
<PAGE>
IN WITNESS WHEREOF, the Issuer and the Indenture Trustee have caused their
names to be signed hereto by their respective officers thereunto duly
authorized, all as of the day and year first above written.
NOVASTAR MORTGAGE FUNDING TRUST SERIES ________,
as Issuer
By:___________________________________________________________, not in its
individual capacity but solely as Owner Trustee
By:_________________________________________________________
Name:
Title:
[INDENTURE TRUSTEE], not in its individual capacity but solely as
Indenture Trustee and as Bond Registrar
By:__________________________________________________________
Name:
Title:
64
<PAGE>
STATE OF )
) ss.:
COUNTY OF )
On this ____ day of __________, before me personally appeared
___________________, to me known, who being by me duly sworn, did depose and
say, that he resides at _____________, he is the _____________________ of the
Owner Trustee, one of the corporations described in and which executed the above
instrument; that he knows the seal of said corporation; that the seal affixed to
said instrument is such corporate seal; that it was so affixed by order of the
Board of Directors of said corporation; and that he signed his name thereto by
like order.
__________________________________
Notary Public
[NOTARIAL SEAL]
65
<PAGE>
STATE OF )
) ss.:
COUNTY OF )
On this ____ day of __________, before me personally appeared
___________________, to me known, who being by me duly sworn, did depose and
say, that he is the _________________ of [INDENTURE TRUSTEE], as Indenture
Trustee, a national banking association, which executed the above instrument;
that he knows the seal of said national banking association; that the seal
affixed to said instrument is such corporate seal; that it was so affixed by
order of the Board of Directors of said national banking association; and that
she signed her name thereto by like order.
______________________________
Notary Public
[NOTARIAL SEAL]
66
<PAGE>
EXHIBIT A
FORM OF BONDS
UNLESS THIS BOND IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY
TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), TO THE TRUSTEE OR ITS AGENT FOR
REGISTRATION OF TRANSFER, EXCHANGE, OR PAYMENT, AND ANY BOND ISSUED IS
REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER NAME AS IS REQUESTED BY AN
AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO CEDE & CO. OR TO
SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC), ANY
TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON
IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST
HEREIN.
THIS BOND IS A NON-RECOURSE OBLIGATION OF THE ISSUER, AND IS LIMITED IN RIGHT OF
PAYMENT TO AMOUNTS AVAILABLE FROM THE TRUST ESTATE AND THE BOND INSURANCE POLICY
AS PROVIDED IN THE INDENTURE REFERRED TO BELOW. THE ISSUER IS NOT OTHERWISE
PERSONALLY LIABLE FOR PAYMENTS ON THIS BOND.
PRINCIPAL OF THIS BOND IS PAYABLE OVER TIME AS SET FORTH HEREIN. ACCORDINGLY,
THE OUTSTANDING PRINCIPAL OF THIS BOND AT ANY TIME MAY BE LESS THAN THE AMOUNT
SHOWN ON THE FACE HEREOF.
NOVASTAR MORTGAGE FUNDING TRUST SERIES _________
COLLATERALIZED MORTGAGE OBLIGATION BONDS, SERIES 1997-2
AGGREGATE BOND PRINCIPAL
BALANCE: $____________
INITIAL BOND PRINCIPAL
BALANCE OF THIS BOND: $ CUSIP NO.
BOND NUMBER:
NovaStar Mortgage Funding Trust Series ______ (the "Issuer"), a Delaware
business trust, for value received, hereby promises to pay to __________ or
registered assigns, the principal sum
<PAGE>
of ______________________________________ ($___________) in monthly installments
on the twenty-fifth day of each month or, if such day is not a Business Day, the
next succeeding Business Day (each a "Payment Date"), commencing in
______________ and ending on or before the Payment Date occurring in
_________________ (the "Stated Maturity") and to pay interest on the Bond
Principal Balance of this Bond outstanding from time to time as provided below.
This Bond is one of a duly authorized issue of NovaStar Mortgage Funding
Trust, Series ___________ Collateralized Mortgage Obligation Bonds (the
"Bonds"), issued under an Indenture, dated as of November 1, 1997 (the
"Indenture"), between the Issuer and _____________________, as indenture trustee
(the "Indenture Trustee", which term includes any successor Indenture Trustee
under the Indenture), to which Indenture and all indentures supplemental thereto
reference is hereby made for a statement of the respective rights thereunder of
the Issuer, the Indenture Trustee, and the Holders of the Bonds and the terms
upon which the Bonds are to be authenticated and delivered. All terms used in
this Bond which are defined in the Indenture shall have the meanings assigned to
them in the Indenture.
Payments of principal and interest on the Bonds will be made on each
Payment Date to Bondholders of record as of the related Record Date. On each
Payment Date, Bondholders will be entitled to receive interest payments in an
aggregate amount equal to the Interest Payment Amount for such Payment Date,
together with principal payments in an aggregate amount equal to the Principal
Payment Amount plus the Subordination Increase Amount, if any, for such Payment
Date. In addition, on each Payment Date, Bondholders in the aggregate will be
entitled to receive additional interest payments equal to the Carry-Forward
Amount for such Payment Date, to the extent of available funds. The "Bond
Principal Balance" of a Bond as of any date of determination is equal to the
initial principal balance thereof as of the Closing Date, reduced by the
aggregate of all amounts previously paid with respect to such Bond on account of
principal.
The principal of, and interest on, this Bond are due and payable as
described in the Indenture, in such coin or currency of the United States of
America as at the time of payment is legal tender for payment of public and
private debts. All payments made by the Issuer with respect to this Bond shall
be equal to this Bond's pro rata share of the aggregate payments on all Bonds as
described above, and shall be applied as between interest and principal as
provided in the Indenture.
_________________________ (the "Bond Insurer"), in consideration of the
payment of the premium and subject to the terms of the financial guaranty
insurance policy (the "Bond Insurance Policy") issued thereby, has
unconditionally and irrevocably guaranteed the payment of the Insured Payment.
The Bond Insurance Policy will not cover any Prepayment Interest Shortfalls,
Relief Act Shortfalls or Carry-Forward Amount.
All principal and interest accrued on the Bonds, if not previously paid,
will become finally due and payable at the Final Scheduled Payment Date.
The Bonds are subject to redemption in whole, but not in part, by the
Issuer on any Payment Date on or after the earlier of (i) the Payment Date on
which the aggregate Principal Balance of the Mortgage Loans is less than or
equal to 25% of the sum of the aggregate Principal Balance of the
-68-
<PAGE>
Initial Mortgage Loans as of the Cut-Off Date and the Original Pre-Funded Amount
and (ii) the Payment Date in _______________.
The Issuer shall not be liable upon the indebtedness evidenced by the Bonds
except to the extent of amounts available from the Trust Estate which
constitutes security for the payment of the Bonds. The assets included in the
Trust Estate and payments under the Bond Insurance Policy will be the sole
source of payments on the Bonds, and each Holder hereof, by its acceptance of
this Bond, agrees that (i) such Bond will be limited in right of payment to
amounts available from the Trust Estate and the Bond Insurance Policy as
provided in the Indenture and (ii) such Holder shall have no recourse to the
Issuer, the Owner Trustee, the Indenture Trustee, the Company, the Servicer or
any of their respective affiliates, or to the assets of any of the foregoing
entities, except the assets of the Issuer pledged to secure the Bonds pursuant
to the Indenture.
Any payment of principal or interest payable on this Bond which is
punctually paid on the applicable Payment Date shall be paid to the Person in
whose name such Bond (or one or more predecessor Bonds) is registered at the
close of business on the Record Date for such Payment Date by check mailed to
such person's address as it appears in the Bond Register on such Record Date,
except for the final installment of principal and interest payable with respect
to such Bond, which shall be payable as provided below. Notwithstanding the
foregoing, upon written request with appropriate instructions by the Holder of
this Bond (holding an aggregate initial Bond Principal Balance of at least
$5,000,000), any payment of principal or interest, other than the final
installment of principal or interest, shall be made by wire transfer to an
account in the United States designated by such Holder reasonably satisfactory
to the Indenture Trustee. All reductions in the principal amount of a Bond (or
one or more predecessor Bonds) effected by payments of principal made on any
Payment Date shall be binding upon all Holders of this Bond and of any bond
issued upon the registration of transfer thereof or in exchange therefor or in
lieu thereof, whether or not such payment is noted on such Bond. The final
payment of this Bond shall be payable upon presentation and surrender thereof on
or after the Payment Date thereof at the Corporate Trust Office or the office or
agency of the Issuer maintained by it for such purpose pursuant to Section 3.02
of the Indenture.
Subject to the foregoing provisions, each Bond delivered under the
Indenture, upon registration of transfer of or in exchange for or in lieu of any
other Bond, shall carry the rights to unpaid principal and interest that were
carried by such other Bond.
If an Event of Default as defined in the Indenture shall occur and be
continuing with respect to the Bonds, the Bonds may become or be declared to be
due and payable in the manner and with the effect provided in the Indenture. If
any such acceleration of maturity occurs prior to the payment of the entire
unpaid Bond Principal Balance of the Bonds, the amount payable to the Holder of
this Bond will be equal to the sum of the unpaid Bond Principal Balance of the
Bonds, together with accrued and unpaid interest thereon as described in the
Indenture. The Indenture provides that, notwithstanding the acceleration of the
maturity of the Bonds, under certain circumstances specified therein, all
amounts collected as proceeds of the Trust Estate securing the Bonds or
otherwise shall continue to be applied to payments of principal of and interest
on the Bonds as if they had not been declared due and payable.
-69-
<PAGE>
The failure to pay any Subordination Increase Amount or Carry-Forward
Amount at any time when funds are not available to make such payment as provided
in the Indenture shall not constitute an Event of Default under the Indenture.
Pursuant to the Indenture, unless a Bond Insurer Default exists (i) the
Bond Insurer shall be deemed to be the holder of the Bonds for certain purposes
specified in the Indenture (other than with respect to payment on the Bonds),
and will be entitled to exercise all rights of the Bondholders thereunder,
including the rights of Bondholders relating to the occurrence of, and the
remedies with respect to, an Event of Default, without the consent of such
Bondholders, and (ii) the Indenture Trustee may take actions which would
otherwise be at its option or within its discretion, including actions relating
to the occurrence of, and the remedies with respect to, an Event of Default,
only at the direction of the Bond Insurer.
As provided in the Indenture and subject to certain limitations therein set
forth, the transfer of this Bond may be registered on the Bond Register of the
Issuer. Upon surrender for registration of transfer of, or presentation of a
written instrument of transfer for, this Bond at the Corporate Trust Office,
accompanied by proper instruments of assignment in form satisfactory to the
Indenture Trustee, one or more new Bonds of any authorized denominations and of
a like aggregate initial Bond Principal Balance will be issued to the designated
transferee or transferees.
Prior to the due presentment for registration of transfer of this Bond, the
Issuer, the Bond Insurer, the Indenture Trustee and any agent of the Issuer, the
Bond Insurer or the Indenture Trustee may treat the Person in whose name this
Bond is registered as the owner of such Bond (i) on the applicable Record Date
for the purpose of making payments and interest of such Bond, and (ii) on any
other date for all other purposes whatsoever, as the owner hereof, whether or
not this Bond be overdue, and none of the Issuer, the Bond Insurer, the
Indenture Trustee or any such agent of the Issuer or the Indenture Trustee shall
be affected by notice to the contrary.
