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Registration No.
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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Form S-3
REGISTRATION STATEMENT
Under
The Securities Act of 1933
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NOVASTAR MORTGAGE FUNDING CORPORATION
(Exact Name of Registrant as Specified in its Charter)
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Delaware 48-1195807
(State of Incorporation) (I.R.S. Employer
Identification Number)
1901 West 47th Place, Suite 105
Westwood, KS 66205
(913) 514-3200
(Address and telephone number of Registrant's principal executive offices)
Copy to:
Scott F. Hartman Michael W. Lochmann, Esq.
NovaStar Mortgage Funding Corporation Stinson, Mag & Fizzell, P.C.
1901 West 47th Place, Suite 105 1201 Walnut, Suite 2800
Westwood, KS 66205 Kansas City, MO 64106
Phone: (913) 514-3200 Phone: (816) 691-3208
Fax: (913) 514-3515 Fax: (816) 691-3495
(Name, address and telephone number of agent for service)
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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
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<TABLE>
<CAPTION>
Proposed Proposed
Amount maximum maximum Amount of
Title of each class of to be offering price aggregate registration
securities being registered registered(2) per unit (1) offering price fee(2)
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<S> <C> <C> <C> <C>
NovaStar Home Equity Loan Asset-Backed
Securities, issuable in series................. $635,000,000 100% $635,000,000 $167,640
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</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee.
(2) The registrant previously registered $1,250,000,000 in securities pursuant
to a shelf registration on Form S-3 (Registration No. 333-44099). The
registrant issued $615,000,000 of these securities in 1998. The registrant
is rolling over the remaining $635,000,000 in securities to this
registration statement and terminating the previous shelf registration
(Registration No. 333-44099). Because the registrant has already paid the
registration fee with respect to the $635,000,000 in securities being
registered pursuant to this registration statement, no additional fee is
due.
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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.
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EXPLANATORY NOTES
The registrant previously registered $1,250,000,000 in securities pursuant
to a shelf registration on Form S-3 (Registration No. 333-44099). The
registrant issued $300,000,000 on April 30, 1998 and $315,000,000 on August 9,
1998 of the securities registered pursuant to such shelf registration. The
registrant is rolling over the remaining $635,000,000 in securities to this
registration statement and terminating the previous shelf registration
(Registration No. 333-44099).
This registration statement includes (i) a base prospectus for the NovaStar
Home Equity Loan Asset-Backed Securities, (ii) an illustrative form of
prospectus supplement for use in an offering of NovaStar Home Equity Loan
Asset-Backed Bonds and (iii) an illustrative form of prospectus supplement for
use in an offering of NovaStar Home Equity Loan Asset-Backed Certificates.
<PAGE>
PROSPECTUS
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NovaStar Mortgage Funding Corporation
NovaStar Home Equity Loan
Asset-Backed Securities
Issuable in Series
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The Securities
You should read the section entitled . will be issued from time to time
"Risk Factors" starting on page of in series,
this prospectus before making a
decision to invest in the
securities.
. will consist of either asset-
backed bonds or asset-backed
certificates,
Retain this prospectus for future
reference. This prospectus may not . will be issued by a trust or other
be used to consummate sales of special purpose entity established
securities unless accompanied by the by the company,
prospectus supplement relating to
the offering of the securities.
. will be backed by one or more
pools of mortgage loans or
manufactured housing contracts
held by the issuer, and
. may have one or more forms of
credit enhancement, such as
insurance policies or reserve
funds.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
accuracy or adequacy of this prospectus. Any representation to the contrary is
a criminal offense.
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NovaStar Mortgage Funding Corporation
The date of this prospectus is , 2001
<PAGE>
TABLE OF CONTENTS
<TABLE>
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Page
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<S> <C>
SUMMARY OF PROSPECTUS...................................................... 4
RISK FACTORS............................................................... 7
THE COMPANY................................................................ 9
THE SELLER AND SERVICER.................................................... 9
USE OF PROCEEDS............................................................ 10
DESCRIPTION OF THE SECURITIES.............................................. 10
Payments of Interest..................................................... 10
Payments of Principal.................................................... 11
Final Scheduled Distribution Date........................................ 11
Optional Redemption, Purchase or Termination............................. 11
Mandatory Termination; Auction Sale...................................... 11
Defeasance............................................................... 12
Weighted Average Life of the Securities.................................. 12
Form of Securities....................................................... 13
THE TRUST FUNDS............................................................ 14
The Mortgage Loans....................................................... 15
The Contracts............................................................ 18
Private Securities....................................................... 19
Accounts................................................................. 20
Collection and Distribution Accounts..................................... 21
Pre-Funding Account...................................................... 21
CREDIT ENHANCEMENT......................................................... 22
Subordinate Securities................................................... 22
Insurance................................................................ 22
Reserve Funds............................................................ 23
Minimum Principal Payment Agreement...................................... 23
Deposit Agreement........................................................ 23
Derivative Contracts..................................................... 23
Participation Agreement.................................................. 24
SERVICING.................................................................. 24
Collection Procedures; Escrow Accounts................................... 24
Deposits To And Withdrawals From The Collection Account.................. 24
Advances And Limitations Thereon......................................... 25
Maintenance Of Hazard Insurance Policies................................. 26
Realization Upon Defaulted Mortgage Loans................................ 27
Enforcement Of Due-On-Sale Clauses....................................... 27
Servicing Compensation And Payment Of Expenses........................... 28
Evidence As To Compliance................................................ 28
Matters Regarding The Servicer........................................... 28
THE AGREEMENTS............................................................. 29
Sale and Assignment Of Primary Assets.................................... 30
Reports To Holders....................................................... 31
Events Of Default; Rights Upon Event Of Default.......................... 32
The Trustee.............................................................. 33
</TABLE>
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<TABLE>
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Page
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<S> <C>
Duties Of The Trustee................................................... 34
Resignation Of Trustee.................................................. 34
Amendment Of Agreement.................................................. 34
Voting Rights........................................................... 34
List Of Holders......................................................... 34
REMIC Administrator..................................................... 34
Termination............................................................. 35
LEGAL ASPECTS OF LOANS.................................................... 35
Mortgage Loans.......................................................... 35
Contracts............................................................... 40
Security Interests In The Manufactured Homes............................ 41
Enforcement Of Security Interests In Manufactured Homes................. 42
Consumer Protection Laws................................................ 43
Transfers Of Manufactured Homes; Enforceability Of "Due-On-Sale"
Clauses................................................................ 43
Applicability Of Usury Laws............................................. 43
Soldiers' And Sailors' Civil Relief Act Of 1940......................... 43
MATERIAL FEDERAL INCOME TAX CONSEQUENCES.................................. 44
Grantor Trust Securities................................................ 44
REMIC Securities........................................................ 46
Debt Securities......................................................... 52
Partnership Interests................................................... 52
Discount And Premium.................................................... 54
Backup Withholding...................................................... 57
Foreign Investors....................................................... 57
STATE TAX CONSIDERATIONS.................................................. 58
ERISA CONSIDERATIONS...................................................... 59
LEGAL INVESTMENT.......................................................... 61
AVAILABLE INFORMATION..................................................... 61
INCORPORATION OF DOCUMENTS BY REFERENCE................................... 62
PLAN OF DISTRIBUTION...................................................... 62
LEGAL MATTERS............................................................. 62
FINANCIAL INFORMATION..................................................... 62
</TABLE>
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SUMMARY OF PROSPECTUS
This summary highlights selected information from this prospectus and does
not contain all of the information that you need to consider in making your
investment decision. To understand all of the terms of the offering of your
series of securities, read carefully this entire prospectus and the
accompanying prospectus supplement.
The Company
The company, NovaStar Mortgage Funding Corporation, will establish the
issuers, act as a conduit for the assets that will secure the securities and
cause the issuers to issue the securities. The company is a wholly-owned
subsidiary of the seller. The principal executive address of the company is
located at 1901 West 47th Place, Suite 105, Westwood, Kansas 66205, telephone
no. (913) 514-3200.
The Seller and Servicer
NovaStar Mortgage, Inc. will act as the seller, meaning that it will be the
primary source of the loans that will secure each series of securities that are
issued. NovaStar Mortgage, Inc. will also act as the servicer of the loans.
Securities Offered
Each class of securities will consist of one or more classes of ownership
securities or debt securities. Ownership securities represent beneficial
ownership interests in the assets held by the issuer. Ownership securities will
be issued in the form of certificates. Debt securities represent indebtedness
secured by the assets of the issuer. Debt securities will be issued in the form
of bonds.
Each series of securities will be issued in one or more classes, one or more
of which may be classes of:
. fixed-rate or adjustable-rate securities,
. compound-interest or accrual securities,
. planned-amortization-class securities,
. targeted-amortization securities,
. non-accelerating securities,
. zero-coupon securities,
. principal-only securities,
. interest-only securities,
. prepayment-only securities,
. participating securities,
. senior securities, or
. subordinated securities.
The interest rate, principal balance, notional balance, minimum denomination
and form of each class of securities will be described in the accompanying
prospectus supplement. The securities will be available in either fully
registered or book-entry form, as described in the accompanying prospectus
supplement.
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The Loans
Each issuer will hold one or more pools of loans, which may include:
. mortgage loans or manufactured housing contracts secured by one-to-four
family residential properties, condominium units and/or manufactured
homes,
. mortgage loans secured by security interests in shares issued by private,
non-profit cooperative housing corporations,
. mortgage loans secured by junior liens on the mortgaged properties,
. mortgage loans with loan-to-value ratios in excess of the appraised value
of the mortgaged property,
. home improvement retail installment contracts, and
. private securities backed by mortgage loans or contracts.
The company will direct the issuer to acquire the loans from the company.
The company will acquire the loans from its parent, NovaStar Mortgage.
Distributions of the Securities
Owners of securities will be entitled to receive payments in the manner
described in the accompanying prospectus supplement, which will specify:
. whether distributions will be made monthly, quarterly, semi-annually or
at other intervals and dates,
. the amount allocable to payments of principal and interest on any
distribution date, and
. whether distributions will be made on a pro rata, random lot or other
basis.
Credit Enhancement
A series of securities, or classes within a series, may have the benefit of
one or more types of credit enhancement, including:
. the use of excess interest to cover losses and to create over-
collateralization,
. the subordination of distributions on the lower classes to the
distributions on more senior classes,
. the allocation of losses on the underlying loans to the lower classes,
. the use of cross support, reserve funds, mortgage insurance policies,
financial guarantee insurance policies, guarantees, letters of credit and
interest rate cap agreements or other derivative contracts, and
. the right to receive cash flows from the liquidation of a separate pool
of delinquent loans or foreclosed properties.
The protection against losses afforded by any credit enhancement will be
limited in the manner described in the accompanying prospectus supplement.
Redemption or Repurchase of Securities
One or more classes of securities may be redeemed or repurchased in whole or
in part at the times described in the prospectus supplement and at a price at
least equal to the amount necessary to pay all principal and interest on the
redeemed classes.
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Legal Investment
The accompanying prospectus supplement will state whether or not the
securities will constitute "mortgage related securities" under the Secondary
Mortgage Market Enhancement Act of 1984.
ERISA Limitations
Employee benefit plans should carefully review with their own legal advisors
whether the purchase or holding of the securities could give rise to a
transaction prohibited or otherwise impermissible under ERISA or the Internal
Revenue Code.
Federal Income Tax Consequences
Each class of securities offered by this prospectus and the accompanying
prospectus supplement will constitute one of the following for federal income
tax purposes:
. interests in a trust treated as a grantor trust,
. ""regular interests" or "residual interests" in a trust treated as one or
more "real estate mortgage investment conduits",
. debt issued by the issuer, or
. interests in an issuer which is treated as a partnership.
Ratings
The securities offered by this prospectus and the accompanying prospectus
supplement will be rated at the time of issuance in one of the four highest
rating categories by at least one statistical rating organization.
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RISK FACTORS
You should consider the following risk factors prior to any purchase of any
class of securities. You should also consider the information under the caption
"Risk Factors" in the accompanying prospectus supplement.
Your investment in any security may be an illiquid investment; you should be
prepared to hold your security to maturity.
A secondary market for these securities is unlikely to develop. If it
does develop, it may not provide you with sufficient liquidity of
investment or continue for the life of these securities. The underwriters
may establish a secondary market in the securities, although no underwriter
will be obligated to do so. We neither expect to list the securities on any
securities exchange nor to have the securities quoted in the automated
quotation system of a registered securities association.
The assets of the trust fund will be limited and, if the assets become
insufficient to service the securities, losses may result.
The securities will be payable solely from the assets of the trust fund.
Neither the company nor any other person will be obligated to make payments
to the security holders, except to the extent of any credit enhancement as
specifically provided in the prospectus supplement. Consequently, security
holders must rely solely upon the assets of the trust fund for the payment
of principal and interest on the securities.
As a result of prepayment on the loans or early redemption of the securities,
you could be fully paid significantly earlier than would otherwise be the case,
which may adversely affect the yield on the maturity on your securities.
The yield to maturity of the securities may be adversely affected by a
higher or lower than anticipated rate of prepayments on the loans. The
yield to maturity on interest-only securities purchased at premiums or
discounts to par will be extremely sensitive to the rate of prepayments on
the loans.
The underlying loans may be prepaid in full or in part at any time,
although prepayment may require the borrower to pay a prepayment penalty or
premium. These penalties may or may not be property of the issuer. The
accompanying prospectus supplement will state whether or not such penalties
will be available to fund distributions owing to you. We cannot predict the
rate of prepayments of the loans, which is influenced by a wide variety of
economic, social and other factors, including prevailing mortgage market
interest rates, the availability of alternative financing, local and
regional economic conditions and homeowner mobility. Therefore, we can give
no assurance as to the level of prepayments that a trust fund will
experience.
Prepayments may result from mandatory prepayments relating to unused
monies held in pre-funding accounts, voluntary early payments by borrowers,
including payments in connection with refinancings, sales of mortgaged
properties subject to "due-on-sale" provisions and liquidations due to
default, as well as the receipt of proceeds from insurance policies. In
addition, repurchases or purchases from the issuer of loans or the payment
of substitution adjustments will have the same effect on the securities as
a prepayment of the loans.
One or more classes of securities of any series may be subject to
optional or mandatory redemption or auction sale in whole or in part, on or
after a specified date, or on or after the time when the aggregate
outstanding principal amount of the underlying loans or the securities is
less than a specified amount. You will bear the risk of reinvesting
unscheduled distributions resulting from redemption.
Any of the foregoing principal prepayments may adversely affect the
yield to maturity of the prepaid securities. Since prevailing interest
rates are subject to fluctuation, there can be no assurance that you will
be able to reinvest these prepayments at a yield equaling or exceeding the
yield on your securities.
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Credit enhancement, even if provided, will in any event be limited in both
amount and scope of coverage, and may not be sufficient to cover all losses or
risks on your investment.
Credit enhancement may be provided in limited amounts to cover some, but
not all, types of losses on the underlying loans and, in most cases, will
reduce over time in accordance with a schedule or formula. Furthermore,
credit enhancement may provide only very limited coverage as to some types
of losses, and may provide no coverage as to other types of losses.
Generally, credit enhancement does not directly or indirectly guarantee to
the investors any specified rate of prepayments, which is one of the
principal risks of your investment. The amount and types of coverage, the
identification of any entity providing the coverage, the terms of any
subordination and any other information will be described in the
accompanying prospectus supplement.
Property values may decline, leading to higher losses on the loans.
An investment in the securities, which are backed by residential real
estate loans, may be affected by a decline in real estate values. A decline
could be caused by a general decline in the real estate market, the
borrower's failure to maintain the property or a natural disaster, among
other things. If property values were to decline, the rates of
delinquencies and foreclosures may rise, thereby increasing the likelihood
of loss. If these losses are not covered by any credit enhancement, you
will bear all risk of these losses 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 loans.
Foreclosure on mortgaged properties involves delays and expense and could cause
losses on the loans.
Even if the mortgaged properties provide adequate security for the
loans, substantial delays could be encountered in connection with the
foreclosure of defaulted loans, and corresponding delays in the receipt of
the foreclosure proceeds could occur. Foreclosures are regulated by state
statutes, rules and judicial decisions and are subject to many of the
delays and expenses of other lawsuits, sometimes requiring several years to
complete. The servicer will be entitled to reimburse itself for any
expenses it has paid in attempting to recover amounts due on the liquidated
loans, including payments to prior lienholders, accrued fees of the
servicer, legal fees and costs of legal action, real estate taxes, and
maintenance and preservation expenses, all of which will reduce the amount
of the net recovery by the trust.
Environmental conditions on the mortgaged property may give rise to
liabilities.
Real property pledged as security to a lender may be subject to
environmental risks which could cause losses on your securities. Under the
laws of some states, contamination of a mortgaged property may give rise to
a lien on the mortgaged property to assure the costs of clean-up. In
several states, this type of lien has priority over the lien of an existing
mortgage or owner's interest against the property. In addition, under the
laws of some states and under CERCLA, a lender may be liable, as an "owner"
or "operator," for costs of addressing releases or threatened releases of
hazardous substances 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 or not the environmental damage or
threat was caused by a prior owner. A lender also will increase its risk of
environmental liability upon the foreclosure of the mortgaged property,
since the lender may then become the legal owner of the property.
State and federal credit protection laws may limit collection of principal and
interest on the loans.
Residential mortgage lending is highly regulated at both the federal and
state levels and violations of these laws, policies and principles may
limit the ability of the servicer to collect all or part of the amounts due
on the loans, may entitle the borrower to a refund of amounts previously
paid and, in addition, could subject the issuer, as the owner of the loan,
to damages and administrative enforcement. The occurrence of any of the
foregoing could cause losses on your securities.
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The Soldiers' and Sailors' Civil Relief Act may limit the ability to collect on
the loans.
The terms of the Soldiers' and Sailors' Civil Relief Act of 1940, or
similar state legislation, benefit mortgagors who enter military service
after the origination of his or her loan, including a mortgagor who is a
member of the National Guard or is in reserve status at the time of the
origination of the loan and is later called to active duty. These
mortgagors may not be charged interest, including fees and charges, above
an annual rate of 6% during the period of the mortgagor's active duty
status, unless a court orders otherwise upon application of the lender. The
implementation of the Soldiers' and Sailors' Civil Relief Act could have an
adverse effect, for an indeterminate period of time, on the ability of the
servicer to collect full amounts of interest on these loans.
In addition, the Soldiers' and Sailors' Civil Relief Act imposes
limitations that would impair the ability of the servicer to foreclose on
loans during the mortgagor's period of active duty status. Thus, in the
event that these loans go into default, there may be delays and losses
occasioned by the inability to realize upon the mortgaged property in a
timely fashion.
Ratings are not recommendations; the ratings assigned to your securities may be
lowered or withdrawn.
Each series of securities will be rated in one of the four highest
rating categories by one or more rating agencies. Any rating would be based
on, among other things, the adequacy of the value of the assets and any
credit enhancement. A rating is not a recommendation to purchase, hold or
sell securities, because it does not address market price or suitability
for a particular investor.
The ratings assigned to the securities will be based on, among other
things, the adequacy of the value of the trust fund and any credit
enhancement. Any rating which is assigned may not remain in effect for any
given period of time or may be lowered or withdrawn entirely by the rating
agencies if, in their judgment, circumstances in the future so warrant.
Ratings may also be lowered or withdrawn because of an adverse change in
the financial or other condition of a provider of credit enhancement or a
change in the rating of a credit enhancement provider's long term debt.
ERISA may restrict the acquisition, ownership and disposition of securities.
Generally, ERISA applies to investments made by benefit plans and
transactions involving the assets of benefit plans. Due to the complexity
of regulations that govern benefit plans, prospective investors that are
subject to ERISA are urged to consult their own counsel regarding
consequences under ERISA of acquisition, ownership and disposition of
securities.
THE COMPANY
The company, NovaStar Mortgage Funding Corporation, was incorporated in the
State of Delaware on January 7, 1998. The company is a wholly-owned subsidiary
of NovaStar Mortgage, Inc., a Virginia corporation with its headquarters in
Westwood, Kansas. The company's principal executive offices are located at
NovaStar Mortgage Funding Corporation, 1901 West 47th Place, Suite 105,
Westwood, Kansas 66205. Its telephone number is (913) 514-3200.
THE SELLER AND SERVICER
The seller, NovaStar Mortgage, Inc., 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. The seller originates subprime
residential mortgage loans through a network of unaffiliated wholesale loan
brokers. The seller utilizes a network of approximately 2,500 wholesale loan
brokers in 48 different states. In addition, the seller services loans
nationwide, and is licensed to do business as a foreign corporation in 49
states. The seller's principal executive offices are located at 1901 West 47th
Place, Suite 105, Westwood, Kansas 66205. Its
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telephone number is (913) 514-3200. The principal office for the seller's
mortgage lending operations are located in Irvine, California. The seller is an
approved HUD lender. The seller will also act as the servicer of the loans.
USE OF PROCEEDS
The net proceeds from the sale of each series of securities will be applied
to one or more of the following purposes: to acquire the primary assets, to
repay indebtedness which has been incurred to obtain funds to acquire the
primary assets, to establish any reserve funds described in the prospectus
supplement and to pay costs of structuring and issuing the securities,
including the costs of obtaining credit enhancement, if any. The acquisition of
the primary assets for a series may be effected by an exchange of securities
with the seller of the primary assets. The seller may agree to reimburse the
company for fees and expenses of the company incurred in connection with the
offering of the securities.
DESCRIPTION OF THE SECURITIES
The company may offer from time to time the securities, which may be asset-
backed bonds or certificates, in one or more series.
The certificates of a series will evidence undivided interests in assets
deposited into a trust fund. The bonds of a series will represent indebtedness
secured by the trust fund. A series may consist of both bonds and certificates.
Each series of securities will consist of one or more classes of securities,
one or more of which may be fixed-rate securities, adjustable-rate securities,
compound-interest securities, variable interest securities, planned-
amortization-class securities, targeted-amortization securities, non-
accelerating securities, zero coupon securities, principal-only securities,
interest-only securities, prepayment-only securities or participating
securities. A series may also include one or more classes of subordinate
securities.
If a series includes multiple classes, the amount, percentage and timing of
distributions of principal, interest or both to each class may vary and one or
more classes' right to distributions of principal, interest or both may be
subordinated to other classes. The primary assets and other assets comprising
the trust fund may be divided into one or more groups and one or more classes
may evidence beneficial ownership of or be secured by the corresponding group.
The trustee, or a paying agent on its behalf, will make payments of
principal of and interest on the securities. Interest on and principal of the
securities of a series will be payable on each distribution date at the times,
at the rates, in the amounts and in the order of priority described in the
prospectus supplement. Payments will be made either by check mailed to holders
of record at their addresses appearing on the security register, or by wire
transfer, as described in the prospectus supplement. Final payments of
principal in retirement of each security will be made only upon presentation
and surrender of the security at the office of the trustee specified in the
prospectus supplement. The trustee will mail notice of the final payment on a
security to the holder of the security before the distribution date on which
the trustee expects to make the final principal payment.
Payments of Interest
The interest-bearing securities of each class will bear interest from the
date and at the rate per annum specified, or calculated in the method described
in, the prospectus supplement. The rate of interest on securities of a series
may be variable or may change with changes in the annual percentage rates of
the loans and/or as prepayments occur on the loans. Principal-only securities
may not be entitled to receive any interest distributions or may be entitled to
receive only nominal interest distributions.
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Interest payable on the securities on a distribution date will include all
interest accrued during the period specified in the prospectus supplement. In
the event interest accrues during the calendar month preceding a distribution
date, the effective yield to holders will be reduced from the yield that would
otherwise be obtainable if interest payable on the securities were to accrue
through the day immediately preceding the distribution date.
Payments of Principal
On each distribution date for a series, principal payments will be made to
the holders of the securities of the series on which principal is then payable,
as described in the prospectus supplement. Principal payments will be allocated
among the classes of a series in the manner, at the times and in the priority
described in the prospectus supplement.
The rate of principal payments of each class may depend principally upon the
rate of payment, including prepayments, on the primary assets. A rate of
prepayment lower or higher than anticipated will affect the yield on the
securities of a series in the manner described under "--Weighted Average Life
of the Securities." Under limited circumstances, a series of securities may be
subject to termination or redemption. See "--Optional Redemption, Purchase or
Termination" below.
Final Scheduled Distribution Date
The final scheduled distribution date on each class of securities is the
date no later than which the principal balance is expected to be reduced to
zero, calculated on the basis of the assumptions described in the prospectus
supplement. The final scheduled distribution date will be specified in the
prospectus supplement. Since payments on the primary assets will be used to
make distributions in reduction of the outstanding principal amount of the
securities, it is likely that the actual final distribution date of any class
will occur earlier, and may occur substantially earlier, than its final
scheduled distribution date.
Furthermore, as a result of delinquencies, defaults and liquidations of the
primary assets in the trust fund, the actual final distribution date of any
certificate may occur later than its final scheduled distribution date. No
assurance can be given as to the actual prepayment experience of a series. See
"--Weighted Average Life of the Securities" below.
Optional Redemption, Purchase or Termination
One or more classes of securities of any series may be subject to optional
redemption or repurchase, in whole or in part, on any distribution date by the
seller, servicer or credit enhancer or an affiliate thereof. Redemption or
repurchase may occur on or after a specified date, or on or after the time as
the aggregate outstanding principal amount of the securities or primary assets,
is less than a percentage not to exceed 25% of the initial aggregate principal
balance of the securities or primary assets. The redemption, purchase or
repurchase price may not be less than an amount necessary to pay all principal
and interest on the securities outstanding. If we have made a REMIC election,
the trustee shall receive a satisfactory opinion of counsel that the optional
redemption, purchase or termination will be conducted so as to constitute a
"qualified liquidation" under section 860F of the Internal Revenue Code. The
risk of reinvesting unscheduled distributions resulting from prepayments of the
securities will be borne by the holders. Neither the trust nor the holders will
have any continuing liability under an optional redemption or repurchase.
Mandatory Termination; Auction Sale
The trustee, the servicer or the seller may be required to effect early
retirement of a series of securities by auction sale. Within a period following
the failure of the holder of the optional termination right to exercise its
right, the required party shall solicit bids for the purchase of all primary
assets remaining in the trust. In the
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event that satisfactory bids are received, the net sale proceeds will be
distributed to holders in the same order of priority as collections on the
loans. A satisfactory bid will not be less than an amount necessary to pay all
principal and interest on the bonds. If satisfactory bids are not received, the
required party shall decline to sell the loans and shall not be under any
obligation to solicit any further bids or otherwise negotiate any further sale
of the loans. The sale and consequent termination of the trust must constitute
a "qualified liquidation" of each REMIC.
Defeasance
The indenture may provide that a trust fund may be discharged through
defeasance. In a defeasance, a party will deposit with the trustee money and/or
direct obligations of or obligations guaranteed by the United States of America
which will provide money in an amount sufficient to pay each installment of
interest and, on the final scheduled distribution date, principal on the bonds.
In the event of any defeasance and discharge of bonds, bond holders would be
able to look only to the deposited money and/or direct obligations for payment
of principal and interest, if any, on their bonds until maturity.
Weighted Average Life of the Securities
"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
the security will be repaid to the investor. The weighted average life of the
securities of a class will be influenced by the rate at which the amount
financed under primary assets included in the trust fund for a series is paid.
Repayment may be in the form of scheduled amortization or prepayments.
Prepayments on loans and other receivables can be measured relative to a
prepayment standard or model. The prospectus supplement will describe the
prepayment standard or model, if any, used and may contain tables setting forth
the projected weighted average life of each class of securities and the
percentage of the original principal amount of each class of securities that
would be outstanding on specified distribution dates based on the assumptions
stated in the prospectus supplement, including assumptions that prepayments on
the mortgage loans or underlying loans relating to the private securities, as
applicable, included in the trust fund are made at rates corresponding to
various percentages of the prepayment standard or model specified in the
prospectus supplement.
There is, however, no assurance that prepayment of the loans will conform to
any level of any prepayment standard or model specified in the prospectus
supplement. The rate of principal prepayments on pools of loans may be
influenced by a variety of factors, including job related factors such as
transfers, layoffs or promotions and personal factors such as divorce,
disability or prolonged illness. Economic conditions, either generally or
within a particular geographic area or industry, also may affect the rate of
principal prepayments. Demographic and social factors may influence the rate of
principal prepayments in that some borrowers have greater financial flexibility
to move or refinance than do other borrowers. The deductibility of mortgage
interest payments, servicing decisions and other factors also affect the rate
of principal prepayments. As a result, there can be no assurance as to the rate
or timing of principal prepayments of the mortgage loans or underlying loans
either from time to time or over the lives of the loans.
The rate of prepayments of conventional housing loans and other receivables
has fluctuated significantly in recent years. In general, however, if
prevailing interest rates fall significantly below the interest rates on the
loans, the loans are likely to prepay at rates higher than if prevailing
interest rates remain at or above the interest rates borne by the loans. In
this regard, it should be noted that the loans may have different interest
rates. In addition, the weighted average life of the securities may be affected
by the varying maturities of the loans. If any loans have actual terms-to-
stated maturity of less than those assumed in calculating the final scheduled
distribution date of the securities, one or more classes of the series may be
fully paid prior to their respective final scheduled distribution date, even in
the absence of prepayments.
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Form of Securities
The securities in each series will either be issued as physical certificates
or in book-entry form. Physical certificates in fully registered form will be
transferable and exchangeable at the corporate trust office of the registrar of
the securities named in the prospectus supplement. No service charge will be
made for any registration of exchange or transfer of securities, but the
trustee may require payment of a sum sufficient to cover any tax or other
government charge.
Securities issued in book-entry form will be registered in the name of Cede
& Co., the nominee of the Depository Trust Company. 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 and a "clearing agency" registered under the provisions
of section 17A of the Securities Exchange Act of 1934. DTC was created to hold
securities for its participating organizations 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. Indirect access to the DTC
system also is available to brokers, dealers, banks and trust companies that
clear through or maintain a custodial relationship with a participant, either
directly or indirectly.
Under a book-entry format, holders that are not participants or indirect
participants but desire to purchase, sell or otherwise transfer ownership of
the securities registered in the name of Cede & Co., as nominee of DTC, may do
so only through participants and indirect participants. In addition, the
holders will receive all distributions of principal of and interest on the
securities from the trustee through DTC and its participants. Under a book-
entry format, holders will receive payments after each distribution date
because, while payments are required to be forwarded to Cede & Co., as nominee
for DTC, on each distribution date, DTC will forward payments to its
participants, which thereafter will be required to forward payments to indirect
participants or holders. Unless and until physical securities are issued, it is
anticipated that the only holder will be Cede & Co., as nominee of DTC, and
that the beneficial holders of securities will not be recognized by the trustee
as holders under the agreements. The beneficial holders will only be permitted
to exercise the rights of holders under the agreements indirectly through DTC
and its participants who in turn will exercise their rights through DTC.
DTC is required to make book-entry transfers of securities among
participants and is required to receive and transmit payments of principal of
and interest on the securities. Participants and indirect participants with
which holders have securities accounts similarly are required to make book-
entry transfers and receive and transmit payments on behalf of their respective
holders. Accordingly, although holders will not process securities, the rules
provide a mechanism by which holders will receive distributions and will be
able to transfer their interests.
Unless and until physical certificates are issued, holders who are not
participants may transfer ownership of securities only through participants by
instructing participants to transfer securities, by book-entry transfer,
through DTC for the account of the purchasers of securities, which account is
maintained with their respective participants. In accordance with DTC's normal
procedures, transfers of ownership of securities will be executed through DTC
and the accounts of the respective participants at DTC will be debited and
credited. Similarly, the respective participants will make debits or credits,
as the case may be, on their records on behalf of the selling and purchasing
holders.
Because DTC can only act on behalf of participants, who in turn act on
behalf of indirect participants and banks, the ability of a holder to pledge
securities to persons or entities that do not participate in the DTC system, or
otherwise act as the owner of the securities may be limited due to the lack of
a physical certificate.
DTC in general advises that it will take any action permitted to be taken by
a holder under an agreement only at the direction of one or more participants
to whose account with DTC the securities are credited.
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Additionally, DTC in general advises that it will take actions on behalf of
specified percentages of the holders only at the direction of participants
whose holdings include current principal amounts of outstanding securities that
satisfy the specified percentages. DTC may take conflicting actions with
respect to other current principal amounts of outstanding securities to the
extent that actions are taken on behalf of participants whose holdings include
current principal amounts of outstanding securities.
Any securities initially registered as physical certificates in the name of
Cede & Co., as nominee of DTC, will be issued in fully registered, certificated
form to holders or their nominees, rather than to DTC or its nominee only under
the events specified in the agreements and described in the prospectus
supplement. Upon the occurrence of any of the events specified in the
agreements and the prospectus supplement, DTC will be required to notify all
participants of the availability through DTC of physical certificates. Upon
surrender by DTC of the securities representing the securities and instruction
for re-registration, the trustee will take the securities in the form of
physical certificates, and thereafter the trustee will recognize the holders of
physical certificates as holders. Thereafter, payments of principal of and
interest on the securities will be made by the trustee directly to holders. The
final distribution of any security, whether physical certificates or securities
registered in the name of Cede & Co., however, will be made only upon
presentation and surrender of the securities on the final distribution date at
the office or agency specified in the notice of final payment to holders.
THE TRUST FUNDS
Each trust fund will include assets originated or acquired by the seller or
sellers specified in the prospectus supplement composed of:
. primary assets, which may include one or more pools of (1) mortgage loans
that are secured by mortgages or deeds of trust on residential
properties, (2) manufactured housing conditional sale contracts and
installment agreements that are secured by manufactured homes, and (3)
securities backed or secured by such loans,
. all monies due on the loans net, if and as provided in the prospectus
supplement, of amounts payable to the servicer of the loans,
. funds on deposit in any pre-funding and interest coverage accounts,
. reserve funds, letters of credit, surety bonds, insurance policies,
interest rate cap agreements or other derivative contracts or other forms
of credit support,
. any mortgaged property acquired by foreclosure or deed in lieu of
foreclosure or repossession,
. any manufactured home acquired by repossession and
.any amount on deposit in the collection account or distribution account.
The mortgage loans will be secured by mortgages and deeds of trust or other
similar security instruments creating a lien on a mortgaged property, which may
be subordinated to one or more senior liens on the mortgaged property. The
contracts will be secured by security interests taken in the manufactured
homes.
An immaterial portion of the assets that are included in a trust fund at the
closing date may deviate from the characteristics that are described in the
prospectus supplement.
The securities will be non-recourse obligations secured by or representing
ownership of the trust fund. Holders of a series of bonds may only proceed
against the collateral securing the bonds in the case of a default and may not
proceed against any assets of the company or the trust fund not pledged to
secure the bonds.
The primary assets securing a series will be acquired from the seller. The
loans relating to a series generally will be originated or purchased by the
seller in the ordinary course of business on a loan by loan
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basis. If the assets securing a series include a significant number of loans
that were purchased in bulk by the seller from a third party, then the
prospectus supplement will describe such purchase. Loans relating to a series
will be serviced by the servicer specified in the prospectus supplement, under
a servicing agreement between the trust fund and the servicer. NovaStar
Mortgage will generally be the servicer.
"Agreement" means the mortgage loan purchase agreement and, as to a series
of certificates, the pooling and servicing agreement, and as to a series of
bonds, the trust agreement, the indenture and the servicing agreement, as the
context requires.
A trust fund relating to a series of securities may be either a common law
trust or a business trust formed under the laws of the state specified in the
prospectus supplement.
Prior to the initial offering of a series of securities, the trust fund will
have no assets or liabilities. We do not expect any trust fund to engage in any
activities other than acquiring, managing and holding the trust assets and the
proceeds thereof, issuing securities and making distributions thereon. No trust
fund will have any significant source of capital other than its assets and any
credit enhancement.
Primary assets included in the trust fund for a series may consist of any
combination of mortgage loans, contracts and private securities. Some of the
loans may be delinquent, although the loans that are delinquent as of the cut-
off date will not exceed 10% of the initial aggregate principal balance of the
primary assets for that series; provided however, that for this purpose a loan
will not be deemed delinquent as of the cut-off date if it is subject to a
mortgage insurance policy and such loan has been delinquent for less than 90
days.
The following is a brief description of the loans we expect to be include as
trust property.
The Mortgage Loans
Mortgage Loans. The primary assets for a series may consist, in whole or in
part, of mortgage loans secured by mortgages on one- to four-family residential
housing, including condominium units and cooperative dwellings, which may be
subordinated to other mortgages on the same mortgaged property. The mortgage
loans may have fixed interest rates or adjustable interest rates and may
provide for other payment characteristics as described below and in the
prospectus supplement.
The mortgage loans will be "closed-end" loans, which do not permit the
borrower to obtain future advances. The mortgage loans will be secured by first
or junior liens on fee simple or leasehold interests in one- to four-family
residential properties. The principal and interest on the mortgage loans
included in the trust for a series of securities will be payable either on the
first day of each month or on different scheduled days throughout each month,
and the interest will be calculated either on a simple interest, actuarial
method or "Rule of 78s" method. When a full principal prepayment is paid on a
mortgage loan during a month, the mortgagor is generally charged interest only
on the days of the month actually elapsed up to the date of prepayment, at a
daily interest rate that is applied to the principal amount of the mortgage
loan so prepaid.
Payment Terms. The payment terms of the mortgage loans to be included in a
trust for a series will be described in the prospectus supplement and may
include any of the following features or combinations thereof or other features
described in the prospectus supplement:
. Interest may be payable at a fixed rate, a rate adjustable from time to
time in relation to an index, a rate that is fixed for a period of time
or under specified circumstances and is followed by an adjustable rate, a
rate that otherwise varies from time to time, or a rate that is
convertible from and adjustable rate to a fixed rate. Changes to an
adjustable rate may be subject to periodic limitations, maximum rates,
minimum rates or a combination of limitations. Accrued interest may be
deferred and added to the principal of a mortgage loan for periods and
under circumstances specified in the prospectus supplement. Mortgage
loans may provide for the payment of interest at a rate lower than the
specified
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loan rate for a period of time of for the life of the mortgage loan, and
the amount of any difference may be contributed from funds supplied by the
seller of the mortgaged property or another source.
. Principal may be payable on a level debt service basis to fully amortize
the mortgage loan over its term, may be calculated on the basis of an
assumed amortization schedule that is significantly longer than the
original term to maturity or on an interest rate that is different from
the loan rate or may not be amortized during all or a portion of the
original term. Payment of all or a substantial portion of the principal
may be due on maturity. Principal may include interest that has been
deferred and added to the principal balance of the mortgage loan.
. Monthly payments of principal and interest may be fixed for the life of
the mortgage loan, may increase over a specified period of time or may
change from period to period. Mortgage loans may include limits on
periodic increases or decreases in the amount of monthly payments and may
include maximum or minimum amounts of monthly payments.
. Prepayments of principal may be subject to a prepayment fee, which may be
fixed for the life of the mortgage loan or may decline over time, and may
be prohibited for the life of the mortgage loan or for specified periods.
Some mortgage loans may permit prepayments after expiration of the
applicable lockout period and may require the payment of a prepayment fee
in connection with any subsequent prepayment. Other mortgage loans may
permit prepayments without payment of a fee unless the prepayment occurs
during specified time periods. The mortgage loans may include "due on
sale" clauses which permit the mortgagee to demand payment of the entire
mortgage loan in connection with the sale or transfer of the mortgaged
property. Other mortgage loans may be assumable by persons meeting the
then applicable underwriting standards of the seller.
Amortization of the Mortgage Loans. The mortgage loans will provide for
payments that are allocated to principal and interest according to either the
actuarial method, the simple interest method or the "Rule of 78s" method. The
prospectus supplement will state whether any of the mortgage loans will
provide for deferred interest or negative amortization.
An actuarial mortgage loan provides for payments in level monthly
installments except, in the case of a balloon loan, the final payment,
consisting of interest equal to one-twelfth of the applicable loan rate times
the unpaid principal balance, with the remainder of the payment applied to
principal.
A simple interest mortgage loan provides for the amortization of the amount
financed under the mortgage loan over a series of equal monthly payments
except, in the case of a balloon loan, the final payment. Each monthly payment
consists of an installment of interest which is calculated on the basis of the
outstanding principal balance of the mortgage loan being multiplied by the
stated loan rate and further multiplied by a fraction, the numerator of which
is the number of days in the period elapsed since the preceding payment of
interest was made and the denominator of which is the number of days in the
annual period for which interest accrues on the mortgage loan. As payments are
received under a simple interest mortgage loan, the amount received is applied
first to interest accrued to the date of payment and the balance is applied to
reduce the unpaid principal balance. Accordingly, if a borrower pays a fixed
monthly installment on a simple interest mortgage loan before its scheduled
due date, the portion of the payment allocable to interest for the period
since the preceding payment was made will be less than it would have been had
the payment been made as scheduled, and the portion of the payment applied to
reduce the unpaid principal balance will be correspondingly greater. However,
the next succeeding payment will result in an allocation of a greater amount
to interest if the payment is made on its scheduled due date.
Conversely, if a borrower pays a fixed monthly installment after its
scheduled due date, the portion of the payment allocable to interest for the
period since the preceding payment was made will be greater than it would have
been had the payment been made as scheduled, and the remaining portion, if
any, of the payment applied to reduce the unpaid principal balance will be
correspondingly less. If each scheduled payment under a simple interest
mortgage loan is made on or prior to its scheduled due date, the principal
balance of the mortgage loan
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will amortize in the manner described in the preceding paragraph. However, if
the borrower consistently makes scheduled payments after the scheduled due
date, the mortgage loan will amortize more slowly than scheduled. If a simple
interest mortgage loan is prepaid, the borrower is required to pay interest
only to the date of prepayment.
Some mortgage loans may be insured under the Federal Housing Authority Title
I credit insurance program created under sections 1 and 2(a) of the National
Housing Act of 1934. Under the Title I program, the Federal Housing Authority
is authorized and empowered to insure qualified lending institutions against
losses on eligible loans. The Title I program operates as a coinsurance program
in which the Federal Housing Authority insures up to 90% of specified losses
incurred on an individual insured loan, including the unpaid principal balance
of the loan, but only to the extent of the insurance coverage available in the
lender's Federal Housing Authority insurance coverage reserve account. The
owner of the loan bears the uninsured loss on each loan.
The mortgaged properties will include single family property, which is one-
to-four family residential housing, including condominium units and cooperative
dwellings. The mortgaged properties may consist of detached individual
dwellings, individual condominiums, townhouses, duplexes, row houses,
individual units in planned unit developments and other attached dwelling
units. Each single family property will be located on land owned in fee simple
by the borrower or on land leased by the borrower for a term at least equal to
the term of the mortgage. Attached dwellings may include owner-occupied
structures where each borrower owns the land upon which the unit is built, with
the remaining adjacent land owned in common or dwelling units subject to a
proprietary lease or occupancy agreement in a cooperatively owned apartment
building.
The prospectus supplement will specify whether or not mortgages on
cooperative dwellings consist of a lien on the shares issued by the cooperative
dwelling and the proprietary lease or occupancy agreement relating to the
cooperative dwelling.
The aggregate principal balance of mortgage loans secured by mortgaged
properties that are owner-occupied will be disclosed in the prospectus
supplement. The sole basis for a representation that a given percentage of the
mortgage loans are secured by single family property that is owner-occupied
will be either (1) the making of a representation by the mortgagor at
origination of the mortgage loan either that the underlying mortgaged property
will be used by the mortgagor for a period of at least six months every year or
that the mortgagor intends to use the mortgaged property as a primary
residence, or (2) a finding that the address of the underlying mortgaged
property is the mortgagor's mailing address as reflected in the servicer's
records. To the extent specified in the prospectus supplement, the mortgaged
properties may include non-owner occupied investment properties and vacation
and second homes.
The initial combined loan-to-value ratio of a mortgage loan is computed in
the manner described in the prospectus supplement, taking into account the
amounts of any senior loans.
Additional Information. The selection criteria for the mortgage loans,
including loan-to-value ratios, original terms to maturity and delinquency
information, will be specified in the prospectus supplement.
The trust fund may include mortgage loans that do not amortize their entire
principal balance by their stated maturity in accordance with their terms and
require a balloon payment of the remaining principal balance at maturity. The
trust fund may include mortgage loans that do not have a specified stated
maturity.
The prospectus supplement for a series for which the primary assets include
mortgage loans will specify, to the extent relevant and to the extent the
information is reasonably available to the company and the company reasonably
believes the information to be reliable:
. the aggregate unpaid principal balance;
. the range and weighted average loan rate, and, in the case of adjustable
rate loans, the range and weighted average of the current loan rates and
the lifetime rate caps, if any;
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. the range and average outstanding principal balance;
. the weighted average original and remaining term-to-stated maturity and
the range of original and remaining terms-to-stated maturity, if
applicable;
. the range and weighted average of combined loan-to-value ratios or loan-
to-value ratios;
. the percentage of mortgage loans that accrue interest at adjustable or
fixed interest rates;
. the geographic distribution of the mortgaged properties;
. the percentage of mortgage loans that are secured by single family
mortgaged properties, shares relating to cooperative dwellings,
condominium units, investment property and vacation or second homes;
. the lien priority;
. the maximum remaining term of the mortgage loans; and
. the delinquency status, including the duration and history of
delinquencies and the percentage of delinquent mortgage loans.
The prospectus supplement will also specify any other limitations on the
types or characteristics of mortgage loans for a series.
The Contracts
Contracts. Contracts in a trust fund will consist of conventional
manufactured housing installment sales contracts and installment loan
agreements originated by a manufactured housing dealer in the ordinary course
of business and purchased by the seller. Each contract will be secured by
manufactured homes, each of which will be located in any of the fifty states or
the District of Columbia. The contracts will be fully amortizing and will bear
interest at a fixed or adjustable annual percentage rate. The seller of the
contracts may retain a portion of the interest payments, called a "fixed
retained yield." If the seller retains a fixed retained yield, the trust will
be entitled to payments on the contracts after payment of the fixed retained
yield.
Manufactured homes, unlike site-built homes, generally depreciate in value.
Consequently, at any time after origination it is possible, especially in the
case of contracts with high loan-to-value ratios at origination, that the
market value of a manufactured home may be lower than the principal amount
outstanding under the contract.
Additional Information. The prospectus supplement for a series for which the
primary assets include contracts will specify, to the extent relevant and to
the extent the information is reasonably available to the company and the
company reasonably believes the information to be reliable:
. the initial aggregate principal balance;
. the range of original terms to maturity;
. the weighted average remaining term to stated maturity;
. the earliest and latest origination dates;
. the range of contract rates and net contract rates;
. the weighted average net contract rate;
. the geographic distribution of manufactured homes;
. the percentage of any contracts which are secured by manufactured homes
which have become permanently affixed to real estate;
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. the percentage of the contracts representing the refinancing of existing
indebtedness;
. the range of loan-to-value ratios; and
. the highest outstanding principal balance at origination of any contract.
The contracts in a trust fund will generally have monthly payments due on
the first of each month and will be fully-amortizing contracts. Contracts may
have due dates which occur on a date other than the first of each month. The
contracts may include adjustable rate contracts that provide for payment
adjustments to be made less frequently than adjustments in the contract rates.
Each adjustment in the contract rate which is not made at the time of a
corresponding adjustment in payments, and which adjusted amount of interest is
not paid currently on a voluntary basis by the obligor, will result in a change
in the rate of amortization of the contract. Moreover, payment adjustments on
the contracts may be subject to limitations, as specified in the prospectus
supplement, which may also affect the rate of amortization on the contract. As
a result, the amount of interest accrued in any month may equal or exceed the
scheduled monthly payment on the contract. In any such month, no principal
would be payable on the contract, and if the accrued interest exceeded the
scheduled monthly payment, the excess interest due would become deferred
interest that is added to the principal balance of the contract. Deferred
interest will bear interest at the contract rate until paid. If the limitations
prevent the payments from being sufficient to amortize fully the contract by
its stated maturity date, a lump sum payment equal to the remaining unpaid
principal balance will be due on the stated maturity date.
Private Securities
Primary assets for a series may consist, in whole or in part, of "private
securities" which include pass-through certificates representing beneficial
interests in underlying loans of the type that would otherwise be eligible to
be loans or collateralized obligations secured by underlying loans. Private
securities may have previously been offered to the public and not purchased as
part of the original distribution or may be acquired in a private transaction.
Although individual underlying loans may be insured or guaranteed by the United
States or an agency or instrumentality thereof, they need not be, and private
securities themselves will not be so insured or guaranteed.
Private securities will have been issued under a pooling and servicing
agreement, a trust agreement or similar agreement. The seller/servicer of the
underlying loans will have entered into the underlying agreement with the
underlying trustee. The underlying trustee or its agent, or a custodian, will
possess the underlying loans. Underlying loans will be serviced by a servicer
directly or by one or more sub-servicers who may be subject to the supervision
of the underlying servicer.
The company of the private securities will be a financial institution or
other entity engaged generally in the business of lending; a public agency or
instrumentality of a state, local or federal government; or a limited purpose
corporation organized for the purpose of, among other things, establishing
trusts and acquiring and selling loans to trusts, and selling beneficial
interests in trusts. The underlying company may be an affiliate of the company.
The obligations of the underlying company will generally be limited to
representations and warranties as to the assets conveyed by it to the trust.
Additionally, although the underlying loans may be guaranteed by an agency
or instrumentality of the United States, the private securities themselves will
not be so guaranteed.
Distributions of principal and interest will be made on the private
securities on the dates specified in the prospectus supplement. The private
securities may be entitled to receive nominal or no principal distributions or
nominal or no interest distributions. Principal and interest distributions will
be made on the private securities by the underlying trustee or the underlying
servicer. The underlying company or the underlying servicer may have the right
to repurchase the underlying loans after a specified date or under other
circumstances specified in the prospectus supplement.
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The underlying loans may be fixed rate, level payment, fully amortizing
loans or adjustable rate loans or loans having balloon or other irregular
payment features. Underlying loans will be secured by mortgages on mortgaged
properties.
Credit Support Relating to Private Securities. Credit support in the form of
reserve funds, subordination of other private securities issued under the
underlying agreement, guarantees, letters of credit, derivative contracts, cash
collateral accounts, insurance policies or other types of credit support may be
provided with respect to the underlying loans or with respect to the private
securities themselves. The type, characteristics and amount of credit support
will be a function of characteristics of the underlying loans and other factors
and will have been established for the private securities on the basis of
requirements of the rating agency that rated the private securities.
Additional Information. The prospectus supplement for a series for which the
primary assets include private securities will specify, to the extent relevant
and to the extent the information is reasonably available to the company and
the company reasonably believes the information to be reliable:
. the aggregate approximate principal amount and type;
. the maximum original term-to-stated maturity;
. the weighted average term-to-stated maturity;
. the pass-through or certificate rate or ranges thereof;
. the underlying company, the underlying servicer and the underlying
trustee;
. characteristics of credit support relating to the underlying loans or to
the private securities;
. the terms on which underlying loans may, or are required to, be purchased
prior to their stated maturity or the stated maturity of the private
securities;
. the terms on which underlying loans may be substituted for those
originally underlying the private securities;
and, as to the underlying loans, the following:
. the payment features, including whether the underlying loans are fixed
rate or adjustable rate and whether they provide for fixed level payments
or other payment features;
. the approximate aggregate principal balance, if known, of the underlying
loans insured or guaranteed by a governmental entity;
. the servicing fee or range of servicing fees;
. the minimum and maximum stated maturities at origination;
. the lien priority; and
.the delinquency status and year of origination.
Accounts
Each trust fund will include one or more accounts. Each account will either
be an account maintained at a depository institution, the long-term unsecured
debt obligations of which are satisfactory to each rating agency, or an account
the deposits in which are insured to the maximum extent available by the
Federal Deposit Insurance Corporation or which are secured in a manner meeting
requirements established by each rating agency.
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The trustee may invest the funds in the accounts in eligible investments
maturing, with exceptions, not later than the day preceding the date funds are
due to be distributed. Eligible investments include, among other investments,
obligations of the United States and agencies thereof, federal funds,
certificates of deposit, commercial paper, demand and time deposits and
banker's acceptances, repurchase agreements of United States government
securities, guaranteed investment contracts and money market funds, in each
case, acceptable to the rating agencies rating the securities.
Collection and Distribution Accounts
A separate collection account will be established in the name of the trustee
for receipt of all amounts received from the primary assets. Amounts on deposit
in the collection account and amounts available from any credit enhancement
will be deposited in a distribution account, which will also be established in
the name of the trustee, for distribution to the holders.
Pre-Funding Account
A trust fund may include a "pre-funding account." On the closing date, the
"pre-funded amount," which is a portion of the proceeds of the sale of the
securities of a series, will be deposited in the pre-funding account and may be
used to acquire additional primary assets during a specified "pre-funding
period." If any pre-funded amount remains on deposit in the pre-funding account
at the end of the pre-funding period, it will be applied in the manner
specified in the prospectus supplement to prepay the bonds and/or the
certificates of the applicable series.
If a pre-funding account is established:
. the pre-funding period will generally not exceed 90 days from the closing
date, and in no event exceed one year from the closing date,
. the additional primary assets to be acquired during the pre-funding
period will be subject to the same representations and warranties and
satisfy the same eligibility requirements as the primary assets included
in the trust fund on the closing date, subject to the exceptions stated
in the prospectus supplement,
. the pre-funding amount will not exceed 50% of the original principal
amount of the securities issued and
. prior to the investment of the pre-funded amount in additional primary
assets, the pre-funded amount will be invested in one or more eligible
investments.
If a pre-funding account is established, an "interest coverage account" may
be established and maintained with the trustee. On the closing date, funds will
be deposited in the interest coverage account and used to fund any shortfall in
the interest accrued on the securities and fees or expenses during the pre-
funding period. Any amounts on deposit in the interest coverage account at the
end of the pre-funding period that are not necessary to fund any shortfall will
be distributed to the person specified in the prospectus supplement.
If a trust fund includes a pre-funding account and the principal balance of
additional primary assets delivered to the trust fund during the pre-funding
period is less than the original pre-funded amount, the securityholders will
receive a prepayment of principal to the extent described in the prospectus
supplement. Any principal prepayment may adversely affect the yield to maturity
of the applicable securities. Since prevailing interest rates are subject to
fluctuation, there can be no assurance that investors will be able to reinvest
a prepayment at yields equaling or exceeding the yields on the securities. It
is possible that the yield on any reinvestment will be lower, and may be
significantly lower, than the yield on the securities.
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CREDIT ENHANCEMENT
The company may obtain credit enhancement, which may include an irrevocable
letter of credit, surety bond or insurance policy, issue subordinate securities
or obtain any other form of credit enhancement or combination thereof in favor
of the trustee on behalf of the holders of a series or designated classes of a
series from an institution or by other means. The credit enhancement will
support the payment of principal and interest on the securities, and may be
applied for other purposes to the extent and under the conditions described in
the prospectus supplement. Credit enhancement for a series may include one or
more of the following forms, or another form specified in the prospectus
supplement. Credit enhancement may be structured so as to protect against
losses relating to more than one trust fund.
Subordinate Securities
Credit enhancement for a series may consist of one or more classes of
subordinate securities. The rights of holders of subordinate securities to
receive distributions on any distribution date will be subordinate in right and
priority to the rights of holders of senior securities of the series.
Insurance
Credit enhancement for a series may include a pool insurance policy, private
mortgage insurance policies on underlying loans, a special hazard insurance
policy, bankruptcy bonds or other types of insurance relating to the primary
assets.
Pool Insurance Policy. A pool insurance policy covers, subject to the
limitations described in a prospectus supplement, losses resulting from
defaults, but generally will not cover the portion of the principal balance of
any loan that is required to be covered by any primary mortgage insurance
policy.
Private Mortgage Insurance Policy. Certain mortgage loans in the trust may
be individually covered by a private mortgage insurance policy, which would
insure the mortgage lender. A private mortgage insurance policy insures a
portion of the loss on a mortgage loan to the extent that the uninsured
exposure of the related mortgage loan is reduced to an amount equal to a
certain percentage of the original loan-to-value ratio of such mortgage loan.
Private mortgage insurance policies typically do not cover losses caused by
physical damage to the mortgaged property, negligence, fraud and certain other
risks.
Special Hazard Insurance Policy. A special hazard insurance policy typically
provides that, where there has been damage to mortgaged property securing a
defaulted or foreclosed mortgage loan or the manufactured home underlying a
contract, title to which has been acquired by the insured, and to the extent
the damage is not covered by the standard hazard insurance policy or any flood
insurance policy, or in connection with partial loss resulting from the
application of the coinsurance clause in a standard hazard insurance policy,
the special hazard insurer will pay the lesser of (1) the cost of repair or
replacement of the mortgaged property or manufactured home or (2) upon transfer
of the mortgaged property or manufactured home to the special hazard insurer,
the unpaid principal balance of the loan at the time of foreclosure, plus
accrued interest to the date of claim settlement and expenses incurred by the
servicer. If the unpaid principal balance plus accrued interest and expenses is
paid by the special hazard insurer, the amount of further coverage under the
special hazard insurance policy will be correspondingly reduced, less any net
proceeds from the sale of the mortgaged property or manufactured home. Any
amount paid as the cost of repair of a mortgaged property or manufactured home
will reduce coverage by the amount paid. Special hazard insurance policies
typically do not cover losses occasioned by war, civil insurrection,
governmental actions, errors in design, faulty workmanship or materials, except
under specified circumstances, nuclear reaction, if the mortgaged property is
in a federally designated flood area, flood, chemical contamination and related
other risks.
Restoration of the mortgaged property or replacement of the manufactured
home with the proceeds described under (1) above is expected to satisfy the
condition under any pool insurance policy that the
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mortgaged property be restored or manufactured home replaced before a claim
under the pool insurance policy may be validly presented with respect to the
defaulted loan. The payment described under (2) above will render unnecessary
presentation of a claim for the loan under any pool insurance policy.
Therefore, so long as a pool insurance policy remains in effect, the payment by
the special hazard insurer of the cost of repair or of the unpaid principal
balance of the loan plus accrued interest and expenses will not affect the
total insurance proceeds paid to security holders, but will affect the relative
amounts of coverage remaining under the special hazard insurance policy and
pool insurance policy.
Bankruptcy Bond. In the event of a bankruptcy of a borrower, the bankruptcy
court may establish the value of the mortgaged property or manufactured home at
an amount less than the then-outstanding principal balance of the loan. The
amount of the secured debt could be reduced to the assigned value, and the
holder of the loan thus would become an unsecured creditor to the extent the
outstanding principal balance of the loan exceeds the assigned value. In
addition, other modifications of the terms of a loan can result from a
bankruptcy proceeding. See "Legal Aspects of the Loans." The company may obtain
a bankruptcy bond or similar insurance contract covering losses resulting from
proceedings with respect to borrowers under the federal bankruptcy code. The
bankruptcy bond will cover losses resulting from a reduction by a bankruptcy
court of scheduled payments of principal and interest on a loan or a reduction
by a bankruptcy court of the principal amount of a loan and will cover unpaid
interest on the amount of the principal reduction from the date of the filing
of a bankruptcy petition.
Reserve Funds
The company may deposit into one or more funds to be established with the
trustee as part of the trust fund or for the benefit of any credit enhancer,
cash, a letter or letters of credit, cash collateral accounts, eligible
investments, or other instruments meeting the criteria of the rating agency
rating any series. In the alternative or in addition to an initial deposit, a
reserve fund may be funded over time through application of all or a portion of
the excess cash flow from the primary assets, to the extent described in the
prospectus supplement.
Amounts withdrawn from any reserve fund will be applied by the trustee to
make payments on the securities of a series, to pay expenses, to reimburse any
credit enhancer or for any other purpose.
The trustee will invest amounts deposited in a reserve fund in eligible
investments.
Minimum Principal Payment Agreement
The company may enter into a minimum principal payment agreement with an
entity specified in the prospectus supplement. The entity would provide
payments on the securities of a series in the event that aggregate scheduled
principal payments and/or prepayments on the primary assets are not sufficient
to make payments on the securities.
Deposit Agreement
The issuer and the trustee for a series may enter into a deposit agreement
with the entity specified in the prospectus supplement. The purpose of a
deposit agreement is to accumulate available cash for investment so that it,
together with income thereon, can be applied to future distributions on one or
more classes of securities.
Derivative Contracts
A trust may hold an interest rate swap agreement, an interest rate cap
agreement or similar derivative contracts providing limited protection against
interest rate risks. These derivative contracts may provide the trust with
additional amounts which will be available to pay interest on the securities,
to build up overcollateralization, or both.
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Participation Agreement
A trust may hold for credit enhancement a participation agreement or similar
right to receive cash flows from the liquidation of a separate pool of
delinquent loans or foreclosed properties. Cash flows from these agreements may
provide the trust with additional amounts which will be available to pay
interest on the securities, to build up overcollateralization, or both.
SERVICING
The following summaries describe material provisions in the servicing
agreements common to each series of securities. The summaries do not purport to
be complete and are subject to and qualified by reference to the provisions of
the servicing agreements and the prospectus supplements. Where particular
provisions or terms used in the servicing agreements are referred to, the
actual provisions are incorporated by reference as part of the summaries.
Collection Procedures; Escrow Accounts
The servicer will make reasonable efforts to collect all payments required
to be made under the loans and will, consistent with the terms of the servicing
agreement and any credit enhancement, follow the collection procedures that it
follows with respect to comparable loans held in its own portfolio. The
servicer may, in its discretion, waive any assumption fee, late payment charge,
or other charge on a loan and to the extent provided in the servicing agreement
arrange with an obligor a schedule for the liquidation of delinquencies by
extending the dates on which the scheduled payments are due on the loan.
The servicer, to the extent permitted by law and required by the underlying
loan documents, will establish and maintain escrow or impound accounts with
respect to loans in which payments by obligors to pay taxes, assessments,
mortgage and hazard insurance premiums, and other comparable items will be
deposited. Withdrawals from the escrow accounts are to be made to effect timely
payment of taxes, assessments and mortgage and hazard insurance, to refund to
obligors amounts determined to be overages, to pay interest to obligors on
balances in the escrow account to the extent required by law, to repair or
otherwise protect the mortgaged property or manufactured home and to clear and
terminate the escrow account. The servicer will be responsible for the
administration of the escrow accounts and generally will make advances to the
escrow accounts when a deficiency exists.
Deposits To And Withdrawals From The Collection Account
The funds held in the collection account may be invested, pending remittance
to the trustee, in eligible investments. The servicer may be entitled to
receive as additional compensation any interest or other income earned on funds
in the collection account.
The servicer will deposit into the collection account on the business day
following the closing date any amounts representing scheduled payments due
after the cut-off date but received by the servicer on or before the closing
date. Thereafter, the servicer will deposit into the collection account the
following:
. All payments on account of principal, including prepayments, on the
primary assets;
. All payments on account of interest on the primary assets after
deducting, if permitted by the servicing agreement, the servicing fee;
. All amounts received by the servicer in connection with the liquidation
of primary assets or property acquired in respect thereof, whether
through foreclosure sale, repossession or otherwise, including payments
in connection with the primary assets received from the obligor, other
than liquidation proceeds, which are amounts required to be paid or
refunded to the obligor under the terms of the
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applicable loan documents or otherwise under law, exclusive of, if
permitted by the servicing agreement, the servicing fee;
. All proceeds under any title insurance, hazard insurance or other
insurance policy covering any primary asset, other than proceeds to be
applied to the restoration or repair of the mortgaged property or
manufactured home or released to the obligor;
. All amounts from any reserve fund;
. All advances made by the servicer; and
. All repurchase prices of any primary assets repurchased by the company,
the servicer or the seller.
The servicer may be permitted, from time to time, to make withdrawals from
the collection account for each series for the following purposes:
. to reimburse itself for advances made by it; the servicer's right to
reimburse itself may be limited to amounts received from particular
loans, including, for this purpose, liquidation proceeds and amounts
representing proceeds of insurance policies covering the mortgaged
property or manufactured home, which represent late recoveries of
scheduled payments respecting which any advance was made;
. to the extent provided in the servicing agreement, to reimburse itself
for any advances that the servicer determines in good faith it will be
unable to recover from late recoveries or proceeds from the particular
loan;
. to reimburse itself from liquidation proceeds for liquidation expenses
and for amounts expended by it in good faith in connection with the
restoration of a damaged mortgaged property or manufactured home and, in
the event deposited in the collection account and not previously
withheld, and to the extent that liquidation proceeds after reimbursement
exceed the outstanding principal balance of the loan, together with
accrued and unpaid interest thereon to the due date for the loan next
succeeding the date of its receipt of liquidation proceeds, to pay to
itself out of the excess the amount of any unpaid servicing fee and any
assumption fees, late payment charges, or other charges on the loan;
. in the event it has elected not to pay itself the servicing fee out of
the interest component of any scheduled payment, late payment or other
recovery with respect to a particular loan prior to the deposit of the
scheduled payment, late payment or recovery into the collection account,
to pay to itself the servicing fee, as adjusted under the servicing
agreement, from any scheduled payment, late payment or other recovery, to
the extent permitted by the servicing agreement;
. to reimburse itself for expenses incurred by and recoverable by or
reimbursable to it; to pay to the applicable person with respect to each
"REO property," a primary asset or mortgaged property acquired through or
in lieu of foreclosure acquired in respect thereof that has been
repurchased or removed from the trust fund by the company, the servicer
or the seller, all amounts received thereon and not distributed as of the
date on which the repurchase price was determined;
. to make payments to the trustee for deposit into the distribution
account, if any, or for remittance to the holders in the amounts and in
the manner provided for in the servicing agreement; and
. to clear and terminate the collection account.
In addition, the servicer may withdraw at any time from the collection
account any amount inadvertently deposited in the collection account.
Advances And Limitations Thereon
The prospectus supplement will describe the circumstances, if any, under
which the servicer will make advances with respect to delinquent payments on
loans. The servicer may fund an advance from its own
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corporate funds, advances made by any sub-servicer or funds held in the
collection account for future payment or withdrawal. The servicer will be
obligated to make advances, and the obligation may be limited in amount, or may
not be activated until a portion of a specified reserve fund is depleted.
Advances are intended to provide liquidity and, except to the extent specified
in the prospectus supplement, not to guarantee or insure against losses.
Accordingly, any funds advanced are recoverable by the servicer out of amounts
received on loans which represent late recoveries of principal or interest,
proceeds of insurance policies or liquidation proceeds respecting which any
advance was made. If an advance is made and subsequently determined to be
nonrecoverable from late collections, proceeds of insurance policies, or
liquidation proceeds from the loan, the servicer may be entitled to
reimbursement from other funds in the collection account or distribution
account, as the case may be, or from a specified reserve fund as applicable, to
the extent specified in the prospectus supplement.
Maintenance Of Hazard Insurance Policies
The prospectus supplement will specify the extent to which the servicer will
be required to maintain or to cause the obligor on each loan to maintain a
standard hazard insurance policy providing coverage of the standard form of
fire insurance with extended coverage for other hazards as is customary in the
state in which the mortgaged property or manufactured home is located. The
standard hazard insurance policies will provide for coverage at least equal to
the applicable state standard form of fire insurance policy with extended
coverage for property of the type securing the loans. In general, the standard
form of fire and extended coverage policy will cover physical damage to or
destruction of, the mortgaged property or manufactured home caused by fire,
lightning, explosion, smoke, windstorm, hail, riot, strike and civil commotion,
subject to the conditions and exclusions particularized in each policy. Because
the standard hazard insurance policies relating to the loans will be
underwritten by different hazard insurers and will cover mortgaged properties
and manufactured homes located in various states, the policies will not contain
identical terms and conditions. The basic terms, however, generally will be
determined by state law and generally will be similar. Most policies typically
will not cover any physical damage resulting from war, revolution, governmental
actions, floods and other water-related causes, earth movement, including
earthquakes, landslides and mudflows, nuclear reaction, wet or dry rot, vermin,
rodents, insects or domestic animals, theft and, in some cases, vandalism. The
foregoing list is merely indicative of common kinds of uninsured risks and is
not intended to be all-inclusive. Uninsured risks not covered by a special
hazard insurance policy or other form of credit enhancement will adversely
affect distributions to holders. When a mortgaged property securing a mortgage
loan is located in a flood area identified by the Department of Housing and
Urban Development under the Flood Disaster Protection Act of 1973, the servicer
will be required to cause flood insurance to be maintained with respect to the
mortgaged property, to the extent available.
The standard hazard insurance policies covering mortgaged properties
securing mortgage loans or manufactured home securing a contract typically will
contain a "coinsurance" clause which, in effect, will require the insured at
all times to carry hazard insurance of a specified percentage, generally 80% to
90%, of the full replacement value of the mortgaged property or manufactured
home, including the improvements on any mortgaged property or manufactured
home, in order to recover the full amount of any partial loss. If the insured's
coverage falls below this specified percentage, the clause will provide that
the hazard insurer's liability in the event of partial loss will not exceed the
greater of (1) the actual cash value, which is the replacement cost less
physical depreciation, of the mortgaged property or manufactured home,
including the improvements, if any, damaged or destroyed or (2) the proportion
of the loss, without deduction for depreciation, as the amount of insurance
carried bears to the specified percentage of the full replacement cost of the
mortgaged property or manufactured home and improvements. Since the amount of
hazard insurance to be maintained on the improvements securing the mortgage
loans and manufactured homes declines as the principal balances owing thereon
decrease, and since the value of the mortgaged properties or manufactured home
will fluctuate in value over time, the effect of this requirement in the event
of partial loss may be that hazard insurance proceeds will be insufficient to
restore fully the damage to the affected mortgaged property or manufactured
home.
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Generally, coverage will be in an amount at least equal to the greater of
(1) the amount necessary to avoid the enforcement of any co-insurance clause
contained in the policy or (2) the outstanding principal balance of the loan.
The servicer may also maintain on REO property that secured a defaulted
mortgage loan and that has been acquired upon foreclosure, deed in lieu of
foreclosure, or repossession, a standard hazard insurance policy in an amount
that is at least equal to the maximum insurable value of the REO property. No
earthquake or other additional insurance will be required of any obligor or
will be maintained on REO property, other than under any applicable laws and
regulations as shall at any time be in force and shall require additional
insurance.
In the event that the servicer obtains and maintains a blanket policy
insuring against hazard losses on all of the loans, written by an insurer then
acceptable to each rating agency which assigns a rating to the series, it will
conclusively be deemed to have satisfied its obligations to cause to be
maintained a standard hazard insurance policy for each loan or REO property.
This blanket policy may contain a deductible clause, in which case the servicer
may be required, in the event that there has been a loss that would have been
covered by the policy absent the deductible clause, to deposit in the
collection account the amount not otherwise payable under the blanket policy
because of the application of the deductible clause.
Realization Upon Defaulted Mortgage Loans
The servicer will use its reasonable best efforts to foreclose upon,
repossess or otherwise comparably convert the ownership of the mortgaged
properties or the manufactured homes as come into and continue in default and
as to which no satisfactory arrangements can be made for collection of
delinquent payments. In connection with a foreclosure, repossession or other
conversion, the servicer will follow the practices and procedures that it deems
necessary or advisable and as are normal and usual in its servicing activities
with respect to comparable loans serviced by it. However, the servicer will not
be required to expend its own funds in connection with any foreclosure or
repossession or towards the restoration of the mortgaged property or
manufactured home unless it determines that (1) the restoration, repossession
or foreclosure will increase the liquidation proceeds available to the holders
after reimbursement to itself for its expenses and (2) its expenses will be
recoverable either through liquidation proceeds or the proceeds of insurance.
In the case of a trust fund for which a REMIC election has been made, the
servicer will be required to liquidate any mortgaged property acquired through
foreclosure within two years after the acquisition of the mortgaged property.
While the holder of a mortgaged property acquired through foreclosure can often
maximize its recovery by providing financing to a new purchaser, the trust
fund, if applicable, will have no ability to do so and neither the servicer nor
the company will be required to do so.
The servicer may arrange with the obligor on a defaulted loan a modification
of the loan. Modifications may only be entered into if they meet the
underwriting policies and procedures employed by the servicer in servicing
receivables for its own account and meet the other conditions in the servicing
agreement.
Enforcement Of Due-On-Sale Clauses
When any mortgaged property is about to be conveyed by the obligor, the
servicer may, to the extent it has knowledge of the prospective conveyance and
prior to the time of the consummation of the conveyance, exercise its rights to
accelerate the maturity of the mortgage loan under the applicable "due-on-sale"
clause, if any, unless it reasonably believes that the clause is not
enforceable under applicable law or if the enforcement of the clause would
result in loss of coverage under any primary mortgage insurance policy. In that
event, the servicer is authorized to accept from or enter into an assumption
agreement with the person to whom the mortgaged property has been or is about
to be conveyed, under which the assuming person becomes liable under the
mortgage loan and under which the original obligor is released from liability
and the assuming person is substituted as the obligor and becomes liable under
the mortgage loan. Any fee collected in connection with an assumption will
generally be retained by the servicer as additional servicing compensation. The
terms of a mortgage loan may not be changed in connection with an assumption.
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Servicing Compensation And Payment Of Expenses
The servicer will be entitled to a periodic servicing fee as servicing
compensation in an amount to be determined as specified in the prospectus
supplement. The servicing fee may be fixed or variable, as specified in the
prospectus supplement. In addition, the servicer may be entitled to servicing
compensation in the form of assumption fees, late payment charges and similar
items, or excess proceeds following disposition of mortgaged property in
connection with defaulted mortgage loans or manufactured homes in connection
with a defaulted contract, as will be further specified in the prospectus
supplement.
The servicer may pay expenses incurred in connection with the servicing of
the mortgage loans, including, without limitation, the payment of the fees and
expenses of the trustee and independent accountants, payment of insurance
policy premiums and the cost of credit support, if any, and payment of expenses
incurred in preparation of reports to holders.
When an obligor makes a principal prepayment in full between due dates on
the loan, the obligor will generally be required to pay interest on the amount
prepaid only to the date of prepayment. If and to the extent provided in the
prospectus supplement in order that one or more classes of the holders of a
series will not be adversely affected by any resulting shortfall in interest,
the amount of the servicing fee may be reduced to the extent necessary to
include in the servicer's remittance to the trustee for deposit into the
distribution account an amount equal to one month's interest on the loan, less
the servicing fee. If the aggregate amount of shortfalls in a month exceeds the
servicing fee for a month, a shortfall to holders may occur.
The servicer will be entitled to reimbursement for expenses incurred by it
in connection with the liquidation of defaulted loans. The holders will suffer
no loss by reason of reimbursement of expenses if expenses are covered under
insurance policies or from excess liquidation proceeds. If claims are either
not made or paid under the applicable insurance policies or if coverage
thereunder has been exhausted, the holders will suffer a loss to the extent
that liquidation proceeds, after reimbursement of the servicer's expenses, are
less than the outstanding principal balance of and unpaid interest on the loan
which would be distributable to holders. In addition, the servicer will be
entitled to reimbursement of expenditures incurred by it in connection with the
restoration of property securing a defaulted loan, prior to the rights of the
holders to receive any proceeds of insurance policies, liquidation proceeds or
amounts derived from other credit enhancement.
The prospectus supplement will describe the priority of the servicer's
right, which is typically senior in priority, to receive funds from the
collection account for a series, whether as the servicing fee or other
compensation, or for the reimbursement of advances, expenses or otherwise, with
respect to the rights of the holders.
Evidence As To Compliance
If so specified in the prospectus supplement, each year, a firm of
independent public accountants will furnish a statement to the trustee to the
effect that it has examined documents and records relating to the servicing of
the loans by the servicer and that, on the basis of its examination, it is of
the opinion that the servicing has been conducted in compliance with the
servicing agreement, except for any exceptions that it believes to be
immaterial and any other exceptions identified in the statement.
The servicer for each series will also provide to the trustee an annual
statement to the effect that the servicer has fulfilled its obligations under
the servicing agreement throughout the preceding calendar year.