The Indenture permits, with certain exceptions as therein provided, the
amendment thereof and the modification of the rights and obligations of the
Issuer and the rights of the Holders of the Bonds under the Indenture at any
time by the Issuer with the consent of the Bond Insurer and the Holders of a
majority of all Bonds at the time outstanding. The Indenture also contains
provisions permitting (i) the Bond Insurer or (ii) if a Bond Insurer Default
exists, the Holders of Bonds representing specified percentages of the aggregate
Bond Principal Balance of the Bonds on behalf of the Holders of all the Bonds,
to waive any past Event of Default under the Indenture and its consequences. Any
such waiver by the Holder, at the time of the giving thereof, of this Bond (or
any one or more predecessor Bonds) shall bind the Holder of every Bond issued
upon the registration of transfer hereof or in exchange hereof or in lieu
hereof, whether or not notation of such consent or waiver is made upon such
Bond. The Indenture also permits the Issuer and the Indenture Trustee to amend
or waive certain terms and conditions set forth in the Indenture without the
consent of the Holders of the Bonds issued thereunder.
Initially, the Bonds will be represented by two bonds registered in the
name of CEDE & Co. as nominee of DTC, acting in its capacity as the Depository
for the Bonds. The Bonds will be delivered in denominations as provided in the
Indenture and subject to certain limitations therein set
-70-
<PAGE>
forth. The Bonds are exchangeable for a like aggregate initial Bond Principal
Balance of Bonds of different authorized denominations, as requested by the
Holder surrendering the same.
Unless the Certificate of Authentication hereon has been executed by the
Indenture Trustee by manual signature, this Bond shall not be entitled to any
benefit under the Indenture, or be valid or obligatory for any purpose.
Each Bondholder, by accepting a Bond, hereby covenants and agrees that such
Bondholder will not at any time institute against NovaStar Assets, the Company
or the Issuer, or join in any institution against NovaStar Assets, the Company
or the Issuer of, any bankruptcy, reorganization, arrangement, insolvency or
liquidation proceedings, or other proceedings under any United States federal or
state bankruptcy or similar law in connection with any obligations relating to
the Bonds, the Indenture or any of the Basic Documents.
So long as no Bond Insurer Default exists, the Bond Insurer shall at all
times be treated as if it were the exclusive Bondholder for the purposes of all
approvals, consents, waivers and the institution of any action and the direction
of all remedies, and the Indenture Trustee shall act in accordance with the
directions of the Bond Insurer so long as it is indemnified therefor to its
reasonable satisfaction.
AS PROVIDED IN THE INDENTURE, THIS BOND AND THE INDENTURE CREATING THIS
BOND SHALL 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.
-71-
<PAGE>
IN WITNESS WHEREOF, the Issuer has caused this instrument to be duly
executed by _____________________, not in its individual capacity but solely as
Owner Trustee.
Dated:
NOVASTAR MORTGAGE FUNDING TRUST SERIES ________
BY: _________________________, not in its
individual capacity but solely in its
capacity as Owner Trustee
By: ___________________________________________
Authorized Signatory
INDENTURE TRUSTEE'S CERTIFICATE OF AUTHENTICATION
This is one of the Bonds referred to in the within-mentioned Indenture.
___________________________________, not in its individual
capacity but solely as Indenture Trustee
By: ___________________________________
Authorized Signatory
72
<PAGE>
ABBREVIATIONS
-------------
The following abbreviations, when used in the inscription on the face of
the Bond, shall be construed as though they were written out in full according
to applicable laws or regulations:
TEN COM -- as tenants in common
TEN ENT -- as tenants by the entireties
JT TEN -- as joint tenants with right of survivorship and not
as tenants in common
UNIF GIFT MIN ACT -- _________Custodian _____________________________
(Cust) (Minor)
under Uniform Gifts to Minor Act _______________
(State)
Additional abbreviations may also be used though not in the above list.
_______________________________________________________________________
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers unto
PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF
ASSIGNEE:
____________________________________________________________________
____________________________________________________________________
____________________________________________________________________
(Please print or typewrite name and address, including zip code, of assignee)
_______________________________________________________________________________
the within bond and all rights thereunder, hereby irrevocably constitution and
appointing _____________________________________ attorney to transfer said
Bond on the books of the Issuer, with full power of substitution in the
premises.
Dated:_____________________ _______________________________________________
Signature Guaranteed by _______________________________________________________
NOTICE: The signature(s) to this assignment must correspond with the name as it
appears upon the face of the within Bond in every particular, without alteration
or enlargement or any change whatsoever. Signature(s) must be guaranteed by a
commercial bank or by a member firm of the New York Stock Exchange or another
national securities exchange. Notarized or witnessed signatures are not
acceptable.
<PAGE>
EXHIBIT B
FORM OF TRUSTEE INITIAL CERTIFICATION
[Closing Date]
[Seller]
[Servicer]
[Bond Insurer]
[Company]
_________________________
_________________________
Re: Indenture, dated as of ___________, 19__ (the "Indenture"),
between NovaStar Mortgage Funding Trust Series ______ (the
"Issuer") and ____________________ (the "Indenture Trustee")
-- NovaStar Mortgage Funding Trust, Series ______
Collateralized Mortgage Obligation Bonds.
Gentlemen:
In accordance with Section 2.03 of the above-captioned Indenture, and
Section 2.1(b) of the Mortgage Loan Purchase Agreement, dated as of
__________________, between NovaStar Financial, Inc., and NovaStar Mortgage
Funding Corporation (the "Mortgage Loan Purchase Agreement"; and together with
the Indenture, the "Agreements"), the undersigned, as Indenture Trustee, hereby
certifies that as to each Mortgage Loan listed in the Mortgage Loan Schedule
(other than any Mortgage Loan paid in full or listed on the attachment hereto)
it has reviewed the Mortgage File and the Mortgage Loan Schedule and has
determined that: (i) all documents required to be included in the Mortgage File
are in its possession; (ii) such documents have been reviewed by it and appear
regular on their face and relate to such Mortgage Loan; and (iii) based on
examination by it, and only as to such documents, the information set forth in
items (i) - (vii) and (xiv) of the definition or description of "Mortgage Loan
Schedule" is correct.
The Indenture Trustee has made no independent examination of any
documents contained in each Mortgage File beyond the review specifically
required in the above-referenced Agreements. The Indenture Trustee makes no
representation that any documents specified in clause (vi) of Section 2.1(b) of
the Mortgage Loan Purchase Agreement should be included in any Mortgage File.
The Indenture Trustee makes no representations as to and shall not be
responsible to verify: (i) the validity, legality, sufficiency, enforceability,
due authorization, recordability or genuineness of any of the documents
contained in each Mortgage File of any of the Mortgage Loans identified on the
Mortgage Loan Schedule, (ii) the collectability, insurability, effectiveness or
suitability of any such Mortgage Loan, or (iii) the existence of any assumption,
modification, written assurance or
-2-
<PAGE>
substitution agreement with respect to any Mortgage File if no such documents
appear in the Mortgage File delivered to the Indenture Trustee.
Capitalized words and phrases used herein shall have the respective
meanings assigned to them in the above-captioned Indenture.
______________________________, not in its
individual capacity but solely as Indenture
Trustee
By: ___________________________________
Name:
Title:
-3-
<PAGE>
EXHIBIT C
FORM OF TRUSTEE FINAL CERTIFICATION
[date]
[Seller]
[Servicer]
[Bond Insurer]
[Company]
__________________________
__________________________
Re: Indenture, dated as of _______________, 19__ (the
"Indenture"), between NovaStar Mortgage Funding Trust Series
______ (the "Issuer") and ____________________ (the "Indenture
Trustee") -- NovaStar Mortgage Funding Trust, Series ______
Collateralized Mortgage Obligation Bonds.
Gentlemen:
In accordance with Section 2.03 of the above-captioned Indenture, and
Section 2.1(b) of the Mortgage Loan Purchase Agreement, dated as of
_______________, between NovaStar Financial, Inc., and NovaStar Mortgage Funding
Corporation (the "Mortgage Loan Purchase Agreement"; and together with the
Indenture, the "Agreements"), the undersigned, as Indenture Trustee, hereby
certifies that as to each Mortgage Loan listed in the Mortgage Loan Schedule
(other than any Mortgage Loan paid in full or listed on the attachment hereto)
it has received the documents set forth in Section 2.1(b) of the Mortgage Loan
Purchase Agreement.
The Indenture Trustee has made no independent examination of any
documents contained in each Mortgage File beyond the review specifically
required in the Agreements. The Indenture Trustee makes no representation that
any documents specified in clause (vi) of Section 2.1(b) should be included in
any Mortgage File. The Indenture Trustee makes no representations as to and
shall not be responsible to verify: (i) the validity, legality, sufficiency,
enforceability, due authorization, recordability or genuineness of any of the
documents contained in each Mortgage File of any of the Mortgage Loans
identified on the Mortgage Loan Schedule, (ii) the collectability, insurability,
effectiveness or suitability of any such Mortgage Loan or (iii) the existence of
any assumption, modification, written assurance or substitution agreement with
respect to any Mortgage File if no such documents appear in the Mortgage File
delivered to the Indenture Trustee.
-4-
<PAGE>
Capitalized words and phrases used herein shall have the respective
meanings assigned to them in the above-captioned Indenture.
__________________________________, not in its
individual capacity but solely as Indenture
Trustee
By: _________________________________________
Name:
Title:
-5-
<PAGE>
EXHIBIT D
MORTGAGE LOAN SCHEDULE
[See Tab 4]
-6-
<PAGE>
APPENDIX A
DEFINITIONS
Addition Notice: With respect to the transfer of Subsequent Mortgage
Loans to the Trust pursuant to Section 2.2(b) of the Mortgage Loan Purchase
Agreement, a notice given to the Rating Agencies, the Indenture Trustee, the
Bond Insurer and the Owner Trustee, which shall be given not later than ten
Business Days prior to the related Subsequent Transfer Date, of the Seller's
designation of Subsequent Mortgage Loans to be sold to the Trust and the
aggregate principal balance as of the Subsequent Cut-off Date of such Subsequent
Mortgage Loans.
Adjustable Rate Initial Mortgage Loan: Each of the Adjustable Rate
Mortgage Loans transferred to the Trust on the Closing Date.
Adjustable Rate Mortgage Loan: Each of the Mortgage Loans identified
in the Mortgage Loan Schedule as having a Mortgage Rate that is subject to
adjustment.
Adjustment Date: As to each Adjustable Rate Mortgage Loan, each date
set forth in the related Mortgage Note on which an adjustment to the interest
rate on such Mortgage Loan becomes effective.
Administrative Fee: The sum of the Owner Trustee Fee and the Bond
Insurance Premium.
Advance: As to any Mortgage Loan, any advance made by the Servicer
pursuant to Section 4.02 of the Servicing Agreement.
Affiliate: With respect to any Person, any other Person controlling,
controlled by or under common control with such Person. For purposes of this
definition, "control" means the power to direct the management and policies of a
Person, directly or indirectly, whether through ownership of voting securities,
by contract or otherwise and "controlling" and "controlled" shall have meanings
correlative to the foregoing.
Appraised Value: The appraised value of a Mortgaged Property based
upon the lesser of (i) the appraisal made at the time of the origination of the
related Mortgage Loan, or (ii) the sales price of such Mortgaged Property at
such time of origination. With respect to a Mortgage Loan the proceeds of which
were used to refinance an existing mortgage loan, the appraised value of the
Mortgaged Property based upon the appraisal (as reviewed and approved by the
Seller) obtained at the time of refinancing.
Assignment of Mortgage: An assignment of Mortgage, notice of transfer
or equivalent instrument, in recordable form, which is sufficient under the laws
of the jurisdiction wherein the related Mortgaged Property is located to reflect
of record the sale of the Mortgage, which assignment, notice of transfer or
equivalent instrument may be in the form of one or more blanket assignments
covering Mortgages secured by Mortgaged Properties located in the same county,
if permitted by law.