Matters Regarding The Servicer
The servicer for each series will be identified in the prospectus
supplement. The servicer may be an affiliate of the company and may have other
business relationships with the company and its affiliates. The servicer will
generally be NovaStar Mortgage, the parent of the company.
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If an event of default occurs under a servicing agreement, the servicer may
be replaced by the trustee or a successor servicer. These events of default and
the rights of the trustee upon a default under the servicing agreement will be
substantially similar to those described under "The Agreements--Events of
Default; Rights Upon Events of Default--Servicing Agreement."
The servicing agreement will specify the circumstances under which the
servicer may assign its rights and delegate its duties and obligations
thereunder for each series, which generally will require that the successor
servicer accepting the assignment or delegation:
. services similar loans in the ordinary course of its business,
. is reasonably satisfactory to the trustee,
. has a net worth of not less than a minimum amount,
. would not cause the securities to be qualified, downgraded or withdrawn,
and
. executes and delivers to the trustee an agreement under which it assumes
the obligations to act as servicer.
No assignment will become effective until the trustee or a successor
servicer has assumed the servicer's obligations and duties under the servicing
agreement. To the extent that the servicer transfers its obligations to a
wholly-owned subsidiary or affiliate, the subsidiary or affiliate need not
satisfy the above criteria. However, the assigning servicer will remain liable
for the servicing obligations under the servicing agreement. Any entity into
which the servicer is merged or consolidated or any successor corporation
resulting from any merger, conversion or consolidation will succeed to the
servicer's obligations under the servicing agreement provided that the
successor or surviving entity meets the above requirements for a successor
servicer.
The servicer, and its directors, officers, employees and agents, will not be
responsible for any action taken or for failing to take any action in good
faith under the servicing agreement, or for errors in judgment. However,
neither the servicer nor its directors, officers, employees and agents will be
protected against any breach of warranty or representations or the failure to
perform its obligations in compliance with the specified standard of care, or
liability which would otherwise be imposed by reason of willful misfeasance,
bad faith or negligence in the performance of their duties or by reason of
reckless disregard of their obligations and duties. Each servicing agreement
will further provide that the servicer and any director, officer, employee or
agent of the servicer is entitled to indemnification from the trust fund and
will be held harmless against any loss, liability or expense incurred in
connection with any legal action relating to the servicing agreement or the
securities, other than any loss, liability or expense incurred by reason of
willful misfeasance, bad faith or negligence in the performance of duties
thereunder or by reason of reckless disregard of obligations and duties
thereunder. In addition, the servicer is not under any obligation to appear in,
prosecute or defend any legal action which is not incidental to its servicing
responsibilities under the servicing agreement which, in its opinion, may
involve it in any expense or liability. The servicer may, in its discretion,
undertake any action which it may deem necessary or desirable with respect to
the servicing agreement and the rights and duties of the parties thereto and
the interests of the holders thereunder. In that event, the servicer may be
entitled to be reimbursed for the legal expenses and costs of the action out of
the collection account.
THE AGREEMENTS
The following summaries describe the material provisions of the agreements.
The summaries do not purport to be complete and are subject to, and qualified
in their entirety by reference to, the provisions of the agreements. Where
particular provisions or terms used in the agreements are referred to, the
provisions or terms are as specified in the agreements.
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Sale and Assignment Of Primary Assets
At the time of issuance of the securities of a series, pursuant to a
mortgage loan purchase agreement the seller will sell, transfer, convey and
assign to the Company, and the Company will in turn sell, transfer, convey and
assign to the trust, all right, title and interest in the primary assets and
other property to be transferred to the trust for a series. The sale and
assignment will include all principal and interest due on or with respect to
the primary assets after the cut-off date specified in the prospectus
supplement, except for any interests in the trust retained by the seller, the
company or its affiliate. The trustee will, concurrently with the assignment,
execute and deliver the securities.
Transfer Of Mortgage Loans. The seller will, as to each mortgage loan,
deliver or cause to be delivered to the trustee, or, as specified in the
prospectus supplement a custodian on behalf of the trustee, the mortgage note
endorsed without recourse to the order of the trustee or in blank, the original
mortgage with evidence of recording indicated thereon, except for any mortgage
not returned from the public recording office, in which case a copy of the
mortgage will be delivered, together with a certificate that the original
mortgage was delivered to the recording office, and an assignment of the
mortgage in recordable form. The trustee or the custodian will hold these
documents in trust for the benefit of the holders.
The seller will cause assignments to the trustee of the mortgages to be
recorded in the appropriate public office for real property records, except in
states where, in the opinion of counsel acceptable to the trustee, recording is
not required. If the seller does not cause assignments to be recorded, the
agreement may require the seller to repurchase from the trustee the affected
mortgage loans, at the price described below with respect to repurchases by
reason of defective documentation. The enforcement of the repurchase obligation
constitutes the sole remedy available to the holders or the trustee for the
failure of a mortgage to be recorded.
Transfer Of Contracts. The seller will transfer physical possession of the
contracts to the trustee or a designated custodian or may retain possession of
the contracts as custodian for the trustee. In addition, the seller will make
an appropriate filing of a financing statement in the appropriate states to
give notice of the trustee's ownership of the contracts. Unless otherwise
specified in the prospectus supplement, the contracts will not be stamped or
marked otherwise to reflect their assignment from the company to the trustee.
Therefore, if through negligence, fraud or otherwise, a subsequent purchaser
were able to take physical possession of the contracts without notice of
assignment, the trustee's interest in contracts could be defeated.
Transfer Of Private Securities. The company will cause private securities to
be registered in the name of the trustee or its nominee or correspondent. The
trustee, or its nominee or correspondent, will have possession of any
certificated private securities. See "The Trust Funds--Private Securities."
Each loan will be identified in a schedule appearing as an exhibit to the
agreements. The schedule will specify with respect to each loan the original
principal amount and unpaid principal balance as of the cut-off date, the
current interest rate, the current scheduled payment of principal and interest,
the maturity date, if any, and if the loan is an adjustable rate loan, the
lifetime rate cap, if any, and the current index.
Repurchase And Substitution Of Non-Conforming Primary Assets. If any
document required to be in the file relating to the primary assets is found by
the trustee within a specified period to be defective in any material respect
and the seller does not cure the defect within a specified period, the seller
will be required to repurchase the affected primary asset.
The seller may, rather than repurchase the primary asset as described above,
remove the primary asset from the trust fund and substitute in its place one or
more other qualifying substitute primary assets. However, (1) with respect to a
trust fund for which no REMIC election is made, the substitution must be
effected within a specified period after the date of initial issuance of the
securities and (2) with respect to a trust fund for which a REMIC election is
made, after a specified time period, the trustee must have received a
satisfactory opinion of counsel that the substitution will not cause the trust
fund to lose its status as a REMIC or otherwise subject the trust fund to a
prohibited transaction tax.
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Any substitute primary asset will have, on the date of substitution, (1) an
outstanding principal balance, after deduction of all scheduled payments due in
the month of substitution, not in excess of the outstanding principal balance
of the deleted primary asset, (2) an interest rate not less than the interest
rate of the deleted primary asset, (3) a remaining term-to-stated maturity not
greater than that of the deleted primary asset, and will comply with all of the
representations and warranties in the applicable agreement as of the date of
substitution.
The above-described cure, repurchase or substitution obligations constitute
the sole remedies available to the holders or the trustee for a material defect
in a document for a primary asset.
The seller will make representations and warranties with respect to primary
assets for a series. If the seller cannot cure a breach of the representations
and warranties in all material respects within the specified time period after
notification by the trustee of the breach, and if the breach is of a nature
that materially and adversely affects the value of the primary asset, the
seller is obligated to repurchase the affected primary asset or, if provided in
the prospectus supplement, provide a substitute primary asset, subject to the
same conditions and limitations on purchases and substitutions as described
above.
No security holder, solely by virtue of the holder's status as a holder,
will have any right under the applicable agreement for a series to institute
any proceeding with respect to that agreement, unless the holder previously has
given to the trustee for the series written notice of default and unless the
majority holders have made written request upon the trustee to institute a
proceeding and have offered to the trustee reasonable indemnity, and the
trustee has failed to do so within a specified period.
Reports To Holders
The trustee or other entity specified in the prospectus supplement will
prepare and forward to each holder on each distribution date, or as soon
thereafter as is practicable, a statement setting forth, to the extent
applicable to any series, among other things:
. the amount of principal distributed to the security holders and the
outstanding principal balance of the securities following the
distribution,
. the amount of interest distributed to the security holders and the
current interest on the securities,
. the amounts of (a) any overdue accrued interest included in the
distribution, (b) any remaining overdue accrued interest with respect to
the securities or (c) any current shortfall in amounts to be distributed
as accrued interest to security holders,
. the amounts of (a) any overdue payments of scheduled principal included
in the distribution, (b) any remaining overdue principal amounts with
respect to the securities, (c) any current shortfall in receipt of
scheduled principal payments on the primary assets or (d) any realized
losses or liquidation proceeds to be allocated as reductions in the
outstanding principal balances of the securities,
. the amount received from credit enhancement, and the remaining amount
available under any credit enhancement,
. the amount of any payment delinquencies on the primary assets, and
. the book value of any primary assets or mortgaged properties acquired
through or in lieu of foreclosure acquired by the trust.
In addition, within a reasonable period of time after the end of each
calendar year, the trustee will furnish to each holder of record at any time
during the calendar year the information specified in the agreements to enable
holders to prepare their tax returns. Information in the distribution date and
annual statements provided to the holders will not have been examined and
reported upon by an independent public accountant.
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A series of securities or one or more classes of the series may be issued in
book-entry form. In that event, owners of beneficial interests in the
securities will not be considered holders and will not receive the reports
directly from the trustee. The trustee will forward reports only to the entity
or its nominee which is the registered holder of the global certificate which
evidences the book-entry securities. Beneficial owners will receive reports
from the participants and indirect participants of the applicable book-entry
system in accordance with their practices and procedures.
Events Of Default; Rights Upon Event Of Default
Servicing Agreement. Events of default under each servicing agreement
generally include:
. any failure by the servicer to deposit any required amounts in the
collection account, which failure continues unremedied for a specified
period after the giving of written notice of the failure to the servicer,
. any failure by the servicer duly to observe or perform in any material
respect any other of its covenants or agreements in the applicable
servicing agreement which continues unremedied for the number of days
specified in the prospectus supplement after the giving of written notice
of the failure to the servicer by the trustee, or to the servicer and the
trustee by the holders of the series evidencing not less than a specified
percentage of the aggregate voting rights of the securities for that
series, and
. events of insolvency, readjustment of debt, marshalling of assets and
liabilities or similar proceedings and actions by the servicer indicating
its insolvency, reorganization or inability to pay its obligations.
The servicing agreement or pooling and servicing agreement will specify the
circumstances under which the trustee of the holders of securities may remove
the servicer upon the occurrence and continuance of an event of default
thereunder relating to the servicing of loans, other than its right to recovery
of other expenses and amounts advanced under the terms of the servicing
agreement which rights the servicer will retain under all circumstances,
whereupon the trustee will succeed to all the responsibilities, duties and
liabilities of the servicer under the servicing agreement and will be entitled
to reasonable servicing compensation not to exceed the applicable servicing
fee, together with other servicing compensation in the form of assumption fees,
late payment charges or otherwise as provided in the servicing agreement.
In the event that the trustee is unwilling or unable so to act, it may
select, or petition a court of competent jurisdiction to appoint, a finance
institution, bank or loan servicing institution with a net worth specified in
the prospectus supplement to act as successor servicer under the provisions of
the applicable servicing agreement. The successor servicer would be entitled to
reasonable servicing compensation in an amount not to exceed the servicing fee
and the other servicing compensation.
During the continuance of any event of default of a servicer, the trustee
will have the right to protect and enforce the rights of the holders, and the
majority holders may direct the time, method and place of conducting any
proceeding for exercising any trust power. However, the trustee will not be
under any obligation to pursue any remedy or to exercise any trusts or powers
unless the holders have offered the trustee reasonable security or indemnity
against the cost, expenses and liabilities which may be incurred by the
trustee. The trustee may decline to follow any direction if the trustee
determines that the action or proceeding so directed may not lawfully be taken
or would involve it in personal liability or be unjustly prejudicial to the
nonassenting holders.
Indenture. Events of default under the indenture for each series of bonds
may include:
. a default in the payment of any principal or interest on any bond, which
continues for a specified period of time;
. failure to perform any other covenant of the issuer in the indenture
which continues for a specified period of time after notice is given;
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. any representation or warranty made by the issuer in the indenture having
been incorrect in a material respect as of the time made, and the breach
is not cured within a specified period of time after notice is given; or
. events of bankruptcy, insolvency, receivership or liquidation of the
issuer.
If an event of default with respect to the bonds of any series at the time
outstanding occurs and is continuing, either the trustee or the holders of a
majority of the outstanding bonds may declare the bonds to be due and payable
immediately. The declaration may, under some circumstances, be rescinded and
annulled by the majority holders.
If, following an event of default with respect to any series of bonds, the
bonds have been declared due and payable, the trustee may, in its discretion,
notwithstanding the acceleration, elect to maintain possession of the
collateral and to continue to apply distributions as if there had been no
acceleration if the collateral continues to provide sufficient funds for the
payment of principal and interest on the bonds as they would have otherwise
become due. In addition, the trustee may not sell or otherwise liquidate the
collateral following an event of default other than a default in the payment of
any principal or interest on any bond of the series for a specified period,
unless all of the holders consent to the sale, the proceeds of the sale are
sufficient to pay in full the principal and interest due on the bonds or the
trustee determines that the collateral would not be sufficient on an ongoing
basis to make all payments on the bonds as those payments would have become
due, and the trustee obtains the consent of the holders of a specified amount
of the bonds.
In the event that the trustee liquidates the collateral in connection with
an event of default involving a payment default, the trustee will have a prior
lien on the proceeds of any liquidation for unpaid fees and expenses. As a
result, upon the occurrence of an event of default, the amount available for
distribution to the holders may be less than would otherwise be the case.
If the principal of the bonds of a series is declared due and payable, the
holders of any bonds issued at a discount from par may be entitled to receive
no more than an amount equal to the unpaid principal amount thereof less the
amount of the discount which is unamortized.
If an event of default shall occur and be continuing, the trustee will not
be obligated to exercise any rights or powers under the indenture at the
request of the holders, unless the holders provide security satisfactory to the
trustee against the expenses and liabilities which might be incurred by it. The
majority holders shall have the right to direct the time, method and place of
conducting any proceeding for any remedy or exercising any power conferred on
the trustee with respect to the bonds. The majority holders may waive the
default, except a default in the payment of principal or interest or a default
caused by a breach of a covenant or provision of the indenture that cannot be
modified without the waiver or consent of all the affected bond holders.
The Trustee
The prospectus supplement will identify the trustee for the series. The
trustee may have normal banking relationships with the company or the servicer.
In addition, for the purpose of meeting the legal requirements of local
jurisdictions, the trustee will have the power to appoint co-trustees or
separate trustees of all or any part of the trust fund relating to a series of
securities. In the event of an appointment, all rights, powers, duties and
obligations conferred or imposed upon the trustee will be conferred or imposed
upon the trustee and each separate trustee or co-trustee jointly, or, in any
jurisdiction in which the trustee shall be incompetent or unqualified to
perform as trustee, singly upon the separate trustee or co-trustee who will
exercise and perform solely at the direction of the trustee. The trustee may
also appoint agents to perform any of the responsibilities of the trustee,
which agents will have any or all of the rights, powers, duties and obligations
of the trustee conferred on them by appointment; although the trustee will
continue to be responsible for its duties and obligations under the agreement.
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Duties Of The Trustee
The trustee will not make any representations as to the validity or
sufficiency of the agreements, the securities or of any primary asset or
documents. If no event of default as defined in the agreement has occurred, the
trustee is required to perform only those duties specifically required of it
under the agreement. Upon receipt of the various certificates, statements,
reports or other instruments furnished to it, the trustee is required to
examine them to determine whether they are in the form required by the
agreements. However, the trustee will not be responsible for the accuracy or
content of any of the documents furnished to it by the holders or the servicer
under the agreement.
The trustee may be held liable for its negligent action or failure to act,
or for its misconduct. The trustee will not be liable, however, with respect to
any action taken, suffered or omitted to be taken by it in good faith in
accordance with the direction of the holders in an event of default. The
trustee is not required to expend its own funds or incur any financial
liability in the performance of its duties, or in the exercise of any of its
rights or powers, if repayment of those funds or adequate indemnity against
risk is not reasonably assured to it.
Resignation Of Trustee
The trustee may, upon written notice to the company, resign at any time, in
which event the company will be obligated to use its best efforts to appoint a
successor trustee. If no successor trustee has been appointed and has accepted
the appointment within 30 days after the giving of a notice of resignation, the
resigning trustee may petition any court of competent jurisdiction for
appointment of a successor trustee. The trustee may also be removed at any time
(1) if the trustee ceases to be eligible to continue as a trustee under the
agreement, (2) if the trustee becomes insolvent or (3) by a majority of the
holders. Any resignation or removal of the trustee and appointment of a
successor trustee will not become effective until acceptance of the appointment
by the successor trustee.
Amendment Of Agreement
Each agreement may be amended by the parties to the agreement, without
notice to or consent of the holders, to correct any ambiguity or any defective
provisions, to supplement any provision, or to comply with any requirements
imposed by the Internal Revenue Code. Any amendment will not adversely affect
in any material respect the interests of any holders.
Each agreement may also be amended by the parties with the consent of a
specified percentage of the holders, for the purpose of adding, changing or
eliminating any provision of the agreement. No amendment may reduce or delay
the payments on any security without the consent of the holder of the security.
Voting Rights
The prospectus supplement will state the method of determining allocation of
voting rights with respect to a series.
List Of Holders
No agreement will provide for the holding of any annual or other meeting of
holders.
REMIC Administrator
For any series with respect to which a REMIC election is made, preparation
of reports and other administrative duties with respect to the trust fund may
be performed by a REMIC administrator, who may be an affiliate of the company
or the trustee.
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Termination
Pooling And Servicing Agreement; Trust Agreement. The pooling and servicing
agreement or trust agreement for a series will terminate upon the distribution
to holders of all amounts payable to them after the final payment or
liquidation of the primary assets and the disposition of all foreclosure
property or the sale by the trustee of the primary assets. For a description of
the ways in which securities may be retired early, see "Description of the
Securities--Optional Redemption, Purchase or Termination" and "--Mandatory
Termination; Auction Sale."
For each series, the servicer or the trustee, as applicable, will give
written notice of termination of the agreement to each holder, and the final
distribution will be made only upon surrender and cancellation of the
securities at an office or agency specified in the notice of termination.
Indenture. The indenture will be discharged with respect to a series of
bonds upon the delivery to the trustee for cancellation of all the bonds or,
with limitations, upon deposit with the trustee of funds sufficient for the
payment in full of all of the bonds of the series. See "Description of the
Securities--Defeasance."
LEGAL ASPECTS OF LOANS
The following discussion contains summaries of legal aspects of loans, which
are general in nature. Because these legal aspects are to a degree governed by
state law, the summaries do not purport to be complete, reflect the laws of any
particular state, nor encompass the laws of all states in which the properties
securing the mortgage loans are situated.
Mortgage Loans
The mortgage loans will be represented by a note and an accompanying
mortgage or deed of trust. The borrower is personally liable to repay the
indebtedness evidenced by the mortgage loan under the note. The mortgage
creates a lien on the related mortgaged property to secure the indebtedness.
Enforcement Of The Note. Under the note, the borrower is personally liable
to repay the indebtedness evidenced by the mortgage loan. In some states, the
lender on a note secured by a lien on real property has the option of bringing
a personal action against the borrower on the debt without first exhausting the
security; however, in some of these states the lender, following judgment on a
personal action, may be deemed to have elected a remedy and may be precluded
from exercising remedies with respect to the related property security.
Consequently, the practical effect of the election requirement, in those states
permitting the election, is that lenders will usually proceed against the
property first rather than bringing a personal action against the borrower on
the note.
Some states have imposed statutory prohibitions that limit the remedies of a
beneficiary under a deed of trust or a mortgagee under a mortgage. In some
states, including California, statutes limit the right of the beneficiary or
mortgagee to obtain a deficiency judgment against the borrower following
foreclosure. A deficiency judgment is a personal judgment against the former
borrower equal in most cases to the difference between the amount due to the
lender and the net amount realized upon the public sales of the real property.
Other statutes require the beneficiary or mortgagee to exhaust the security
afforded under a deed of trust or mortgage by foreclosure in an attempt to
satisfy the full debt before bringing a personal action against the borrower.
Finally, in other states, statutory provisions limit any deficiency judgment
against the former borrower following a foreclosure to the excess of the
outstanding debt over the fair value of the property at the time of the public
sale. The purpose of these statutes is generally to prevent a beneficiary or
mortgagee from obtaining a large deficiency judgment against the former
borrower as a result of low or no bids at the judicial sale.
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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, 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 on a loan on a debtor's residence by paying arrearages within a
reasonable time period and reinstating the original loan payment schedule even
though the lender accelerated the 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 loan default by
paying arrearages over a number of years.
Federal bankruptcy courts also have indicated that the terms of a 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.
Tax liens arising under the Internal Revenue Code may 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 loans by numerous federal and some state consumer protection laws.
These laws include, by example, the federal Truth-in-Lending Act, Real Estate
Settlement Procedures Act, Equal Credit Opportunity Act, Fair Credit Billing
Act, Fair Credit Reporting Act and related statutes and state laws, such as the
California Fair Debt Collection Practices Act. These laws and regulations
impose specific statutory liabilities upon lenders who originate loans and fail
to comply with the provisions of the law. In some cases, this liability may
affect assignees of the loans.
Security Interests -- Real Estate Mortgages. The mortgage loans for a series
will be secured by either mortgages or deeds of trust or deeds to secure debt
depending upon the prevailing practice in the state in which the mortgaged
property subject to a mortgage loan is located. The filing of a mortgage, deed
of trust or deed to secure debt creates a lien or title interest upon the real
property covered by the instrument and represents the security for the
repayment of an obligation that is customarily evidenced by a promissory note.
It is not prior to the lien for real estate taxes and assessments or other
charges imposed under governmental police powers and may also be subject to
other liens under the laws of the jurisdiction in which the mortgaged property
is located. Priority with respect to the instruments depends on their terms,
the knowledge of the parties to the mortgage and generally on the order of
recording with the applicable state, county or municipal office. There are two
parties to a mortgage, the mortgagor, who is the borrower/property owner or the
land trustee, and the mortgagee, who is the lender. Under the mortgage
instrument, the mortgagor delivers to the mortgagee a note or bond and the
mortgage. In the case of a land trust, there are three parties because title to
the mortgaged property is held by a land trustee under a land trust agreement
of which the borrower/property owner is the beneficiary; at origination of a
mortgage loan, the borrower executes a separate undertaking to make payments on
the mortgage note. A deed of trust transaction normally has three parties: The
trustor, who is the borrower/property owner; the beneficiary, who is the
lender; and the trustee, a third-party grantee. Under a deed of trust, the
trustor grants the mortgaged property, irrevocably until the debt is paid, in
trust, generally with a power of sale, to the trustee to secure payment of the
obligation. The mortgagee's authority under a mortgage and the trustee's
authority under a deed of trust are governed by the law of the state in which
the real property is located, the express provisions of the mortgage or deed of
trust, and, in some cases, in deed of trust transactions, the directions of the
beneficiary.
Foreclosure On Mortgages. Foreclosure of a mortgage is generally
accomplished by judicial action. Generally, the action is initiated by the
service of legal pleadings upon all parties having an interest of record in the
real property. Delays in completion of the foreclosure occasionally may result
from difficulties in locating
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necessary parties defendant. When the mortgagee's right to foreclosure is
contested, the legal proceedings necessary to resolve the issue can be time-
consuming and expensive. After the completion of a judicial foreclosure
proceeding, the court may issue a judgment of foreclosure and appoint a
receiver or other officer to conduct the sale of the mortgaged property. In
some states, mortgages may also be foreclosed by advertisement, under a power
of sale provided in the mortgage. Foreclosure of a mortgage by advertisement is
essentially similar to foreclosure of a deed of trust by nonjudicial power of
sale.
Foreclosure of a deed of trust is generally accomplished by a nonjudicial
trustee's sale under a specific provision in the deed of trust which authorizes
the trustee to sell the mortgaged property upon any default by the borrower
under the terms of the note or deed of trust. In some states, foreclosure also
may be accomplished by judicial action in the manner provided for foreclosure
of mortgages. In some states, the trustee must record a notice of default and
send a copy to the borrower-trustor and to any person who has recorded a
request for a copy of a notice of default and notice of sale. In addition, the
trustee in some states must provide notice to any other individual having an
interest in the real property, including any junior lienholders. If the deed of
trust is not reinstated within any applicable cure period, a notice of sale
must be posted in a public place and, in most states, published for a specified
period of time in one or more newspapers. In addition, some state laws require
that a copy of the notice of sale be posted on the mortgaged property and sent
to all parties having an interest of record in the mortgaged property. The
trustor, borrower, or any person having a junior encumbrance on the real
estate, may, during a reinstatement period, cure the default by paying the
entire amount in arrears plus the costs and expenses incurred in enforcing the
obligation. Generally, state law controls the amount of foreclosure expenses
and costs, including attorney's fees, which may be recovered by a lender. If
the deed of trust is not reinstated, a notice of sale must be posted in a
public place and, in most states, published for a specified period of time in
one or more newspapers. In addition, some state laws require that a copy of the
notice of sale be posted on the mortgaged property, recorded and sent to all
parties having an interest in the real property.
An action to foreclose a mortgage is an action to recover the mortgage debt
by enforcing the mortgagee's rights under the mortgage. It is regulated by
statutes and rules and subject throughout to the court's equitable powers.
Generally, a mortgagor is bound by the terms of the related mortgage note and
the mortgage as made and cannot be relieved from his default if the mortgagee
has exercised his rights in a commercially reasonable manner. However, since a
foreclosure action historically was equitable in nature, the court may exercise
equitable powers to relieve a mortgagor of a default and deny the mortgagee
foreclosure on proof that either the mortgagor's default was neither willful
nor in bad faith or the mortgagee's action established a waiver, fraud, bad
faith, or oppressive or unconscionable conduct warranting a court of equity to
refuse affirmative relief to the mortgagee. A court of equity may relieve the
mortgagor from an entirely technical default where that default was not
willful.
A foreclosure action is subject to most of the delays and expenses of other
lawsuits if defenses or counterclaims are interposed, sometimes requiring up to
several years to complete. Moreover, a non-collusive, regularly conducted
foreclosure sale may be challenged as a fraudulent conveyance, regardless of
the parties' intent, if a court determines that the sale was for less than fair
consideration and the sale occurred while the mortgagor was insolvent and
within one year, or within the state statute of limitations if the trustee in
bankruptcy elects to proceed under state fraudulent conveyance law, of the
filing of bankruptcy. Similarly, a suit against the debtor on the related
mortgage note may take several years and, generally, is a remedy alternative to
foreclosure, the mortgagee being precluded from pursuing both at the same time.
In the case of foreclosure under either a mortgage or a deed of trust, the
sale by the referee or other designated officer or by the trustee is a public
sale. However, because of the difficulty third party purchasers have in
determining the exact status of title and because the physical condition of the
mortgaged property may have deteriorated during the foreclosure proceedings, it
is uncommon for a third party to purchase the mortgaged property at a
foreclosure sale. Rather, it is common for the lender to purchase the mortgaged
property from the trustee or referee for an amount which may be equal to the
unpaid principal amount of the mortgage note secured by the mortgage or deed of
trust plus accrued and unpaid interest and the expenses of
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foreclosure, in which event the mortgagor's debt will be extinguished or the
lender may purchase for a lesser amount in order to preserve its right against
a borrower to seek a deficiency judgment in states where that judgment is
available. Thereafter, subject to the right of the borrower in some states to
remain in possession during the redemption period, the lender will assume the
burdens of ownership, including obtaining hazard insurance, paying taxes and
making repairs at its own expense as are necessary to render the mortgaged
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 mortgaged property. Depending upon market conditions, the ultimate
proceeds of the sale of the mortgaged property may not equal the lender's
investment in the mortgaged property. Any loss may be reduced by the receipt of
any mortgage guaranty insurance proceeds.
Rights Of Redemption. In some states, after sale under a deed of trust or
foreclosure of a mortgage, the trustor or mortgagor and foreclosed junior
lienors are given a statutory period in which to redeem the mortgaged property
from the foreclosure sale. The right of redemption should be distinguished from
the equity of redemption, which is a non-statutory right that must be exercised
prior to the foreclosure sale. In some states, redemption may occur only upon
payment of the entire principal balance of the loan, accrued interest and
expenses of foreclosure. In other states, redemption may be authorized if the
former borrower pays only a portion of the sums due. The effect of a statutory
right of redemption is to diminish the ability of the lender to sell the
foreclosed mortgaged property. The exercise of a right of redemption would
defeat the title of any purchaser at a foreclosure sale, or of any purchaser
from the lender subsequent to foreclosure or sale under a deed of trust.
Consequently the practical effect of a right of redemption is to force the
lender to retain the mortgaged property and pay the expenses of ownership until
the redemption period has run. In some states, there is no right to redeem
mortgaged property after a trustee's sale under a deed of trust.
Junior Mortgages; Rights Of Senior Mortgages. The mortgage loans comprising
or underlying the primary assets included in the trust fund for a series will
be secured by mortgages or deeds of trust which may be second or more junior
mortgages to other mortgages held by other lenders or institutional investors.
The rights of the trust, and therefore the holders, as mortgagee under a junior
mortgage, are subordinate to those of the mortgagee under the senior mortgage,
including the prior rights of the senior mortgagee to receive hazard insurance
and condemnation proceeds and to cause the mortgaged property securing the
mortgage loan to be sold upon default of the mortgagor, thereby extinguishing
the junior mortgagee's lien unless the junior mortgagee asserts its subordinate
interest in the mortgaged property in foreclosure litigation and, possibly,
satisfies the defaulted senior mortgage. A junior mortgagee may satisfy a
defaulted senior loan in full and, in some states, may cure the default and
bring the senior loan current, in either event adding the amounts expended to
the balance due on the junior loan. In most states, absent a provision in the
mortgage or deed of trust, no notice of default is required to be given to a
junior mortgagee.
The standard form of the mortgage used by most institutional lenders confers
on the mortgagee the right both to receive all proceeds collected under any
hazard insurance policy and all awards made in connection with condemnation
proceedings, and to apply the proceeds and awards to any indebtedness secured
by the mortgage, in any order as the mortgagee may determine. Thus, in the
event improvements on the mortgaged property are damaged or destroyed by fire
or other casualty, or in the event the mortgaged property is taken by
condemnation, the mortgagee or beneficiary under underlying senior mortgages
will have the prior right to collect any insurance proceeds payable under a
hazard insurance policy and any award of damages in connection with the
condemnation and to apply the same to the indebtedness secured by the senior
mortgages. Proceeds in excess of the amount of senior mortgage indebtedness, in
most cases, may be applied to the indebtedness of a junior mortgage.
Another provision sometimes found in the form of the mortgage or deed of
trust used by institutional lenders obligates the mortgagor to pay before
delinquency all taxes and assessments on the mortgaged property and, when due,
all encumbrances, charges and liens on the mortgaged property which appear
prior to the mortgage or deed of trust, to provide and maintain fire insurance
on the mortgaged property, to maintain and repair the mortgaged property and
not to commit or permit any waste thereof, and to appear in and defend any
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action or proceeding purporting to affect the mortgaged property or the rights
of the mortgagee under the mortgage. Upon a failure of the mortgagor to perform
any of these obligations, the mortgagee is sometimes given the right to perform
the obligation itself, at its election, with the mortgagor agreeing to
reimburse the mortgagee for any sums expended by the mortgagee on behalf of the
mortgagor. All sums so expended by the mortgagee become part of the
indebtedness secured by the mortgage.
Due-On-Sale Clauses In Mortgage Loans. Due-on-sale clauses permit the lender
to accelerate the maturity of the loan if the borrower sells or transfers,
whether voluntarily or involuntarily, all or part of the real mortgaged
property securing the loan without the lender's prior written consent. The
enforceability of these clauses has been the subject of legislation or
litigation in many states, and in some cases, typically involving single family
residential mortgage transactions, their enforceability has been limited or
denied. In any event, the Garn-St. Germain Depository Institutions Act of 1982
preempts state law that prohibits the enforcement of due-on-sale clauses and
permits lenders to enforce these clauses in accordance with their terms, with
exceptions. As a result, due-on-sale clauses have become generally enforceable
except in those states whose legislatures exercised their authority to regulate
the enforceability of the clauses with respect to loans that were (1)
originated or assumed during the "window period" under the Garn-St. Germain Act
which ended in all cases not later than October 15, 1982, and (2) originated by
lenders other than national banks, federal savings institutions and federal
credit unions.
In addition, under federal bankruptcy law, due-on-sale clauses may not be
enforceable if they result from the bankruptcy proceeding.
Enforceability Of Prepayment And Late Payment Fees. Forms of notes,
mortgages and deeds of trust used by lenders may contain provisions obligating
the borrower to pay a late charge if payments are not timely made, and in some
circumstances may provide for prepayment fees or penalties if the obligation is
paid prior to maturity. In some states, there are or may be specific
limitations, upon the late charges which a lender may collect from a borrower
for delinquent payments. Some states also limit the amounts that a lender may
collect from a borrower as an additional charge if the loan is prepaid. Late
charges and prepayment fees are typically retained by servicers as additional
servicing compensation.
Most conventional single-family loans may be prepaid in full or in part
without penalty. The regulations of the Office of Thrift Supervision prohibit
the imposition of a prepayment penalty or equivalent fee for or in connection
with the acceleration of a loan by exercise of a due-on-sale clause. A
mortgagee to whom a prepayment in full has been tendered may be compelled to
give either a release of the mortgage or an instrument assigning the existing
mortgage. The absence of a restraint on prepayment, particularly with respect
to loans having higher mortgage rates, may increase the likelihood of
refinancing or other early retirements of the loans.
Equitable Limitations On Remedies. In connection with lenders' attempts to
realize upon their security, courts have invoked general equitable principles.
The equitable principles are generally designed to relieve the borrower from
the legal effect of his defaults under the loan documents. Examples of judicial
remedies that have been fashioned include judicial requirements that the lender
undertake affirmative and expensive actions to determine the causes of the
borrower's default and the likelihood that the borrower will be able to
reinstate the loan. In some cases, courts have substituted their judgment for
the lender's judgment and have required that lenders reinstate loans or recast
payment schedules in order to accommodate borrowers who are suffering from
temporary financial disability. In other cases, courts have limited the right
of a lender to realize upon his security if the default under the security
agreement is not monetary, such as the borrower's failure to adequately
maintain the mortgaged property or the borrower's execution of secondary
financing affecting the mortgaged property. Finally, some courts have been
faced with the issue of whether or not federal or state constitutional
provisions reflecting due process concerns for adequate notice require that
borrowers under security agreements receive notices in addition to the
statutorily-prescribed minimums. For the most part, these cases have upheld the
notice provisions as being reasonable or have found that, in cases involving
the sale by a trustee under a deed of trust or by a mortgagee under a mortgage
having a power of sale, there is insufficient state action to afford
constitutional protections to the borrower.
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Applicability Of Usury Laws. Title V of the Depository Institutions
Deregulation and Monetary Control Act of 1980, provides that state usury
limitations shall not apply to specified types of residential first lien loans
originated by specified types of lenders. The Office of Thrift Supervision is
authorized to issue rules and regulations and to publish interpretations
governing implementation of Title V. Title V authorizes any state to reimpose
interest rate limits by adopting, before April 1, 1983, a state law, or by
certifying that the voters of a state have voted in favor of any provision,
constitutional or otherwise, which expressly rejects an application of the
federal law. Fifteen states adopted such a law prior to the April 1, 1983
deadline. 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 loans covered by Title V.
Security Interests In Personal Property And Fixtures. A portion of each
mortgaged property may consist of property which is "personal property" or a
"fixture" under local state law. This will most commonly occur when the
proceeds of the related mortgage loan were applied to property improvements,
although any mortgaged property may have some personal property components. A
financing statement generally is not required to be filed to perfect a purchase
money security interest in consumer goods. Those purchase money security
interests are assignable. In general, a purchase money security interest grants
to the holder a security interest that has priority over a conflicting security
interest in the same collateral and the proceeds of the collateral. However, to
the extent that the collateral subject to a purchase money security interest
becomes a fixture, in order for the related purchase money security interest to
take priority over a conflicting interest in the fixture, the holder's interest
in the personal property must generally be perfected by a timely fixture
filing. In general, a security interest does not exist in ordinary building
material incorporated into an improvement on land. Contracts that finance
lumber, bricks, other types of ordinary building material or other goods that
are deemed to lose their characterization, upon incorporation of the materials
into the related property, will not be secured by a purchase money security
interest in the personal property being financed.
Enforcement Of Security Interest In Personal Property. So long as the
personal property has not become subject to the real estate law, a creditor can
repossess the property securing a contract by voluntary surrender, by "self-
help" repossession that is peaceful or, in the absence of voluntary surrender
and the ability to repossess without breach of the peace, by judicial process.
The holder of a contract must give the debtor a number of days' notice prior to
commencement of any repossession. Most states place restrictions on
repossession sales, including requiring prior notice to the debtor and
commercial reasonableness in effecting the sale. Most states also require that
the debtor be given notice of any sale prior to resale of the unit that the
debtor may redeem it at or before the resale.
Under the laws applicable in most states, a creditor is entitled to obtain a
deficiency judgment from a debtor for any deficiency on repossession and resale
of the property securing the debtor's loan. However, some states impose
prohibitions or limitations on deficiency judgments, and in many cases the
defaulting borrower would have no assets with which to pay a judgment.
Other statutory provisions, including federal and state bankruptcy and
insolvency laws and general equitable principles, may limit or delay the
ability of a lender to repossess and resell collateral or enforce a deficiency
judgment.
Contracts
As a result of the assignment of the contracts to the trustee, the trust
fund will succeed collectively to all of the rights and will assume the
obligations of the obligee under the contracts. Each contract evidences both
the obligor's obligation to repay the loan, and the grant of a security
interest in the manufactured home. 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 in effect in the states in which the manufactured homes
initially were registered. The Uniform Commercial Code treats the sale of
chattel paper in a manner similar to perfection of a security interest in
chattel paper. The seller will transfer physical possession of the contracts to
the trustee or a designated custodian or may retain possession of the
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contracts as custodian for the trustee. In addition, the seller will make an
appropriate filing of a financing statement in the appropriate states to give
notice of the trustee's ownership of the contracts. Unless otherwise specified
in the prospectus supplement, the contracts will not be stamped or marked
otherwise to reflect their assignment from the company to the trustee.
Therefore, if through negligence, fraud or otherwise, a subsequent purchaser
were able to take physical possession of the contracts without notice of the
assignment, the trustee's interest in contracts could be defeated.
Security Interests In The Manufactured Homes
The manufactured homes securing the contracts may be located in all 50
states. Security interests in manufactured homes may be perfected either by
notation of the secured party's lien on the certificate of title or by delivery
of the required documents and payment of a fee to the state motor vehicle
authority, depending on state law. In some non-title states, perfection is
governed by the Uniform Commercial Code. The servicer may effect the 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 servicer fails, due to clerical errors, to effect
the notation or delivery, or files the security interest under the wrong law,
the trustee may not have a first priority security interest in the manufactured
home securing a contract. As manufactured homes have become larger and often
have been attached to their sites without any apparent intention to move them,
courts in many states have held that manufactured homes 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 secured party must file either a "fixture filing" under the
provisions of the Uniform Commercial Code 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
Uniform Commercial Code, and the notation of the security interest on the
certificate of title or the filing of a 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 seller and transferred to the
issuer. With respect to a series of securities and if so described in the
prospectus supplement, the servicer may be required to perfect a security
interest in the manufactured home under applicable real estate laws. The
servicer will represent that at the date of the initial issuance of the related
securities 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 trustee on behalf of the holders. Neither the company nor
the trustee will amend the certificates of title to identify the trustee or the
trust fund as the new secured party, and neither the company nor the servicer
will deliver the securities of title to the trustee or note thereon the
interest of the trustee. Accordingly, the servicer, or the seller, continues to
be named as the secured party on the certificate of title relating to the
manufactured homes. In many states, the assignment is an effective conveyance
of the security interest without amendment of any lien noted on the related
certificate of title and the new secured party succeeds to the company's rights
as the secured party. However, in some states there exists a risk that, in the
absence of an amendment to the certificate of title, the assignment of the
security interest in the manufactured home might not be effective or perfected
or that, in the absence of notation or delivery to the trustee, the assignment
of the security interest in the manufactured home might not be effective
against creditors of the servicer (or the seller) or a trustee in bankruptcy of
the servicer, or the seller.
In the absence of fraud, forgery or permanent affixation of the manufactured
home to its site by the manufactured home owner, or administrative error by
state recording officials, the notation of the lien of the
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servicer, or the seller, on the certificate of title or delivery of the
required documents and fees will be sufficient to protect the holders 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 trustee is
not perfected, that security interest would be subordinate to, among others,
subsequent purchasers for value of manufactured homes and holders of perfected
security interests. There also exists a risk in not identifying the trustee as
the new secured party on the certificate of title that, through fraud or
negligence, the security interest of the holders could be released.
In the event that the owner of a manufactured home moves it to a state other
than the state in which that 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 relocation and thereafter until the
owner re-registers the manufactured home in the state. If the owner were to
relocate a manufactured home to another state and not re-register the
manufactured home in that state, and if steps are not taken to re-perfect the
trustee's security interest in that 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 trustee must surrender possession if it holds the certificate
of title to the manufactured home or, in the case of manufactured homes
registered in states which provide for notation of lien, the servicer would
receive notice of surrender if the security interest in the manufactured home
is noted on the certificate of title. Accordingly, the trustee would have the
opportunity to re-perfect its security interest in the manufactured home in the
state of relocation. In states which do not require a certificate of title for
registration of a manufactured home, re-registration could defeat perfection.
In the ordinary course of servicing the manufactured housing conditional sales
contracts, the servicer takes steps to effect the re-perfection upon receipt of
notice of registration or information from the obligor as to relocation.
Similarly, when an obligor under a manufactured housing conditional sales
contract sells a manufactured home, the trustee, or its custodian, must
surrender possession of the certificate of title or the servicer 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 servicing
agreement, the servicer is obligated to take steps 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 over a perfected
security interest. The seller will represent that it has no knowledge of any
liens with respect to any manufactured home securing payment on any contract.
However, those liens could arise at any time during the term of a contract. No
notice will be given to the trustee or holders in the event that a lien arises.
Enforcement Of Security Interests In Manufactured Homes
The servicer on behalf of the trustee, to the extent required by the related
servicing agreement, may take action to enforce the trustee's security interest
with respect to contracts in default by repossession and resale of the
manufactured homes securing the defaulted contracts. So long as the
manufactured home has not become subject to the real estate law, a creditor can
repossess a manufactured home securing a contract by voluntary surrender, by
"self-help" repossession that is peaceful or, in the absence of voluntary
surrender and the ability to repossess without breach of the peace, by judicial
process. The holder of a contract must give the debtor a number of days' notice
prior to commencement of any repossession. The Uniform Commercial Code and
consumer protection laws in most states place restrictions on repossession
sales, including requiring prior notice to the debtor and commercial
reasonableness in effecting the sale. The law in most states also requires that
the debtor be given notice of any sale prior to resale of the unit so that the
debtor may redeem at or before the resale. In the event of the repossession and
resale of a manufactured home, the trustee would be entitled to be paid out of
the sale proceeds before those proceeds could be applied to the payment of the
claims of unsecured creditors or the holders of subsequently perfected security
interests or, thereafter, to the debtor.
Under the laws applicable in most states, a creditor is entitled to obtain a
deficiency judgment from a debtor for any deficiency on repossession and resale
of the manufactured home securing that debtor's loan.
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However, some states impose prohibitions or limitations on deficiency
judgments, and in many cases the defaulting borrower would have no assets with
which to pay a judgment.
Other statutory provisions, including federal and state bankruptcy and
insolvency laws and general equitable principles, may limit or delay the
ability of a lender to repossess and resell collateral or enforce a deficiency
judgment.
Consumer Protection Laws
The so-called "holder-in-due-course" rule of the Federal Trade Commission is
intended to defeat the ability of the transferor of a consumer credit contract
which is the seller of goods which gave rise to the transaction, and related
lenders and assignees, to transfer the contract free of notice of claims by the
debtor thereunder. The effect of this rule is to subject the assignee of
contract to all claims and defenses which the debtor could assert against the
seller of goods. Liability under this rule is limited to amounts paid under a
contract; however, the obligor also may be able to assert the rule to set off
remaining amounts due as a defense against a claim brought by the trustee
against the obligor. Numerous other federal and state consumer protection laws
impose requirements applicable to the origination of the contracts, including
the Truth in Lending Act, the Federal Trade Commission Act, the Fair Credit
Billing Act, the Fair Credit Reporting Act, the Equal Credit Opportunity Act,
the Fair Debt Collection Practices Act and the Uniform Consumer Credit Code. In
the case of some of these laws, the failure to comply with their provisions may
affect the enforceability of the related contract.
Transfers Of Manufactured Homes; Enforceability Of "Due-On-Sale" Clauses
The contracts, in general, prohibit the sale or transfer of the related
manufactured homes without the consent of the servicer and permit the
acceleration of the maturity of the contracts by the servicer upon any sale or
transfer that is not consented to.
In the case of a transfer of a manufactured home after which the servicer
desires to accelerate the maturity of the related contract, the servicer's
ability to do so will depend on the enforceability under state law of the "due-
on-sale" clause. The Garn-St. Germain Depository Institutions Act of 1982
generally preempts state laws prohibiting enforcement of "due-on-sale" clauses
applicable to the manufactured homes, with some exemptions and conditions.
Consequently, in some states the servicer may be prohibited from enforcing a
"due-on-sale" clause in the contracts.
Applicability Of Usury Laws
Title V of the Depository Institutions Deregulation and Monetary Control Act
of 1980 provides that, subject to the following conditions, state usury
limitations shall not apply to any loan which is secured by a first lien on
specified kinds of manufactured housing. The contracts would be covered if they
satisfy specified 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 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, and state is authorized by the law to
adopt a provision limiting discount points or other charges on loans covered by
Title V. The seller will represent that all of the contracts comply with
applicable usury law.
Soldiers' And Sailors' Civil Relief Act Of 1940
Under the Soldiers' and Sailors' Civil Relief Act of 1940, members of all
branches of the military on active duty, including draftees and reservists in
military service, (1) are entitled to have interest rates reduced
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and capped at 6% per annum, on obligations (including mortgage loans) incurred
prior to the commencement of military service for the duration of military
service, (2) may be entitled to a stay of proceedings on any kind of
foreclosure or repossession action in the case of defaults on those obligations
entered into prior to military service for the duration of military service and
(3) may have the maturity of the obligations incurred prior to military service
extended, the payments lowered and the payment schedule readjusted for a period
of time after the completion of military service. However, the benefits of (1),
(2), or (3) above are subject to challenge by creditors and if, in the opinion
of the court, the ability of a person to comply with the obligations is not
materially impaired by military service, the court may apply equitable
principles accordingly. If a borrower's obligation to repay amounts otherwise
due on a mortgage loan included in a trust fund for a series is relieved under
the Soldiers' and Sailors' Civil Relief Act of 1940, none of the trust fund,
the servicer, the company nor the trustee will be required to advance the
amounts, and any loss in respect thereof may reduce the amounts available to be
paid to the holders of the securities of that series.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
The following is a general discussion of the material anticipated federal
income tax consequences to investors of the purchase, ownership and disposition
of the securities offered hereby. The discussion is based upon laws,
regulations, rulings and decisions now in effect, all of which are subject to
change. The discussion below does not purport to deal with all federal tax
consequences applicable to all categories of investors, some of which may be
subject to special rules. Investors are urged to consult their own tax advisors
in determining the particular federal, state and local consequences to them of
the purchase, ownership and disposition of the securities. References in this
section to "sections" and the "code" refer to the Internal Revenue Code of
1986, as amended.
The following discussion addresses securities of four general types:
. securities representing interests in a grantor trust which the company
will covenant not to elect to have treated as a REMIC;
. securities representing interests in a trust, or a portion thereof, which
the company will covenant to elect to have treated as a REMIC under
sections 860A through 860G;
. securities that are intended to be treated for federal income tax
purposes as indebtedness secured by the underlying loans; and
. securities representing interests in a trust that is intended to be
treated as a partnership under the code.
The prospectus supplement for each series of securities will indicate
whether a REMIC election (or elections) will be made for the related trust and,
if a REMIC election is to be made, will identify all "regular interests" and
"residual interests" in the REMIC.
The Taxpayer Relief Act of 1997 adds provisions to the code that require the
recognition of gain upon the "constructive sale of an appreciated financial
position." A constructive sale of an appreciated financial position occurs if a
taxpayer enters into transactions with respect to a financial instrument that
have the effect of substantially eliminating the taxpayer's risk of loss and
opportunity for gain with respect to the financial instrument. These provisions
apply only to classes of securities that do not have a principal balance.
Grantor Trust Securities
With respect to each series of grantor trust securities, Stinson, Mag &
Fizzell, P.C., special tax counsel to the company, will deliver its opinion to
the company that the related grantor trust will be classified as a grantor
trust and not as a partnership or an association taxable as a corporation. The
opinion shall be attached on Form 8-K to be filed with the Securities and
Exchange Commission within fifteen days after the initial issuance of the
securities or filed with the Securities and Exchange Commission as a post-
effective amendment to the
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prospectus. Accordingly, each beneficial owner of a grantor trust security will
generally be treated as the owner of an interest in the loans included in the
grantor trust.
For purposes of the following discussion, a grantor trust security
representing an undivided equitable ownership interest in the principal of the
loans constituting the related grantor trust, together with interest thereon at
a pass-through rate, will be referred to as a "grantor trust fractional
interest security." A grantor trust security representing ownership of all or a
portion of the difference between interest paid on the loans constituting the
related grantor trust and interest paid to the beneficial owners of grantor
trust fractional interest securities issued with respect to the grantor trust
will be referred to as a "grantor trust strip security."
Taxation Of Beneficial Owners Of Grantor Trust Securities. Beneficial owners
of grantor trust fractional interest securities generally will be required to
report on their federal income tax returns their respective shares of the
income from the loans (including amounts used to pay reasonable servicing fees
and other expenses but excluding amounts payable to beneficial owners of any
corresponding grantor trust strip securities) and, subject to the limitations
described below, will be entitled to deduct their shares of any reasonable
servicing fees and other expenses. If a beneficial owner acquires a grantor
trust fractional interest security for an amount that differs from its
outstanding principal amount, the amount includible in income on a grantor
trust fractional interest security may differ from the amount of interest
distributable thereon. See "Discount and Premium," below. Individuals holding a
grantor trust fractional interest security directly or through pass-through
entities will be allowed a deduction for reasonable servicing fees and expenses
only to the extent that the aggregate of the beneficial owner's miscellaneous
itemized deductions exceeds 2% of the beneficial owner's adjusted gross income.
Further, beneficial owners (other than corporations) subject to the alternative
minimum tax may not deduct miscellaneous itemized deductions in determining
alternative minimum taxable income.
Beneficial owners of grantor trust strip securities generally will be
required to treat the securities as "stripped coupons" under section 1286.
Accordingly, that beneficial owner will be required to treat the excess of the
total amount of payments on the security over the amount paid for the security
as original issue discount and to include the discount in income as it accrues
over the life of the security. See "--Discount and Premium," below.
Grantor trust fractional interest securities may also be subject to the
coupon stripping rules if a class of grantor trust strip securities is issued
as part of the same series of securities. The consequences of the application
of the coupon stripping rules would appear to be that any discount arising upon
the purchase of that security (and perhaps all stated interest thereon) would
be classified as original issue discount and includible in the beneficial
owner's income as it accrues (regardless of the beneficial owner's method of
accounting), as described below under "--Discount and Premium." The coupon
stripping rules will not apply, however, if (i) the pass-through rate is no
more than 100 basis points lower than the gross rate of interest payable on the
underlying loans and (ii) the difference between the outstanding principal
balance on the security and the amount paid for the security is less than 0.25%
of the principal balance times the weighted average remaining maturity of the
security.
Sales Of Grantor Trust Securities. Any gain or loss recognized on the sale
of a grantor trust security (equal to the difference between the amount
realized on the sale and the adjusted basis of the grantor trust security) will
be capital gain or loss, except to the extent of accrued and unrecognized
market discount, which will be treated as ordinary income, and in the case of
banks and other financial institutions except as provided under section 582(c).
The adjusted basis of a grantor trust security will generally equal its cost,
increased by any income reported by the seller (including original issue
discount and market discount income) and reduced (but not below zero) by any
previously reported losses, any amortized premium and by any distributions of
principal.
Grantor Trust Reporting. The trustee will furnish to each beneficial owner
of a grantor trust fractional interest security with each distribution a
statement setting forth the amount of the distribution allocable to principal
on the underlying loans and to interest thereon at the related interest rate.
In addition, within a
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reasonable time after the end of each calendar year, based on information
provided by the servicer, the trustee will furnish to each beneficial owner
during the year any customary factual information that the servicer deems
necessary or desirable to enable beneficial owners of grantor trust securities
to prepare their tax returns and will furnish comparable information to the
Internal Revenue Service (the "IRS") as and when required to do so by law.
REMIC Securities
If provided in a prospectus supplement, an election will be made to treat a
trust as a REMIC. With respect to each series of securities for which that
election is made, Stinson, Mag & Fizzell, P.C., special tax counsel to the
company, will deliver its opinion to the company that, assuming compliance with
the pooling and servicing agreement, the trust will be treated as a REMIC for
federal income tax purposes. A trust for which a REMIC election is made will be
referred to in this prospectus as a "REMIC trust." The securities of each class
will be designated as "regular interests" in the REMIC trust except that a
separate class will be designated as the "residual interest" in the REMIC
trust. The prospectus supplement for each series of securities will state
whether securities of each class will constitute a REMIC regular security or a
REMIC residual security. The opinion shall be attached on Form 8-K to be filed
with the Securities and Exchange Commission within fifteen days after the
initial issuance of the securities or filed with the Securities and Exchange
Commission as a post-effective amendment to the prospectus.
A REMIC trust will not be subject to federal income tax except with respect
to income from prohibited transactions and in other instances described below.
See "--Taxes on a REMIC Trust." Generally, the total income from the mortgage
loans in a REMIC trust will be taxable to the beneficial owners of the
securities of that series, as described below.
Regulations issued by the Treasury Department on December 23, 1992 (the
"REMIC regulations") provide some guidance regarding the federal income tax
consequences associated with the purchase, ownership and disposition of REMIC
securities. While material provisions of the REMIC regulations are discussed
below, investors should consult their own tax advisors regarding the possible
application of the REMIC regulations in their specific circumstances.
Special Tax Attributes. REMIC regular securities and REMIC residual
securities will be "regular or residual interests in a REMIC" within the
meaning of section 7701(a)(19)(C)(xi) and "real estate assets" within the
meaning of section 856(c)(5)(A). If at any time during a calendar year less
than 95% of the assets of a REMIC trust consist of "qualified mortgages"
(within the meaning of section 860G(a)(3)) then the portion of the REMIC
regular securities and REMIC residual securities that are qualifying assets
under those sections during the calendar year may be limited to the portion of
the assets of the REMIC trust that are qualified mortgages. Similarly, income
on the REMIC regular securities and REMIC residual securities will be treated
as "interest on obligations secured by mortgages on real property" within the
meaning of section 856(c)(3)(B), subject to the same limitation as described in
the preceding sentence. For purposes of applying this limitation, a REMIC trust
should be treated as owning the assets represented by the qualified mortgages.
The assets of the trust fund will include, in addition to the mortgage loans,
payments on the mortgage loans held pending distribution on the REMIC regular
securities and REMIC residual securities and any reinvestment income thereon.
REMIC regular securities and REMIC residual securities held by a financial
institution to which section 585, 586 or 593 applies will be treated as
evidences of indebtedness for purposes of section 582(c)(1). REMIC regular
securities will also be qualified mortgages with respect to other REMICs.
Taxation Of Beneficial Owners Of REMIC Regular Securities. Except as
indicated below in this federal income tax discussion, the REMIC regular
securities will be treated for federal income tax purposes as debt instruments
issued by the REMIC trust on the settlement date and not as ownership interests
in the REMIC trust or its assets. Beneficial owners of REMIC regular securities
that otherwise report income under a cash method of accounting will be required
to report income with respect to those securities under an accrual
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method. For additional tax consequences relating to REMIC regular securities
purchased at a discount or with premium, see "--Discount and Premium," below.
Taxation Of Beneficial Owners Of REMIC Residual Securities
Daily Portions. Except as indicated below, a beneficial owner of a REMIC
residual security for a REMIC trust generally will be required to report its
daily portion of the taxable income or net loss of the REMIC trust for each day
during a calendar quarter that the beneficial owner owned the REMIC residual
security. For this purpose, the daily portion shall be determined by allocating
to each day in the calendar quarter its ratable portion of the taxable income
or net loss of the REMIC trust for the quarter and by allocating the amount so
allocated among the beneficial owners of residual securities (on that day) in
accordance with their percentage interests on that day. Any amount included in
the gross income or allowed as a loss of any beneficial owner of a residual
security by virtue of this paragraph will be treated as ordinary income or
loss.
The requirement that each beneficial owner of a REMIC residual security
report its daily portion of the taxable income or net loss of the REMIC trust
will continue until there are no securities of any class outstanding, even
though the beneficial owner of the REMIC residual security may have received
full payment of the stated interest and principal on its REMIC residual
security.
The trustee will provide to beneficial owners of REMIC residual securities
of each series of securities (i) any information as is necessary to enable them
to prepare their federal income tax returns and (ii) any reports regarding the
securities of the series that may be required under the code.
Taxable Income Or Net Loss Of A REMIC Trust. The taxable income or net loss
of a REMIC trust will be the income from the qualified mortgages it holds and
any reinvestment earnings less deductions allowed to the REMIC trust. The
taxable income or net loss for a given calendar quarter will be determined in
the same manner as for an individual having the calendar year as the taxable
year and using the accrual method of accounting, with modifications. The first
modification is that a deduction will be allowed for accruals of interest
(including any original issue discount, but without regard to the investment
interest limitation in section 163(d)) on the REMIC regular securities (but not
the REMIC residual securities), even though REMIC regular securities are for
non-tax purposes evidences of beneficial ownership rather than indebtedness of
a REMIC trust. Second, market discount or premium equal to the difference
between the total stated principal balances of the qualified mortgages and the
basis to the REMIC trust generally will be included in income (in the case of
discount) or deductible (in the case of premium) by the REMIC trust as it
accrues under a constant yield method, taking into account the "prepayment
assumption" (as defined in the prospectus supplement, see "--Discount and
Premium--Original Issue Discount," below). The basis to a REMIC trust in the
qualified mortgages is the aggregate of the issue prices of all the REMIC
regular securities and REMIC residual securities in the REMIC trust on the
settlement date. If, however, a substantial amount of a class of REMIC regular
securities or REMIC residual securities has not been sold to the public, then
the fair market value of all the REMIC regular securities or REMIC residual
securities in that class as of the date of the prospectus supplement should be
substituted for the issue price.
Third, no item of income, gain, loss or deduction allocable to a prohibited
transaction (see "--Taxes on a REMIC Trust--Prohibited Transactions" below)
will be taken into account. Fourth, a REMIC trust generally may not deduct any
item that would not be allowed in calculating the taxable income of a
partnership by virtue of section 703(a)(2). Finally, the limitation on
miscellaneous itemized deductions imposed on individuals by section 67 will not
be applied at the REMIC trust level to any servicing and guaranty fees. (See,
however, "--Pass-Through of Servicing and Guaranty Fees to Individuals" below.)
In addition, under the REMIC regulations, any expenses that are incurred in
connection with the formation of a REMIC trust and the issuance of the REMIC
regular securities and REMIC residual securities are not treated as expenses of
the REMIC trust for which a deduction is allowed. If the deductions allowed to
a REMIC trust exceed its gross income for a calendar quarter, the excess will
be a net loss for the REMIC trust for that calendar quarter. The REMIC
regulations also provide that any gain or loss to a REMIC trust from the
disposition of any asset, including a
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qualified mortgage or "permitted investment" (as defined in section 860G(a)(5))
will be treated as ordinary gain or loss.
A beneficial owner of a REMIC residual security may be required to recognize
taxable income without being entitled to receive a corresponding amount of
cash. This could occur, for example, if the qualified mortgages are considered
to be purchased by the REMIC trust at a discount, some or all of the REMIC
regular securities are issued at a discount, and the discount included as a
result of a prepayment on a mortgage loan that is used to pay principal on the
REMIC regular securities exceeds the REMIC trust's deduction for unaccrued
original issue discount relating to the REMIC regular securities. Taxable
income may also be greater in earlier years because interest expense
deductions, expressed as a percentage of the outstanding principal amount of
the REMIC regular securities, may increase over time as the earlier classes of
REMIC regular securities are paid, whereas interest income with respect to any
given mortgage loan expressed as a percentage of the outstanding principal
amount of that mortgage loan, will remain constant over time.
Basis Rules And Distributions. A beneficial owner of a REMIC residual
security has an initial basis in its security equal to the amount paid for that
REMIC residual security. That basis is increased by amounts included in the
income of the beneficial owner and decreased by distributions and by any net
loss taken into account with respect to the REMIC residual security. A
distribution on a REMIC residual security to a beneficial owner is not included
in gross income to the extent it does not exceed the beneficial owner's basis
in the REMIC residual security (adjusted as described above) and, to the extent
it exceeds the adjusted basis of the REMIC residual security, shall be treated
as gain from the sale of the REMIC residual security.
A beneficial owner of a REMIC residual security is not allowed to take into
account any net loss for any calendar quarter to the extent that the net loss
exceeds the beneficial owner's adjusted basis in its REMIC residual security as
of the close of the calendar quarter (determined without regard to the net
loss). Any loss disallowed by reason of this limitation may be carried forward
indefinitely to future calendar quarters and, subject to the same limitation,
may be used only to offset income from the REMIC residual security.
Excess Inclusions. Any excess inclusions with respect to a REMIC residual
security are subject to special tax rules. With respect to a beneficial owner
of a REMIC residual security, the excess inclusion for any calendar quarter is
defined as the excess (if any) of the daily portions of taxable income over the
sum of the "daily accruals" for each day during a quarter that the REMIC
residual security was held by the beneficial owner. The daily accruals are
determined by allocating to each day during a calendar quarter its ratable
portion of the product of the "adjusted issue price" of the REMIC residual
security at the beginning of the calendar quarter and 120% of the "federal
long-term rate" in effect on the settlement date, based on quarterly
compounding, and properly adjusted for the length of the quarter. For this
purpose, the adjusted issue price of a REMIC residual security as of the
beginning of any calendar quarter is equal to the issue price of the REMIC
residual security, increased by the amount of daily accruals for all prior
quarters and decreased by any distributions made with respect to the REMIC
residual security before the beginning of that quarter. The issue price of a
REMIC residual security is the initial offering price to the public (excluding
bond houses and brokers) at which a substantial number of the REMIC residual
securities were sold. The federal long-term rate is a blend of current yields
on treasury securities having a maturity of more than nine years, computed and
published monthly by the IRS.
In general, beneficial owners of REMIC residual securities with excess
inclusion income cannot offset that income by losses from other activities. For
beneficial owners that are subject to tax only on unrelated business taxable
income (as defined in section 511 ), an excess inclusion of a beneficial owner
is treated as unrelated business taxable income. With respect to variable
contracts (within the meaning of section 817), a life insurance company cannot
adjust its reserve to the extent of any excess inclusion, except as provided in
regulations. The REMIC regulations indicate that if a beneficial owner of a
REMIC residual security is a member of an affiliated group filing a
consolidated income tax return, the taxable income of the affiliated group
cannot be less than the sum of the excess inclusions attributable to all
residual interests in REMICs held by
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members of the affiliated group. For a discussion of the effect of excess
inclusions on foreign investors that own REMIC residual securities, see "--
Foreign Investors" below.
The Treasury Department also has the authority to issue regulations that
would treat all taxable income of a REMIC trust as excess inclusions if the
REMIC residual security does not have "significant value." Although the
Treasury Department did not exercise this authority in the REMIC regulations,
future regulations may contain this rule. If that rule were adopted, it is
unclear how significant value would be determined for these purposes. If no
similar rule is applicable, excess inclusions should be calculated as discussed
above.
In the case of any REMIC residual securities that are held by a real estate
investment trust, the aggregate excess inclusions with respect to REMIC
residual securities reduced (but not below zero) by the real estate investment
trust taxable income (within the meaning of section 857(b)(2), excluding any
net capital gain) will be allocated among the shareholders of that trust in
proportion to the dividends received by the shareholders from the trust, and
any amount so allocated will be treated as an excess inclusion with respect to
a REMIC residual security as if held directly by the shareholder. Similar rules
will apply in the case of regulated investment companies, common trust funds
and cooperatives that hold a REMIC residual security.
Pass-Through Of Servicing And Guaranty Fees To Individuals. A beneficial
owner of a REMIC residual security who is an individual will be required to
include in income a share of any servicing and guaranty fees. A deduction for
these fees will be allowed to a beneficial owner only to the extent that those
fees, along with some of the beneficial owner's other miscellaneous itemized
deductions exceed 2% of the beneficial owner's adjusted gross income. In
addition, a beneficial owner of a REMIC residual security may not be able to
deduct any portion of the fees in computing a beneficial owner's alternative
minimum tax liability. A beneficial owner's share of the fees will generally be
determined by (i) allocating the amount of the expenses for each calendar
quarter on a pro rata basis to each day in the calendar quarter, and (ii)
allocating the daily amount among the beneficial owners in proportion to their
respective holdings on that day.
Taxes On A REMIC Trust
Prohibited Transactions. The Code imposes a tax on a REMIC equal to 100% of
the net income derived from "prohibited transactions." In general, a prohibited
transaction means the disposition of a qualified mortgage other than under
specified exceptions, the receipt of investment income from a source other than
a mortgage loan or other permitted investments, the receipt of compensation for
services, or the disposition of an asset purchased with the payments on the
qualified mortgages for temporary investment pending distribution on the
regular and residual interests.
Contributions To A REMIC After The Startup Day. The Code imposes a tax on a
REMIC equal to 100% of the value of any property contributed to the REMIC after
the "startup day" (generally the same as the settlement date). Exceptions are
provided for cash contributions to a REMIC (i) during the three month period
beginning on the startup day, (ii) made to a qualified reserve fund by a
beneficial owner of a residual interest, (iii) in the nature of a guarantee,
(iv) made to facilitate a qualified liquidation or clean-up call, and (v) as
otherwise permitted by treasury regulations.
Net Income From Foreclosure Property. The Code imposes a tax on a REMIC
equal to the highest corporate rate on "net income from foreclosure property."
The terms "foreclosure property" (which includes property acquired by deed in
lieu of foreclosure) and "net income from foreclosure property" are defined by
reference to the rules applicable to real estate investment trusts. Generally,
foreclosure property would be treated as such for a period of three years, with
a possible extension. Net income from foreclosure property generally means gain
from the sale of foreclosure property that is inventory property and gross
income from foreclosure property other than qualifying rents and other
qualifying income for a real estate investment trust.
Sales Of REMIC Securities. Except as provided below, if a REMIC regular
residual security is sold, the seller will recognize gain or loss equal to the
difference between the amount realized in the sale and its adjusted basis in
the security. The adjusted basis of a REMIC regular security generally will
equal the cost of
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that security to the seller, increased by any original issue discount or market
discount included in the seller's gross income with respect to the security and
reduced by distributions on that security previously received by the seller of
amounts included in the stated redemption price at maturity and by any premium
that has reduced the seller's interest income with respect to the security. See
"--Discount and Premium." The adjusted basis of a REMIC residual security is
determined as described above under "--Taxation of Beneficial Owners of REMIC
Residual Securities--Basis Rules and Distributions." Except as provided in the
following paragraph or under section 582(c) , any gain or loss will be capital
gain or loss, provided the security is held as a "capital asset" (generally,
property held for investment) within the meaning of section 1221.
Gain from the sale of a REMIC regular security that might otherwise be
capital gain will be treated as ordinary income to the extent that the gain
does not exceed the excess, if any, of (i) the amount that would have been
includible in the income of the beneficial owner of a REMIC regular security
had income accrued at a rate equal to 110% of the "applicable federal rate"
(generally, an average of current yields on treasury securities) as of the date
of purchase over (ii) the amount actually includible in the beneficial owner's
income. In addition, gain recognized on a sale by a beneficial owner of a REMIC
regular security who purchased the security at a market discount would also be
taxable as ordinary income in an amount not exceeding the portion of the
discount that accrued during the period a security was held by the beneficial
owner, reduced by any market discount includible in income under the rules
described below under "--Discount and Premium."
If a beneficial owner of a REMIC residual security sells its REMIC residual
security at a loss, the loss will not be recognized if, within six months
before or after the sale of the REMIC residual security, the beneficial owner
purchases another residual interest in any REMIC or any interest in a taxable
mortgage pool (as defined in section 7701(i) ) comparable to a residual
interest in a REMIC. That disallowed loss would be allowed upon the sale of the
other residual interest (or comparable interest) if the rule referred to in the
preceding sentence does not apply to that sale. While this rule may be modified
by treasury regulations, no such regulations have yet been published.
Transfers Of REMIC Residual Securities. Section 860E(e) imposes a
substantial tax, payable by the transferor (or, if a transfer is through a
broker, nominee, or other middleman as the transferee's agent, payable by that
agent) upon any transfer of a REMIC residual security to a disqualified
organization and upon a pass-through entity (including regulated investment
companies, real estate investment trusts, common trust funds, partnerships,
trusts, estates, cooperatives, and nominees) that owns a REMIC residual
security if the pass-through entity has a disqualified organization as a
record-holder. For purposes of the preceding sentence, a transfer includes any
transfer of record or beneficial ownership, whether by purchase, by default
under a secured lending agreement or otherwise.
The term "disqualified organization" includes the United States, any state
or political subdivision thereof, any foreign government, any international
organization, or any agency or instrumentality of the foregoing (other than
taxable instrumentalities), any cooperative organization furnishing electric
energy or providing telephone service to persons in rural areas, or any
organization (other than a farmers' cooperative) that is exempt from federal
income tax, unless the organization is subject to the tax on unrelated business
income. Moreover, an entity will not qualify as a REMIC unless there are
reasonable arrangements designed to ensure that (i) residual interests in the
entity are not held by disqualified organizations and (ii) information
necessary for the application of the REMIC tax will be made available.
Restrictions on the transfer of a REMIC residual security and other provisions
that are intended to meet this requirement are described in the pooling and
servicing agreement, and will be discussed more fully in the prospectus
supplement relating to the offering of any REMIC residual security. In
addition, a pass-through entity (including a nominee) that holds a REMIC
residual security may be subject to additional taxes if a disqualified
organization is a recordholder of an interest in that entity. A transferor of a
REMIC residual security (or an agent of a transferee of a REMIC residual
security, as the case may be) will be relieved of that tax liability if (i) the
transferee furnishes to the transferor (or the transferee's agent) an affidavit
that the transferee is not a disqualified organization, and (ii) the transferor
(or the transferee's agent) does not have actual knowledge that the affidavit
is false at the time of the transfer. Similarly, no tax will be imposed on a
pass-through entity for a period with respect to an interest in that entity
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is owned by a disqualified organization if (i) the record-holder of the
interest furnishes to the pass-through entity an affidavit that it is not a
disqualified organization, and (ii) during that period, the pass-through entity
has no actual knowledge that the affidavit is false.
The Taxpayer Relief Act of 1997 adds provisions to the code that will apply
to an "electing large partnership." If an electing large partnership holds a
REMIC residual security, all interests in the electing large partnership are
treated as held by disqualified organizations for purposes of the tax imposed
upon a pass-through entity by section 860E(e). An exception to this tax,
otherwise available to a pass-through entity that is furnished with affidavits
by record holders of interests in the entity and that does not know the
affidavits are false, is not available to an electing large partnership.
Under the REMIC regulations, a transfer of a "noneconomic residual interest"
to a U.S. Person (as defined below in "--Foreign Investors--grantor trust
securities and REMIC regular securities") will be disregarded for all federal
tax purposes unless no significant purpose of the transfer is to impede the
assessment or collection of tax. A REMIC residual security would be treated as
constituting a noneconomic residual interest unless, at the time of the
transfer, (i) the present value of the expected future distributions on the
REMIC residual security is no less than the product of the present value of the
"anticipated excess inclusions" with respect to that security and the highest
corporate rate of tax for the year in which the transfer occurs, and (ii) the
transferor reasonably expects that the transferee will receive distributions
from the applicable REMIC trust in an amount sufficient to satisfy the
liability for income tax on any "excess inclusions" at or after the time when
the liability accrues. Anticipated excess inclusions are the excess inclusions
that are anticipated to be allocated to each calendar quarter (or portion
thereof) following the transfer of a REMIC residual security, determined as of
the date the security is transferred and based on events that have occurred as
of that date and on the prepayment assumption. See "--Discount and Premium" and
"--Taxation of Beneficial Owners of REMIC Residual Securities--Excess
Inclusions."
The REMIC regulations provide that a significant purpose to impede the
assessment or collection of tax exists if, at the time of the transfer, a
transferor of a REMIC residual security has "improper knowledge" (i.e., either
knew, or should have known, that the transferee would be unwilling or unable to
pay taxes due on its share of the taxable income of the REMIC trust). A
transferor is presumed not to have improper knowledge if (i) the transferor
conducts, at the time of a transfer, a reasonable investigation of the
financial condition of the transferee and, as a result of the investigation,
the transferor finds that the transferee has historically paid its debts as
they come due and finds no significant evidence to indicate that the transferee
will not continue to pay its debts as they come due in the future; and (ii) the
transferee makes representations to the transferor in the affidavit relating to
disqualified organizations discussed above. Transferors of a REMIC residual
security should consult with their own tax advisors for further information
regarding the transfers.
Reporting And Other Administrative Matters. For purposes of the
administrative provisions, each REMIC trust will be treated as a partnership
and the beneficial owners of REMIC residual securities will be treated as
partners. The trustee will prepare, sign and file federal income tax returns
for each REMIC trust, which returns are subject to audit by the IRS. Moreover,
within a reasonable time after the end of each calendar year, the trustee will
furnish to each beneficial owner that received a distribution during that year
a statement setting forth the portions of any distributions that constitute
interest distributions, original issue discount, and any other information
required by treasury regulations and, with respect to beneficial owners of
REMIC residual securities in a REMIC trust, information necessary to compute
the daily portions of the taxable income (or net loss) of the REMIC trust for
each day during the year. The trustee will also act as the tax matters partner
for each REMIC trust, either in its capacity as a beneficial owner of a REMIC
residual security or in a fiduciary capacity. Each beneficial owner of a REMIC
residual security, by the acceptance of its REMIC residual security, agrees
that the trustee will act as its fiduciary in the performance of any duties
required of it in the event that it is the tax matters partner.
Each beneficial owner of a REMIC residual security is required to treat
items on its return consistently with the treatment on the return of the REMIC
trust, unless the beneficial owner either files a statement
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identifying the inconsistency or establishes that the inconsistency resulted
from incorrect information received from the REMIC trust. The IRS may assert a
deficiency resulting from a failure to comply with the consistency requirement
without instituting an administrative proceeding at the REMIC trust level.
Termination. In general, no special tax consequences will apply to a
beneficial owner of a REMIC regular security upon the termination of a REMIC
trust by virtue of the final payment or liquidation of the last mortgage loan
remaining in the trust fund. If a beneficial owner of a REMIC residual
security's adjusted basis in its REMIC residual security at the time the
termination occurs exceeds the amount of cash distributed to the beneficial
owner in liquidation of its interest, although the matter is not entirely free
from doubt, it would appear that the beneficial owner of the REMIC residual
security is entitled to a loss equal to the amount of that excess.