<PAGE>
Authorized Newspaper: A newspaper of general circulation in the
Borough of Manhattan, The City of New York, printed in the English language and
customarily published on each Business Day, whether or not published on
Saturdays, Sundays or holidays.
Authorized Officer: With respect to the Issuer, any officer of the
Owner Trustee who is authorized to act for the Owner Trustee in matters relating
to the Issuer and who is identified on the list of Authorized Officers delivered
by the Owner Trustee to the Indenture Trustee on the Closing Date (as such list
may be modified or supplemented from time to time thereafter).
Available Funds: As to any Payment Date, an amount equal to the
amount on deposit in the Payment Account on such Payment Date and available for
distribution to the Bondholders (minus (i) the Bond Insurance Premium and the
Indenture Trustee Fee and (ii) if the Bonds have been declared due and payable
following an Event of Default on such Payment Date, any amounts owed to the
Indenture Trustee by the Issuer pursuant to Section 6.07 of the Indenture and
any amounts owed to the Bond Insurer by the Issuer pursuant to Section 5.04(b)
of the Indenture).
Bankruptcy Code: The Bankruptcy Code of 1978, as amended.
Base Specified Overcollateralization Amount: $_________, which equals
the product of the Target Percentage and the Original Pool Balance.
Basic Documents: The Trust Agreement, the Certificate of Trust, the
Indenture, the Mortgage Loan Purchase Agreement, the Owner Transfer Agreement,
the Insurance Agreement, the Indemnification Agreement, the Servicing Agreement,
the Certificate Sale Agreement, and the other documents and certificates
delivered in connection with any of the above.
Beneficial Owner: With respect to any Bond, the Person who is the
beneficial owner of such Bond as reflected on the books of the Depository or on
the books of a Person maintaining an account with such Depository (directly as a
Depository Participant or indirectly through a Depository Participant, in
accordance with the rules of such Depository).
Bond Insurance Policy: The financial guaranty insurance policy number
#25357, issued by the Bond Insurer to the Indenture Trustee for the benefit of
the Bondholders.
Bond Insurance Premium: The premium payable to the Bond Insurer, as
specified in the Insurance Agreement.
Bond Insurer: _________________________________________ or any
successor thereto.
Bond Insurer Default: The existence and continuance of any of the
following: (a) a failure by the Bond Insurer to make a payment required under
the Bond Insurance Policy in accordance with its terms; or (b)(i) the Bond
Insurer (A) files any petition or commences any case or proceeding under any
provision or chapter of the Bankruptcy Code or any other similar federal or
state law relating to insolvency, bankruptcy, rehabilitation, liquidation or
reorganization, (B) makes a general assignment for the benefit of its creditors,
or (C) has an order for relief entered against it
-2-
<PAGE>
under the Bankruptcy Code or any other similar federal or state law relating to
insolvency, bankruptcy, rehabilitation, liquidation or reorganization which is
final and nonappealable; or (ii) a court of competent jurisdiction, the New York
Department of Insurance or other competent regulatory authority enters a final
and nonappealable order, judgment or decree (A) appointing a custodian, trustee,
agent or receiver for the Bond Insurer or for all or any material portion of its
property or (B) authorizing the taking of possession by a custodian, trustee,
agent or receiver of the Bond Insurer (or the taking of possession of all or any
material portion of the property of the Bond Insurer).
Bond Interest Rate: With respect to each Payment Date after the first
Payment Date, a per annum rate equal to the lesser of (i)(a) with respect to
each Payment Date up to and including the earlier of (x) the Payment Date in
______________ and (y) the Payment Date which occurs on or prior to the date on
which the aggregate Principal Balance of the Mortgage Loans is less than ___% of
the sum of the aggregate Principal Balance of the Initial Mortgage Loans as of
the Cut-off Date and the Original Pre-Funded Amount, One-Month LIBOR plus ____%,
and (b) with respect to each Payment Date thereafter, One-Month LIBOR plus ____%
and (ii) ____% per annum. The Bond Interest Rate for the first Payment Date will
equal ___% per annum.
Bond Owner: The Beneficial Owner of a Bond.
Bond Percentage: With respect to any Payment Date and any Bond, the
ratio expressed as a percentage of the Bond Principal Balance of such Bond to
the aggregate Bond Principal Balance of all Bonds immediately prior to such
Payment Date.
Bond Principal Balance: With respect to any Bond, the initial
principal balance thereof as of the Closing Date, reduced by all amounts
distributed in respect of principal with respect to such Bond.
Bond Register: The register maintained by the Bond Registrar in which
the Bond Registrar shall provide for the registration of Bonds and of transfers
and exchanges of Bonds.
Bond Registrar: The Indenture Trustee, in its capacity as Bond
Registrar.
Bondholder or Holder: The Person in whose name a Bond is registered
in the Bond Register, except that, any Bond registered in the name of the
Seller, the Company, the Issuer or the Indenture Trustee or any Affiliate of any
of them shall be deemed not to be a Bondholder or Holder, nor shall any Bond so
owned be considered outstanding, for purposes of giving any request, demand,
authorization, direction, notice, consent or waiver under the Indenture or the
Trust Agreement, provided that, in determining whether the Indenture Trustee
shall be protected in relying upon any such request, demand, authorization,
direction, notice, consent or waiver, only Bonds that the Indenture Trustee
knows to be so owned shall be so disregarded. Pledgees of Bonds that have been
pledged in good faith may be regarded as Holders if the pledgee establishes to
the satisfaction of the Indenture Trustee the pledgee's right so to act with
respect to such Bonds and that the pledgee is not the Issuer, any other obligor
upon the Bonds or any Affiliate of any of the foregoing Persons. Any Bonds on
which payments are made under the Bond Insurance Policy shall be deemed
Outstanding
-3-
<PAGE>
until the Bond Insurer has been reimbursed with respect thereto and the Bond
Insurer shall be deemed the Bondholder thereof to the extent of such
unreimbursed payment.
Bonds: NovaStar Mortgage Funding Trust, Series _____ Collateralized
Mortgage Obligation Bonds, designated as the "Bonds" in the Indenture.
Book-Entry Bonds: Beneficial interests in the Bonds, ownership and
transfers of which shall be made through book entries by the Depository as
described in Section 4.06 of the Indenture.
Business Day: Any day other than (i) a Saturday or a Sunday or (ii) a
day on which banking institutions in the City of New York, Delaware, California
or Kansas or in the city in which the corporate trust offices of the Indenture
Trustee or the principal office of the Bond Insurer are located, are required or
authorized by law to be closed.
Business Trust Statute: Chapter 38 of Title 12 of the Delaware Code,
12 Del. Code (S)(S)3801 et seq., as the same may be amended from time to time.
Carry-Forward Amount: With respect to the Bonds and any Payment Date,
an amount equal to the excess, if any, of (a) the amount determined pursuant to
clause (i) of the definition of the Interest Payment Amount minus (b) the
Guaranteed Interest Payment Amount.
Cash Liquidation: As to any defaulted Mortgage Loan other than a
Mortgage Loan as to which an REO Acquisition occurred, a determination by the
Servicer that it has received all Liquidation Proceeds and other payments or
cash recoveries which the Servicer reasonably and in good faith expects to be
finally recoverable with respect to such Mortgage Loan.
Certificate Distribution Account: The account or accounts created and
maintained pursuant to Section 3.10(c) of the Trust Agreement. The Certificate
Distribution Account shall be an Eligible Account.
Certificate Paying Agent: The meaning specified in Section 3.10 of
the Trust Agreement.
Certificate Percentage Interest: With respect to each Certificate,
the Certificate Percentage Interest on the face thereof.
Certificate Register: The register maintained by the Certificate
Registrar in which the Certificate Registrar shall provide for the registration
of Certificates and of transfers and exchanges of Certificates.
Certificate Registrar: Initially, the Indenture Trustee, in its
capacity as Certificate Registrar, or any successor to the Indenture Trustee in
such capacity.
Certificate Sale Agreement: means the Certificate Sale Agreement
dated as of ________________ between NovaStar Assets and NCFC.
-4-
<PAGE>
Certificate of Trust: The Certificate of Trust filed for the Trust
pursuant to Section 3810(a) of the Business Trust Statute.
Certificates or Home Equity Loan Asset-Backed Certificates: The
NovaStar Mortgage Funding Trust, Series ______ Collateralized Mortgage
Obligation Bonds, evidencing the beneficial ownership interest in the Issuer and
executed by the Owner Trustee in substantially the form set forth in Exhibit A
to the Trust Agreement.
Certificateholder: The Person in whose name a Certificate is
registered in the Certificate Register. Pledgees of Certificates that have been
pledged in good faith may be regarded as Certificateholders if the pledgee
establishes to the satisfaction of the Indenture Trustee or the Owner Trustee,
as the case may be, the pledgee's right so to act with respect to such
Certificates and that the pledgee is not the Issuer, any other obligor upon the
Certificates or any Affiliate of any of the foregoing Persons.
Closing Date: _____________.
Code: The Internal Revenue Code of 1986, as amended, and the rules
and regulations promulgated thereunder.
Collateral: The meaning specified in the Granting Clause of the
Indenture.
Collection Account: The account or accounts created and maintained
pursuant to Section 3.06(d) of the Servicing Agreement. The Collection Account
shall be an Eligible Account.
Combined Loan-to-Value Ratio: With respect to any Mortgage Loan which
is secured by a second lien on the related Mortgaged Property at any given time
generally will be the ratio, expressed as a percentage, the numerator of which
is the sum of (i) the original principal balance of the Mortgage Loan plus (ii)
the unpaid principal balance of any first lien on the related Mortgaged Property
as of such date, and the denominator of which is the lesser of (i) the appraised
value of the related Mortgaged Property as of the date of the appraisal used by
or on behalf of the Seller to underwrite such Mortgage Loan or (ii) the sale
price of the related Mortgaged Property if such a sale occurred at origination
of the Mortgage Loan.
Company: NovaStar Mortgage Funding Corporation, a Delaware
corporation, and its successors and assigns.
Compensating Interest: With respect to any Determination Date, an
amount equal to the lesser of (i) the aggregate amount of Prepayment Interest
Shortfall for the related Prepayment Period and (ii) the Servicing Fee for such
Determination Date.
Corporate Trust Office: With respect to the Indenture Trustee,
Certificate Registrar, Certificate Paying Agent and Paying Agent, the principal
corporate trust office of the Indenture Trustee and Bond Registrar at which at
any particular time its corporate trust business shall be administered, which
office at the date of the execution of this instrument is located at
_________________, _______________________________________________, Attention:
NovaStar Mortgage Funding
-5-
<PAGE>
Trust, Series _____. With respect to the Owner Trustee, the principal corporate
trust office of the Owner Trustee at which at any particular time its corporate
trust business shall be administered, which office at the date of the execution
of this Trust Agreement is located at __________________,
Attention: NovaStar Mortgage Funding Trust, Series _____.
Cumulative Loss Percentage: As to any Payment Date and the Mortgage
Loans, the percentage equivalent of the fraction obtained by dividing (i) the
aggregate of Realized Losses on the Mortgage Loans from the Cut-off Date through
such Payment Date by (ii) the aggregate Principal Balance of the Mortgage Loans
as of the Cut-off Date.
Cut-off Date: ______________.
------------
Cut-off Date Principal Balance: With respect to any Initial Mortgage
Loan, the unpaid principal balance thereof as of the opening of business on the
last day of the related Due Period immediately prior to the Cut-off Date.
Debt Service Reduction: With respect to any Mortgage Loan, a reduction
in the scheduled Monthly Payment for such Mortgage Loan by a court of competent
jurisdiction in a proceeding under the Bankruptcy Code, except such a reduction
constituting a Deficient Valuation or any reduction that results in a permanent
forgiveness of principal.