Debt Securities
With respect to each series of debt securities, Stinson, Mag & Fizzell,
P.C., special tax counsel to the company, will deliver its opinion to the
company that the securities will be classified as debt secured by the related
loans. Consequently, the debt securities will not be treated as ownership
interests in the loans or the trust. Beneficial owners will be required to
report income received with respect to the debt securities in accordance with
their normal method of accounting. For additional tax consequences relating to
debt securities purchased at a discount or with premium, see "--Discount and
Premium," below.
Special Tax Attributes. As described above, REMIC securities will possess
special tax attributes by virtue of the REMIC provisions. In general, debt
securities will not possess these special tax attributes. Investors to whom
these attributes are important should consult their own tax advisors regarding
investment in debt securities.
Sale Or Exchange. If a beneficial owner of a debt security sells or
exchanges the security, the beneficial owner will recognize gain or loss equal
to the difference, if any, between the amount received and the beneficial
owner's adjusted basis in the security. The adjusted basis in the security
generally will equal its initial cost, increased by any original issue discount
or market discount previously included in the seller's gross income with
respect to the security and reduced by the payments previously received on the
security, other than payments of qualified stated interest, and by any
amortized premium.
In general (except as described in "--Discount and Premium--Market
Discount," below), except for financial institutions subject to section 582(c)
, any gain or loss on the sale or exchange of a debt security recognized by an
investor who holds the security as a capital asset (within the meaning of
section 1221), will be capital gain or loss and will be long-term or short-term
depending on whether the security has been held for more than one year.
Partnership Interests
With respect to each series of partnership interests, Stinson, Mag &
Fizzell, P.C., special tax counsel to the company, will deliver its opinion to
the company that the trust will be treated as a partnership and not an
association taxable as a corporation for federal income tax purposes. The
opinion shall be attached on Form 8-K to be filed with the Securities and
Exchange Commission within fifteen days after the initial issuance of the
securities or filed with the Securities and Exchange Commission as a post-
effective amendment to the prospectus.
Special Tax Attributes. As described above, REMIC securities will possess
special tax attributes by virtue of the REMIC provisions. In general,
partnership interests will not possess these special tax attributes. Investors
to whom these attributes are important should consult their own tax advisors
regarding investment in partnership interests.
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Taxation Of Beneficial Owners Of Partnership Interests. If the trust is
treated as a partnership for federal income tax purposes, the trust will not be
subject to federal income tax. Instead, each beneficial owner of a partnership
interest will be required to separately take into account an allocable share of
income, gains, losses, deductions, credits and other tax items of the trust.
These partnership allocations are made in accordance with the code, treasury
regulations and the partnership agreement (here, the trust agreement and
related documents).
The trust's assets will be the assets of the partnership. The trust's income
will consist primarily of interest and finance charges earned on the underlying
mortgage loans. The trust's deductions will consist primarily of interest
accruing with respect to any indebtedness issued by the trust, servicing and
other fees, and losses or deductions upon collection or disposition of the
trust's assets.
The trust could have an obligation to make payments of withholding tax on
behalf of a beneficial owner of a partnership interest. (See "Backup
Withholding" and "Foreign Investors" below).
Substantially all of the taxable income allocated to a beneficial owner of a
partnership interest that is a pension, profit sharing or employee benefit plan
or other tax-exempt entity (including an individual retirement account) will
constitute "unrelated business taxable income" generally taxable to the holder
under the code.
Under section 708, the trust will be deemed to terminate for federal income
tax purposes if 50% or more of the capital and profits interests in the trust
are sold or exchanged within a 12-month period. Under the final regulations
issued on May 9, 1997, if such a termination occurs, the trust is deemed to
contribute all of its assets and liabilities to a newly formed partnership in
exchange for a partnership interest. Immediately thereafter, the terminated
partnership distributes interests in the new partnership to the purchasing
partner and remaining partners in proportion to their interests in liquidation
of the terminated partnership.
Sale Or Exchange Of Partnership Interests. Generally, capital gain or loss
will be recognized on a sale or exchange of partnership interests in an amount
equal to the difference between the amount realized and the seller's tax basis
in the partnership interests sold. A beneficial owner of a partnership
interest's tax basis in a partnership interest will generally equal the
beneficial owner's cost increased by the beneficial owner's share of trust
income (includible in income) and decreased by any distributions received with
respect to the partnership interest. In addition, both the tax basis in the
partnership interest and the amount realized on a sale of a partnership
interest would take into account the beneficial owner's share of any
indebtedness of the trust. A beneficial owner acquiring partnership interests
at different prices may be required to maintain a single aggregate adjusted tax
basis in the partnership interest, and upon sale or other disposition of some
of the partnership interests, allocate a portion of the aggregate tax basis to
the partnership interests sold (rather than maintaining a separate tax basis in
each partnership interest for purposes of computing gain or loss on a sale of
that partnership interest).
Any gain on the sale of a partnership interest attributable to the
beneficial owner's share of unrecognized accrued market discount on the assets
of the trust would generally be treated as ordinary income to the holder and
would give rise to special tax reporting requirements. If a beneficial owner of
a partnership interest is required to recognize an aggregate amount of income
over the life of the partnership interest that exceeds the aggregate cash
distributions with respect thereto, that excess will generally give rise to a
capital loss upon the retirement of the partnership interest. If a beneficial
owner sells its partnership interest at a profit or loss, the transferee will
have a higher or lower basis in the partnership interests than the transferor
had. The tax basis of the trust's assets will not be adjusted to reflect that
higher or lower basis unless the trust files an election under section 754.
Partnership Reporting Matters. The Owner trustee is required to (i) keep
complete and accurate books of the trust, (ii) file a partnership information
return (IRS Form 1065) with the IRS for each taxable year of the trust and
(iii) report each beneficial owner of a partnership interest's allocable share
of items of trust income and expense to beneficial owners and the IRS on
Schedule K-1. The trust will provide the Schedule K-1
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information to nominees that fail to provide the trust with the information
statement described below and those nominees will be required to forward the
information to the beneficial owners of the partnership interests. Generally,
beneficial owners of a partnership interests must file tax returns that are
consistent with the information return filed by the trust or be subject to
penalties unless the beneficial owner of a partnership interest notifies the
IRS of all the inconsistencies.
Under section 6031, any person that holds partnership interests as a nominee
at any time during a calendar year is required to furnish the trust with a
statement containing information on the nominee, the beneficial owners and the
partnership interests so held. Required information includes (i) the name,
address and taxpayer identification number of the nominee and (ii) as to each
beneficial owner (x) the name, address and identification number of the person,
(y) whether the person is a United States person, a tax-exempt entity or a
foreign government, and international organization, or any wholly owned agency
or instrumentality of either of the foregoing, and (z) information on
partnership interests that were held, bought or sold on behalf of the person
throughout the year. In addition, brokers and financial institutions that hold
partnership interests through a nominee are required to furnish directly to the
trust information as to themselves and their ownership of partnership
interests. A clearing agency registered under section 17A of the Securities
Exchange Act of 1934 is not required to furnish any such information statement
to the trust. Nominees, brokers and financial institutions that fail to provide
the trust with the information described above may be subject to penalties.
The Code provides for administrative examination of a partnership as if the
partnership were a separate and distinct taxpayer. Generally, the statute of
limitations for partnership items does not expire before three years after the
date on which the partnership information return is filed. Any adverse
determination following an audit of the return of the trust by the appropriate
taxing authorities could result in an adjustment of the returns of the
beneficial owner of a partnership interests, and a beneficial owner of a
partnership interest may be precluded from separately litigating a proposed
adjustment to the items of the trust. An adjustment could also result in an
audit of the beneficial owner of a partnership interest's returns and
adjustments of items not related to the income and losses of the trust.
Discount And Premium
A security purchased for an amount other than its outstanding principal
amount will be subject to the rules governing original issue discount, market
discount or premium. In addition, all grantor trust strip securities and some
grantor trust fractional interest securities will be treated as having original
issue discount by virtue of the coupon stripping rules in section 1286. In very
general terms, (1) original issue discount is treated as a form of interest and
must be included in a beneficial owner's income as it accrues (regardless of
the beneficial owner's regular method of accounting) using a constant yield
method; (2) market discount is treated as ordinary income and must be included
in a beneficial owner's income as principal payments are made on the security
(or upon a sale of a security); and (3) if a beneficial owner so elects,
premium may be amortized over the life of the security and offset against
inclusions of interest income. These tax consequences are discussed in greater
detail below.
Original Issue Discount. In general, a security will be considered to be
issued with original issue discount equal to the excess, if any, of its "stated
redemption price at maturity" over its "issue price." The issue price of a
security is the initial offering price to the public, excluding bond houses and
brokers, at which a substantial number of the securities was sold. The issue
price also includes any accrued interest attributable to the period between the
beginning of the first remittance period and the settlement date. The stated
redemption price at maturity of a security that has a notional principal amount
or receives principal only or that is or may be an accrual security is equal to
the sum of all distributions to be made under the security. The stated
redemption price at maturity of any other security is its stated principal
amount, plus an amount equal to the excess, if any, of the interest payable on
the first distribution date over the interest that accrues for the period from
the settlement date to the first distribution date.
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Notwithstanding the general definition, original issue discount will be
treated as zero if the discount is less than 0.25% of the stated redemption
price at maturity multiplied by its weighted average life. The weighted average
life of a security is apparently computed for this purpose as the sum, for all
distributions included in the stated redemption price at maturity of the
amounts determined by multiplying (1) the number of complete years (rounding
down for partial years) from the settlement date until the date on which each
distribution is expected to be made under the assumption that the mortgage
loans prepay at the rate specified in the prospectus supplement by (2) a
fraction, the numerator of which is the amount of the distribution and the
denominator of which is the security's stated redemption price at maturity. If
original issue discount is treated as zero under this rule, the actual amount
of original issue discount must be allocated to the principal distributions on
the security and, when each distribution is received, gain equal to the
discount allocated to the distribution will be recognized.
Section 1272(a)(6) contains special original issue discount rules directly
applicable to REMIC securities and debt securities. The Taxpayer Relief Act of
1997 extends application of section 1272(a)(6) to grantor trust securities for
tax years beginning after August 5, 1997. Under these rules, (1) the amount and
rate of accrual of original issue discount on each series of securities will be
based on (x) the prepayment assumption, and (y) in the case of a security
calling for a variable rate of interest, an assumption that the value of the
index upon which the variable rate is based remains equal to the value of that
rate on the settlement date, and (2) adjustments will be made in the amount of
discount accruing in each taxable year in which the actual prepayment rate
differs from the prepayment assumption.
Section 1272(a)(6)(B)(iii) requires that the prepayment assumption used to
calculate original issue discount be determined in the manner prescribed in
treasury regulations. To date, no such regulations have been promulgated. The
legislative history of this Code provision indicates that the assumed
prepayment rate must be the rate used by the parties in pricing the particular
transaction. The company anticipates that the prepayment assumption for each
series of securities will be consistent with this standard. The company makes
no representation, however, that the mortgage loans for a given series will
prepay at the rate reflected in the prepayment assumption for that series or at
any other rate. Each investor must make its own decision as to the appropriate
prepayment assumption to be used in deciding whether or not to purchase any of
the securities.
Each beneficial owner must include in gross income the sum of the "daily
portions" of original issue discount on its security for each day during its
taxable year on which it held the security. For this purpose, in the case of an
original beneficial owner, the daily portions of original issue discount will
be determined as follows. A calculation will first be made of the portion of
the original issue discount that accrued during each "accrual period." The
trustee will supply, at the time and in the manner required by the IRS, to
beneficial owners, brokers and middlemen information with respect to the
original issue discount accruing on the securities. The trustee will report
original issue discount based on accrual periods of no longer than one year
either (1) beginning on a distribution date or, in the case of the first
accrual period, the settlement date, and ending on the day before the next
distribution date or (2) beginning on the next day following a distribution
date and ending on the next distribution date.
Under section 1272(a)(6), the portion of original issue discount treated as
accruing for any accrual period will equal the excess, if any, of (1) the sum
of (A) the present values of all the distributions remaining to be made on the
security, if any, as of the end of the accrual period and (B) the distribution
made on the security during the accrual period of amounts included in the
stated redemption price at maturity, over (2) the adjusted issue price of the
security at the beginning of the accrual period. The present value of the
remaining distributions referred to in the preceding sentence will be
calculated based on (1) the yield to maturity of the security, calculated as of
the settlement date, giving effect to the prepayment assumption, (2) events
(including actual prepayments) that have occurred prior to the end of the
accrual period, (3) the prepayment assumption, and (4) in the case of a
security calling for a variable rate of interest, an assumption that the value
of the index upon which the variable rate is based remains the same as its
value on the settlement date over the entire life of the security. The adjusted
issue price of a security at any time will equal the issue price of the
security,
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increased by the aggregate amount of previously accrued original issue discount
with respect to that security, and reduced by the amount of any distributions
made on the security as of that time of amounts included in the stated
redemption price at maturity. The original issue discount accruing during any
accrual period will then be allocated ratably to each day during the period to
determine the daily portion of original issue discount.
In the case of grantor trust strip securities and some REMIC securities, the
calculation described in the preceding paragraph may produce a negative amount
of original issue discount for one or more accrual periods. No definitive
guidance has been issued regarding the treatment of the negative amounts. The
legislative history to section 1272(a)(6) indicates that the negative amounts
may be used to offset subsequent positive accruals but may not offset prior
accruals and may not be allowed as a deduction item in a taxable year in which
negative accruals exceed positive accruals. Beneficial owners of the securities
should consult their own tax advisors concerning the treatment of negative
accruals.
A subsequent purchaser of a security that purchases the security at a cost
less than its remaining stated redemption price at maturity also will be
required to include in gross income for each day on which it holds the
security, the daily portion of original issue discount with respect to that
security, but reduced, if the cost of the security to the purchaser exceeds its
adjusted issue price, by an amount equal to the product of (1) the daily
portion and (2) a constant fraction, the numerator of which is the excess and
the denominator of which is the sum of the daily portions of original issue
discount on the security for all days on or after the day of purchase.
Market Discount. A beneficial owner that purchases a security at a market
discount, that is, at a purchase price less than the remaining stated
redemption price at maturity of the security, or, in the case of a security
with original issue discount, its adjusted issue price, will be required to
allocate each principal distribution first to accrued market discount on the
security, and recognize ordinary income to the extent that the distribution
does not exceed the aggregate amount of accrued market discount on the security
not previously included in income. With respect to securities that have
unaccrued original issue discount, the market discount must be included in
income in addition to any original issue discount. A beneficial owner that
incurs or continues indebtedness to acquire a security at a market discount may
also be required to defer the deduction of all or a portion of the interest on
the indebtedness until the corresponding amount of market discount is included
in income. In general terms, market discount on a security may be treated as
accruing either (1) under a constant yield method or (2) in proportion to
remaining accruals of original issue discount, if any, or if none, in
proportion to remaining distributions of interest on the security, in any case
taking into account the prepayment assumption. The trustee will make available,
as required by the IRS, to beneficial owners of securities information
necessary to compute the accrual of market discount.
Notwithstanding the above rules, market discount on a security will be
considered to be zero if that discount is less than 0.25% of the remaining
stated redemption price at maturity of the security multiplied by its weighted
average remaining life. Weighted average remaining life presumably would be
calculated in a manner similar to weighted average life, taking into account
payments, including prepayments, prior to the date of acquisition of the
security by the subsequent purchaser. If market discount on a security is
treated as zero under this rule, the actual amount of market discount must be
allocated to the remaining principal distributions on the security and, when
each distribution is received, gain equal to the discount allocated to that
distribution will be recognized.
Securities Purchased At A Premium. A purchaser of a security that purchases
the security at a cost greater than its remaining stated redemption price at
maturity will be considered to have purchased that "premium security" at a
premium. The purchaser need not include in income any remaining original issue
discount and may elect, under section 171(c)(2) , to treat the premium as an
"amortizable bond premium." If a beneficial owner makes that election, the
amount of any interest payment that must be included in the beneficial owner's
income for each period ending on a distribution date will be reduced by the
portion of the premium allocable to each period based on the plan's yield to
maturity. The premium amortization should be made using constant yield
principles. If the election is made by the beneficial owner, the election will
also apply to all bonds the interest on which is not excludible from gross
income held by the beneficial owner at the beginning of the first
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taxable year to which the election applies and to all the fully taxable bonds
thereafter acquired by it, and is irrevocable without the consent of the IRS.
If the election is not made, (1) the beneficial owner must include the full
amount of each interest payment in income as it accrues, and (2) the premium
must be allocated to the principal distributions on the plan and, when each
principal distribution is received, a loss equal to the premium allocated to
that distribution will be recognized. Any tax benefit from the premium not
previously recognized will be taken into account in computing gain or loss upon
the sale or disposition of the plan.
Some securities may provide for only nominal distributions of principal in
comparison to the distributions of interest thereon. It is possible that the
IRS or the Treasury Department may issue guidance excluding some securities
from the rules generally applicable to debt instruments issued at a premium. In
particular, it is possible that a security will be treated as having original
issue discount equal to the excess of the total payments to be received thereon
over its issue price. In that event, section 1272(a)(6) would govern the
accrual of the original issue discount, but a beneficial owner would recognize
substantially the same income in any given period as would be recognized if an
election were made under section 171(c)(2). Unless and until the Treasury
Department or the IRS publishes specific guidance relating to the tax treatment
of these securities, the trustee intends to furnish tax information to
beneficial owners of the securities in accordance with the rules described in
the preceding paragraph.
Special Election. For any security acquired on or after April 4, 1994, a
beneficial owner may elect to include in gross income all "interest" that
accrues on the security by using a constant yield method. For purposes of the
election, the term "interest" includes stated interest, acquisition discount,
original issue discount, de minimis original issue discount, market discount,
de minimis market discount and unstated interest as adjusted by any amortizable
bond premium or acquisition premium. A beneficial owner should consult its own
tax advisor regarding the time and manner of making and the scope of the
election and the implementation of the constant yield method.
Backup Withholding
Distributions of interest and principal, as well as distributions of
proceeds from the sale of securities, may be subject to the "backup withholding
tax" under section 3406 at a rate of 31% if recipients of the distributions
fail to furnish to the payor information, including their taxpayer
identification numbers, or otherwise fail to establish an exemption from the
tax. Any amounts deducted and withheld from a distribution to a recipient would
be allowed as a credit against that recipient's federal income tax.
Furthermore, penalties may be imposed by the IRS on a recipient of
distributions that is required to supply information but that does not do so in
the proper manner.
The Internal Revenue Service recently issued final withholding regulations,
that change the rules relating to presumptions currently available relating to
information reporting and backup withholding. The withholding regulations would
provide alternative methods of satisfying the beneficial ownership
certification requirement. The withholding regulations are effective January 1,
2001, although valid withholding certificates that are held on December 31,
2000 remain valid until the earlier of December 31, 2001 or the due date of
expiration of the certificate under the rules as currently in effect.
Foreign Investors
The withholding regulations would require, in the case of securities held by
a foreign partnership, that (x) the certification described above be provided
by the partners rather than by the foreign partnership and (y) the partnership
provide information, including a United States taxpayer identification number.
See "--Backup Withholding" above. A look-through rule would apply in the case
of tiered partnerships.
Non-U.S. Persons should consult their own tax advisors regarding the
application to them of the withholding regulations.
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Grantor Trust Securities And REMIC Regular Securities. Distributions made on
a grantor trust security, debt security or a REMIC regular security to, or on
behalf of, a beneficial owner that is not a U.S. Person generally will be
exempt from U.S. federal income and withholding taxes. The term "U.S. Person"
means a citizen or resident of the United States, a corporation, partnership or
other entity created or organized in or under the laws of the United States or
any political subdivision thereof, an estate that is subject to U.S. federal
income tax regardless of the source of its income, or a trust if a court within
the United States can exercise primary supervision over its administration and
at least one United States fiduciary has the authority to control all
substantial decisions of the trust. This exemption is applicable provided (a)
the beneficial owner is not subject to U.S. tax as a result of a connection to
the United States other than ownership of the security, (b) the beneficial
owner signs a statement under penalties of perjury that certifies that the
beneficial owner is not a U.S. Person, and provides the name and address of
that beneficial owner, and (c) the last U.S. Person in the chain of payment to
the beneficial owner receives a statement from the beneficial owner or a
financial institution holding on its behalf and does not have actual knowledge
that the statement is false. Beneficial owners should be aware that the IRS
might take the position that this exemption does not apply to a beneficial
owner that also owns 10% or more of the REMIC residual securities of any REMIC
trust, or to a beneficial owner that is a "controlled foreign corporation"
described in section 881(c)(3)(C).
REMIC Residual Securities. Amounts distributed to a beneficial owner of a
REMIC residual security that is a not a U.S. Person generally will be treated
as interest for purposes of applying the 30%, or lower treaty rate, withholding
tax on income that is not effectively connected with a U.S. trade or business.
Temporary treasury regulations clarify that amounts not constituting excess
inclusions that are distributed on a REMIC residual security to a beneficial
owner that is not a U.S. Person generally will be exempt from U.S. federal
income and withholding tax, subject to the same conditions applicable to
distributions on grantor trust securities, debt securities and REMIC regular
securities, as described above, but only to the extent that the obligations
directly underlying the REMIC trust that issued the REMIC residual security,
e.g., mortgage loans or regular interests in another REMIC, were issued after
July 18, 1984. In no case will any portion of REMIC income that constitutes an
excess inclusion be entitled to any exemption from the withholding tax or a
reduced treaty rate for withholding. See "--REMIC Securities--Taxation of
Beneficial Owners of REMIC residual securities--Excess Inclusions."
Partnership Interests. Depending upon the particular terms of the trust
agreement and servicing agreement, a trust may be considered to be engaged in a
trade or business in the United States for purposes of federal withholding
taxes with respect to non-U.S. persons. If the trust is considered to be
engaged in a trade or business in the United States for those purposes and the
trust is treated as a partnership, the income of the trust distributable to a
non-U.S. person would be subject to federal withholding tax. Also, in those
cases, a non-U.S. beneficial owner of a partnership interest that is a
corporation may be subject to the branch profits tax. If the trust is notified
that a beneficial owner of a partnership interest is a foreign person, the
trust may withhold as if it were engaged in a trade or business in the United
States in order to protect the trust from possible adverse consequences of a
failure to withhold. A foreign holder generally would be entitled to file with
the IRS a claim for refund with respect to withheld taxes, taking the position
that no taxes were due because the trust was not in a U.S. trade or business.
STATE TAX CONSIDERATIONS
In addition to the federal income tax consequences described in "Material
Federal Income Tax Consequences," potential investors should consider the state
and local income tax consequences of the acquisition, ownership, and
disposition of the securities. State and local income tax law may differ
substantially from the corresponding federal law, and this discussion does not
purport to describe any aspect of the income tax laws of any state or locality.
Therefore, potential investors should consult their own tax advisors with
respect to the various state and local tax consequences of an investment in the
securities.
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ERISA CONSIDERATIONS
Section 406 of ERISA and section 4975 of the Internal Revenue Code prohibit
a "plan," which is a pension, profit sharing or other employee benefit plan and
individual retirement arrangements from engaging in transactions involving
"plan assets" with persons that are "parties in interest" under ERISA or
"disqualified persons" under the Internal Revenue Code with respect to the
plan, unless a statutory or administrative exemption applies to the
transaction. ERISA and the Internal Revenue Code also prohibit generally
actions involving conflicts of interest by persons who are fiduciaries of those
plans or arrangements. A violation of these "prohibited transaction" rules may
generate excise tax and other liabilities under ERISA and the Internal Revenue
Code for those persons. In addition, investments by plans are subject to
ERISA's general fiduciary requirements, including the requirement of investment
prudence and diversification and the requirement that a plan's investments be
made in accordance with the documents governing the plan. Employee benefit
plans that are governmental plans, as defined in Section 3(32) of ERISA, and
church plans, as defined in section 3(33) of ERISA, are not subject to ERISA
requirements. Accordingly, assets of these plans may be invested in securities
without regard to the ERISA considerations discussed below, subject to the
provisions of other applicable federal, state and local law. Any plan which is
qualified and exempt from taxation under section 401(a) and 501(a) of the
Internal Revenue Code, however, is subject to the prohibited transaction rules
of section 503 of the Internal Revenue Code.
Transactions involving the trust might be deemed to constitute prohibited
transactions under ERISA and the Internal Revenue Code with respect to a plan,
including an individual retirement arrangement, that purchased securities.
Therefore, in the absence of an exemption, the purchase, sale or holding of a
security by a plan, including individual retirement arrangements, subject to
section 406 of ERISA or section 4975 of the Internal Revenue Code might result
in prohibited transactions and the imposition of excise taxes and civil
penalties.
Certificates. The Department of Labor has issued to various underwriters
individual prohibited transaction exemptions, which generally exempt from the
application of the prohibited transaction provisions of section 406(a),
406(b)(1), 406(b)(2) and 407(a) of ERISA and the excise taxes imposed by
sections 4975(a) and (b) of the Internal Revenue Code, transactions with
respect to the initial purchase, the holding and the subsequent resale by plans
of certificates in pass-through trusts that consist of secured receivables,
secured loans and other secured obligations that meet the conditions and
requirements of the underwriter exemptions. The underwriter exemptions will
only be available for securities that are certificates.
Among the conditions that must be satisfied in order for the underwriter
exemptions to apply to offered certificates are the following:
. the acquisition of the certificates by a plan is on terms, including the
price for the certificates, that are at least as favorable to the plan as
they would be in an arm's-length transaction with an unrelated party;
. the rights and interests evidenced by the certificates acquired by the
plan are not subordinated to the rights and interests evidenced by other
certificates of the trust;
. the certificates acquired by the plan have received a rating at the time
of the acquisition that is one of the three highest generic rating
categories from Standard & Poor's, Moody's Investors Service, Duff &
Phelps Credit Rating Co. or Fitch Investors Service;
. the trustee is not an affiliate of any other member of the restricted
group, as defined below)
. the sum of all payments made to and retained by the underwriters in
connection with the distribution of the certificates represents not more
than reasonable compensation for underwriting the certificates; the sum
of all payments made to and retained by the originators and the company
in exchange for the assignment of the loans to the trust estate
represents not more than the fair market value of the loans; the sum of
all payments made to and retained by any servicer represents not more
than reasonable compensation for that person's services under the pooling
and servicing agreement and reimbursement of that person's reasonable
expenses;
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. the plan investing in the certificates is an "accredited investor" as
defined in Rule 501(a)(1) of Regulation D of the Securities and Exchange
Commission under the Securities Act of 1933; and
. in the event that all of the obligations used to fund the trust have not
been transferred to the trust on the closing date, additional obligations
of the types specified in the prospectus supplement and/or pooling and
servicing agreement having an aggregate value equal to no more than 25%
of the total principal amount of the certificates being offered by the
trust may be transferred to the trust, in exchange for amounts credited
to the account funding the additional obligations, within a funding
period of no longer than 90 days or 3 months following the closing date.
The trust estate must also meet the following requirements:
. the corpus of the trust estate must consist solely of assets of the type
that have been included in other investment pools;
. certificates in the other investment pools must have been rated in one of
the three highest rating categories of Standard & Poor's, Moody's
Investors Service, Fitch Investors Service or Duff & Phelps Credit Rating
Co. for at least one year prior to the plan's acquisition of
certificates; and
. certificates evidencing interests in other investment pools must have
been purchased by investors other than plans for at least one year prior
to the plan's acquisition of certificates.
Moreover, the underwriter exemptions provide relief from self-
dealing/conflict of interest prohibited transactions that may occur when the
plan fiduciary causes a plan to acquire certificates in a trust in which the
fiduciary, or its affiliate, is an obligor on the receivables held in the
trust; although, among other requirements, (1) in the case of an acquisition in
connection with the initial issuance of certificates, at least fifty percent of
each class of certificates in which plans have invested is acquired by persons
independent of the restricted group and at least fifty percent of the aggregate
interest in the trust is acquired by persons independent of the restricted
group; (2) the fiduciary, or its affiliate, is an obligor with respect to five
percent or less of the fair market value of the obligations contained in the
trust; (3) the plan's investment in certificates of any class does not exceed
twenty-five percent of all of the certificates of that class outstanding at the
time of the acquisition; and (4) immediately after the acquisition, no more
than twenty-five percent of the assets of the plan with respect to which the
person is a fiduciary are invested in certificates representing an interest in
one or more trusts containing assets sold or serviced by the same entity. The
underwriter exemptions do not apply to plans companyed by the "restricted
group," which is the company, the underwriters, the trustee, any servicer, any
obligor with respect to mortgage loans included in the trust fund constituting
more than five percent of the aggregate unamortized principal balance of the
assets in the trust fund, or any affiliate of the parties.
In addition to the underwriter exemptions, the Department of Labor has
issued Prohibited Transaction Class Exemption ("PTCE") 83-1 which provides an
exemption for transactions involving the sale or exchange of residential
mortgage pool pass-through certificates by plans and for transactions in
connection with the servicing and operation of the mortgage pool.
Bonds. The underwriter exemptions will not be available for securities that
are bonds. Under the "plan assets regulation" issued by the United States
Department of Labor, the assets of the trust would be treated as plan assets of
a plan for the purposes of ERISA and the Internal Revenue Code only if the plan
acquired an equity interest in the trust and none of the exceptions contained
in the plan assets regulation were applicable. An "equity interest" is defined
under the plan assets regulation as an interest other than an instrument which
is treated as indebtedness under applicable local law and which has no
substantial equity features. Accordingly, if the bonds are treated as having
substantial equity features, the purchase, holding and resale of the bonds
could result in a transaction that is prohibited under ERISA or the Internal
Revenue Code. If the bonds are treated as indebtedness without substantial
equity features, the trust's assets would not be deemed assets of a plan.
However, in that case, the acquisition or holding of the bonds by or on behalf
of a plan could nevertheless give rise to a prohibited transaction, if the
acquisition and holding of bonds by or on behalf of a plan was deemed to
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be a prohibited loan to a party in interest with respect to the plan.
Exemptions from the prohibited transaction rules could be applicable to the
purchase and holding of bonds by a plan, depending on the type and
circumstances of the plan fiduciary making the decision to acquire the bonds.
Included among these exemptions are: PTCE 84-14, regarding transactions
effected by "qualified professional asset managers"; PTCE 90-1, regarding
transactions entered into by insurance company pooled separate accounts; PTCE
91-38, regarding transactions entered into by bank collective investment funds;
PTCE 95-60, regarding transactions entered into by insurance company general
accounts; and PTCE 96-23, regarding transactions effected by "in-house asset
managers". Each purchaser and each transferee of a bond that is treated as debt
for purposes of the plan assets regulation may be required to represent and
warrant that its purchase and holding of the bond will be covered by one of the
exemptions listed above or by another Department of Labor class exemption.
Consultation With Counsel. The prospectus supplement for each series of
securities will provide further information which plans should consider before
purchasing the offered securities. A plan fiduciary considering the purchase of
securities should consult its tax and/or legal advisors regarding whether the
assets of the trust would be considered plan assets, the possibility of
exemptive relief from the prohibited transaction rules and other ERISA issues
and their potential consequences. Moreover, each plan fiduciary should
determine whether under the general fiduciary standards of investment prudence
and diversification, an investment in the securities is appropriate for the
plan, taking into account the overall investment policy of the plan and the
composition of the plan's investment portfolio. The sale of securities to a
plan is in no respect a representation by the company or the underwriters that
this investment meets all relevant requirements with respect to investments by
plans generally or any particular plan or that this investment is appropriate
for plans generally or any particular plan.
In John Hancock Mutual Life Insurance Co. v. Harris Trust and Savings Bank,
510 U.S. 86 (1993), the United States Supreme Court ruled that assets held in
an insurance company's general account may be deemed to be "plan assets" for
ERISA purposes.
LEGAL INVESTMENT
The related prospectus supplement will describe whether or not the
securities will constitute "mortgage-related securities" within the meaning of
SMMEA. Accordingly, investors whose investment authority is subject to legal
restrictions should consult their own legal advisors to determine whether and
to what extent the securities constitute legal investments for them.
AVAILABLE INFORMATION
The company has filed a registration statement with respect to the
securities with the Securities and Exchange Commission. This prospectus, which
forms a part of the registration statement, and the prospectus supplement
relating to each series of securities contain summaries of the material terms
of the agreements, but do not contain all of the information in the
registration statement. For further information, reference is made to the
registration statement and its exhibits. The registration statement and
exhibits can be inspected and copied at prescribed rates at the public
reference facilities maintained by the Securities and Exchange Commission at
its Public Reference Section, 450 Fifth Street, NW, Washington, D.C. 20549, and
at its Regional Office located as follows, Midwest Regional Office, 500 West
Madison Street, Chicago, Illinois 60661; and Northeast Regional Office, Seven
World Trade Center, New York, New York 10048. In addition, the Securities and
Exchange Commission maintains a World Wide Web site at http://www.sec.gov
containing reports, proxy and information statements and other information
regarding registrants, including the company, that file electronically with the
Securities and Exchange Commission.
Each trust will be required to file reports with the Securities and Exchange
Commission as required by the Securities Exchange Act of 1934. The company
intends to cause each trust to suspend filing the reports if and when the
reports are no longer required under said act.
61
<PAGE>
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 and you must not rely upon such information or
representations. This prospectus and any prospectus supplement do not
constitute an offer to sell or a solicitation of an offer to buy any
securities other than the securities offered hereby and thereby nor an offer
of the securities to any person in any state or other jurisdiction in which
that offer would be unlawful. You should not assume that information in this
prospectus is correct as of any time subsequent to its date.
INCORPORATION OF DOCUMENTS BY REFERENCE
All documents that we subsequently file with the Securities and Exchange
Commission under sections 13(a), 13(c), 14 or 15(d) of the Securities Exchange
Act of 1934, after the date of this prospectus shall be incorporated by
reference in this prospectus and be a part of this prospectus. Any statement
contained in a document incorporated by reference shall be modified or
superseded if a statement contained in this prospectus, the prospectus
supplement or in any other document subsequently incorporated by reference
modifies or replaces that statement.
The company will provide without charge, on request of each person to whom
this prospectus is delivered, a copy of any of the documents that are
incorporated by reference in this prospectus. Requests should be directed to
NovaStar Mortgage Funding Corporation, 1901 West 47th Place, Suite 105,
Westwood, KS 66205, telephone (913) 514-3200.
PLAN OF DISTRIBUTION
The company may offer each series of securities through one or more firms
that may be designated at the time of each offering of the securities. The
prospectus supplement will describe the specific terms of the offering of the
series and of each class within the series, the names of the underwriters, the
purchase price of the securities, the proceeds to the company from the sale,
any securities exchange on which the securities may be listed, and, if
applicable, the initial public offering prices, the discounts and commissions
to the underwriters and any discounts and concessions allowed or reallowed to
dealers. The place and time of delivery of each series will be stated in the
prospectus supplement.
LEGAL MATTERS
Stinson, Mag & Fizzell, P.C., Kansas City, Missouri, or any other counsel
identified in the prospectus supplement, will pass upon legal matters for the
company.
FINANCIAL INFORMATION
The company has determined that its financial statements are not material
to the offering made hereby.
A new trust will be formed to own the primary assets and to issue each
series of securities. Each new trust will have no assets or obligations prior
to the issuance of the securities and will not engage in any activities other
than those described in this prospectus. Accordingly, no financial statements
with respect to the trusts will be included in this prospectus or any
prospectus supplement.
A prospectus supplement and the related Form 8-K may contain financial
statements of any credit enhancer.
62
<PAGE>
Prospectus Supplement
(To Prospectus Dated )
--------------------------------
-------------------
$_____________
NovaStar Home Equity Loan
Asset-Backed Bonds,
NovaStar Mortgage Funding Trust, Series Series_________
Issuer
NovaStar Mortgage, Inc.
Seller and Servicer
NovaStar Mortgage Funding Corporation
Company
-------------------
NovaStar Mortgage Funding Trust, Series______, will issue________ classes of
asset-backed bonds secured primarily by a pledge of the assets of the issuer.
The issuer's assets consist primarily of conventional, first mortgage loans on
one- to four-family residential properties.
------------------------------------------------------------------------------
Consider carefully the risk factors starting on page S-__ of this prospectus
supplement and page ___ of the prospectus before making a decision to invest in
the bonds.
The bonds represent asset-backed debt secured primarily by the mortgage loans
held by the issuer. The bonds are not interests in or obligations of any other
person.
No governmental agency or instrumentality has insured or guaranteed the bonds or
the underlying mortgage loans.
------------------------------------------------------------------------------
The Bonds--
The issuer will issue the two classes of bonds offered for sale by this
prospectus supplement.
Interest and principal on each class of bonds is scheduled to be paid monthly on
the 25th day of the month or, if such day is not a business day, the next
succeeding business day. The first scheduled payment date is_________________.
Credit enhancement--
The assets of the issuer will initially exceed the principal balance of the
bonds and such overcollateralization will be available to absorb losses.
Excess interest from any of the two groups of mortgage loans may be utilized to
cover credit losses and certain interest shortfalls on the other class of bonds
relating to the other group of mortgage loans.
The issuer will also issue two classes of subordinated bonds and a residual
certificate which are not offered by this prospectus supplement.
Each class of bonds will be unconditionally and irrevocably guaranteed as to the
timely payment of scheduled interest and ultimate principal pursuant to the
terms of a financial guarantee insurance policy to be issued by _______________.
<TABLE>
<CAPTION>
Offering Information:
Initial Aggregate Proceeds to the
Class Bond Balance Price to Public Underwriting Discount Company(2)
-------------------- ----------------- --------------- --------------------- -----------------
<S> <C> <C> <C> <C>
Class A-1 Bonds $ 100.00% $
Class A-2 Bonds $ 100.00% $
Total $ 100.00% $
------------------------
</TABLE>
(1) Plus accrued interest, if any, from .
------------------------
(2) Before deducting expenses, estimated to be .
---------------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined
if this prospectus supplement or the prospectus is truthful or complete.
Any representation to the contrary is a criminal offense. _______________
_____________________ as underwriter, will offer the bonds only after the
bonds have been issued by the issuer, and delivered to, and accepted by
the underwriter. The underwriter has the right to reject any order. We
expect to deliver the bonds on or about through The Depository Trust
Company, CEDEL S.A. or the Euroclear System.
___________________
The date of this prospectus supplement is______
<PAGE>
IMPORTANT NOTICE ABOUT THE INFORMATION PRESENTED IN THIS
PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS
We provide information to you about the offered bonds in two
separate documents that progressively provide more detail: (1) the accompanying
prospectus, which provides general information, some of which may not apply to
your series of bonds, and (2) this prospectus supplement, which describes the
specific terms of your series of bonds.
This prospectus supplement does not contain complete
information about the offering of the bonds. Additional information is contained
in the prospectus. You are urged to read both this prospectus supplement and the
prospectus in full. We cannot sell the offered bonds to you unless you have
received both this prospectus supplement and the prospectus.
The prospectus contemplates several different types of
securities, some of which are not relevant to this offering. You should rely on
the information in this prospectus supplement with respect to the two classes of
bonds offered hereby.
The company has filed with the Securities and Exchange
Commission (the "Commission") a registration statement under the Securities Act
of 1933, as amended, with respect to the bonds offered pursuant to this
prospectus supplement. This prospectus supplement and the prospectus, which form
a part of the registration statement, omit certain information contained in such
registration statement pursuant to the rules and regulations of the Commission.
You may inspect and copy the registration statement at the Public Reference Room
at the Commission at 450 Fifth Street, N.W., Washington, D.C. and the
Commission's regional offices at Seven World Trade Center, 13th Floor, New York,
New York, 10048 and Northwestern Atrium Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661. You can obtain copies of such materials at
prescribed rates from the Public Reference Section of the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549. In addition, the Commission
maintains a site on the World Wide Web containing reports, proxy materials,
information statements and other items. The address is http://www.sec.gov.
We include cross-references in this prospectus supplement and
the accompanying prospectus to captions in these materials where you can find
further related discussions. The following table of contents and the table of
contents included in the accompanying prospectus provide the pages on which
these captions are located.
S-2
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
TABLE OF CONTENTS...............................................................
SUMMARY.........................................................................
Parties......................................................................
Description of the Bonds.....................................................
Payments on the Bonds........................................................
Subordinated Bonds and the Residual Certificate..............................
Credit Enhancement...........................................................
Mortgage Loan Pool...........................................................
Pre-Funding Account and Interest Coverage Account............................
Optional Termination.........................................................
Federal Income Tax Consequences..............................................
ERISA Considerations.........................................................
Legal Investment.............................................................
Rating.......................................................................
RISK FACTORS....................................................................
Underwriting Standards.......................................................
Delinquencies and Potential Delinquencies....................................
Balloon Loans................................................................
Geographic Concentration.....................................................
Subsequent Mortgage Loans....................................................
Mandatory Prepayment.........................................................
Special Prepayment Considerations............................................
Special Yield Considerations.................................................
Risk of Mortgage Loan Yield Reducing the Interest Rate on the Bonds..........
Converted Mortgage Loans.....................................................
USE OF PROCEEDS.................................................................
DESCRIPTION OF THE MORTGAGE POOL................................................
General......................................................................
Mortgage rate Adjustment.....................................................
Six-Month LIBOR Index........................................................
One-Year CMT Index...........................................................
Mortgage Loan Characteristics................................................
Conveyance of Subsequent Mortgage Loans and the Pre-Funding Account..........
Underwriting Standards for the Mortgage Loans................................
Primary Mortgage Insurance Policies..........................................
Additional Information.......................................................
THE SELLER......................................................................
THE ISSUER......................................................................
THE COMPANY.....................................................................
THE OWNER TRUSTEE...............................................................
THE INDENTURE TRUSTEE...........................................................
THE BOND ADMINISTRATOR..........................................................
THE BOND INSURER................................................................
General......................................................................
Ratings......................................................................
Capitalization...............................................................
Incorporation of Certain Information by Reference............................
Insurance Regulation.........................................................
DESCRIPTION OF THE BONDS........................................................
General......................................................................
Book-Entry Bonds.............................................................
Assignment of Mortgage Loans.................................................
Payments.....................................................................
Available Funds..............................................................
Interest Payments on the Bonds...............................................
Calculation of One-Month LIBOR...............................................
Principal Payments on the Bonds..............................................
Priority of Payment..........................................................
</TABLE>
S-3
<PAGE>
<TABLE>
<S> <C>
Overcollateralization Provisions.............................................
Cross-Collateralization......................................................
Bond Insurance Policy........................................................
Advances.....................................................................
The Paying Agent.............................................................
Optional Termination.........................................................
Mandatory Prepayments on the bonds...........................................
Interest Coverage Account....................................................
CERTAIN YIELD AND PREPAYMENT CONSIDERATIONS.....................................
DESCRIPTION OF THE SERVICING AGREEMENT..........................................
The Servicer.................................................................
Foreclosure and Delinquency Experience with Subprime Mortgage Loans..........
Servicing and Other Compensation.............................................
Ninety-Day Renewable Terms...................................................
Purchase of Delinquent Mortgage Loans........................................
THE INDENTURE...................................................................
Control by Bond Insurer......................................................
Events of Default............................................................
Rights Upon Event of Default.................................................
Limitation on Suits..........................................................
The Bond Administrator and the Indenture trustee.............................
FEDERAL INCOME TAX CONSEQUENCES.................................................
REMIC Elections..............................................................
METHOD OF DISTRIBUTION..........................................................
CERTAIN LEGAL MATTERS...........................................................
RATINGS.........................................................................
LEGAL INVESTMENT................................................................
ERISA CONSIDERATIONS............................................................
ANNEX I GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES...........
Initial Settlement...........................................................
Secondary Market Trading.....................................................
Certain U.S. Federal Income Tax Documentation Requirements...................
</TABLE>
S-4
<PAGE>
SUMMARY
. This summary highlights selected information from this prospectus
supplement and does not contain all of the information that you need to
consider in making your investment decision. To understand all of the terms
of the offering of the bonds, read carefully this entire prospectus
supplement and the accompanying prospectus.
. This summary provides an overview of certain calculations, cash flow
priorities and other information to aid your understanding and is qualified
by the full description of these calculations, cash flow priorities and
other information in this prospectus supplement and the accompanying
prospectus.
Parties
Issuer
NovaStar Mortgage Funding Trust, Series ______, a Delaware business trust. An
election will be made to treat certain assets of the issuer as a "real estate
mortgage investment conduit" ("REMIC") for federal income tax purposes.
Seller and Servicer
NovaStar Mortgage, Inc., a Virginia corporation. See "The Seller" and
"Description of the Servicing Agreement--The Servicer" herein.
Company
NovaStar Mortgage Funding Corporation, a Delaware corporation. See "The Company"
herein.
Owner trustee
_____________________, a _____________________ corporation.
Indenture Trustee
_____________________, a _____________________ corporation. Chase will act as
the initial paying agent.
Bond Administrator
_____________________, a _____________________. In its capacity as bond
administrator, ______________ will act as the initial certificate registrar and
custodian in addition to performing other administrative functions on behalf of
the indenture trustee.
Bond Insurer
_____________________. See "The Bond Insurer" herein.
Description of the Bonds
The issuer will issue its Home Equity Loan Asset Backed Bonds, Series ______ in
two classes: the class A-1 bonds and the class A-2 bonds. The initial principal
amount of each class of bonds is indicated on the front cover.
S-5
<PAGE>
The Assets of the Issuer
The bonds will be primarily secured by a pledge of the assets of the issuer. The
assets of the issuer will consist primarily of (i) two separate groups of
conventional, one- to four-family first lien mortgage loans; (ii) a security
interest in the related underlying property; (iii) principal and interest
payments on the mortgage loans; (iv) money on deposit in a pre-funding account
which shall be used to purchase additional mortgage loans; and (v) money on
deposit in other accounts which may be established with respect to the issuer.
Each group of mortgage loans secures only the related class of bonds (and the
subordinated bonds), except to the extent of cross-collateralization of excess
cash flow, as further described herein.
The Final Scheduled Payment Date
The final scheduled payment date for all classes of bonds, on which the final
payment of principal must ultimately be made, is _____________________. We
anticipate, however, that the actual final payment of principal and interest on
the bonds will occur significantly earlier.
Book-Entry Format
The bonds will be issued, maintained and transferred on the book-entry records
of the Depository Trust Company. The bonds will be offered in registered form,
in minimum denominations of $25,000 and integral multiples of $1,000 in excess
thereof.
Payments on the Bonds
Payment Dates
Principal and interest is scheduled to be paid to the bondholders on the 25th
day of each month, or, if such day is not a business day, on the next succeeding
business day, commencing on __________.
Record Dates
The indenture trustee will make payments to the bondholders of record as of the
related record date. The record date for the class A-1 bonds is the last
business day prior to a payment date. The record date for the class A-2 bonds is
the last day of the calendar month preceding a payment date. For all classes of
bonds, the record date for the first payment date shall be the closing date.
Due Periods
Generally, payments made to bondholders on each payment date will relate to the
collections of principal and interest on the mortgage loans in the related due
period. The due period commences on the second day of the calendar month
immediately before the month in which the related payment date occurs and ends
on the first day of the calendar month in which the related payment date occurs.
Funds Available for Payment of Interest and Principal
The following funds will generally be available for the payment of interest and
principal on each class of bonds on each payment date:
. 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;
S-6
<PAGE>
. any amounts representing interest on amounts in the payment account and
miscellaneous fees and collections, including assumption fees and
prepayment penalties with respect to the mortgage loans in the related
group (but excluding late fees);
. any unscheduled payments and receipts, including prepayments on the related
mortgage loans, received during the related prepayment period and proceeds
of repurchases, and adjustments in the case of substitutions and
terminations, net liquidation proceeds and insurance proceeds, proceeds
from any MI policy;
. all advances made for such payment date in respect of the related mortgage
loans;
. the amount, if any, of payments received under the bond insurance policy
for such class; and
. during the funding period, an amount from the interest coverage account to
cover shortfalls in interest caused by the pre-funding feature, and at the
end of the funding period, amounts in the pre-funding account;
net of the bond insurance premium, servicing and other administrative fees and
other amounts reimbursable therefrom to the servicer and any subservicer
allocable to such class.
Interest
Interest on the bonds will accrue at the applicable bond interest rate during
the related interest period. Generally for the class A-1 bonds, the interest
period will run from each payment date to and including the day preceding the
next payment date. In the case of the first payment date, interest begins to
accrue on the class A-1 bonds on the day of the closing. For the class A-2
bonds, the interest period will be the calendar month immediately preceding the
related payment date.
Interest on the class A-1 bonds will be calculated on the basis of the actual
number of days elapsed in the interest period in a year of 360 days. Interest on
the class A-2 bonds will be calculated on the basis of twelve 30-day months in a
360 day year.
Bond Interest Rate
The annual rate of interest on the class A-1 bonds will be equal to one-month
LIBOR plus ________%.
The annual rate of interest on the class A-2 bonds will be ________%.
For each payment date after the payment date on which the principal balance of
all mortgage loans is reduced to less than ___% of the sum of the principal
balance of the initial mortgage loans as of the cut-off date and the original
pre-funded amount, the rates of interest on each class of bonds will increase by
the following amounts:
Class Rate Step Up
--------------- ----------------------
A-1 ______%
A-2 ______%
The rate of interest on each class of bonds is also subject to an available
funds cap rate. If the rate of interest described above for a class of bonds
would exceed the weighted average coupon for the mortgage loans in the related
group net of certain fees of the trust allocated to such class (expressed as an
annual rate) and, for the class A-1 bonds, a minimum spread of %, then the bond
interest rate will be accordingly reduced.
S-7
<PAGE>
If, on any payment date, the available funds cap rate limits the interest rate
on the class A-1 bonds, then the amount of the resulting interest shortfall will
be carried forward and be due and payable on the following payment date and
shall accrue interest at the applicable bond interest rate until paid. The bond
insurance policy does not guarantee payment of this interest shortfall.
There is no carry-forward feature with respect to the class A-2 bonds.
Principal
On each payment date, the bondholders are scheduled to receive an amount of
principal generally equal to the lesser of:
. the remainder of amounts described above under the heading "Funds Available
for Payment of Interest and Principal" for the related group after
reimbursing the bond insurer for amounts paid previously under the bond
insurance policy in respect of such class, and monthly interest on the
related class of bonds; and
. the sum of (i) the scheduled principal on the mortgage loans in the related
group collected or advanced during the related due period, (ii) unscheduled
principal on the mortgage loans in the related group collected during the
related prepayment period and (iii) an accelerated payment of principal
used to maintain the required overcollateralization amount.
Advances
The servicer will make advances in respect of delinquent payments of principal
and interest on the mortgage loans. The servicer, however, is only required to
make such advances if it believes that it can recover the advance from later
proceeds or collections on the related mortgage loan. The purpose of such
advances is to maintain a regular cash flow to the bondholders, not to guarantee
or insure against losses. The Servicer may make advances from its own funds or
from funds held in the collection account.
Compensating Interest Payments
The servicer will also make interest payments to compensate in part for any
shortfall in interest payments on the bonds which result from a mortgagor
prepaying all or part of a mortgage loan. The servicer's obligation to make such
payments is limited to the amount of its servicing fee. The servicer is not
entitled to recover compensating interest payments from the issuer.
Application of Excess Cash
Generally, because the monthly payments of interest and principal on the
mortgage loans exceed the monthly payments of interest and principal and
administrative fees for the bonds, each month there will be excess cash above
that required to pay principal and interest on the bonds. Excess cash for each
group will be used to pay down the bond balance of the related class of bonds in
order to maintain the required level of overcollateralization and to reimburse
the bond insurer in respect of such bonds. Any excess cash remaining after
payments on the related class of bonds will be used with respect to the other
classes of bonds to make up any interest shortfalls, to fund their
overcollateralization requirement and to reimburse the bond insurer, as further
described herein. Any remaining excess cash will be paid to the holder of the
subordinated bonds and will not be available for any subsequent payments to the
bondholders or the bond insurer.
S-8
<PAGE>
Subordinated Bonds and the Residual Certificate
The issuer will also issue two classes of subordinated bonds, and one class of
residual certificates. The subordinated bonds and residual certificates are
subordinate in right of payment to the bonds. The company will be the initial
holder of the subordinated bonds and the residual certificates. The subordinated
bonds and the residual certificate are not offered by this prospectus
supplement.
Credit Enhancement
Credit enhancement reduces the risk of losses to bondholders created by
shortfalls in payments received and losses incurred on the mortgage loans. The
credit enhancement available to the bondholders will consist of the bond
insurance policy issued by _________________, the bond insurer, and the
overcollateralization and excess cash flow cross-collateralization provisions of
the indenture.
Bond Insurance Policy
________________________, the bond insurer, will issue its irrevocable and
unconditional bond insurance policy on or before ________________________ for
the benefit of the bondholders. The effect of the bond insurance policy is to
guaranty the timely payment of interest on, and the ultimate payment of the
principal amounts, of each class of bonds.
For any payment date, the amount paid by the bond insurer will generally equal
the sum of (a) the interest payable on the related class of bonds minus the
amount described above under the heading "Funds Available for Payment of
Interest and Principal" for such date and (b) the amount necessary to keep the
bonds from being undercollateralized (i.e., to ensure that the issuer's
liabilities do not exceed its assets).
Payments Not Insured by the Bond Insurance Policy
The bond insurance policy does not insure the payment of the following:
. any interest shortfall arising where the available funds rate cap limits
the amount of interest paid on a class of bonds;
. any shortfall in compensating interest as a result of prepayments on the
mortgage loans; or
. shortfalls in interest due to the application of the Relief Act (as defined
in this prospectus supplement).
Payments of these amounts may only be funded from any excess cash which would
otherwise be distributed to the holders of the subordinated bonds.
Overcollateralization
As of the closing date, the aggregate principal amount of the mortgage loans in
each group and the amount on deposit in the pre-funding account held for such
group is greater than the principal balance of the related class of bonds. This
excess of the issuer's assets over the total principal balance of the bonds is
known as "overcollateralization." The initial overcollateralization (as a
percentage of the related bond balance) for each class of bonds is as follows:
Class Initial OC
--------------- --------------------
A-1 _________%
A-2 _________%
S-9
<PAGE>
On each payment date, the indenture trustee will apply excess cash from each
group to pay down the bond balance of the related class as necessary to maintain
the required level of overcollateralization for such class.
The required level of overcollateralization may increase or decrease over time.
Any increase may result in an accelerated amortization of the bonds until the
required level is reached. Any decrease will result in slower amortization of
the bonds until the required level is reached.
Mortgage Loan Pool
Statistical Information
The statistical information on the mortgage loans presented in this prospectus
supplement is based on the pool of mortgage loans (divided into two groups) to
be transferred to the issuer on the closing date and are stated as of the
cut-off date, ____________________.
Mortgage Loan Data
The pool of mortgage loans have been divided into four mortgage loan groups:
Group I: adjustable rate mortgage loans which primarily secure the class A-1
bonds; and
Group II: fixed rate mortgage loans which primarily secure the class A-2 bonds.
As of the cut-off date, there were ________________ initial mortgage loans in
the mortgage pool secured by mortgages on residential properties, exclusively,
and having the following characteristics. Percentages of mortgage loans with a
characteristic, unless stated otherwise, are determined by weighted average
principal amount as of the cut-off date.
S-10
<PAGE>
Group I Initial Mortgage Loans
Number of Initial
mortgage loans __________
Principal Balance
Aggregate
Principal Balance $__________________
Average
Principal Balance $__________________
Range of Principal
Balances $_______ - $_______
Coupon Rates
Weighted Average
Coupon Rate ________%
Range of Coupon
Rates ________% - _______%
Remaining Term to Maturity
Weighted Average
Remaining Term to
Maturity ________
Range of Remaining
Term to Maturity ________ - ________
Original Loan-to-Value
Ratio
Weighted Average
Original
Loan-to-Value Ratio ________%
Range of Original
Loan-to-Value Ratios ________% - _______%
Percentage of Convertible
Mortgage Loans ________%
Number of
Convertible
Mortgage Loans ________%
Aggregate Principal
Balance of
Convertible
Mortgage Loans $___________________
Percentage of First Lien
Mortgage Loans _________%
Delinquent Loans
30-59 days _________%
60-89 days _________%
S-11
<PAGE>
Group II Initial Mortgage Loans
Number of Initial
mortgage loans __________
Principal Balance
Aggregate
Principal Balance $__________________
Average Principal
Balance $__________________
Range of
Principal Balances $_______ - $_______
Coupon Rates
Weighted Average
Coupon Rate ________%
Range of Coupon
Rates ________% - _______%
Remaining Term to
Maturity
Weighted Average
Remaining Term to
Maturity ________
Range of
Remaining Term to
Maturity ________ - ________
Original Loan-to-Value
Ratio
Weighted Average
Original
Loan-to-Value
Ratio ________%
Range of Original
Loan-to-Value
Ratios ________% - _______%
Percentage of First
Lien Mortgage Loans ________%
Delinquent Loans
30-59 days _________%
60-89 days
_________%
Percentage of
Balloon Loans* _________%
* "Balloon loans" require monthly payments of principal based on 30-year
amortization schedules, but have scheduled maturity dates of 15 years from the
due date of the first monthly payment, in each case leaving a substantial
portion of the original principal amount due and payable on the respective
scheduled maturity date.
Pre-Funding Account and Interest Coverage Account
The mortgage loans in each group will consist of initial mortgage loans held by
the issuer on the closing date and subsequent mortgage loans to be acquired by
the issuer. The issuer will deposit money into a
S-12
<PAGE>
segregated account (designated as the "pre-funding account") which will be used
from time to time on or before _________________ to acquire subsequent mortgage
loans for addition to each group to secure the related class of bonds. These
subsequent mortgage loans must satisfy certain criteria described in this
prospectus supplement. The prefunded amount for each group, expressed as a
percentage equal to the prefunded amount divided by the sum of the total initial
collateral balance and the prefunded amount for such group is as follows:
Group Prefunding
--------------- ----------------
I _______%
II _______%
On the closing date, a portion of the sales proceeds of the bonds will be
deposited in an "interest coverage" account for application to cover shortfalls
in interest on the bonds attributable to the pre-funding feature during the
funding period.
Mandatory Prepayment of Principal from Excess Moneys in the Pre-Funding Account
To the extent that the issuer does not fully use amounts on deposit in the pre-
funding account to purchase additional mortgage loans for a group by
___________________, the issuer will apply the remaining amounts for such group
as a prepayment of the principal of the related class of bonds on the payment
date in _________________. Although no assurance is possible, the issuer
anticipates that a substantial amount of the money initially deposited in the
pre-funding account will be used up to purchase additional mortgage loans, and
that there will be no material amount of principal prepaid on the bonds from
amounts in the pre-funding account.
Optional Termination
The servicer has the option to purchase the mortgage loans and cause a
redemption of the bonds, on or after any payment date on which the aggregate
principal balance of the mortgage loans in all two groups has declined to be
equal to or less than ___% of the sum of the principal balance of the initial
mortgage loans as of the cut-off date and the original pre-funded amount. Such
redemption must constitute a "qualified liquidation" within the meaning of
Section 860F of the Code, including, without limitation, the requirement that
the qualified liquidation takes place over a period not to exceed 90 days.
Federal Income Tax Consequences
The owner trustee will elect to treat certain assets of the issuer as a REMIC
for federal income tax purposes. The bonds and the subordinated bonds will be
designated as "regular interests" in a REMIC and the residual class of
certificates will be designated as the "residual interest" with respect to the
REMIC. Bondholders will include interest on the bonds in income in accordance
with an accrual method of accounting.
ERISA Considerations
The bonds may be purchased by pension, profit-sharing and other employee benefit
plans that are subject to the Employee Retirement Income Security Act of 1974,
as amended, provided that certain conditions described herein are satisfied. A
fiduciary of any such plan that is considering a purchase of bonds
S-13
<PAGE>
should, among other things, consult with experienced legal counsel in
determining whether all required conditions for such purchase have been
satisfied.
Legal Investment
The bonds will constitute "mortgage related securities" for purposes of the
Secondary Mortgage Market Enhancement Act of 1984, as amended, for so long as
they are rated in at least the second highest rating category by one or more
nationally recognized statistical rating agencies. Institutions whose investment
activities are subject to legal investment laws and regulations or to review by
certain regulatory authorities may be subject to restrictions on investment in
the bonds.
Rating
Before the issuer can issue the offered bonds, each class of bonds must receive
at least the following ratings from [Standard & Poor's, a division of The
McGraw-Hill Companies, Inc.], and [Moody's Investors Service, Inc.] in order to
be issued:
Rating
--------------------------------
[S&P] [Moody's]
---------- -------------
Class A-1 Bonds ______ ______
Class A-2 Bonds ______ ______
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 principal
prepayments, the corresponding effect on yield to investors or the payment of
any shortfall arising due to the interest rate cap limiting the interest rate on
the bonds.
S-14
<PAGE>
RISK FACTORS
Prospective investors 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 initial mortgage loans were underwritten and the subsequent
mortgage loans will be underwritten generally in accordance with underwriting
standards described in "Description of the Mortgage Pools--Underwriting
Standards for Mortgage Loans" herein, 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 the Federal National Mortgage
Association ("Fannie Mae") or the Federal Home Loan Mortgage Corporation
("Freddie Mac") due to credit characteristics that do not meet the Fannie Mae or
Freddie Mac underwriting guidelines, including mortgagors whose creditworthiness
and repayment ability do not satisfy such Fannie Mae or Freddie Mac 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 Fannie Mae or Freddie Mac underwriting guidelines. Accordingly,
mortgage loans underwritten to 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 Fannie Mae or Freddie Mac underwriting guidelines or to
typical "A" credit borrowers.
Delinquencies and Potential Delinquencies
Approximately ______% and ______%, respectively, of the initial
mortgage loans in group I and group II were thirty days or more but less than
sixty days delinquent in their monthly payments as of the cut-off date (all
percentages in this section determined by aggregate principal balance of the
related loan group as of the cut-off date). Approximately ______% and ______%,
respectively, of the initial mortgage loans in group I and group II were sixty
days or more but less than ninety days delinquent as of the cut-off date. No
mortgage loans were 90 days or more delinquent as of the cut-off date.
Approximately ______% and ______%, respectively, of the initial
mortgage loans in group I and group II will be covered by a lender-paid mortgage
insurance policy.
Approximately ______% and ______%, respectively, of the initial
mortgage loans in group I and group II have original loan-to-value ratios in
excess of 80%. Mortgage loans with a loan-to-value ratio in excess of 80% 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 property
securing such mortgage loans. 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.
S-15
<PAGE>
Balloon Loans
Approximately ______% of the initial mortgage loans in group II are
"balloon loans"; that is, they require monthly payments of principal based on 30
year amortization schedules and have scheduled maturity dates of 15 years from
the due date of the first monthly payment, in each case leaving a substantial
portion of the original principal amount due and payable on the respective
scheduled maturity date. 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. No person is obligated to refinance any balloon
loan.
Geographic Concentration
Approximately % and %, respectively, of the initial mortgage loans in
group I and group II are secured by mortgaged properties located in the State of
___________. In the event ___________ experiences a decline in real estate
values, losses on the mortgage loans may be greater than otherwise would be the
case.
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 under "Description of the
Mortgage Pool-- Underwriting Standards for the Mortgage Loans" herein.
Mandatory Prepayment
If the pre-funding account for a group is not fully applied to the
purchase of subsequent mortgage loans for such group by the end of the funding
period, the remaining funds will be used to make a principal prepayment in the
related class of bonds. Although no assurances can be given, the company intends
that the principal amount of subsequent mortgage loans sold to the issuer will
consume the pre-funding account and that there will be no material principal
prepayment on the bonds.
Special Prepayment Considerations
The rate and timing of principal payments on the bonds will depend, on
the rate and timing of principal payments (including prepayments, defaults,
liquidations, purchases of the mortgage loans due to a breach of a
representation or warranty and the servicer's limited right to purchase
delinquent mortgage loans) on the related mortgage loans. Accordingly, the bonds
are subject to inherent cash-flow uncertainties because the mortgage loans may
be prepaid at any time. Generally, when prevailing interest rates increase,
prepayment rates on mortgage loans tend to decrease, resulting in a slower
return of principal to investors at a time when reinvestment at such higher
prevailing rates would be desirable. Conversely, when prevailing interest rates
decline, prepayment rates on mortgage loans tend
S-16
<PAGE>
to increase, resulting in a faster return of principal to investors at a time
when reinvestment at comparable yields may not be possible.
Approximately ______% and ______%, respectively, of the initial
mortgage loans in group I and group II are subject to prepayment penalties.
Typically, the mortgage loans with a prepayment penalty 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
"Description of the Securities--Weighted Average Life of the Securities" 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. The yield to maturity on the
bonds will also depend on the related 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
"Description of the Securities--Weighted Average Life of the Securities" in the
Prospectus.
Risk of Mortgage Loan Yield Reducing the Interest Rate on the Bonds
The class A-1 bond interest rate is based upon, the value of an index
(one-month LIBOR) which is different from the value of the indices applicable to
the related mortgage loans (six-month LIBOR and one-year CMT). 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
class A-1 bond interest rate adjusts monthly based upon one-month LIBOR. In
addition, one-month LIBOR and the mortgage indices 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. Thus, it
is possible, for example, that one-month LIBOR may rise during periods in which
the mortgage indices are stable or falling or that, even if both one-month LIBOR
and the mortgage indices rise during the same period, one-month LIBOR may rise
much more rapidly than the mortgage indices. See "Description of the Bonds--
Interest Payments on the Bonds." The bond interest rate for the class A-1 bonds
is limited by an available funds rate cap. While any reductions in the bond
interest rates will be carried forward and paid out of
S-17
<PAGE>
excess cashflows on future payment dates, there can be no assurance that such
cash flows will be available. The bond insurance policy does not cover any such
shortfalls.
There are ________ loans in group II, representing _______% by
aggregate principal balance of the initial mortgage loans in such group, which
have a net weighted average coupon lower than the related bond interest rate.
After the rate step up date, _____% of the initial loans in group II, if not
prepaid prior to such date, will have a net weighted average coupon lower than
the related bond interest rate. If these groups were to experience prepayments
on the mortgage loans in such groups bearing higher rates of interest, it is
possible that the remaining mortgage loans in such groups would not be able to
support these rates of interest. In such a case, the related bond interest rates
would be reduced by an available funds rate cap. There is no carry forward
feature for the class A-2 bonds, and the bond insurance policy does not cover
any such shortfalls.
Converted Mortgage Loans
Approximately ______% of the initial mortgage loans in group I are,
and up to 100% of the subsequent mortgage loans in group I may be, loans which
are convertible, subject to certain conditions, from a variable rate loan to a
fixed rate loan at the option of the borrower.
The fixed interest rate on a converted mortgage loan in most cases may
be lower than the variable rate that would have been in effect on such loan if
it had not been converted. Accordingly, conversion of convertible mortgage loans
will have the effect of causing the weighted average coupon rate on the mortgage
loans in group I to decline, possibly significantly. In such event, the interest
rate on the class A-1 bonds may be reduced through operation of the available
funds cap rate.
USE OF PROCEEDS
After deducting the estimated expenses of this offering, the net
proceeds to the company from the sale of the bonds offered hereby are estimated
to be $________. The company anticipates that the entire net proceeds will be
used to purchase the initial mortgage loans from the seller and to fund the pre-
funding account and the interest coverage account. The seller anticipates that
it will use the entire net proceeds to it to repay indebtedness and accrued
interest under its warehouse lines of credit. The company and the seller believe
that funds provided by the net proceeds of this offering will be sufficient to
accomplish the purposes set forth above.
DESCRIPTION OF THE MORTGAGE POOL
General
The statistical information presented in this prospectus supplement
describes only the mortgage loans included in the trust estate on 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"). All statistical information is stated as of _____________
(the "cut-off date") and all percentages, unless otherwise stated, are by
aggregate principal balance of the related loan group. The actual principal
balances of the initial mortgage loans as of the closing date will be lower, and
may be significantly lower, than the principal balances thereof as of the cut-
off date as shown herein.
S-18
<PAGE>
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 company and from the company 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. In any
case the addition of such mortgage loans will not materially affect the
aggregate characteristics of the mortgage loans.
The mortgage pool will consist of conventional, monthly payment, first
lien mortgage loans with terms to maturity of not more than 30 years from the
date of origination or modification. The mortgage pool will consist of four
mortgage loan groups (each, a "group"), and are segregated according to whether
such mortgage loans bear interest at adjustable (such loans, "adjustable rate
mortgage loans or fixed (such loans, "fixed rate mortgage loans") rates of
interest.
MORTGAGE LOAN GROUPS
Group Interest Rate
------------------- ---------------------
Group I ___________
Group II ___________
NovaStar Mortgage, Inc., in its capacity as seller (the "seller"),will
convey the initial mortgage loans to the company pursuant to a mortgage loan
purchase agreement (the "purchase agreement"). The company will convey the
initial mortgage loans to the issuer on the closing date. All of the mortgage
loans will be serviced by NovaStar Mortgage, Inc. (in such capacity, the
"servicer"). The seller will make certain representations and warranties with
respect to the mortgage loans under the purchase agreement and, as more
particularly described herein, 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 bonds or the bond insurer. See "Description of the
Bonds--Assignment of Mortgage Loans" in this Prospectus Supplement.
The representations and warranties made by the seller will be assigned
to the indenture trustee for the benefit of the bondholders and the bond
insurer.
Approximately ______% and ______%, respectively, of the initial
mortgage loans in group I and group II will have loan-to-value ratios in excess
of ______%. Approximately ______% and ______%, respectively, of the initial
mortgage loans in group I and group are covered by a lender-paid primary
mortgage insurance policy (each, a "MI Policy") insuring first losses on the
principal balance of each such initial mortgage loan. See "Description of the
Mortgage Pool--Primary Mortgage Insurance" herein. The remainder of the initial
mortgage loans will not be covered by a MI policy.
As of the cut-off date, the minimum loan-to-value ratios at
origination for the initial mortgage loans in group I and group II were
approximately _____% and _____% respectively, the
S-19
<PAGE>
maximum loan-to-value ratios at origination were approximately _____% and
_____%, respectively, and the weighted average loan-to-value ratios at
origination were approximately _____% and _____%, respectively.
All of the mortgage loans will contain a customary "due-on-sale"
clause, although the mortgage loans may be assumable if permitted by the
servicer 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 bonds.
Mortgage rate Adjustment
The mortgage rate on each mortgage loan in group II is fixed. The
mortgage rate on ______% of the initial mortgage loans in group I adjusts semi-
annually. The mortgage rate on ____% of the initial mortgage loans in group I
adjusts annually.
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 initial mortgage loans is
the first day of the month.
Substantially all of the adjustable rate initial 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 initial 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 initial mortgage in group I 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.
S-20
<PAGE>
One-Year CMT Index
The index applicable to the determination of the mortgage rate on
approximately ______% of the initial mortgage loans (by aggregate principal
balance of the related group as of the cut-off date) in group I 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").
Mortgage Loan Characteristics
All percentages of the initial mortgage loans described herein are
approximate percentages (except as otherwise indicated) by aggregate principal
balance of the related group as of the cut-off date.
Except with respect to mortgage loans that require monthly payments of
principal based on 30 year amortization schedules and have scheduled maturity
dates of 15 years from the due date of the first monthly payment (such loans,
"balloon loans"), the initial mortgage loans generally have original terms to
stated maturity of approximately 30 years.
None of the initial mortgage loans are secured by junior liens on the
related mortgaged properties.
None of the initial mortgage loans are subject to temporary buydown
plans, pursuant to which the monthly payments made by the mortgage during the
early years of the loan are less than the scheduled monthly payments thereon.
Group I: Adjustable Rate Mortgage Loans
Effective with the first payment due on an adjustable rate initial
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 initial
mortgage loans in group I is ___ months.
As of the cut-off date, each initial mortgage loan in group I will
have an unpaid principal balance of not less than $______________or more than
$______________ and the average unpaid principal balance of the initial mortgage
loans in group I will be $______________. The latest stated maturity date of any
of the initial mortgage loans in group I will be _________________; 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 in group I will be approximately ____ months. The weighted
average original term to maturity of the initial mortgage loans in group I will
be approximately _____ months.
The earliest month and year of origination of any initial mortgage
loan in group I was _____________ and the latest month and year of origination
of any initial mortgage loan in group I will be ______________.
Approximately ____% of the mortgage loans in group I provide for
payment of a prepayment charge. As to each such mortgage loan, the prepayment
charge provisions typically provide
S-21
<PAGE>
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.
Approximately ______% of initial mortgage loans in group I are
convertible mortgage loans.
Approximately ______% of the initial mortgage loans in group I are
covered by MI policies.
Set forth below is a description of certain additional characteristics
of the initial mortgage loans in group I as of the cut-off date (except as
otherwise indicated). Dollar amounts and percentages may not sum to totals due
to rounding.
S-22
<PAGE>
Geographic Distribution of the Mortgaged Properties of the Group I Initial
Mortgage Loans
<TABLE>
<CAPTION>
Percentage of
Group I Mortgage
Number of Aggregate Loans by Aggregate
State Mortgage Loans Principal Balance Principal Balance
------------------------------- -------------------- ------------------------ -------------------------
<S> <C> <C> <C>
Alaska $
Arizona
California
Colorado
Connecticut
District of Columbia
Florida
Georgia
Idaho
Illinois
Indiana
Iowa
Kentucky
Louisiana
Maryland
Michigan
Minnesota
Mississippi
Missouri
Montana
Nebraska
Nevada
New Jersey
New Mexico
North Carolina
Ohio
Oklahoma
Oregon
Pennsylvania
South Carolina
Tennessee
Texas
Utah
Virginia
Washington
West Virginia
Wisconsin
-------------------- ------------------------ -------------------------
Total $ 100.00%
==================== ======================== =========================
</TABLE>
No more than approximately ______% of the group I initial mortgage
loans will be secured by mortgaged properties located in any one zip code.
S-23
<PAGE>
Mortgage Loan Type of the Group I Initial Mortgage Loans
<TABLE>
<CAPTION>
Percentage of
Group I Mortgage
Number of Aggregate Loans by Aggregate
Mortgage Loan Type Mortgage Loans Principal Balance Principal Balance
------------------------ ----------------- ------------------- -------------------------
<S> <C> <C> <C>
One-Year CMT $
One-Year CMT 15 yr.
2/28 6-Month LIBOR
3/27 6-Month LIBOR
Six-Month LIBOR
----------------- ------------------- -------------------------
Total $ 100.00%
================= =================== =========================
</TABLE>
Loan to Value Ratios at Origination of the Group I Initial Mortgage Loans
<TABLE>
<CAPTION>
Percentage of
Group I Mortgage
Range of Loan-to-Value Number of Aggregate Loans by Aggregate
Ratios at Origination (%) Mortgage Loans Principal Balance Principal Balance
------------------------ ----------------- ------------------- -------------------------
<S> <C> <C> <C>
5.01 - 10.00 $
30.01 - 35.00
35.01 - 40.00
40.01 - 45.00
45.01 - 50.00
50.01 - 55.00
55.01 - 60.00
60.01 - 65.00
65.01 - 70.00
70.01 - 75.00
75.01 - 80.00
80.01 - 85.00
85.01 - 90.00
90.01 - 95.00
95.01 - 100.00
----------------- ------------------- -------------------------
Total $ 100.00%
================= =================== =========================
</TABLE>
As of the cut-off date, the minimum and maximum loan-to-value ratios
at origination for the group I initial mortgage loans were approximately ______%
and ______%, respectively, and the weighted average loan-to-value ratio at
origination of the group I initial mortgage loans was approximately ______%.