Default: Any occurrence which is or with notice or the lapse of time
or both would become an Event of Default.
Deficiency Amount: The meaning provided in the Bond Insurance Policy.
Deficient Valuation: With respect to any Mortgage Loan, a valuation by
a court of competent jurisdiction of the Mortgaged Property in an amount less
than the then outstanding indebtedness under the Mortgage Loan, or any reduction
in the amount of principal to be paid in connection with any scheduled Monthly
Payment that constitutes a permanent forgiveness of principal, which valuation
or reduction results from a proceeding under the Bankruptcy Code.
Definitive Bonds: The meaning specified in Section 4.06 of the
Indenture.
Deleted Mortgage Loan: A Mortgage Loan replaced or to be replaced with
an Eligible Substitute Mortgage Loan.
Delinquency Amount: The product of the Rolling Delinquency Percentage
and the aggregate Principal Balances of the Mortgage Loans as of the close of
business on the last day of the related Due Period.
Delinquency Percentage: As of the last day of any Due Period and with
respect to the Mortgage Loans, the percentage equivalent of a fraction, the
numerator of which equals the aggregate Principal Balance of the Mortgage Loans
that are 90 or more days delinquent, in foreclosure or converted to REO
Properties as of such last day of such Due Period, and the
-6-
<PAGE>
denominator of which is the aggregate Principal Balance of the Mortgage Loans as
of the last day of such Due Period.
Depository or Depository Agency: The Depository Trust Company or a
successor appointed by the Indenture Trustee with the approval of the Company.
Any successor to the Depository shall be an organization registered as a
"clearing agency" pursuant to Section 17A of the Exchange Act and the
regulations of the Securities and Exchange Commission thereunder.
Depository Participant: A Person for whom, from time to time, the
Depository effects book-entry transfers and pledges of securities deposited with
the Depository.
Determination Date: With respect to any Payment Date, the 15/th/ day
of the related month, or if the 15th day of such month is not a Business Day,
the immediately preceding Business Day.
Determination Date Report: The meaning specified in Section 4.01 of
the Servicing Agreement.
Due Date: The first day of the month of the related Payment Date.
Due Period: With respect to any Mortgage Loan and Due Date, the period
commencing on the second day of the month preceding the month of such Payment
Date (or, with respect to the first Due Period, the day following the Cut-off
Date) and ending on the related Due Date.
Eligible Account: An account that is either: (A) a segregated account
or accounts maintained with an institution whose deposits are insured by the
FDIC, the unsecured and uncollateralized long term debt obligations of which
institution shall be rated AA or higher by Standard & Poor's and Aa2 or higher
by Moody's and in the highest short term rating category by each of the Rating
Agencies, and which is (i) a federal savings and loan association duly
organized, validly existing and in good standing under the federal banking laws,
(ii) an institution duly organized, validly existing and in good standing under
the applicable banking laws of any state; (iii) a national banking association
duly organized, validly existing and in good standing under the federal banking
laws, (iv) a principal subsidiary of a bank holding company or (v) approved in
writing by the Bond Insurer and each Rating Agency or (B) a segregated trust
account or accounts maintained with the trust department of a federal or state
chartered depository institution acceptable to the Bond Insurer and each Rating
Agency, having capital and surplus of not less than $100,000,000, acting in its
fiduciary capacity.
Eligible Investments: One or more of the following:
(i) direct obligations of, and obligations fully guaranteed by,
the United States of America, any of the Federal Home Mortgage Corporation,
the Federal National Mortgage Association, the Federal Home Loan Banks or
any agency or instrumentality of the United States of America the
obligations of which are backed by the full faith and credit of the United
States of America;
-7-
<PAGE>
(ii) (A) demand and time deposits in, certificates of deposit of,
banker's acceptances issued by or federal funds sold by any depository
institution or trust company (including the Indenture Trustee or its agent
acting in their respective commercial capacities) incorporated under the
laws of the United States of America or any State thereof and subject to
supervision and examination by federal and/or state authorities, so long as
at the time of such investment or contractual commitment providing for such
investment, such depository institution or trust company has a short term
unsecured debt rating in the highest available rating category of each of
the Rating Agencies and provided that each such investment has an original
maturity of no more than 365 days, and (B) any other demand or time deposit
or deposit which is fully insured by the Federal Deposit Insurance
Corporation;
(iii) repurchase obligations with a term not to exceed 30 days
with respect to any security described in clause (i) above and entered into
with a depository institution or trust company (acting as a principal)
rated "A" or higher by S&P and A2 or higher by Moody's; provided, however,
that collateral transferred pursuant to such repurchase obligation must (A)
be valued daily at current market price plus accrued interest, (B) pursuant
to such valuation, equal, at all times, 105% of the cash transferred by the
Indenture Trustee in exchange for such collateral and (C) be delivered to
the Indenture Trustee or, if the Indenture Trustee is supplying the
collateral, an agent for the Indenture Trustee, in such a manner as to
accomplish perfection of a security interest in the collateral by
possession of certificated securities.
(iv) securities bearing interest or sold at a discount issued by
any corporation incorporated under the laws of the United States of America
or any State thereof which has a long term unsecured debt rating in the
highest available rating category of each of the Rating Agencies at the
time of such investment;
(v) commercial paper having an original maturity of less than 365
days and issued by an institution having a short term unsecured debt rating
in the highest available rating category of each of the Rating Agencies at
the time of such investment;
(vi) a guaranteed investment contract approved by each of the
Rating Agencies and the Bond Insurer and issued by an insurance company or
other corporation having a long term unsecured debt rating in the highest
available rating category of each of the Rating Agencies at the time of
such investment;
(vii) money market funds having ratings in the highest available
long-term rating category of each of the Rating Agencies at the time of
such investment; any such money market funds which provide for demand
withdrawals being conclusively deemed to satisfy any maturity requirement
for Eligible Investments set forth in the Indenture; and
(viii) any investment approved in writing by each of the Rating
Agencies and the Bond Insurer.
provided, however, that each such instrument shall be acquired in an arm's
length transaction and no such instrument shall be an Eligible Investment if it
represents, either (1) the right to receive only
-8-
<PAGE>
interest payments with respect to the underlying debt instrument or (2) the
right to receive both principal and interest payments derived from obligations
underlying such instrument and the principal and interest payments with respect
to such instrument provide a yield to maturity greater than 120% of the yield to
maturity at par of such underlying obligations; provided further, however, that
each such instrument acquired shall not be acquired at a price in excess of par.
The Indenture Trustee may purchase from or sell to itself or an affiliate, as
principal or agent, the Eligible Investments listed above.
Eligible Substitute Mortgage Loan: A Mortgage Loan substituted by the
Seller for a Deleted Mortgage Loan which must, on the date of such substitution,
as confirmed in an Officer's Certificate delivered to the Indenture Trustee and
the Bond Insurer, (i) have an outstanding principal balance, after deduction of
the principal portion of the monthly payment due in the month of substitution
(or in the case of a substitution of more than one Mortgage Loan for a Deleted
Mortgage Loan, an aggregate outstanding principal balance, after such
deduction), not in excess of the outstanding principal balance of the Deleted
Mortgage Loan (the amount of any shortfall to be deposited by the Seller in the
Collection Account in the month of substitution); (ii) comply in all material
respects with each representation and warranty set forth in clauses (ii) through
(lxix) of Section 3.1(b) of the Mortgage Loan Purchase Agreement other than
clauses (iii), (v)-(xiv), (xlii), (xlv), (lvi), (lvii), (lx) and (lxiii); (iii)
have a Mortgage Rate and, with respect to an Adjustable Rate Mortgage Loan, a
Gross Margin no lower than and not more than 1% per annum higher than the
Mortgage Rate and Gross Margin, respectively, of the Deleted Mortgage Loan as of
the date of substitution; (iv) have a Loan-to-Value Ratio and Combined Loan-to-
Value Ratio, if applicable, at the time of substitution no higher than that of
the Deleted Mortgage Loan at the time of substitution; (v) have a remaining term
to stated maturity not greater than (and not more than one year less than) that
of the Deleted Mortgage Loan; (vi) not be 30 days or more delinquent; (vii) not
be a Negative Amortization Loan; and (viii) have a lien priority equal to or
superior to the lien priority of the Deleted Mortgage Loan.
ERISA: The Employee Retirement Income Security Act of 1974, as
amended.
Event of Default: With respect to the Indenture, any one of the
following events (whatever the reason for such Event of Default 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):
(i) a default by the Issuer in the payment of (a) the Interest
Payment Amount or the Principal Payment Amount with respect to a Payment
Date on such Payment Date or (b) the Subordination Increase Amount or the
Carry-Forward Amount, but only, with respect to clause (b), to the extent
funds are available to make such payment as provided in the Indenture
(provided that for purposes of this clause, payment by the Indenture
Trustee from proceeds of the Bond Insurance Policy shall not be considered
payment by the Issuer with respect to the Bonds); or
(ii) the failure by the Issuer on the Final Scheduled Payment
Date to reduce the Bond Principal Balance to zero (provided that for
purposes of this clause, payment
-9-
<PAGE>
by the Indenture Trustee from proceeds of the Bond Insurance Policy shall
not be considered payment by the Issuer with respect to the Bonds); or
(iii) there occurs a default in the observance or performance of
any covenant or agreement of the Issuer made in the Indenture, or any
representation or warranty of the Issuer made in the Indenture or in any
certificate or other writing delivered pursuant thereto or in connection
therewith proving to have been incorrect in any material respect as of the
time when the same shall have been made, and such default shall continue or
not be cured, or the circumstance or condition in respect of which such
representation or warranty was incorrect shall not have been eliminated or
otherwise cured, for a period of 30 days after there shall have been given,
by registered or certified mail, to the Issuer by the Indenture Trustee or
to the Issuer and the Indenture Trustee by the Bond Insurer, or if a Bond
Insurer Default exists, the Holders of at least 25% of the aggregate Bond
Principal Balance of the Bonds, a written notice specifying such default or
incorrect representation or warranty and requiring it to be remedied and
stating that such notice is a notice of default hereunder; or
(iv) there occurs the filing of a decree or order for relief by
a court having jurisdiction in the premises in respect of the Issuer or any
substantial part of the Trust Estate in an involuntary case under any
applicable federal or state bankruptcy, insolvency or other similar law now
or hereafter in effect, or appointing a receiver, liquidator, assignee,
custodian, trustee, sequestrator or similar official of the Issuer or for
any substantial part of the Trust Estate, or ordering the winding-up or
liquidation of the Issuer's affairs, and such decree or order shall remain
unstayed and in effect for a period of 60 consecutive days; or
(v) there occurs the commencement by the Issuer of a voluntary
case under any applicable federal or state bankruptcy, insolvency or other
similar law now or hereafter in effect, or the consent by the Issuer to the
entry of an order for relief in an involuntary case under any such law, or
the consent by the Issuer to the appointment or taking possession by a
receiver, liquidator, assignee, custodian, trustee, sequestrator or similar
official of the Issuer or for any substantial part of the assets of the
Trust Estate, or the making by the Issuer of any general assignment for the
benefit of creditors, or the failure by the Issuer generally to pay its
debts as such debts become due, or the taking of any action by the Issuer
in furtherance of any of the foregoing.
Event of Servicer Termination: With respect to the Servicing
Agreement, a Servicing Default as defined in Section 6.01 of the Servicing
Agreement.
Excess Subordination Amount: With respect to any Payment Date, the
excess, if any, of (a) the Subordination Amount that would apply on such Payment
Date after taking into account all distributions to be made on such Payment Date
(exclusive of any reductions thereto attributable to Subordination Reduction
Amounts on such Payment Date) over (b) the Required Subordination Amount for
such Payment Date.
Exchange Act: The Securities Exchange Act of 1934, as amended, and the
rules and regulations promulgated thereunder.