S-24
<PAGE>
Cut-Off Date Principal Balances of the Group I Initial Mortgage Loans
<TABLE>
<CAPTION>
Percentage of
Group I Mortgage
Range of Cut-off date Number of Aggregate Loans by Aggregate
Principal Balances ($) Mortgage Loans Principal Balance Principal Balance
------------------------ ----------------- ------------------- -------------------------
<S> <C> <C> <C>
15,000.01 - 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
----------------- ------------------- -------------------------
Total $ 100.00%
================= =================== =========================
</TABLE>
The average cut-off date principal balance of the group I initial mortgage
loans will be $____________.
S-25
<PAGE>
Remaining Terms to Maturity of the Group I Initial Mortgage Loans
<TABLE>
<CAPTION>
Percentage of
Group I Mortgage
Months Remaining to Number of Aggregate Loans by Aggregate
Maturity Mortgage Loans Principal Balance Principal Balance
------------------------ ----------------- ------------------- -------------------------
<S> <C> <C> <C>
171 - 175 $
306 - 310
311 - 315
316 - 320
326 - 330
331 - 335
336 - 340
341 - 345
346 - 350
351 - 355
356
357
358
359
----------------- ------------------- -------------------------
Total $ 100.00%
================= =================== =========================
</TABLE>
The weighted average remaining term to maturity of the group I
initial mortgage loans will be approximately months.
Types of Mortgaged Properties of the Group I Initial Mortgage Loans
<TABLE>
<CAPTION>
Percentage of
Group I Mortgage
Number of Aggregate Loans by Aggregate
Property Type Mortgage Loans Principal Balance Principal Balance
------------------------ ----------------- ------------------- -------------------------
<S> <C> <C> <C>
Attached Housing $
Condominium Hi-Rise
Condominium Lo-Rise
Detached Housing
Manufactured Housing
Multiple Unit
PUD
PUD Deminimus
PUD Regular
Single Family Residence
Townhouse
----------------- ------------------- -------------------------
Total $ 100.00%
================= =================== =========================
</TABLE>
S-26
<PAGE>
Use of Proceeds of the Group I Initial Mortgage Loans
<TABLE>
<CAPTION>
Percentage of Group I
Mortgage Loans by
Number of Mortgage Aggregate Aggregate Principal
Use of Proceeds Loans Principal Balance Balance
-------------------------------- ------------------ ----------------- ---------------------
<S> <C> <C> <C>
Const-Perm--- Equity Take-Out $
Const-Perm--- No Equity Take-Out
Purchase
Refinance--- Equity Take-Out
Refinance--- No Equity Take-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 the related property securing such mortgage loan (the related
"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.
Occupancy Status of the Mortgaged Properties of the Group I Initial Mortgage
Loans
<TABLE>
<CAPTION>
Percentage of Group I
Mortgage Loans by
Number of Aggregate Aggregate Principal
Occupancy Status Mortgage Loans Principal Balance Balance
----------------------------- -------------- ----------------- ---------------------
<S> <C> <C> <C>
Investment Non-Owner Occupied $
Investment Owner Occupied
Primary
Secondary
-------------- ----------------- ---------------------
Total $ 100.00%
============== ================= =====================
</TABLE>
S-27
<PAGE>
Documentation Type of the Group I Initial Mortgage Loans
<TABLE>
<CAPTION>
Percentage of Group I
Mortgage Loans by
Aggregate Aggregate Principal
Documentation Number of Mortgage Loans Principal Balance Balance
------------- ------------------------ ----------------- ---------------------
<S> <C> <C> <C>
Full $
Limited
Stated
------------------------ ----------------- ---------------------
Total $ 100.00%
======================== ================= =====================
</TABLE>
Risk Classifications of the Group I Initial Mortgage Loans
<TABLE>
<CAPTION>
Percentage of Group I
Mortgage Loans by
Aggregate Aggregate Principal
Risk Classification Number of Mortgage Loans Principal Balance Balance
------------------- ------------------------ ----------------- ---------------------
<S> <C> <C> <C>
AA $
A
A-
B
C
D
------------------------ ----------------- ---------------------
Total $ 100.00%
======================== ================= =====================
</TABLE>
Delinquencies of the Group I Initial Mortgage Loans
<TABLE>
<CAPTION>
Percentage of Group I
Mortgage Loans by
Aggregate Aggregate Principal
Number of Days Delinquent Number of Mortgage Loans Principal Balance Balance
------------------------- ------------------------ ----------------- ---------------------
<S> <C> <C> <C>
0 - 29 $
30 - 59
60 - 89
------------------------ ----------------- ---------------------
Total $ 100.00%
======================== ================= =====================
</TABLE>
S-28
<PAGE>
Current Mortgage rates of the Group I Initial Mortgage Loans
<TABLE>
<CAPTION>
Percentage of Group I
Mortgage Loans by
Range of Current Mortgage Number of Aggregate Aggregate Principal
Rates (%) Mortgage Loan Principal Balance Balance
------------------------- ------------- ----------------- ---------------------
<S> <C> <C> <C>
7.001 - 7.500 $
7.501 - 8.000
8.001 - 8.500
8.501 - 9.000
9.001 - 9.500
9.501 - 10.000
10.001 - 10.500
10.501 - 11.000
11.001 - 11.500
11.501 - 12.000
12.001 - 12.500
12.501 - 13.000
13.001 - 13.500
------------- ----------------- ---------------------
Total $ 100.00%
------------- ----------------- ---------------------
</TABLE>
The weighted average current mortgage rate of the initial mortgage
loans in group I will be approximately _______ % per annum.
Minimum Rates of the Group I Initial Mortgage Loans
<TABLE>
<CAPTION>
Percentage of Group I
Mortgage Loans by
Range of Minimum Number of Aggregate Aggregate Principal
Rates (%) Mortgage Loans Principal Balance Balance
---------------- -------------- ----------------- ---------------------
<S> <C> <C> <C>
7.001 - 7.500 $
7.501 - 8.000
8.001 - 8.500
8.501 - 9.000
9.001 - 9.500
9.501 - 10.000
10.001 - 10.500
10.501 - 11.000
11.001 - 11.500
11.501 - 12.000
12.001 - 12.500
12.501 - 13.000
13.001 - 13.500
-------------- ----------------- ---------------------
Total $ 100.00%
============== ================= =====================
</TABLE>
The weighted average minimum mortgage rate of the initial mortgage
loans in group I as of the cut-off date will be approximately _____ % per annum.
S-29
<PAGE>
Initial Periodic Rate Cap of the Group I Initial Mortgage Loans
<TABLE>
<CAPTION>
Percentage of Group I
Mortgage Loans by
Initial Periodic Rate Number of Aggregate Aggregate Principal
Cap (%) Mortgage Loans Principal Balance Balance
--------------------- -------------- ----------------- ---------------------
<S> <C> <C> <C>
1.000 $
2.000
3.000
-------------- ----------------- ---------------------
Total $ 100.00%
============== ================= =====================
</TABLE>
The weighted average initial periodic rate cap of the initial
mortgage loans in group I is _______ %.
Periodic Rate Cap of the Group I Initial Mortgage Loans
<TABLE>
<CAPTION>
Percentage of Group I
Mortgage Loans by
Number of Aggregate Aggregate Principal
Periodic Rate Cap (%) Mortgage Loans Principal Balance Balance
--------------------- -------------- ----------------- ---------------------
<S> <C> <C> <C>
1.000 $
2.000
-------------- ----------------- ---------------------
Total $ 100.00%
============== ================= =====================
</TABLE>
The weighted average periodic rate cap of initial mortgage loans
in group I is _________%.
S-30
<PAGE>
Maximum Rates of the Group I Initial Mortgage Loans
<TABLE>
<CAPTION>
Percentage of Group I
Mortgage Loans by
Range of Maximum Number of Aggregate Aggregate Principal
Rates (%) Mortgage Loans Principal Balance Balance
---------------- -------------- ----------------- ---------------------
<S> <C> <C> <C>
13.001 - 13.500 $
14.001 - 14.500
14.501 - 15.000
15.001 - 15.500
15.501 - 16.000
16.001 - 16.500
16.501 - 17.000
17.001 - 17.500
17.501 - 18.000
18.001 - 18.500
18.501 - 19.000
19.001 - 19.500
19.501 - 20.000
20.001 - 20.500
-------------- ----------------- ---------------------
Total $ 100.00%
============== ================= =====================
</TABLE>
The weighted average maximum mortgage rate for initial mortgage
loans in group I will be approximately _____ % per annum.
S-31
<PAGE>
Next Interest Adjustment date of the Group I Initial Mortgage Loans
<TABLE>
<CAPTION>
Percentage of Group I
Mortgage Loans by
Aggregate Aggregate Principal
Next Adjustment date Number of Mortgage Loans Principal Balance Balance
-------------------- ------------------------ ----------------- --------------------
<S> <C> <C> <C>
$
------------------------ ----------------- --------------------
Total $ 100.00%
======================== ================= ====================
</TABLE>
The weighted average remaining months to the next adjustment date
of the initial mortgage loans in group I as of the cut-off date will be
approximately___________ months.
S-32
<PAGE>
Gross margins of the Group I Initial Mortgage Loans
<TABLE>
<CAPTION>
Percentage of Group I
Mortgage Loans by
Range of Gross Aggregate Aggregate Principal
Margins (%) Number of Mortgage Loans Principal Balance Balance
-------------- ------------------------ ----------------- ---------------------
<S> <C> <C> <C>
3.001 - 3.500 $
3.501 - 4.000
4.001 - 4.500
4.501 - 5.000
5.001 - 5.500
5.501 - 6.000
6.001 - 6.500
6.501 - 7.000
7.001 - 7.500
7.501 - 8.000
8.001 - 8.500
8.501 - 9.000
9.001 - 9.500
------------------------ ----------------- --------------------
Total $ 100.00%
======================== ================= ====================
</TABLE>
The weighted average gross margin of the initial mortgage loans
in group I will be approximately_________ % per annum.
S-33
<PAGE>
Group II: Fixed Rate Mortgage Loans
As of the cut-off date, each initial mortgage loan in group II
will have an unpaid principal balance of not less than $________ or more than
$_________ and the average unpaid principal balance of the initial mortgage
loans in group II will be $__________. The latest stated maturity date of any of
the initial mortgage loans in group II will be __________; 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 in group II will be approximately _______ months. The
weighted average original term to maturity of the initial mortgage loans in
group II will be approximately _________ months.
The earliest year of origination of any initial mortgage loan in
group II is and the latest month and year of origination of any initial mortgage
loan in group II will be ______________.
Approximately _________% of the mortgage loans in group II
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.
Approximately __________% of the initial mortgage loans in group
II are covered by MI policies.
Set forth below is a description of certain additional
characteristics of the initial mortgage loans in group II as of the cut-off date
(except as otherwise indicated). Dollar amounts and percentages may not sum to
totals due to rounding.
S-34
<PAGE>
Geographic Distribution of the Mortgaged Properties of the Group II Initial
Mortgage Loans
<TABLE>
<CAPTION>
Percentage of Group II
Mortgage Loans by
Aggregate Aggregate Principal
State Number of Mortgage Loans Principal Balance Balance
----- ------------------------ ----------------- ----------------------
<S> <C> <C> <C>
Alaska $
Arizona
Arkansas
California
Colorado
Connecticut
Delaware
Florida
Georgia
Illinois
Indiana
Kansas
Kentucky
Louisiana
Maryland
Michigan
Minnesota
Mississippi
Missouri
Montana
Nevada
North Carolina
Ohio
Oklahoma
Oregon
Pennsylvania
South Carolina
South Dakota
Tennessee
Texas
Utah
Virginia
Washington
West Virginia
------------------------ ----------------- ----------------------
Total $ 100.00%
======================== ================= ======================
</TABLE>
No more than approximately _________% of the group II
initial mortgage loans will be secured by mortgaged properties located in any
one zip code.
S-35
<PAGE>
Loan to Value Ratios at Origination of the Group II Initial Mortgage Loans
<TABLE>
<CAPTION>
Percentage of Group II
Mortgage Loans by
Range of Loan-to-Value Number of Aggregate Aggregate Principal
Ratios at Origination (%) Mortgage Loans Principal Balance Balance
------------------------- -------------- ----------------- ----------------------
<S> <C> <C> <C>
10.01 - 15.00 $
15.01 - 20.00
20.01 - 25.00
25.01 - 30.00
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>
As of the cut-off date, the minimum and maximum loan-to-value
ratios at origination for the group II initial mortgage loans were approximately
________% and ________%, respectively, and the weighted average loan-to-value
ratio at origination of the group II initial mortgage loans was
approximately ________ %.
S-36
<PAGE>
Mortgage rates of the Group II Initial Mortgage Loans
<TABLE>
<CAPTION>
Percentage of Group II
Mortgage Loans By
Range of Mortgage Aggregate Aggregate Principal
Rates (%) Number of Mortgage Loans Principal Balance Balance
--------------------- ------------------------- ------------------ -------------------------
<S> <C> <C> <C>
7.001 - 7.500 $
7.501 - 8.000
8.001 - 8.500
8.501 - 9.000
9.001 - 9.500
9.501 - 10.000
10.001 - 10.500
10.501 - 11.000
11.001 - 11.500
11.501 - 12.000
12.001 - 12.500
12.501 - 13.000
13.001 - 13.500
14.001 - 14.500
------------------------- ----------------------------- --------------------
Total $ 100.00%
========================= ============================= ====================
</TABLE>
The weighted average mortgage rate of the initial mortgage
loans in group II will be approximately % per annum.
Cut-off date Principal Balances of the Group II Initial Mortgage Loans
<TABLE>
<CAPTION>
Percentage of Group II
Mortgage Loans by
Range of Cut-off date Principal Aggregate Aggregate Principal
Balances ($) Number of Mortgage Loans Principal Balance Balance
------------------------------- ------------------------ ------------------ -------------------------
<S> <C> <C>
15,000.01 - 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
------------------------- --------------------- -----------------------
Total $ 100.00%
========================= ===================== =======================
</TABLE>
The average cut-off date principal balance of the group II
initial mortgage loans will be $_______.
S-37
<PAGE>
Remaining Terms to Maturity of the Group II Initial Mortgage Loans
<TABLE>
<CAPTION>
Percentage of Group II
Mortgage Loans by
Aggregate Aggregate Principal
Months Remaining to Maturity Number of Mortgage Loans Principal Balance Balance
---------------------------- -------------------------- ------------------ -------------------------
<S> <C> <C> <C>
111 - 115 $
116 - 120
166 - 170
171 - 175
176
177
178
179
180
231 - 235
236 - 240
346 - 350
351 - 355
356
357
358
359
------------------------- ------------------- -------------------------
Total $ 100.00%
========================= =================== =========================
</TABLE>
The weighted average remaining term to maturity of the group
II initial mortgage loans will be approximately _______ months.
Original Terms to Maturity of the Group II Initial Mortgage Loans
<TABLE>
<CAPTION>
Percentage of Group II
Mortgage Loans by
Aggregate Aggregate Principal
Range of Original Terms (months) Number of Mortgage Loans Principal Balance Balance
-------------------------------- -------------------------- ------------------ -----------------------
<S> <C> <C>
116 - 120 $
176 - 180
236 - 240
356 - 360
---------------------------- ----------------- -----------------------
Total $
============================ ================= =======================
</TABLE>
The weighted average original term to maturity of the group II
initial mortgage loans will be approximately _________ months.
S-38
<PAGE>
Types of Mortgaged Properties of the Group II Initial Mortgage Loans
<TABLE>
<CAPTION>
Percentage of Group II
Mortgage Loans by
Aggregate Aggregate Principal
Property Type Number of Mortgage Loans Principal Balance Balance
-------------------------- --------------------------- -------------------- ----------------------
<S> <C> <C>
Attached Housing $
Condominium Hi-Rise
Condominium Lo-Rise
Manufactured Housing
Multiple Unit
PUD
PUD Regular
Single Family Residence
--------------------------- ------------------- -------------------
Total $ 100.00%
========================== =================== ===================
</TABLE>
Use of Proceeds of the Group II Initial Mortgage Loans
<TABLE>
<CAPTION>
Percentage of Group II
Mortgage Loans by
Number of Mortgage Aggregate Aggregate Principal
Use of Proceeds Loans Principal Balance Balance
----------------- ------------------ ----------------- ---------------------
<S> <C> <C> <C>
Const-Perm $
Const-Perm--- Equity Take-Out
Const-Perm--- No Equity Take-Out
Purchase
Refinance--- Equity Take-Out
Refinance--- No Equity Take-Out
----------------- ----------------- ----------------------
Total $ 100.00%
================= ================ ======================
</TABLE>
S-39
<PAGE>
Occupancy Status of the Mortgaged Properties of the Group II Initial Mortgage
Loans
<TABLE>
<CAPTION>
Percentage of Group II
Mortgage Loans by
Aggregate Aggregate Principal
Occupancy Status Number of Mortgage Loans Principal Balance Balance
------------------------------- ------------------------ ------------------ ----------------------
<S> <C> <C> <C>
Investment Non-Owner Occupied $
Investment Owner Occupied
Primary
Secondary
------------------------ -------------------- --------------------
Total $ 100.00%
======================== ==================== ====================
</TABLE>
Documentation Type of the Group II Initial Mortgage Loans
<TABLE>
<CAPTION>
Percentage of Group II
Mortgage Loans by
Aggregate Aggregate Principal
Documentation Number of Mortgage Loans Principal Balance Balance
------------- ------------------------- ---------------- -----------------------
<S> <C> <C> <C>
Full $
Limited
Stated
----------------------- ---------------- -----------------------
Total $ 100.00%
======================= ================ =======================
</TABLE>
Risk Classifications of the Group II Initial Mortgage Loans
<TABLE>
<CAPTION>
Percentage of Group II
Mortgage Loans by
Aggregate Aggregate Principal
Risk Classification Number of Mortgage Loans Principal Balance Balance
--------------------- ------------------------ ------------------ ----------------------
<S> <C> <C> <C>
AA $
A
A-
B
C
D
---------------------- ------------------ ----------------------
Total $ 100.00%
====================== ================== ======================
</TABLE>
S-40
<PAGE>
Delinquencies of the Group II Initial Mortgage Loans
<TABLE>
<CAPTION>
Percentage of Group II
Mortgage Loans by
Aggregate Aggregate Principal
Number of Days Delinquent Number of Mortgage Loans Principal Balance Balance
--------------------------- -------------------------- ----------------- -----------------------
<S> <C> <C> <C>
0 - 29 $
30 - 59
60 - 89
------------------------- ----------------- -----------------------
Total $ 100.00%
========================= ================= =======================
</TABLE>
Conveyance of Subsequent mortgage loans and the Pre-Funding Account
Under the purchase agreement, following the initial issuance of the
bonds, the seller will be obligated from time to time to sell to the company and
the company will be obligated to sell to the issuer 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 criteria set forth herein under
"Description of the Mortgage Pool--Underwriting Standards for the Mortgage
Loans." Subsequent mortgage loans will be transferred to the issuer pursuant to
subsequent transfer instruments (the "subsequent transfer instruments") among
the seller, the company and the issuer. In connection with the purchase of
subsequent mortgage loans for each group on such dates of transfer (the
"subsequent transfer dates"), the issuer will be required to pay from amounts on
deposit in the pre-funding account (as defined below) held with respect to such
group a cash purchase price of 100% of the principal balance thereof. The issuer
will designate each 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 in each related group will increase by an amount
equal to the aggregate principal balance of the subsequent mortgage loans so
acquired for such group and the amount in the pre-funding account held with
respect to such group will decrease accordingly.
On the closing date, approximately $___________ 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. Of such amount, $____________and
$____________ (the related "original pre-funded amount") is held with respect to
group I and group II, respectively. During the funding period (as defined
herein), the related original pre-funded amount will be reduced (on any date of
determination, the related original pre-funded amount as so reduced, the related
"pre-funded amount") by the amount thereof used to purchase subsequent mortgage
loans for such group. 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
S-41
<PAGE>
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 and the company will deliver
certain opinions of counsel acceptable to the bond insurer, the issuer and the
bond administrator 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 Standards for the Mortgage
Loans" herein; (vi) such subsequent mortgage loan must have a loan-to-value
ratio of no more than ______%; (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; (x) each
subsequent mortgage loan that is underwritten to the seller's underwriting
standards for AA, A and A-credit risks must be covered by a MI policy acceptable
to the bond insurer; and (xi) if such subsequent mortgage loan relates to group
I, bears interest at an adjustable rate, and if such subsequent mortgage loan
related to group II, bears interest at a fixed rate. In addition, the bond
administrator 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 the
issuer and included in the trust estate; provided, however, that the addition of
such subsequent 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 with respect to each class of bonds.
Underwriting Standards for the Mortgage Loans
All of the initial mortgage loans were originated or purchased
by the seller in the ordinary course of business on a loan by loan basis
directly from mortgage brokers and mortgage loan originators.
The underwriting guidelines of the seller 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
S-42
<PAGE>
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 underwriter's 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 Fannie Mae 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 seller 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 seller 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
judgment of the underwriter warrants an exception. All loans in excess of
$350,000 currently require the approval of the underwriting supervisor and all
loans over $500,000 require the approval of the Chief Credit Officer. In
addition, the President of the seller approves all loans in excess of $750,000.
With respect to each mortgage loan secured by a second lien on the
related mortgaged property, the "combined loan-to-value ratio" 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.
The initial mortgage loans were underwritten by the seller using the
following categories and criteria 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.
S-43
<PAGE>
<TABLE>
<CAPTION>
AAA Risk AA Risk A Risk A-Risk B Risk C Risk C-Risk
--------------- ------------- ------------ ------------ ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Mortgage History No 30-day late Maximum one Maximum one Maximum two Maximum three Maximum five Max two
within last 24 30-day late 30-day late 30-day late 30-day late 30-day late, 90-day late
months. within last 24 within last 12 within last 12 and one 60-day two 60-day within last
months. (must months. months. late or four late, and one 12 months.
be 0x30 in the 30-day late 90-day late
most recent 12 within last 12 within last 12
months). months. If months. If
4x30 or 1x60, 1x90, reduce
reduce LTV by LTV by 5%.
5%.
Consumer Credit Minimum 640 Maximum three Maximum three Maximum three Maximum five Maximum four Discretionary.
FICO. Minimum 30-day late 30-day late 30-day late 30-day late, 60-day late, Credit is
660 FICO for 85 within last 24 within last 12 and one 60-day two 60-day two 90-day generally
LTV. Minimum months. months. late, or five late, and one late, or six expected to
680 FICO for 90 30-day late 90-day late, 60-day late, be late pay.
to 97 LTV. within last 12 or six 30-day and one 90-day
months. late and three late within
60 day late last 12 months.
within last 12
months. If
1x90 is a
major
(*$5000),
reduce LTV by
5%
Bankruptcy Chapter 7: Chapter 7: Chapter 7: Chapter 7: Chapter 7: Chapter 7: Chapter 7:
Filings
3 years since 3 years since 3 years since 2 years since 18 months 1 year since discharged
discharge date. discharge date. discharge date. discharge date. since discharge date.
discharge date. Chapter 13:
Chapter 13: Chapter 13: Chapter 13: Chapter 13: Chapter 13:
Chapter 13: No seasoning
2 years since 2 years since 2 years since 1 year since 12 month required; buy
discharge date. discharge date. discharge date. discharge date. 1 year since satisfactory out required
discharge date. pay history;
buy out
required.
Prior 60 Months. 60 Months. 60 Months. 36 Months. 24 Months. 24 Months. 12 Months.
Foreclosures/
NOD
Adverse Accounts All adverse All adverse All adverse All adverse All adverse All adverse All adverse
accounts in the accounts in accounts in accounts in accounts in accounts in accounts in
last 24 months the last 24 the last 24 the last 24 the last 24 the last 24 the last 24
must be months must be months must be months not to months not to months not to months not to
satisfied. satisfied. satisfied. exceed $1000. exceed $2500. exceed $5000. exceed $5000.
None*$1500 in None*$1500 in None*$1500 in
last 12 months. last 12 months. last 12 months.
Debt-to-Income 45% 45% 45% 45% for any 50% 55% 55%
Ratio LTV less than
85%. For LTVs
greater than
or equal
</TABLE>
* greater than
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<PAGE>
<TABLE>
<CAPTION>
AAA Risk AA Risk A Risk A-Risk B Risk C Risk C-Risk
------------ --------------- ---------------- --------------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
to 85%, Debt
Service Ratio
of 50%
Maximum 97% 95% 90% 90% 85% 75% 65%
Loan-to-Value
Ratio
Maximum 100% 100% 100% 100% 90% 80% No junior
Combined liens
Loan-to-Value permitted.
Ratio
</TABLE>
Close attention is paid to geographic diversification in managing
credit risk. The seller believes one of the best tools for managing credit risk
is to diversify the markets in which it originates and purchases mortgage loans.
The seller 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 seller higher than twice that market's
percentage of the total national market share.
Quality control reviews are conducted to ensure that all mortgage
loans 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 Seller reviews a high percentage of
mortgage loans with (i) principal balances in excess of $350,000, (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
Seller also performs appraisal reviews and compliance reviews as part of the
quality control process to ensure adherence to state and federal regulations.
Primary Mortgage Insurance Policies
Approximately ______% and ______%, respectively, of the initial
mortgage loans in group I and group II are covered by a MI policy issued by (the
"MI insurer"). The remainder of the initial mortgage loans will not be covered
by a MI policy. Each MI policy insures losses on the principal balance of each
such mortgage loan in an amount generally equal to, at the option of the MI
insurer, either (a) the sum of (i) the principal balance of the mortgage loan,
(ii) unpaid accumulated interest due on the mortgage loan at the mortgage rate
(for a maximum period of two years) and (iii) the amount of certain advances
(such as hazard insurance, taxes, maintenance expenses and foreclosure costs)
made by the servicer, reduced by certain mitigating amounts collected with
respect thereto (collectively, the "loss amount"), in which case the MI insurer
would take title to the mortgaged property, or (b) an amount equal to the
product of (i) the loss amount and (ii) the percentage of coverage (the
"coverage percentage") specified in the MI policy, in which case the issuer
would retain title to (and the proceeds obtained in a foreclosure and sale of)
the mortgaged property. The coverage percentage specified in each MI policy will
be different depending upon the original loan-to-value ratio of the related
mortgage loan (mortgage loans with higher loan-to-value ratios will generally
have a higher coverage percentage and mortgage loans with lower loan-to-value
ratios will generally have a lower coverage percentage). Each MI policy will
remain in place for the life of the related mortgage loan (provided that no MI
insurer insolvency event (as defined herein) has occurred and is continuing),
even if the related loan-to-value ratio decreases below _____%. If a MI insurer
insolvency event has occurred or is continuing, the issuer shall, at the
direction
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<PAGE>
of the bond insurer, and may in the case of a bond insurer default, terminate
the MI policy on any mortgage loan that is not then past due.
Claim payments, if any, under a MI policy will be made to the
servicer, deposited in the collection account and treated in the same manner as
a prepayment of the related mortgage loan. Premiums payable on the MI policies
(the "MI premiums") will be paid monthly by the servicer with funds withdrawn
from the collection account with respect to the related mortgage loans.
The bond insurer requires that, in the event of a downgrade in the
rating of the MI insurer or a cumulative claims denial by the MI insurer in an
amount greater than a specified amount, the required overcollateralization
amount will step up to an amount specified in the insurance agreement.
Additional Information
Prior to the issuance of the bonds, certain of the 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
NovaStar Mortgage, Inc., a Virginia corporation (in its capacity as
seller, the "seller"), is a wholly-owned subsidiary of NFI Holding Corporation,
Inc., a Delaware corporation ("holding").
The seller originates subprime residential mortgage loans through a
network of unaffiliated wholesale loan brokers. The seller utilizes a network of
approximately 2,500 wholesale loan brokers in 48 different states. In addition,
the seller services loans nationwide, and is qualified to do business as a
foreign corporation in 49 states. The seller's principal executive offices are
located at 1900 W. 47th Place, Suite 205, Westwood, Kansas 66205. The principal
office for the seller's mortgage lending operations are in Irvine, California.
The seller is an approved HUD lender.
The seller has made representations and warranties respecting the
mortgage loans and the remedies for any breach thereof are assigned to the
indenture trustee for the benefit of the bondholders and the bond insurer. The
seller has only limited assets available to perform the 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
either 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 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.
NovaStar Mortgage, Inc. will also act as the servicer of the
mortgage loans. See "Description of the Servicing Agreement--The Servicer"
herein.
S-46
<PAGE>
THE ISSUER
NovaStar Mortgage Funding Trust, Series ______ (the "issuer"), is a
business trust formed under the laws of the State of Delaware and governed by
the trust agreement, dated as of __________________ (the "trust agreement"),
between the company and _____________________, as the owner trustee, for the
transactions described in this Prospectus Supplement. 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, the subordinated bonds and the residual certificates, (iii)
making payments on the bonds, the subordinated bonds and the residual
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, the MI
policies and certain related assets pledged to secure the bonds.
The issuer's principal offices are in _____________________,
_______________________, in care of _______________________, as owner trustee.
THE COMPANY
NovaStar Mortgage Funding Corporation, a Delaware corporation (the
"company"), was incorporated in the State of Delaware on January 7, 1998. The
company is a wholly-owned subsidiary of the seller. The principal executive
offices of NovaStar Mortgage Funding Corporation are located at 1901 W. 47th
Place, Suite 105, Westwood, Kansas, 66205.
The seller will convey the initial mortgage loans to the company,
who will in turn convey the initial mortgage loans to the issuer. The issuer
then will pledge the mortgage loans, without recourse, to the indenture trustee
pursuant to the indenture as security for the bonds.
THE OWNER TRUSTEE
____________________ is the owner trustee under the trust
agreement. The owner trustee is a ______________ banking corporation and its
principal offices are located in _________________, ____________________.
Neither the owner trustee nor any director, officer or employee of
the owner trustee will be under any liability to the issuer or the bondholders
under the trust agreement under any circumstances, except for the owner
trustee's own willful 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, provided such person meets the eligibility standards under
the trust agreement.
THE INDENTURE TRUSTEE
_________________________, a _____________________________, will
act as indenture trustee. A copy of the indenture will be provided by the issuer
without charge upon written request. Requests should
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<PAGE>
be addressed to the indenture trustee at _______________________________________
_______________________, Attention:____________________________. _______________
will act as initial paying agent.
THE BOND ADMINISTRATOR
______________, a _______________________, will act as bond
administrator (the "bond administrator"). In its capacity as bond administrator,
__________________ shall perform certain administrative functions on behalf of
the indenture trustee and shall act as the initial certificate registrar and
custodian.
THE BOND INSURER
The information set forth in this section has been provided by
__________________. (hereinafter in this section the "bond insurer"). No
representation is made by the underwriter, the seller, the servicer, the
company, the issuer, the owner trustee or any of their affiliates as to the
accuracy or completeness of such information or any information related to the
bond insurer incorporated by reference herein.
General
___________________ is a monoline insurance company incorporated in
___________ under the laws of the State of __________. ____________ is licensed
to engage in the financial guaranty insurance business in all 50 states, the
District of Columbia and Puerto Rico.
________________________ and its subsidiaries are engaged in the
business of writing financial guaranty insurance, principally in respect of
securities offered in domestic and foreign markets. In general, financial
guaranty insurance consists of the issuance of a guaranty of scheduled payments
of an issuer's securities -- thereby enhancing the credit rating of those
securities -- in consideration for the payment of a premium to the insurer.
______________ and its subsidiaries principally insure asset-backed,
collateralized and municipal securities. Asset-backed securities are generally
supported by residential mortgage loans, consumer or trade receivables,
securities or other assets having an ascertainable cash flow or market value.
Collateralized securities include public utility first mortgage bonds and
sale/leaseback obligation bonds. Municipal securities consist largely of general
obligation bonds, special revenue bonds and other special obligations of state
and local governments. ______________ insures both newly issued securities sold
in the primary market and outstanding securities sold in the secondary market
that satisfy _____________________ underwriting criteria.
___________________ is a wholly owned subsidiary of___________________
___________, a ______________________. Major shareholders of ___________ include
_______________________. No shareholder of ________________ is obligated to pay
any debt of __________________________ or any claim under any insurance policy
issued by _______________________________ or to make any additional contribution
to the capital of ___________________.
The principal executive offices of ______________ are located at
________ _____________, and its telephone number at that location is
____________.
S-48
<PAGE>
[Additional disclosure to be provided by the bond insurer.]
Ratings
_________________ insurance financial strength is rated "____________"
by [Moody's]; ________________ insurer financial strength is rated "____" by
[Standard & Poor's] and ________________ claims paying ability is rated
"_______" by _________________. and ________________________. Such ratings
reflect only the views of the respective rating agencies, are not
recommendations to buy, sell or hold securities and are subject to revision or
withdrawal at any time by such rating agencies. See "Ratings" herein.
Capitalization
The following table sets forth the capitalization of _______________
and its wholly owned subsidiaries on the basis of generally accepted accounting
principles as of _________________________, as well as such capitalization as
adjusted to give effect to certain transactions entered into during
___________________________:
______________________
(Unaudited in Thousands)
--------------------------------
Actual As Adjusted
------------- ---------------
Deferred Premium Revenue
(net of prepaid reinsurance premiums) $ $
Surplus Notes
Minority Interests
Shareholder's Equity:
Common Stock
Additional Paid-In Capital
Accumulated Other Comprehensive Income
(net of deferred income taxes)
Accumulated Earnings
Total Shareholder's Equity _____________ _______________
Total Deferred Premium Revenue, Surplus Notes,
Minority Interests and Shareholder's Equity $ $
============= ===============
________________
For further information concerning ________________________, see the
consolidated financial statements of ____________________________, and the notes
thereto, incorporated by reference herein. _______________________ financial
statements are included as exhibits to the annual reports on Form 10-K and
quarterly reports on Form 10-Q filed with the Securities and Exchange Commission
by ____________________________ and may be reviewed at the EDGAR website
maintained by the Securities and Exchange Commission and at ________________
website, http://www.____________.com. Copies of the statutory quarterly and
annual statements filed with the State of ________________ Insurance Department
by _____________ _______________ are available upon request to the State of
____________________ ________________ Insurance Department.
S-49
<PAGE>
Incorporation of Certain Information by Reference
[To be provided by the bond insurer]
Insurance Regulation
[To be provided by the bond insurer]
DESCRIPTION OF THE BONDS
General
The issuer will issue two classes of NovaStar Home Equity Loan Asset-
Backed Bonds (the "bonds"), the class A-1 bonds (the "class A-1 bonds") in an
aggregate principal amount of $________ and the class A-2 bonds (the "class A-2
bonds") in an aggregate principal amount of $__________. The bonds will be
issued pursuant to an indenture, dated as of _______________________ (the
"indenture"), among the issuer, the bond administrator and the indenture
trustee. The issuer will also issue one or more classes of subordinated bonds
(the "subordinated bonds"), which are subordinated in right of payment to the
bonds and a residual class in each REMIC (the "residual certificates") which are
not being offered hereby. The subordinated bonds and the residual certificates
will initially be retained by the company or its affiliates. The following
summaries describe certain provisions of the bonds, 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) MI policies and certain other 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
rights under the purchase agreement; (vi) an assignment of the issuer's rights
under the servicing agreement and any subservicing 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 $1,000 in excess thereof.
Book-Entry Bonds
The bonds will be book-entry bonds ("book-entry bonds"). Persons
acquiring beneficial ownership interests in the bonds ("bond owners") may elect
to hold their bonds through the Depository Trust Company ("DTC") in the United
States, or CEDEL or Euroclear (in Europe) if they are participants of such
systems, or indirectly through organizations which are participants in such
systems. Each class of book-entry bonds will be issued in one or more
certificates which equal the aggregate principal amount of the bonds of each
Class and will initially be registered in the name of Cede & Co., the nominee of
DTC.
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<PAGE>
CEDEL and Euroclear will hold omnibus positions on behalf of their participants
through customers' securities accounts in CEDEL's and Euroclear's names on the
books of their respective depositories which in turn will hold such positions in
customers' securities accounts in the depositories' names on the books of DTC.
Citibank, N.A., will act as depository for CEDEL and The Chase Manhattan Bank
will act as depository for Euroclear (in such capacities, individually the
"relevant depository" and collectively the "European depositories"). Investors
may hold such beneficial interests in the Book-Entry bonds in minimum
denominations representing bond principal balances of $25,000 and in multiples
of $1,000 in excess thereof. Except as described below, no person acquiring a
book-entry bond (each, a "beneficial owner") will be entitled to receive a
physical certificate representing such bond (a "definitive bond"). Unless and
until definitive bonds are issued, it is anticipated that the only "bondholders"
of the bonds will be Cede & Co., as nominee of DTC. Bond owners will not be
bondholders as that term is used in the indenture. Bond owners are only
permitted to exercise their rights indirectly through the participating
organizations that utilize the services of DTC, including securities brokers and
dealers, banks and trust companies and clearing corporations and certain other
organizations ("participants") and DTC.
A bond owner's ownership of a book-entry bond will be recorded on the
records of the brokerage firm, bank, thrift institution or other financial
intermediary (each, a "financial intermediary") that maintains the beneficial
owner's account for such purpose. In turn, the financial intermediary's
ownership of such book-entry bond will be recorded on the records of DTC (or of
a participating firm that acts as agent for the financial intermediary, whose
interests will in turn be recorded on the records of DTC, if the beneficial
owner's financial intermediary is not a DTC participant, and on the records of
CEDEL or Euroclear, as appropriate). Bond owners will receive all payments of
principal of, and interest on, the bonds from the indenture trustee through DTC
and DTC participants. While the bonds are outstanding (except under the
circumstances described below), under the rules, regulations and procedures
creating and affecting DTC and its operations (the "Rules"), DTC is required to
make book-entry transfers among participants on whose behalf it acts with
respect to the bonds and is required to receive and transmit payments of
principal of, and interest on, the bonds. Participants and indirect participants
which have indirect access to the DTC system, 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"), with
whom bond owners have accounts with respect to bonds are similarly required to
make book-entry transfers and receive and transmit such payments on behalf of
their respective bond owners. Accordingly, although bond owners will not possess
certificates, the rules provide a mechanism by which bond owners will receive
payments and will be able to transfer their interest.