-10-
<PAGE>
Expenses: The meaning specified in Section 7.02 of the Trust
Agreement.
FDIC: The Federal Deposit Insurance Corporation or any successor
thereto.
FHLMC: The Federal Home Loan Mortgage Corporation, or any successor
thereto.
Final Scheduled Payment Date: The Payment Date occurring in
__________.
Fixed Rate Initial Mortgage Loan: Each of the Fixed Rate Mortgage
Loans transferred to the Trust on the Closing Date.
Fixed Rate Mortgage Loan: Each of the Mortgage Loans identified in the
Mortgage Loan Schedule as having a Mortgage Rate that is fixed.
FNMA: The Federal National Mortgage Association, or any successor
thereto.
Foreclosure Profit: With respect to a Liquidated Mortgage Loan, the
amount, if any, by which (i) the aggregate of its Net Liquidation Proceeds
exceeds (ii) the related Principal Balance (plus accrued and unpaid interest
thereon at the applicable Mortgage Rate from the date interest was last paid
through the date of receipt of the final Liquidation Proceeds) of such
Liquidated Mortgage Loan immediately prior to the final recovery of its
Liquidation Proceeds.
Funding Period: The period beginning on the Closing Date and ending on
the earlier of the date on which (a) the amount on deposit in the Pre-Funding
Account is less than $10,000 or (b) the close of business on ________________.
Grant: Pledge, bargain, sell, warrant, alienate, remise, release,
convey, assign, transfer, create, and grant a lien upon and a security interest
in and right of set-off against, deposit, set over and confirm pursuant to the
Indenture. A Grant of the Collateral or of any other agreement or instrument
shall include all rights, powers and options (but none of the obligations) of
the granting party thereunder, including the immediate and continuing right to
claim for, collect, receive and give receipt for principal and interest payments
in respect of such collateral or other agreement or instrument and all other
moneys payable thereunder, to give and receive notices and other communi
cations, to make waivers or other agreements, to exercise all rights and
options, to bring proceedings in the name of the granting party or otherwise,
and generally to do and receive anything that the granting party is or may be
entitled to do or receive thereunder or with respect thereto.
Gross Margin: With respect to any Mortgage Loan, the percentage set
forth as the "Gross Margin" for such Mortgage Loan on the Mortgage Loan
Schedule, as adjusted from time to time in accordance with the terms of the
Servicing Agreement.
Guaranteed Interest Payment Amount: As to any Payment Date, an amount
equal to interest accrued on the aggregate outstanding Principal Balance of the
Mortgage Loans payable on the related Due Date minus the aggregate amount of the
related Servicing Fee, the Indenture Trustee Fee, the Owner Trustee Fee, the
Bond Insurance Premium and the Minimum Spread.
-11-
<PAGE>
Indemnification Agreement: The Indemnification Agreement, dated as of
___________________, among the Bond Insurer, the Seller and the Underwriter,
including any amendments and supplements thereto.
Indemnified Party: The meaning specified in Section 7.02 of the Trust
Agreement.
Indenture: The indenture, dated as of ________________, between the
Issuer, as debtor, and the Indenture Trustee, as Indenture Trustee.
Indenture Trustee: _____________________, a national banking
association, and its successors and assigns or any successor indenture trustee
appointed pursuant to the terms of the Indenture.
Indenture Trustee Fee: With respect to each Mortgage Loan and any
Payment Date the product of (i) the Indenture Trustee Fee Rate divided by 12 and
(ii) the Principal Balance of such Mortgage Loan as of such date.
Indenture Trustee Fee Rate: 0.0125% per annum.
Independent: When used with respect to any specified Person, the
Person (i) is in fact independent of the Issuer, any other obligor on the Bonds,
the Seller, NovaStar Assets, the Servicer, the Issuer, the Company and any
Affiliate of any of the foregoing Persons, (ii) does not have any direct
financial interest or any material indirect financial interest in the Issuer,
any such other obligor, the Seller, NovaStar Assets, the Servicer, the Issuer,
the Company or any Affiliate of any of the foregoing Persons and (iii) is not
connected with the Issuer, any such other obligor, the Seller, NovaStar Assets,
the Servicer, the Issuer, the Company or any Affiliate of any of the foregoing
Persons as an officer, employee, promoter, underwriter, trustee, partner,
director or person performing similar functions.
Independent Certificate: A certificate or opinion to be delivered to
the Indenture Trustee under the circumstances described in, and otherwise
complying with, the applicable require ments of Section 10.01 of the Indenture,
made by an Independent appraiser or other expert appointed by the Issuer and
approved by the Indenture Trustee in the exercise of reasonable care, and such
opinion or certificate shall state that the signer has read the definition of
"Independent" in this Indenture and that the signer is Independent within the
meaning thereof.
Index: With respect to any Adjustable Rate Mortgage Loan, the index
for the adjustment of the Mortgage Rate set forth as such on the related
Mortgage Note.
Initial Mortgage Loan: A Mortgage Loan transferred and conveyed by the
Company to the Issuer on the Closing Date, as listed on the Mortgage Loan
Schedule.
Initial Specified Subordinated Amount: During the Funding Period, the
amount equal to 4.7% of the Original Pool Balance and as of any date of
determination after the end of the Funding Period, the amount specified by the
Bond Insurer in an Insurer Subsequent Mortgage Loan Certificate
-12-
<PAGE>
delivered by the Bond Insurer to the Indenture Trustee after the Funding Period
pursuant to Section 2.2 of the Mortgage Loan Purchase Agreement and Section 4.08
of the Insurance Agreement.
Insurance Agreement: The Insurance Agreement, dated as of
_________________, among the Servicer, the Seller, NovaStar Assets, the Company,
the Issuer, the Indenture Trustee and the Bond Insurer, including any amendments
and supplements thereto.
Insured Payment: Shall have the meaning set forth in the Bond
Insurance Policy.
Insurance Proceeds: Proceeds paid by any insurer (other than the Bond
Insurer) pursuant to any insurance policy covering a Mortgage Loan which are
required to be remitted to the Servicer, or amounts required to be paid by the
Servicer pursuant to the Servicing Agreement, net of any component thereof (i)
covering any expenses incurred by or on behalf of the Servicer in connection
with obtaining such proceeds, (ii) that is applied to the restoration or repair
of the related Mortgaged Property or (iii) released to the Mortgagor in
accordance with the Servicer's normal servicing procedures.
Insurer Subsequent Mortgage Loan Certificate: The certificate set
forth in Exhibit to the Insurance Agreement.
Interest Coverage Account: The account established and maintained by
the Indenture Trustee pursuant to Section 8.09 of the Indenture.
Interest Coverage Addition: As to any Payment Date during the Funding
Period, an amount, not less than $0.00, equal to the remainder of (x) the
product of (A) the Original Pre-Funded Amount and (B) a rate equal to the sum of
(i) the Bond Interest Rate for the related Interest Period and (ii) the rate
used to calculate the Bond Insurance Premium (both rates calculated as one-
twelfth of the annual rate) minus (y) interest collected on all Subsequent
Mortgage Loans during the related Interest Period (and after the related
Subsequent Cut-off Date with respect to any Subsequent Mortgage Loans
transferred during such Interest Period).
Interest Coverage Amount: The amount to be paid from proceeds
received from the sale of the Bonds for deposit into the Interest Coverage
Account pursuant to Section 8.09 of the Indenture, which amount shall be
$____________ on the Closing Date.
Interest Determination Date: With respect to any Interest Period, the
second London Business Day preceding the commencement of such Interest Period.
Interest Payment Amount: With respect to any Payment Date, an amount
equal to the lesser of (i) interest accrued during the related Interest Period
on the Bond Principal Balances of the Bonds at the then-applicable Bond Interest
Rate and (ii) the Guaranteed Interest Payment Amount.
Interest Period: With respect to any Payment Date other than the first
Payment Date, the period beginning on the preceding Payment Date and ending on
the day preceding such Payment
-13-
<PAGE>
Date, and in the case of the first Payment Date, the period beginning on the
Closing Date and ending on the day preceding the first Payment Date.
Interest Rate Adjustment Date: With respect to each Adjustable Rate
Mortgage Loan, the date or dates on which the Mortgage Rate is adjusted in
accordance with the related Mortgage Note.
Investment Company Act: The Investment Company Act of 1940, as
amended, and any amendments thereto.
Issuer: NovaStar Mortgage Funding Trust, Series ______, a Delaware
business trust, or its successor in interest.
Issuer Request: A written order or request signed in the name of the
Issuer by any one of its Authorized Officers and approved in writing by the Bond
Insurer, so long as no Bond Insurer Default exists, and delivered to the
Indenture Trustee.
LIBOR Business Day: Any day other than (i) a Saturday or a Sunday or
(ii) a day on which banking institutions in the State of New York or in the city
of London, England are required or authorized by law to be closed.
Lien: Any mortgage, deed of trust, pledge, conveyance, hypothecation,
assignment, participation, deposit arrangement, encumbrance, lien (statutory or
other), preference, priority right or interest or other security agreement or
preferential arrangement of any kind or nature whatsoever, including, without
limitation, any conditional sale or other title retention agreement, any
financing lease having substantially the same economic effect as any of the
foregoing and the filing of any financing statement under the UCC (other than
any such financing statement filed for informational purposes only) or
comparable law of any jurisdiction to evidence any of the foregoing; provided,
however, that any assignment pursuant to Section 6.02 of the Servicing Agreement
shall not be deemed to constitute a Lien.
Lifetime Rate Cap: With respect to each Adjustable Rate Mortgage Loan
with respect to which the related Mortgage Note provides for a lifetime rate
cap, the maximum Mortgage Rate permitted over the life of such Mortgage Loan
under the terms of such Mortgage Note, as set forth on the Mortgage Loan
Schedule and initially as set forth on Exhibit A to the Servicing Agreement.
Liquidated Mortgage Loan: With respect to any Payment Date, (i) any
Mortgage Loan in respect of which the Servicer has determined, in accordance
with the servicing procedures specified in the Servicing Agreement, as of the
end of the related Prepayment Period that substantially all Liquidation Proceeds
which it reasonably expects to recover with respect to the disposition of the
related Mortgaged Property or REO Property have been recovered and, (ii) any
Mortgage Loan secured by a second lien of which any portion of a scheduled
monthly payment of principal and interest is in excess of 180 days past due.
Liquidation Expenses: Out-of-pocket expenses (exclusive of overhead)
which are incurred by or on behalf of the Servicer in connection with the
liquidation of any Mortgage Loan and
-14-
<PAGE>
not recovered under any insurance policy, such expenses including, without
limitation, legal fees and expenses, any unreimbursed amount expended respecting
the related Mortgage Loan and any related and unreimbursed expenditures for real
estate property taxes or for property restoration, preservation or insurance
against casualty loss or damage.
Liquidation Proceeds: Proceeds (including Insurance Proceeds but not
including amounts received under the Bond Insurance Policy) received in
connection with the liquidation of any Mortgage Loan or related REO Property,
including any proceeds received on second lien Mortgage Loans in excess of 180
days past due, whether through trustee's sale, foreclosure sale or otherwise.
Loan-to-Value Ratio: With respect to any Mortgage Loan, as of any date
of determination, a fraction expressed as a percentage, the numerator of which
is the then current principal amount of the Mortgage Loan, and the denominator
of which is the lesser of the Purchase Price or the Appraised Value of the
related Mortgaged Property.
Loan Year: With respect to any Mortgage Loan, the one year period
commencing on the day succeeding the origination of such Mortgage Loan and
ending on the anniversary date of such Mortgage Loan, and each annual period
thereafter.
London Business Day: Any day on which banks in the City of London,
England are open and conducting transactions in United States dollars.
Maximum Bond Interest Rate: ____% per annum.
Maximum Mortgage Rate: With respect to each Adjustable Rate Mortgage
Loan, the maximum Mortgage Rate.
Minimum Mortgage Rate: With respect to each Adjustable Rate Mortgage
Loan, the minimum Mortgage Rate.
Minimum Spread: With respect to each Mortgage Loan and any Payment
Date the product of (i) ____% divided by 12 and (ii) the Principal Balance of
such Mortgage Loan as of such date.
Monthly Payment: With respect to any Mortgage Loan (including any REO
Property) and any Due Date, the payment of principal and interest due thereon in
accordance with the amortization schedule at the time applicable thereto (after
adjustment, if any, for partial Principal Prepayments and for Deficient
Valuations occurring prior to such Due Date but before any adjustment to such
amortization schedule by reason of any bankruptcy, other than a Deficient
Valuation, or similar proceeding or any moratorium or similar waiver or grace
period).
Moody's: Moody's Investors Service, Inc. or its successor in interest.
Mortgage: The mortgage, deed of trust or other instrument creating a
first lien on an estate in fee simple interest in real property securing a
Mortgage Loan.
-15-
<PAGE>
Mortgage File: The file containing the Related Documents pertaining to
a particular Mortgage Loan and any additional documents required to be added to
the Mortgage File pursuant to the Mortgage Loan Purchase Agreement or the
Servicing Agreement.
Mortgage Loan Purchase Agreement: The Mortgage Loan Purchase
Agreement, dated as of ______________, among the Seller, the Company, the
Indenture Trustee and the Issuer.
Mortgage Loan Schedule: With respect to any date, the schedule of
Mortgage Loans pledged under the Indenture on such date. The schedule of Initial
Mortgage Loans as of the Cut-off Date is the schedule set forth in Exhibit D of
the Indenture and the schedule or schedules of Subsequent Mortgage Loans, if
any, as of the Subsequent Cut-off Date, which schedules set forth as to each
Mortgage Loan
(i) the loan number and name of the Mortgagor;
(ii) the street address, city, state and zip code of the Mortgaged
Property;
(iii) the Mortgage Rate at origination;
(iv) with respect to an Adjustable Rate Mortgage Loan, the Maximum
Rate and the Minimum Rate;
(v) the maturity date;
(vi) the original principal balance;
(vii) the first payment date;
(viii) the type of Mortgaged Property;
(ix) the Monthly Payment in effect as of the Cut-off Date (with
respect to an Initial Mortgage Loan) or Subsequent Cut-off
Date (with respect to a Subsequent Mortgage Loan);
(x) the Principal Balance as of the Cut-off Date (with respect to
an Initial Mortgage Loan) or Subsequent Cut-off Date (with
respect to a Subsequent Mortgage Loan);
(xi) with respect to an Adjustable Rate Mortgage Loan, the Index,
the Gross Margin; the Lifetime Rate Cap and the Periodic Rate
Cap;
(xii) with respect to an Adjustable Rate Mortgage Loan, the first
Adjustment Date and next Adjustment Date, if any;
(xiii) with respect to an Adjustable Rate Mortgage Loan, the
Adjustment Date frequency and Payment Date frequency;
-16-
<PAGE>
(xiv) the occupancy status;
(xv) the purpose of the Mortgage Loan;
(xvi) the Appraised Value of the Mortgaged Property;
(xvii) the original term to maturity;
(xviii) the paid-through date of the Mortgage Loan;
(xix) the Loan-to-Value Ratio;
(xx) whether the Mortgage Loan is an Adjustable Rate Mortgage Loan
or a Fixed Rate Mortgage Loan; and
(xxi) whether or not the Mortgage Loan was underwritten pursuant to
a limited documentation program.
The Mortgage Loan Schedule shall also set forth the total of the
amounts described under (ix) above for all of the Mortgage Loans.
Mortgage Loans: At any time, collectively, all Mortgage Loans that
have been sold to the Company and to the Issuer, as applicable, under the
Mortgage Loan Purchase Agreement or sold to or substituted for pursuant to
Section 2.1 and 3.1 of the Mortgage Loan Purchase Agreement, transferred to the
Company under the Ownership Transfer Agreement and transferred and conveyed to
the Issuer, in each case together with the Related Documents, and that remain
subject to the terms of the Indenture. As applicable, Mortgage Loan shall be
deemed to refer to the related REO Property and both Initial Mortgage Loans and
Subsequent Mortgage Loans.
Mortgage Note: The note or other evidence of the indebtedness of a
Mortgagor under a Mortgage Loan.
Mortgage Rate: With respect to any Mortgage Loan, the annual rate at
which interest accrues on such Mortgage Loan.
Mortgaged Property: The underlying property, including real property
and improvements thereon, securing a Mortgage Loan.
Mortgagor: The obligor or obligors under a Mortgage Note.
NCFC: NovaStar Certificates Financing Corp., a Delaware corporation,
and its successors and assigns.
Net Liquidation Proceeds: With respect to any Liquidated Mortgage
Loan, Liquidation Proceeds net of Liquidation Expenses.
-17-
<PAGE>
Net Monthly Excess Cashflow: For any Payment Date, the amount of
Available Funds remaining after distributions pursuant to clauses (i) through
(v) of Section 3.05 of the Indenture (minus any Subordination Reduction Amount).
Net Mortgage Rate: With respect to any Mortgage Loan and any day, the
related Mortgage Rate less the sum of the related Servicing Fee Rate and the
Indenture Trustee Fee Rate.
Nonrecoverable Advance: With respect to any Mortgage Loan, any Advance
(i) which was previously made or is proposed to be made by the Servicer; and
(ii) which, in the good faith judgment of the Servicer, will not or, in the case
of a proposed Advance, would not, be ultimately recoverable by the Servicer from
Liquidation Proceeds, Insurance Proceeds or future payments on such Mortgage
Loan.
NovaStar Assets: NovaStar Assets Corp., a Delaware corporation, and
its successors and assigns.
Officer's Certificate: With respect to the Servicer, a certificate
signed by the President, a Director, a Vice President or an Assistant Vice
President, of the Servicer and delivered to the Indenture Trustee. With respect
to the Issuer, a certificate signed by any Authorized Officer of the Issuer,
under the circumstances described in, and otherwise complying with, the
applicable requirements of Section 10.01 of the Indenture, and delivered to the
Indenture Trustee. Unless otherwise specified, any reference in the Indenture to
an Officer's Certificate shall be to an Officer's Certificate of any Authorized
Officer of the Issuer.
One-Month LIBOR: With respect to any Interest Period, the rate
determined by the Indenture Trustee on the related Interest Determination Date
on the basis of the offered rates of the Reference Banks for one-month United
States dollar deposits, as such rates appear on the Telerate Page 3750, as of
11:00 a.m. (London time) on such Interest Determination 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
Interest Period (commencing on the first day of such Interest Period). The
Indenture 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
The City of New York, selected by the Indenture Trustee, 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 Interest Period
(commencing on the first day of such Interest Period).
"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 Indenture Trustee and
engaged in transactions in European deposits in the international Eurocurrency
market.
-18-
<PAGE>
The establishment of One-Month LIBOR on each Interest Determination
Date by the Indenture Trustee and the Indenture Trustee's calculation of the
rate of interest applicable to the Bonds for the related Interest Period shall
(in the absence of manifest error) be final and binding.
Opinion of Counsel: A written opinion of counsel acceptable to the
Bond Insurer, who may be in-house counsel for the Servicer if acceptable to the
Indenture Trustee, the Bond Insurer and the Rating Agencies or counsel for the
Company, as the case may be.
Original Pool Balance: The sum of the aggregate of the Principal
Balances of all Initial Mortgage Loans as of the Cut-off Date and the Original
Pre-Funded Amount.
Original Pre-Funded Amount: The amount deposited (from the Bond
proceeds) in the Pre-Funding Account on the Closing Date, which amount is
$50,000,000.
Original Value: Except in the case of a refinanced Mortgage Loan, the
lesser of the Appraised Value or sales price of Mortgaged Property at the time a
Mortgage Loan is closed, and for a refinanced Mortgage Loan, the Original Value
is the value of such property set forth in an appraisal acceptable to the
Servicer.
Outstanding: With respect to the Bonds, as of the date of
determination, all Bonds theretofore executed, authenticated and delivered under
this Indenture except:
(i) Bonds theretofore canceled by the Bond Registrar or delivered to
the Indenture Trustee for cancellation; and
(ii) Bonds in exchange for or in lieu of which other Bonds have been
executed, authenticated and delivered pursuant to the Indenture unless
proof satisfactory to the Indenture Trustee is presented that any such
Bonds are held by a holder in due course;
All Bonds that have been paid with funds provided under the Bond Insurance
Policy shall be deemed to be Outstanding until the Bond Insurer has been
reimbursed with respect thereto.
Owner Trust Estate: The corpus of the Issuer created by the Trust
Agreement which consists of items referred to in Section 2.05 of the Trust
Agreement.
Owner Trustee: ____________________ and its successors and assigns or
any successor owner trustee appointed pursuant to the terms of the Trust
Agreement.
Owner Trustee Fee: $4,000 per annum, payable on the Payment Date
occurring each December commencing in ____________.
Paying Agent: Any paying agent or co-paying agent appointed pursuant
to Section 3.03 of the Indenture, which initially shall be the Indenture
Trustee.
Payment Account: The account established by the Indenture Trustee
pursuant to Section 3.01 of the Indenture. The Payment Account shall be an
Eligible Account.
-19-
<PAGE>
Payment Adjustment Date: With respect to each Negative Amortization
Loan, the date set forth in the related Mortgage Note on which the Monthly
Payment may change each month. The first Payment Adjustment Date as to each
Negative Amortization Loan is set forth in the Mortgage Loan Schedule.
Payment Cap: With respect to each Negative Amortization Loan and each
Payment Adjustment Date, the amount (expressed as a percentage) by which the
Monthly Payment on such Negative Amortization Loan due in the month preceding
such Payment Adjustment Date is multiplied for purposes of calculating the
maximum amount to which the Monthly Payment may be adjusted, as identified as
such on the Mortgage Loan Schedule.
Payment Date: The ____ day of each month, or if such day is not a
Business Day, then the next Business Day.
Percentage Interest: With respect to any Bond, the percentage obtained
by dividing the Bond Principal Balance of such Bond by the aggregate of the Bond
Principal Balances of all Bonds. With respect to any Certificate, the percentage
on the face thereof.
Periodic Rate Cap: With respect to any Adjustable Rate Mortgage Loan,
the maximum rate, if any, by which the Mortgage Rate on such Mortgage Loan can
adjust on any Adjustment Date, as stated in the related Mortgage Note or
Mortgage.
Person: Any individual, corporation, partnership, joint venture,
association, joint-stock company, trust, unincorporated organization or
government or any agency or political subdivision thereof.
Pool Balance: With respect to any date, the sum of the aggregate of
the Principal Balances of all Mortgage Loans and the Pre-Funded Amount as of
such date.
Pre-Funded Amount: With respect to any date of determination, the
amount on deposit in the Pre-Funding Account.
Pre-Funding Account: The account established and maintained by the
Indenture Trustee pursuant to Section 8.08 of the Indenture.
Preference Amount: Any amount previously distributed to a Holder on
the Bonds that is recoverable and sought to be recovered as a voidable
preference by a trustee in bankruptcy pursuant to the United States Bankruptcy
Code (11 U.S.C.), as amended from time to time, in accordance with a final
nonappealable order of a court having competent jurisdiction.
Prepayment Interest Shortfall: As to any Payment Date and any
Mortgage Loan (other than a Mortgage Loan relating to an REO Property) that was
the subject of (a) a Principal Prepayment in full during the related Prepayment
Period, an amount equal to the excess of interest accrued during the related
Prepayment Period at the Net Mortgage Rate on the Principal Balance of such
Mortgage Loan over the amount of interest (adjusted to the Net Mortgage Rate)
paid by the Mortgagor for such Prepayment Period to the date of such Principal
Prepayment in full or (b) a partial
-20-
<PAGE>
Principal Prepayment during the prior calendar month, an amount equal to
interest accrued during the related Prepayment Period at the Net Mortgage Rate
on the amount of such partial Prepayment.
Prepayment Period: As to any Payment Date, the calendar month preceding
the month of such Payment Date.
Principal Balance: With respect to any Mortgage Loan or related REO
Property, at any given time, (i) the Principal Balance of the Mortgage Loan as
of the Cut-off Date or Subsequent Cut-off Date, as applicable, minus (ii) the
sum of (a) the principal portion of the Monthly Payments due with respect to
such Mortgage Loan or REO Property during each Due Period ending prior to the
most recent Payment Date which were received or with respect to which an Advance
was made, and (b) all Principal Prepayments with respect to such Mortgage Loan
or REO Property, and all Insurance Proceeds, Liquidation Proceeds and REO
Proceeds, to the extent applied by the Servicer as recoveries of principal in
accordance with the Servicing Agreement with respect to such Mortgage Loan or
REO Property, and (c) the principal portion of any Realized Loss with respect
thereto for any previous Payment Date.
Principal Payment Amount: (a) With respect to any Payment Date, other than
the Final Scheduled Payment Date and the first Payment Date following any
acceleration of the Bonds following an Event of Default, the lesser of (a) the
sum of (x) the Available Funds remaining after distributions pursuant to clauses
(i) through (iii) of Section 3.05 of the Indenture and (y) any portion of any
Insured Payment for such Payment Date representing a Subordination Deficit and
(b) the sum of:
(1) the principal portion of all Monthly Payments received and
Advances made during the related Due Period on each Mortgage
Loan;
(2) the Principal Balance of any Mortgage Loan repurchased during
the related Prepayment Period pursuant to the Mortgage Loan
Purchase Agreement or Sections 3.12 or 3.18 of the Servicing
Agreement and the amount of any Substitution Adjustment Amounts
received during the related Prepayment Period;
(3) the principal portion of all other unscheduled collections
received during the related Prepayment Period (or deemed to be
received during the related Prepayment Period) (including,
without limitation and without duplication, Principal Prepayments
in full, partial Principal Prepayments, Insurance Proceeds,
Liquidation Proceeds and REO Proceeds) to the extent applied by
the Servicer as payments or recoveries of principal of the
related Mortgage Loan;
(4) any Insured Payment paid with respect to any Subordination
Deficit; and
-21-
<PAGE>
(5) with respect to the Payment Date immediately following the
end of the Funding Period, any amounts in the related Pre-Funding
Account after giving effect to any purchase of related Subsequent
Mortgage Loans;
minus
-----
(6) the amount of any Subordination Reduction Amount for such
Payment Date;
and (b) with respect to the Final Scheduled Payment Date and the first Payment
Date following any acceleration of the Bonds following an Event of Default, the
amount necessary to reduce the Bond Principal Balance to zero.
Principal Prepayment: Any payment of principal made by the Mortgagor on a
Mortgage Loan which is received in advance of its scheduled Due Date and which
is not accompanied by an amount of interest representing scheduled interest due
on any date or dates in any month or months subsequent to the month of
prepayment.
Proceeding: Any suit in equity, action at law or other judicial or
administrative proceeding.
Prospectus: The Prospectus Supplement dated ______________, together with
the attached Prospectus dated _______________, with respect to the Bonds.
Prospectus Supplement: The Prospectus Supplement dated ____________, with
respect to the Bonds.
Purchase Price: The meaning specified in Section 2.1(a) of the Home Equity
Loan Purchase Agreement.
Rating Agency: Any nationally recognized statistical rating organization,
or its successor, that rated the Bonds at the request of the Company at the time
of the initial issuance of the Bonds. Initially such rating agencies shall
consist of ___________ and ______________. If such organization or a successor
is no longer in existence, "Rating Agency" shall be such nationally recognized
statistical rating organization, or other comparable Person, designated by the
Bond Insurer so long as no Bond Insurer Default exists, notice of which
designation shall be given to the Indenture Trustee. [References herein to the
highest short term unsecured rating category of a Rating Agency shall mean A-1
or better in the case of Standard & Poor's and P-1 or better in the case of
Moody's and in the case of any other Rating Agency shall mean such equivalent
rating. References herein to the highest long-term rating category of a Rating
Agency shall mean "AAA" in the case of Standard & Poor's and "Aaa" in the case
of Moody's and in the case of any other Rating Agency, such equivalent rating.]
Realized Loss: With respect to each Mortgage Loan (or REO Property) as to
which a Cash Liquidation or REO Disposition has occurred, an amount (not less
than zero) equal to (i) the Principal Balance of the Mortgage Loan (or REO
Property) as of the date of Cash Liquidation or REO Disposition, plus (ii)
interest (and REO Imputed Interest, if any) at the Net Mortgage Rate from
-22-
<PAGE>
the Due Date as to which interest was last paid or advanced to Bondholders up to
the last day of the month in which the Cash Liquidation (or REO Disposition)
occurred on the Principal Balance of such Mortgage Loan (or REO Property)
outstanding during each Due Period that such interest was not paid or advanced,
minus (iii) Net Liquidation Proceeds, if any, received during the month in which
such Cash Liquidation (or REO Disposition) occurred, minus the portion thereof
reimbursable to the Servicer or any Subservicer with respect to related Advances
or expenses as to which the Servicer or Subservicer is entitled to reimbursement
thereunder but which have not been previously reimbursed. With respect to each
Mortgage Loan which has become the subject of a Deficient Valuation, the
difference between the principal balance of the Mortgage Loan outstanding
immediately prior to such Deficient Valuation and the principal balance of the
Mortgage Loan as reduced by the Deficient Valuation. With respect to each
Mortgage Loan which has become the object of a Debt Service Reduction, the
amount of such Debt Service Reduction.
Record Date: With respect to the Bonds and any Payment Date, the last day
of the calendar month preceding such Payment Date or in the case of the first
Payment Date, the Record Date shall be the Closing Date.
Reference Banks: Bankers Trust Company, Barclay's Bank PLC, The Bank of
Tokyo and National Westminster Bank PLC and their successors in interest;
provided that if any of the foregoing banks are not suitable to serve as a
Reference Bank, then any leading banks selected by the Indenture Trustee which
are engaged in transactions in Eurodollar deposits in the international
Eurocurrency market (i) with an established place of business in London, (ii)
not controlling, under the control of or under common control with the Company
or any Affiliate thereof, (iii) whose quotations appear on the Reuters Screen
LIBO Page on the relevant Interest Determination Date and (iv) which have been
designated as such by the Indenture Trustee.
Registered Holder: The Person in whose name a Bond is registered in the
Bond Register on the applicable Record Date.
Related Documents: With respect to each Mortgage Loan, the documents
specified in Section 2.1(b) of the Mortgage Loan Purchase Agreement and any
documents required to be added to such documents pursuant to the Mortgage Loan
Purchase Agreement, the Mortgage Loan Transfer Agreement, the Trust Agreement,
the Indenture or the Servicing Agreement.
Relief Act: The Soldiers' and Sailors' Civil Relief Act of 1940, as
amended.
Relief Act Shortfall: As to any Payment Date and any Mortgage Loan (other
than a Mortgage Loan relating to an REO Property), any shortfalls relating to
the Relief Act or similar legislation or regulations.
REO Acquisition: The acquisition by the Servicer on behalf of the
Indenture Trustee for the benefit of the Bondholders and the Bond Insurer of any
REO Property pursuant to Section 3.13 of the Servicing Agreement.
REO Disposition: As to any REO Property, a determination by the Servicer
that it has received substantially all Insurance Proceeds, Liquidation Proceeds,
REO Proceeds and other
-23-
<PAGE>
payments and recoveries (including proceeds of a final sale) which the Servicer
expects to be finally recoverable from the sale or other disposition of the REO
Property.
REO Imputed Interest: As to any REO Property, for any period, an amount
equivalent to interest (at the Net Mortgage Rate that would have been applicable
to the related Mortgage Loan had it been outstanding net, with respect to a
Negative Amortization Loan, of amounts that would have been Deferred Interest,
if any) on the unpaid principal balance of the Mortgage Loan as of the date of
acquisition thereof for such period as such balance is reduced pursuant to
Section 3.13 of the Servicing Agreement by any income from the REO Property
treated as a recovery of principal and with respect to a Negative Amortization
Loan, as such balance is increased by the addition of Deferred Interest.
REO Proceeds: Proceeds, net of expenses, received in respect of any REO
Property (including, without limitation, proceeds from the rental of the related
Mortgaged Property), which proceeds are required to be deposited into the
Collection Account within two days of receipt by the Servicer.
REO Property: A Mortgaged Property that is acquired by the Issuer by
foreclosure or by deed in lieu of foreclosure.
Repurchase Event: With respect to any Mortgage Loan, either (i) a discovery
that, as of the Closing Date the related Mortgage was not a valid lien on the
related Mortgaged Property subject only to (A) the lien of real property taxes
and assessments not yet due and payable, (B) covenants, conditions, and
restrictions, rights of way, easements and other matters of public record as of
the date of recording of such Mortgage and such other permissible title
exceptions as are permitted and (C) other matters to which like properties are
commonly subject which do not materially adversely affect the value, use,
enjoyment or marketability of the related Mortgaged Property or (ii) with
respect to any Mortgage Loan as to which the Seller delivers an affidavit
certifying that the original Mortgage Note has been lost or destroyed, a
subsequent default on such Mortgage Loan if the enforcement thereof or of the
related Mortgage is materially and adversely affected by the absence of such
original Mortgage Note.
Repurchase Price: With respect to any Mortgage Loan required to be
repurchased on any date pursuant to the Mortgage Loan Purchase Agreement or
permitted to be purchased by the Servicer pursuant to the Servicing Agreement,
an amount equal to the sum, without duplication, of (i) 100% of the Principal
Balance thereof (without reduction for any amounts charged off) and (ii) unpaid
accrued interest at the Mortgage Rate on the outstanding principal balance
thereof from the Due Date to which interest was last paid by the Mortgagor (or
with respect to which an Advance was last made by the Servicer) to the first day
of the month following the month of purchase plus (iii) the amount of any
unreimbursed Servicing Advances or unreimbursed Advances made with respect to
such Mortgage Loan plus (iv) any other amounts owed to the Servicer or the
Subservicer pursuant to Section 3.07 of the Servicing Agreement and not included
in clause (iii) of this definition.
Required Subordination Amount: (a) For any Payment Date occurring during
the period commencing on the Closing Date and ending on the later of the
thirtieth Payment Date following the Closing Date and the date upon which the
principal in the amount of one-half of the
-24-
<PAGE>
Original Pool Balance has been received by the Bondholders, the greater of: (i)
the Base Specified Overcollateralization Amount and (ii) 75% of the Delinquency
Amount and (b) for any Payment Date occurring after the end of the period in
clause (a) above, the greatest of (i) two times the product of the Target
Percentage and the Pool Balance as of the close of business as of the last day
of the related Due Period, (ii) 75% of the Delinquency Amount, (iii) 0.50% of
the Original Pool Balance and (iv) an amount equal to the sum of the Principal
Balances of the three Mortgage Loans with the largest Principal Balances. On or
prior to the day the Funding Period ends, the Bond Insurer may adjust the
Required Subordinated Amount. The Required Subordinated Amount may be increased
by the Rating Agencies at the time of the delivery of any Subsequent Mortgage
Loans.
Notwithstanding the above, the Required Subordination Amount shall not
step-down pursuant to clause (b) above, (i) if a claim on the Bond Insurance
Policy has occurred, (ii) if a Servicing Default has occurred which has not been
waived by the Bond Insurer or (iii) if the Required Subordination Amount after
the step-down would equal or exceed the Delinquency Amount.
Upon the end of the Funding Period, the Required Subordination Amount may
be reduced or eliminated by the Bond Insurer in its sole discretion. Upon any
such reduction or elimination, the Servicer shall give written notice thereof to
each Rating Agency.
Responsible Officer: With respect to the Indenture Trustee, any officer of
the Indenture Trustee with direct responsibility for the administration of the
Indenture and also, with respect to a particular matter, any other officer to
whom such matter is referred because of such officer's knowledge of and
familiarity with the particular subject.
Rolling Delinquency Percentage: For any Payment Date, the average of the
Delinquency Percentages for the Mortgage Loans as of the last day of each of the
three (or 1 and 2 in the case of the first two Payment Dates, as applicable)
most recently ended Due Periods.
Sale: The meaning assigned in Section 5.15 of the Indenture.
Securities Act: The Securities Act of 1933, as amended, and the rules and
regulations promulgated thereunder.
Security: Any of the Certificates or Bonds.
Securityholder or Holder: Any Bondholder or a Certificateholder.
Security Instrument: A written instrument creating a valid first lien on a
Mortgaged Property securing a Mortgage Note, which may be any applicable form of
mortgage, deed of trust, deed to secure debt or security deed, including any
riders or addenda thereto.
Seller: NovaStar Financial, Inc., a Maryland corporation, and its
successors and assigns.
Servicer: NovaStar Mortgage, Inc., a Virginia corporation, and its
successors and assigns.
-25-
<PAGE>
Servicing Account: The separate trust account created and maintained by the
Servicer or each Subservicer with respect to the Mortgage Loans or REO Property,
which shall be an Eligible Account, for collection of taxes, assessments,
insurance premiums and comparable items as described in Section 3.08 of the
Servicing Agreement.
Servicing Advances: All customary, reasonable and necessary "out of
pocket" costs and expenses incurred in connection with a default, delinquency or
other unanticipated event in the performance by the Servicer of its servicing
obligations, including, without duplication, but not limited to, the cost of (i)
the preservation, restoration and protection of a Mortgaged Property, (ii) any
enforcement or judicial proceedings, including foreclosures, (iii) the
management and liquidation of any REO Property and (iv) compliance with the
obligations under Section 3.13 of the Servicing Agreement.
Servicing Agreement: The Servicing Agreement, dated as of _______________,
among the Servicer, the Indenture Trustee and the Issuer.
Servicing Default: The meaning assigned in Section 6.01 of the Servicing
Agreement.
Servicing Fee: With respect to the Mortgage Loans and any Payment Date, the
product of (i) the Servicing Fee Rate divided by 12 and (ii) the Principal
Balance of such Mortgage Loans as of such date.
Servicing Fee Rate: With respect to any Mortgage Loan, 0.50% per annum.
Servicing Officer: Any officer of the Servicer involved in, or responsible
for, the administration and servicing of the Mortgage Loans whose name and
specimen signature appear on a list of servicing officers furnished to the
Indenture Trustee (with a copy to the Bond Insurer) by the Servicer or a
Subservicer, as such list may be amended from time to time.
Single Bond: A Bond in the amount of $1,000.
Standard & Poor's: Standard & Poor's Ratings Service, or its successor in
interest.
Subordination Amount: As of any Payment Date, the excess, if any, of (x)
the sum of the Pool Balance as of the close of business on the last day of the
related Due Period, over (y) the Bond Principal Balance of the Bonds as of such
Payment Date (and following the making of all distributions on such Payment
Date).
Subordination Deficit: With respect to any Payment Date, the amount, if
any, by which (x) the aggregate Bond Principal Balance of the Bonds as of such
Payment Date, and following the making of all distributions to be made on such
Payment Date (except for any payment to be made as to principal from proceeds of
the Bond Insurance Policy), exceeds (y) the Pool Balance as of the close of
business on the preceding Due Date for such Payment Date.
-26-
<PAGE>
Subordination Increase Amount: With respect to any Payment Date, the amount
of any Net Monthly Excess Cashflow (including any Subordination Reduction
Amount) available in the Payment Account to increase the Subordination Amount up
to the Required Subordination Amount.
Subordination Reduction Amount: With respect to any Payment Date, an
amount equal to the lesser of (a) the Excess Subordination Amount and (b) the
principal collections received by the Servicer with respect to the prior Due
Period.
Subsequent Cut-off Date: With respect to those Subsequent Mortgage Loans
which are sold to the Trust pursuant to a Subsequent Transfer Instrument, one
Business Day prior to the Subsequent Transfer Date.
Subsequent Mortgage Loan: A Mortgage Loan sold by the Seller to the Trust
pursuant to Section 2.2 of the Mortgage Loan Purchase Agreement, such Mortgage
Loan being identified on the Mortgage Loan Schedule attached to a Subsequent
Transfer Instrument.
Subsequent Transfer Date: With respect to each Subsequent Transfer
Instrument, the date on which the related Subsequent Mortgage Loans are sold to
the Trust.
Subsequent Transfer Instrument: Each Subsequent Transfer Instrument dated
as of a Subsequent Transfer Date executed by the Seller and the Issuer
substantially in the form of Exhibit 2 to the Home Equity Loan Purchase
Agreement, by which Subsequent Mortgage Loans are sold to the Trust.
Subservicer: Any Person with whom the Servicer has entered into a
Subservicing Agreement as a Subservicer.
Subservicing Account: An Eligible Account established or maintained by a
Subservicer as provided for in Section 3.06(e) of the Servicing Agreement.
Subservicing Agreement: The written contract between the Servicer and any
Subservicer relating to servicing and administration of certain Mortgage Loans
as provided in Section 3.02 of the Servicing Agreement.
Subservicing Fee: With respect to each Mortgage Loan and any Payment Date,
the portion of the Servicing Fee paid to a Subservicer.
Substitution Adjustment Amount: With respect to any Eligible Substitute
Mortgage Loan, the amount as defined in Section 2.03 of the Servicing Agreement.
Superior Lien: With respect to any Mortgage Loan which is secured by a
second lien, the mortgage loan(s) having a superior priority on the related
Mortgaged Property.
Target Percentage: ____%.
Transferor: NovaStar Assets.
-27-
<PAGE>
Treasury Regulations: Regulations, including proposed or temporary
Regulations, promulgated under the Code. References herein to specific
provisions of proposed or temporary regulations shall include analogous
provisions of final Treasury Regulations or other successor Treasury
Regulations.
Trust: The NovaStar Mortgage Funding Trust, Series ______ to be created
pursuant to the Trust Agreement.
Trust Agreement: The Trust Agreement, dated as of _____________, as amended
and restated by the Amended and Restated Trust Agreement, dated as of
______________, between the Owner Trustee and the Company.
Trust Estate: The meaning specified in the Granting Clause of the
Indenture.
Trust Indenture Act or TIA: The Trust Indenture Act of 1939, as amended
from time to time, as in effect on any relevant date.
UCC: The Uniform Commercial Code, as amended from time to time, as in
effect in any specified jurisdiction.
Underwriter: _________________________________________.
Underwriting Agreement: means the Underwriting Agreement among the
Underwriter and the Company with respect to the offer and sale of the Bonds, as
the same may be amended from time to time.
Underwriting Guidelines: The underwriting guidelines of the Seller, as set
forth in the Prospectus under the heading "Description of the Home Equity Pool."
-28-
<PAGE>
EXHIBIT 5.1
[LETTERHEAD OF STINSON, MAG & FIZZELL, P.C.]
January 12, 1998
NovaStar Mortgage Funding Corporation
1900 West 47th Place, Suite 205
Westwood, KS 66205
Re: NovaStar Mortgage Funding Corporation
Collateral Mortgage Obligation Bonds
Registration Statement On Form S-3
Ladies and Gentlemen:
We have acted as special counsel to NovaStar Mortgage Funding
Corporation, a Delaware corporation (the "Registrant") in connection with the
registration under the Securities Act of 1933, as amended (the "Act"), of
Collateralized Mortgage Obligation Bonds (the "Bonds"), and the related
preparation and filing of a Registration Statement on Form S-3 (the
"Registration Statement"). The Bonds are issuable in series under separate
indentures (each such agreement, an "Indenture"), between an issuer and an
indenture trustee, each to be identified in the prospectus supplement for such
series of Bonds. Each Indenture will be substantially in the respective form
filed as an Exhibit to the Registration Statement.
In connection with rendering this opinion letter, we have examined the
form of the Indenture contained as an Exhibit to the Registration Statement, the
Registration Statement and such records and other documents as we have deemed
necessary. As to matters of fact, we have examined and relied upon
representations or certifications of officers of the Registrant and public
officials. We have assumed the authenticity of all documents submitted to us as
originals, the genuineness of all signatures, the legal capacity of natural
persons and the conformity to the originals of all documents. We have assumed
that all parties, other than the Registrant, had the corporate power and
authority to enter into and perform all obligations thereunder, and, as to such
parties, we also have assumed the due authorization by all requisite corporate
action and the enforceability of such documents.
In rendering this opinion letter, we express no opinion as to the laws
of any jurisdiction other than the laws of the State of Missouri and the
corporate laws of the State of Delaware, nor do we express any opinion, either
implicitly or otherwise, on any issue not expressly addressed below. In
rendering this opinion letter, we have not passed upon and do not pass upon the
application of "doing business" or the securities laws of any jurisdiction. This
opinion letter is further subject to the qualification that enforceability may
be limited by (i) bankruptcy, insolvency, liquidation, receivership, moratorium,
reorganization or other laws
<PAGE>
NovaStar Mortgage Funding Corporation
January 12, 1998
Page 2
affecting the enforcement of the rights of creditors generally and (ii) general
principles of equity, whether enforcement is sought in a proceeding in equity or
at law.
Based on the foregoing, we are of the opinion that:
1. When an Indenture for a series of Bonds has been duly authorized
by all necessary action and duly executed and delivered by the parties thereto,
such Indenture will be a legal and valid obligation of the applicable issuer.
2. When an Indenture for a series of Bonds has been duly authorized
by all necessary action and duly executed and delivered by the parties thereto,
and when the Bonds of such series have been duly executed and authenticated in
accordance with the provisions of that Indenture, and issued and sold as
contemplated in the Registration Statement and the prospectus and prospectus
supplement delivered in connection therewith, such Bonds will be legally and
validly issued and outstanding, fully paid and non-assessable, and will be
binding obligations of the applicable issuer, and the holders of such Bonds will
be entitled to the benefits of that Indenture.
3. The description of federal income tax consequences appearing
under the heading "Certain Federal Income Tax Consequences" in the prospectus
relating to the Bonds and contained in the Registration Statement, while not
purporting to discuss all possible federal income tax consequences of an
investment in the Bonds, is accurate with respect to those tax consequences
which are discussed.
We hereby consent to the filing of this opinion letter as an Exhibit
to the Registration Statement, and to the use of our name in the prospectus and
prospectus supplement relating to the Bonds included in the Registration
Statement under the heading "Legal Matters", and in the prospectus relating to
the Bonds included in the Registration Statement under the heading "Certain
Federal Income Tax Consequences", without admitting that we are "experts" within
the meaning of the Act, and the rules and regulations thereunder, with respect
to any part of the Registration Statement, including this Exhibit.
Very truly yours,
STINSON, MAG & FIZZELL, P.C.
By: /s/ Michael W. Lochmann
Michael W. Lochmann
MWL/lkf