Bond owners will not receive or be entitled to receive certificates
representing their respective interests in the bonds, except under the limited
circumstances described below. Unless and until definitive bonds are issued,
bond owners who are not participants may transfer ownership of bonds only
through participants and indirect participants by instructing such participants
and indirect participants to transfer bonds, by book-entry transfer, through DTC
for the account of the purchasers of such bonds, which account is maintained
with their respective participants. Under the rules and in accordance with DTC's
normal procedures, transfers of ownership of bonds will be executed through DTC
and the accounts of the respective participants at DTC will be debited and
credited. Similarly, the participants and indirect participants will make debits
or credits, as the case may be, on their records on behalf of the selling and
purchasing bond owners.
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<PAGE>
Because of time zone differences, credits of securities received in
CEDEL or Euroclear as a result of a transaction with a participant will be made
during subsequent securities settlement processing and dated the business day
following the DTC settlement date. Such credits or any transactions in such
securities settled during such processing will be reported to the relevant
Euroclear or CEDEL participants on such business day. Cash received in CEDEL or
Euroclear as a result of sales of securities by or through a CEDEL participant
(as defined herein) or Euroclear participant (as defined herein) to a DTC
participant will be received with value on the DTC settlement date but will be
available in the relevant CEDEL or Euroclear cash account only as of the
business day following settlement in DTC. For information relating to tax
documentation procedures relating to the bonds, see "Material Federal Income Tax
Consequences--Foreign Investors" in the Prospectus and "Global Clearance,
Settlement and Tax Documentation Procedures--Certain U.S. Federal Income Tax
Documentation Requirements" in Annex I hereto.
Transfers between participants will occur in accordance with DTC
Rules. Transfers between CEDEL participants and Euroclear participants will
occur in accordance with their respective rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through CEDEL
participants or Euroclear participants, on the other, will be effected in DTC in
accordance with DTC rules on behalf of the relevant European international
clearing system by the relevant depository; however, such cross-market
transactions will require delivery of instructions to the relevant European
international clearing system by the counterparty in such system in accordance
with its rules and procedures and within its established deadlines (European
time). The relevant European international clearing system will, if the
transaction meets its settlement requirements, deliver instructions to the
relevant depository to take action to effect final settlement on its behalf by
delivering or receiving securities in DTC, and making or receiving payment in
accordance with normal procedures for same day fund settlement applicable to
DTC. CEDEL participants and Euroclear participants may not deliver instructions
directly to the European depositories.
DTC, which is a New York-chartered limited purpose trust company,
performs services for its participants, some of which (and/or their
representatives) own DTC. In accordance with its normal procedures, DTC is
expected to record the positions held by each DTC participant in the book-entry
bonds, whether held for its own account or as nominee for another person. In
general, beneficial ownership of book-entry bonds will be subject to the rules,
regulation and procedures governing DTC and DTC participants as in effect from
time to time.
CEDEL is incorporated under the laws of Luxembourg as a professional
depository. CEDEL holds securities for its participating organizations ("CEDEL
participants") and facilitates the clearance and settlement of securities
transactions between CEDEL participants through electronic book-entry changes in
accounts of CEDEL participants, thereby eliminating the need for physical
movement of certificates. Transactions may be settled in CEDEL in any of 28
currencies, including United States dollars. CEDEL provides to its CEDEL
participants, among other things, services for safekeeping, administration,
clearance and settlement of internationally traded securities and securities
lending and borrowing. CEDEL interfaces with domestic markets in several
countries. As a professional depository, CEDEL is subject to regulation by the
Luxembourg Monetary Institute. CEDEL participants are recognized financial
institutions around the world, including underwriters, securities brokers and
dealers, banks, trust companies, clearing corporations and certain other
organizations. Indirect access to CEDEL is
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<PAGE>
also available to others, such as banks, brokers, dealers and trust companies
that clear through or maintain a custodial relationship with a CEDEL
participant, either directly or indirectly.
Euroclear was created in 1968 to hold securities for its participants
("Euroclear participants") and to clear and settle transactions between
Euroclear participants through simultaneous electronic book-entry delivery
against payment, thereby eliminating the need for physical movement of
certificates and any risk from lack of simultaneous transfers of securities and
cash. Transactions may be settled in any of 32 currencies, including United
States dollars. Euroclear includes various other services, including securities
lending and borrowing and interfaces with domestic markets in several countries
generally similar to the arrangements for cross-market transfers with DTC
described above. Euroclear is operated by the Brussels, Belgium office of Morgan
Guaranty Trust Company of New York ("Morgan" and in such capacity, the
"Euroclear operator"), under contract with Euroclear Clearance Systems S.C., a
Belgian cooperative corporation (the "cooperative"). All operations are
conducted by Morgan, and all Euroclear securities clearance accounts and
Euroclear cash accounts are accounts with the Euroclear operator, not the
Belgian cooperative. The Belgian cooperative establishes policy for Euroclear on
behalf of Euroclear participants. Euroclear participants include banks
(including central banks), securities brokers and dealers and other professional
financial intermediaries. Indirect access to Euroclear is also available to
other firms that clear through or maintain a custodial relationship with a
Euroclear participant, either directly or indirectly.
The Euroclear operator is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. As such, it is
regulated and examined by the Board of Governors of the Federal Reserve System
and the New York State Banking Department, as well as the Belgian Banking
Commission.
Securities clearance accounts and cash accounts with Morgan are
governed by the Terms and Conditions Governing Use of Euroclear and the related
Operating Procedures of the Euroclear System and applicable Belgian law
(collectively, the "Terms and Conditions"). The Terms and Conditions govern
transfers of securities and cash within Euroclear, withdrawals of securities and
cash from Euroclear, and receipts of payments with respect to securities in
Euroclear. All securities in Euroclear are held on a fungible basis without
attribution of specific certificates to specific securities clearance accounts.
The Euroclear Operator acts under the Terms and Conditions only on behalf of
Euroclear participants, and has no record of or relationship with persons
holding through Euroclear participants.
Payments on the book-entry bonds will be made on each payment date by
the indenture trustee to DTC. DTC will be responsible for crediting the amount
of such payments to the accounts of the applicable DTC participants in
accordance with DTC's normal procedures. Each DTC participant will be
responsible for disbursing such payments to the beneficial owners of the book-
entry bonds that it represents and to each financial intermediary for which it
acts as agent. Each such financial intermediary will be responsible for
disbursing funds to the beneficial owners of the book-entry bonds that it
represents.
Under a book-entry format, beneficiary owners of the book-entry bonds
may experience some delay in their receipt of payments, since such payments will
be forwarded by the indenture trustee to Cede & Co., as nominee of DTC. Payments
with respect to bonds held through CEDEL or Euroclear will be credited to the
cash accounts of CEDEL participants or Euroclear participants in accordance with
the relevant system's rules and procedures, to the extent received by the
relevant depository. Such payments will be subject to tax reporting in
accordance with relevant United States tax laws and regulations. See
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<PAGE>
"Material Federal Income Tax Consequences--Foreign Investors" and "--Backup
Withholding" in the Prospectus. Because DTC can only act on behalf of financial
intermediaries, the ability of a beneficial owner to pledge book-entry bonds to
persons or entities that do not participate in the depository system, or
otherwise take actions in respect of such book-entry bond, may be limited due to
the lack of physical certificates for such book-entry bonds. In addition,
issuance of the book-entry bonds in book-entry form may reduce the liquidity of
such bonds in the secondary market since certain potential investors may be
unwilling to purchase bonds for which they cannot obtain physical certificates.
Monthly and annual reports on the issuer will be provided to Cede &
Co., as nominee of DTC, and may be made available by Cede & Co., to beneficial
owners upon request, in accordance with the rules, regulations and procedures
creating and affecting DTC or the relevant depository, and to the financial
intermediaries to whose DTC accounts the book-entry bonds of such beneficial
owners are credited.
DTC has advised the issuer and the indenture trustee that, unless and
until definitive bonds are issued, DTC will take any action permitted to be
taken by the holders of the book-entry bonds under the indenture only at the
direction of one or more financial intermediaries to whose DTC accounts the
book-entry bonds are credited, to the extent that such actions are taken on
behalf of financial intermediaries whose holdings include such book-entry bonds.
CEDEL or the Euroclear Operator, as the case may be, will take any other action
permitted to be taken by a bondholder under the indenture on behalf of a CEDEL
participant or Euroclear participant only in accordance with its relevant rules
and procedures and subject to the ability of the relevant depository to effect
such actions on its behalf through DTC. DTC may take actions, at the direction
of the related participants, with respect to some bonds which conflict with
actions taken with respect to other bonds.
Definitive bonds will be issued to beneficial owners of the book-entry
bonds, or their nominees rather than to DTC, only if (a) DTC or the issuer
advises the indenture trustee in writing that DTC is no longer willing,
qualified or able to discharge properly its responsibilities as nominee and
depository with respect to the book-entry bonds and the issuer or the indenture
trustee is unable to locate a qualified successor or (b) the issuer, at its sole
option, elects to terminate a book-entry system through DTC.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the bond administrator, on behalf of the indenture trustee,
will be required to notify all beneficial owners of the occurrence of such event
and the availability through DTC of the definitive bonds. Upon surrender by DTC
of the global note or notes representing the book-entry bonds and instructions
for re-registration, the bond administrator, as registrar, will issue definitive
bonds, and thereafter the indenture trustee and the bond administrator will
recognize the holders of such definitive bonds as bondholders under the
indenture.
Although DTC, CEDEL and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of bonds among participants of DTC,
CEDEL and Euroclear, they are under no obligation to perform or continue to
perform such procedures and such procedures may be discontinued at any time.
None of the company, the servicer, the bond insurer, the owner
trustee, the issuer, the bond administrator or the indenture trustee will have
any responsibility for any aspect of the records relating to or payments made on
account of beneficial ownership interests of the book-entry bonds held
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<PAGE>
by Cede & Co., as nominee of DTC, or for maintaining, supervising or reviewing
any records relating to such beneficial ownership interests.
For additional information regarding DTC and the book-entry
bonds, see Annex I hereto and "The Agreements--Form of the Securities" in the
Prospectus.
Assignment of Mortgage Loans
On the closing date, the seller will convey the initial
mortgage loans to the company and the company will convey the initial mortgage
loans to the issuer. The issuer will pledge the initial mortgage loans to the
indenture trustee as security for the bonds.
At the time of issuance of the bonds, pursuant to the
indenture the issuer will pledge all of its right, title and interest in and to
the mortgage loans, including all principal and interest due on each such
mortgage loan after the applicable cut-off date, together with its right, title
and interest in and to the proceeds of any related insurance policies received
after the applicable cut-off date, to the indenture trustee as security for the
bonds; provided, however, that the seller will reserve and retain all its right,
title and interest in and to principal and interest due on such mortgage loan on
or prior to the applicable cut-off date (whether or not received on or prior to
such cut-off date), and to prepayments and prepayment charges received on or
prior to the applicable cut-off date. The bond administrator on behalf of the
indenture trustee, concurrently with the pledge of the initial mortgage loans to
the indenture trustee as security for the bonds, will authenticate and deliver
the bonds at the direction of the issuer in exchange for, among other things,
the initial mortgage loans.
The indenture will require the issuer to deliver to the bond
administrator on behalf of the indenture trustee the mortgage loans, the related
mortgage notes endorsed by the seller, or the last holder of record, without
recourse to the indenture trustee, the related mortgages or deeds of trust with
evidence of recording thereon, all intervening mortgage assignments, if any, and
certain other documents relating to the mortgage loans (the "mortgage files").
The seller will be required to cause to be prepared and recorded, at its expense
and within the time period specified in the purchase agreement, assignments of
the mortgages from the seller, or the last holder of record, to the indenture
trustee.
The bond administrator, on behalf of the indenture trustee,
will review the mortgage files delivered to it on the closing date or the date
of each subsequent transfer within 45 days after the closing date, and if any
document required to be included in any mortgage file is found to be missing or
to be defective in any material respect and such defect is not cured within 45
days following notification thereof to the issuer, the bond administrator will
require either that the related mortgage loan be removed from the mortgage pool
or that a mortgage loan conforming to the requirements of the indenture (a
"qualified replacement mortgage loan") be substituted for the related mortgage
loan within 90 days after the closing date in the manner described below.
In connection with the transfer of the mortgage loans pursuant
to the purchase agreement, the seller will make certain representations and
warranties as to the accuracy in all material respects of the information set
forth on a schedule identifying and describing each mortgage loan. In addition,
the seller will make certain other representations and warranties regarding the
mortgage loans, including, for instance, that each mortgage loan, at its
origination, complied in all material respects with applicable state and federal
laws, that each mortgage is a valid first priority lien, that, as of the
applicable cut-off date, no mortgage loan included in the mortgage pool as of
the closing date was more than 89 days past due, that each mortgaged property
consists of a one- to four-family residential property or unit in a condominium
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or planned unit development, that the seller had good title to each mortgage
loan prior to such transfer and that the originator was authorized to originate
each mortgage loan. The rights of the company to enforce remedies for breaches
of such representations and warranties in the purchase agreement against the
seller will be assigned to the indenture trustee pursuant to the indenture.
If with respect to any mortgage loan (1) a defect in any
document constituting a part of the related mortgage file remains uncured within
the period specified above and materially and adversely affects the value of any
such mortgage loan or materially and adversely affects the interest of the
indenture trustee, the bondholders or the bond insurer or (2) a breach of any
representation or warranty made by the seller relating to such mortgage loan
occurs and such breach materially and adversely affects the value of any such
mortgage loan or materially and adversely affects the interests of the indenture
trustee, the bondholders or the bond insurer therein, then the bond
administrator on behalf of the indenture trustee will enforce the remedies for
such defects or breaches against the seller by requiring the seller to remove
the related mortgage loan (any such mortgage loan, a "defective mortgage loan")
from the trust by remitting to the collection account an amount equal to the
principal balance of such defective mortgage loan (plus certain realized losses)
together with interest accruing at the mortgage rate (net of the applicable
servicing fee rate) on such defective mortgage loan from the date interest was
last paid by the related mortgagor to the end of the due period preceding the
month in which such payment date occurs, less any payments received during the
related collection period in respect of such defective mortgage loan (the
"repurchase price"). The seller will also have the option, but not the
obligation, to substitute for such defective mortgage loan a qualified
replacement mortgage loan, but only if such substitution is made within two
years after the closing date. Upon delivery of a qualified replacement mortgage
loan and deposit of certain amounts in the collection account as set forth in
the indenture, or deposit of the repurchase price in the collection account and
receipt by the bond administrator, the indenture trustee and the bond insurer of
written notification of any such substitution or removal, as the case may be,
the bond administrator on behalf of the indenture trustee shall cause to be
executed and delivered an instrument of transfer or assignment necessary to vest
legal and beneficial ownership of such defective mortgage loan (including any
property acquired in respect thereof or proceeds of any insurance policy with
respect thereto) in the seller and release such defective mortgage loan from the
lien of the indenture.
The obligation of the seller to cure, remove or substitute any
mortgage loan as described above will constitute the sole remedy available to
bondholders, the bond insurer or the indenture trustee for a defective mortgage
loan.
Payments
Payments on the bonds will be made by 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 on__________________ (each, a "payment
date"). Payments on the bonds will be made to the persons in whose names such
bonds are registered on the record date. The "record date" for the class A-1 is
the business day prior to the related payment date, and for the class A-2 bonds
is the last day of the calendar month prior to the related payment date. In each
case, the record date for the initial payment date is the closing date. 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 a class of
bonds having denominations aggregating at least $______________ , 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
bond register on the related record date. However, the final payment in respect
of the bonds will be made
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only upon presentation and surrender thereof at the office or the agency of the
indenture trustee specified in the notice to holders of such final payment. A
"business day" is any day other than (i) a Saturday or Sunday or (ii) a day on
which banking institutions in New York, California, Kansas or Delaware or in the
city in which the corporate trust office of the indenture trustee or the
principal office of the bond insurer are located, is required or authorized by
law to be closed.
Available Funds
The "available funds" for each class of bonds on any payment
date will equal the amount received by the indenture trustee and available in
the payment account on each payment date for such class. The available funds
will generally be equal to the sum of, net of amounts reimbursable therefrom to
the servicer and any subservicer and administrative fees for such class (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 with respect to the mortgage loans in the related group (but excluding
late fees), (iii) any unscheduled payments and receipts, including mortgagor
prepayments on the related mortgage loans, received during the related
prepayment period (as defined herein) and proceeds of repurchases, and
adjustments in the case of substitutions and terminations, net liquidation
proceeds, insurance proceeds, proceeds from any MI policy ("MI insurance
proceeds"), and (iv) all advances made for such payment date in respect of the
related mortgage loans. In addition, on the payment date relating to the due
period in which the termination of the funding period occurred, available funds
will include the amount on deposit in the pre-funding account with respect to
such class 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 for such class. 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 each class of bonds will be
entitled to receive an amount (the related "interest payment amount") equal to
interest accrued on the related bond principal balance immediately prior to such
payment date at the related bond interest rate (as defined below) for the
related interest period.
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The bonds will bear interest at the following rates:
On or Prior to the Rate Step Up Date
------------------------------------
Class Rate
----- ----
A-1 One-Month LIBOR plus ______ %
A-2 ______ %
After the Rate Step Up Date
---------------------------
Class Rate
----- ----
A-1 One-Month LIBOR plus ______ %
A-2 ______ %
The "bond interest rate" for each class of bonds is equal to
the lesser of (i) the rate stated above (the "stated rate") and (ii) the
available funds cap rate.
The "available funds cap rate" with respect to each class of
bonds for any payment date is a rate per annum equal to the fraction, expressed
as a percentage, the numerator and denominator of which are as follows:
(i) the numerator of which is an amount equal to the
product of (x) the weighted average mortgage rate on the mortgage loans in the
related group and (y) 1/12 of the aggregate principal balance of the mortgage
loans in the related group less the related administrative fee for the related
----
group; and
(ii) the denominator of which is an amount equal to the
product of the related bond principal balance and the number of days elapsed in
the related interest period divided by 360;
less, in the case of the class A-1 bonds, 0.50%.
----
The "rate step up date" is the payment date on which the
aggregate principal balance of the mortgage loans is reduced to equal to or less
than 10% of the sum of the principal balance of the initial mortgage loans as of
the cut-off date and the original pre-funded amount.
With respect to the class A-1 bonds and any payment date, to
the extent that the related interest payment amount is reduced because the
stated rate exceeds the related available funds cap rate (such excess amount,
the related "carry-forward amount"), such amount will be carried forward and
distributed to the holders of such class, together with interest thereon at the
related bond interest rate applicable from time to time, after certain payments
to the holders of the bonds and the bond insurer, to the extent of related
available funds. There is no carry-forward feature with respect to the class A-2
bonds.
Interest on the bonds will accrue during the "interest
period." The interest period for the class A-1 bonds is the period from the
prior payment date through and including the day preceding the related payment
date. Interest will accrue on the class A-1 bonds on the basis of the actual
number of days in the interest period and a 360 day year. The interest period
for the class A-2 bonds is the calendar month preceding the related payment date
Interest will accrue on the class A-2 bonds on the basis of twelve 30-day months
and a 360 day year. In the case of the first payment date, interest begins to
accrue on the class A-1 bonds and the class A-2 bonds on the closing date.
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Certain Administrative Fees of the Issuer
With respect to each payment date and each group of mortgage
loans, the bond administrator will be entitled to a fee (the "bond administrator
fee") equal to 1/12 of _____ % per annum (the "bond administrator fee rate")
times the sum of the principal balance of the mortgage loans in the related
group and the pre-funded amount with respect to such group as of such date. With
respect to each payment date and group of mortgage loans, the servicer is
entitled to retain out of collections its servicing fee (the "servicing fee"),
which is equal to 1/12 of ____ % per annum (the "servicing fee rate") times the
principal balance of the mortgage loans as of such date. The bond administrator
will be responsible for paying the fee due to the indenture trustee (the
"indenture trustee fee"). For any payment date, the "owner trustee fee" is
$______ per annum for each group and the related class (payable on the payment
date in _____________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
aggregate bond principal balance (the bond Insurance premium collectively with
the MI premiums, the servicing fee and the bond administrator fee with respect
to a group, the "administrative fee" for such group and the related class).
The bond insurance policy does not cover any shortfall in any
interest payment amount caused by any prepayment interest shortfalls, and 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 any carry-forward amount.
The "bond principal balance" on any date of determination for
any class of bonds is the initial principal balance of such class of bonds as of
the closing date, reduced by all payments of principal thereon prior to such
date of determination.
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
The bond administrator will determine the London interbank
offered rate for one-month United States dollar deposits ("one-month LIBOR") for
each interest period for the bonds on the second London business day preceding
such interest period (each such date, an "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 bond
administrator 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
___________________, selected by the bond administrator , at approximately 11:00
a.m., ___________________ 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).
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"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 bond
administrator and engaged in transactions in European deposits in the
international Eurocurrency market.
The establishment of one-month LIBOR on each interest
determination date by the bond administrator and the bond administrator'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
Principal payments will be payable on each class of bonds on
each payment date in an aggregate amount equal to the related principal payment
amount for such payment date. The "principal payment amount" for a class of
bonds (a) on 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 related 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
allocated to such class and (y) the sum of:
(i) the principal portion of all scheduled monthly payments
on the mortgage loans in the related group received or advanced (as defined
herein) on the mortgage loans with respect to the related due date (and with
respect to the first payment date, received after the cut-off date);
(ii) the principal portion of all proceeds of the repurchase
of a mortgage loan in the related group (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 (and
with respect to the first payment date, received after the cut-off date);
(iii) the principal portion of all other unscheduled
collections with respect to mortgage loans in the related group received during
the related prepayment period (or deemed to be received during the related
prepayment period) (and with respect to the first payment date, received after
the cut-off date) (including, without limitation, full and partial principal
prepayments made by the respective mortgagors, net liquidation proceeds and
insurance proceeds and termination 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 allocated to such class; and
(v) with respect to the payment date immediately following
the end of the funding period, any amounts in the pre-funding account and the
interest coverage account relating to the group securing such class after giving
effect to any purchase of subsequent mortgage loans;
minus
-----
(vi) the amount of any subordination reduction amount with
respect to such class for such payment date;
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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 principal balance of such
class of bonds to zero.
In addition to the principal payment amount, the holders of
each class of bonds on each payment date may receive an additional payment of
principal as a subordination increase amount or otherwise through the cross-
collateralization feature described below. In no event will any principal
payment amount with respect to any payment date be (x) less than zero or (y)
greater than the then outstanding principal balance of the related class of
bonds.
Priority of Payment
On each payment date, available funds (and any insured payment
which may only be used to pay items (i) and (ii) below) with respect to a class
of bonds will be distributed in the following order of priority, in each case to
the extent of available funds remaining:
(i) to the holders of such class of bonds, the related
interest payment amount with respect to such payment date;
(ii) to the holders of such class of bonds, the related
principal payment amount with respect to such payment date;
(iii) to the holders of each other class of bonds, the
related cross-collateralization amount in respect of interest shortfalls with
respect to such payment date;
(iv) to the holders of each other class of bonds, the
related cross-collateralization amount in respect of principal shortfalls with
respect to such payment date;
(v) to the bond insurer, the sum of (a) all amounts
previously paid by the bond insurer under the bond insurance policy with respect
to such class which have not previously been reimbursed, (b) any other amounts
due to the bond insurer with respect to such class pursuant to the agreement
pursuant to which the bond insurance policy is issued (the "insurance
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
(collectively, the related "reimbursement amount");
(vi) to the bond insurer, the related cross-
collateralization amount for bond insurer reimbursement for other classes of
bonds with respect to such payment date;
(vii) to the holders of such class of bonds, an amount equal
to the difference, if any, between the related required subordination amount and
the related subordinated amount, in reduction of the related bond principal
balance, until such bond principal balance has been reduced to zero;
(viii) to the holders of each other class of bonds, the
related cross-collateralization amount in respect of any remaining deficiency in
the required subordinated amount with respect to such payment date;
(ix) to the holders of the class A-1 bonds, any related
carry-forward amount for such payment date;
(x) to the holders of the class A-1 bonds, the related
cross-collateralization amount in respect of any remaining carry-forward amounts
with respect to such payment date;
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(xi) to the indenture trustee and the bond administrator, an
amount (prorated according to amounts available therefor from each class) for
any indemnity amounts owing to the trust administrator or the bond administrator
under the indenture;
(xii) to the servicer, any amounts (prorated according to
amounts available therefor from each class) owing to the servicer pursuant to
the servicing agreement in connection with the indemnity by the issuer
thereunder, and in the event there is a successor servicer, additional
compensation, if necessary; and
(xiii) any remaining amounts to the holders of the
subordinated bonds.
Overcollateralization Provisions
Overcollateralization Resulting from Cash Flow Structure. With
respect to any payment date and a class of bonds, the excess, if any, of (x) the
sum of the aggregate principal balances of the mortgage loans in the related
group 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 held with respect to
the related group over (y) the bond principal balance of the bonds of such class
as of such payment date (and following the making of all payments made on such
payment date) is the related "subordination amount" as of such payment date. The
indenture requires that, on each payment date, the related net monthly excess
cashflow, if any, be applied on such payment date as an accelerated payment of
principal on such class of bonds, but only to the limited extent hereafter
described. The net monthly excess cashflow for a class of bonds may also be used
to make accelerated payments of principal on the other classes of bonds as
described above under "Priority of Payment" and below under "Cross-
Collateralization." The "net monthly excess cashflow" for each class of bonds
and any payment date is equal to the amount of the related available funds
remaining after application to items (i) through (vi) under "Priority of
Payment" herein. This application has the effect of accelerating the
amortization of each class of bonds relative to the amortization of the mortgage
loans in the related group. Such an accelerated payment of principal on each
class of bonds is required until the related subordination amount has increased
to the level equal to the required subordination amount for such class of bonds
and payment date.
Any amount actually applied as an accelerated payment of
principal on a class of bonds is a "subordination increase amount" with respect
to such class. The required level of the subordination amount with respect to
each class and a payment date is the related "required subordination amount."
The indenture generally provides that the required subordination amount with
respect to each class may, over time, decrease, or increase, subject to certain
floors, caps and triggers.
Initially, the sum of the aggregate principal balance of the
initial mortgage loans in each group as of the cut-off date and the original
pre-funded amount allocated to such group will exceed the bond principal balance
of the related class of bonds as of the closing date. This excess is known as
the "target subordination amount" for such class of bonds and is equal to _____%
and _____% of the sum of the aggregate principal balance of the initial mortgage
loans in the related group as of the cut-off date and the portion of the
original pre-funded amount allocated to such group for class A-1 and class A-2,
respectively. The bond insurer may adjust the target subordination amount for
each class of bonds.
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In the event that the required subordination amount for a
class of bonds is permitted to decrease or "step down" on a payment date in the
future, a portion of the principal payment which would otherwise be distributed
to the holders of such class of bonds on such payment date shall be distributed
to the holders of the subordinated bonds on such payment date. This has the
effect of decelerating the amortization of a class of bonds relative to the
amortization of the mortgage loans in the related group and of reducing the
related subordination amount. With respect to any class of bonds and any payment
date, the difference, if any, between (a) the related 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
the related subordination reduction amounts (as described below) on such payment
date) and (b) the required subordination amount for such class of bonds and for
such payment date is the related "excess subordination amount" with respect to
such payment date. With respect to any class of bonds and any payment date, an
amount equal to the lesser of (a) the related excess subordination amount and
(b) the principal collections on the mortgage loans in the related group
received by the servicer with respect to the related due period is the
"subordination reduction amount" for such class of bonds. In addition, a
subordination reduction amount may result even prior to the occurrence of any
decrease or "step down" in the required subordination amount for a class of
bonds. This is because the holders of the class of bonds will generally be
entitled to receive 100% of collected principal, even though the bond principal
balance of the class of bonds may represent less than 100% of the aggregate
principal balance of the mortgage loans in the related group. In the absence of
the provisions relating to a subordination reduction amount, the foregoing may
otherwise increase the subordination amount for a class of bonds above the
required subordination amount for such class of bonds even without the
application of any related 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 in a group 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 related class of bonds on such payment date. If any
mortgage loan in a group became a Liquidated mortgage loan (as defined below)
during such prepayment period, the net liquidation proceeds 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 related class of 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 related subordination amount, which, to the extent
that such reduction causes such subordination amount to be less than the
required subordination amount for the class of bonds applicable to the related
payment date, will require the payment of a subordination increase amount for
the class of bonds on such payment date (or, if insufficient funds are available
on such payment date, on subsequent payment dates, until such subordination
amount equals the required subordination amount for the class of bonds).
Overcollateralization and the bond insurance policy. The
indenture defines a "subordination deficit" with respect to the bonds and a
payment date to be the amount, if any, by which
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(x) the aggregate bond principal balance of all 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 payment
date. The indenture requires the bond administrator to make a claim for an
insured payment under the bond insurance policy for the benefit of the indenture
trustee not later than the second business day prior to any payment date as to
which the bond administrator 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.
Cross-Collateralization
The cash flow provisions of the issuer provide for limited
"cross-collateralization," in which excess amounts with respect to one or more
classes is used to make payments with respect to one or more other classes. At
each point in the waterfall (described above under "Priority of Payment")
providing for the application of cash flows as cross-collateralization, the bond
administrator will determine whether with respect to each class, there is either
(x) cash available for application to the other class or (y) cash required from
the other classes. If the aggregate amount required is greater than the
aggregate amount available, the indenture trustee will apply such amount
available to each class that requires cash pro rata in accordance with the
amount required by each class. Alternatively, if the aggregate amount available
is greater than the aggregate amount required, the indenture trustee will take
the required amount pro rata in accordance with the excess amount available in
each class.
Bond Insurance Policy
The following information has been supplied by the bond
insurer for inclusion in this prospectus supplement.
Simultaneously with the issuance of the bonds, the bond
insurer will issue the bond insurance policy to the indenture trustee on behalf
of and for the benefit of the bondholders pursuant to which it will irrevocably
and unconditionally guaranty payment on each payment date to the indenture
trustee on behalf of and for the benefit of the bondholders of an amount equal
to the interest payment amount for each class of bonds plus any subordination
deficit for such payment date calculated in accordance with the original terms
of the bonds when issued and without regard to any amendment or modification of
the bonds or the indenture except amendments or modifications to which the bond
insurer has given its prior written consent. The amount of the "insured
payment", if any, made by the bond insurer to the bondholders under the bond
insurance policy on each payment date is the sum (without duplication) of (i)
any shortfall in the amount required to pay the subordination deficit for such
payment date from a source other than the bond insurance policy, (ii) any
shortfall in the amount required to pay the interest payment amount (less any
prepayment interest shortfalls and relief act shortfalls) for each class of
bonds on such payment date from a source other than the bond insurance policy,
and (iii) on the final scheduled payment date, the outstanding bond principal
balance on all classes of bonds. Payments which become due on an accelerated
basis as a result of (a) a default by the issuer, (b) an election by the issuer
to pay principal on an accelerated basis or (c) any other cause do not
constitute "insured payments," unless the bond insurer elects, in its sole
discretion, to pay such principal due upon acceleration, together
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with any accrued interest to the date of acceleration. The effect of the bond
insurance policy is to guaranty the timely payment of interest on, and the
ultimate principal amount of the bonds. Notwithstanding the foregoing, the bond
insurer is permitted at its sole option, but is not required, to pay any losses
in connection with the liquidation of a mortgage loan in accordance with the
bond insurance policy.
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.
"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, or similar legislation or regulations.
Payment of claims under the bond insurance policy will be made
by the bond insurer following receipt by the bond insurer of the appropriate
notice for payment on the later to occur of (a) 12:00 noon, _______________
time, on the second business day following receipt of such notice for payment,
and (b) 12:00 noon, ______________ time, on the relevant payment date.
If any payment of an amount guaranteed by the bond insurer
pursuant to the bond insurance policy is avoided as a preference payment under
applicable bankruptcy, insolvency, receivership or similar law the bond insurer
will pay such amount out of the funds of the bond insurer on the later of (a)
the date when due to be paid pursuant to the order referred to below or (b) the
first to occur of (i) the fourth business day following receipt by the bond
insurer from the bond administrator of (A) a certified copy of the order (the
"order") of the court or other governmental body which exercised jurisdiction to
the effect that a bondholder is required to return principal or interest
distributed with respect to a bond during the term of the bond insurance policy
because such distributions were avoidable preferences under applicable
bankruptcy law, (B) a certificate of the bondholder that the order has been
entered and is not subject to any stay, and (C) an assignment duly executed and
delivered by the bondholder, in such form as is reasonably required by the bond
insurer and provided to the bondholder by the bond insurer, irrevocably
assigning to the bond insurer all rights and claims of the bondholder relating
to or arising under the bonds against the debtor which made such preference
payment or otherwise with respect to such preference payment, or (ii) the date
of receipt by the bond insurer from the bond administrator of the items referred
to in clauses (A), (B) and (C) above if, at least four business days prior to
such date of receipt, the bond insurer shall have received written notice from
the bond administrator that such items were to be delivered on such date and
such date was specified in such notice. Such payment shall be disbursed to the
receiver, conservator, debtor-in-possession or trustee in bankruptcy named in
the order and not to the bond administrator or any bondholder directly (unless a
bondholder has previously paid such amount to the receiver, conservator,
debtor-in-possession or trustee in bankruptcy named in the order, in which case
such payment shall be disbursed to the indenture trustee for distribution to
such bondholder upon proof of such payment reasonably satisfactory to the bond
insurer).
The terms "receipt" and "received," with respect to the bond
insurance policy, means actual delivery to the bond insurer and to its fiscal
agent appointed by the bond insurer at its option, if any, prior to 12:00 p.m.,
______________ time, on a business day; delivery either on a day that is not a
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business day or after 12:00 p.m., ____________________ time, shall be deemed to
be receipt on the next succeeding business day. If any notice or certificate
given under the bond insurance policy by the bond administrator is not in proper
form or is not properly completed, executed or delivered, it shall be deemed not
to have been received, and the bond insurer or the fiscal agent shall promptly
so advise the bond administrator and the bond administrator may submit an
amended notice.
The bond insurer's obligations under the bond insurance policy in
respect of insured payments shall be discharged to the extent funds are
transferred to the indenture trustee as provided in the bond insurance policy,
whether or not such funds are properly applied by the bond administrator.
The bond insurer shall be subrogated to the rights of each
bondholder to receive payments of principal and interest, as applicable, with
respect to distributions on the bonds to the extent of any payment by the bond
insurer under the bond insurance policy. To the extent the bond insurer makes
insured payments, either directly or indirectly (as by paying through the paying
agent), to the bondholders, the bond insurer will be subrogated to the rights of
the bondholders, as applicable, with respect to such insured payment, shall be
deemed to the extent of the payments so made to be a registered bondholder for
purposes of payment and shall receive all future payments of principal and
interest, as applicable, until all such insured payments by the bond insurer
have been fully reimbursed, provided that the bondholders have received the full
amount of the payments of principal and interest, as applicable.
Claims under the bond insurance policy will rank equally with any
other unsecured and unsubordinated obligations of the bond insurer except for
certain obligations in respect of tax and other payments to which preference is
or may become afforded by statute. The terms of the bond insurance policy cannot
be modified, altered or affected by any other agreement or instrument, or by the
merger, consolidation or dissolution of the master servicer. The bond insurance
policy by its terms may not be canceled or revoked. The bond insurance policy is
governed by the laws of the State of ______________.
Pursuant to the terms of the indenture, unless a bond insurer
default exists, the bond insurer shall be deemed to be the bondholders for
certain purposes (other than with respect to payment on the bonds), 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 the prior written consent of the bond insurer. In addition, the bond
insurer will have certain additional rights as a third party beneficiary to the
indenture.
The bond insurer does not accept any responsibility for the
accuracy of 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 insurer set forth under the
heading "The bond insurer" herein. Additionally, the bond insurer makes no
representation regarding the bonds or the advisability of investing in the
bonds.
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
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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.
Bond Insurance Policy Does Not Apply to Prepayment Risk
In general, the protection afforded by the bond insurance policy
is protection for credit risk and not for prepayment risk. A claim may not be
made under the bond insurance policy, in an attempt to guarantee or insure that
any particular rate of prepayment is experienced by the trust estate.
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 below)
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 successor servicer will be obligated to make any
such advance, in accordance with the terms of the servicing agreement.
The servicer may fund an advance from its own corporate funds,
advances made by any subservicer or funds held in the collection account for
future payment or withdrawal.
Advances made from funds held in the collection account may be
made by the servicer from subsequent collections of principal and interest
received on other mortgage loans and deposited into the collection account.
Advances made from the collection account are not limited to subsequent
collections of principal and interest received on the delinquent mortgage loan
with respect to which an Advance is made. If on the fourth business day prior to
any payment date funds in the collection account are less than the amount
required to be paid to the bondholders on such payment date, then the servicer
will deposit its own funds into the payment account in the amount of the lesser
of (i) any unreimbursed advances previously made by the servicer with funds held
in the collection account or (ii) the shortfall in the collection account;
provided, however, that in no event will the servicer deposit into the
collection account an amount that is less than any shortfall in the collection
account attributable to delinquent payments on mortgage loans which the servicer
deems to be recoverable and which has not been covered by an Advance from the
servicer's own corporate funds or any subservicer's funds.
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.
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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 Termination
The mortgage loans may be purchased by the servicer on any payment
date on or after the payment date on which the aggregate principal balance of
the mortgage loans is equal to or less than _____% of the sum of the principal
balance of the initial mortgage loans as of the cut-off date and the original
pre-funded amount. This will result in a redemption of the bonds. The purchase
price for the mortgage loans will be an amount sufficient to pay 100% of the
aggregate outstanding bond principal balance of each class of bonds and accrued
and unpaid interest thereon (including any carry-forward amount) at the related
bond interest rate through the date on which the issuer is terminated together
with all amounts due and owing to the bond insurer, the servicer, the bond
administrator and the indenture trustee. Such termination must constitute a
"qualified liquidation" (within the meaning of Section 860F of the Code) of the
REMIC established by the issuer, including, without limitation, the requirement
that the qualified liquidation takes place over a period not to exceed 90 days.
Mandatory Prepayments on the Bonds
Each class of 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 for the related group 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 for
each class of bonds.
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 to
cover shortfalls in the interest payment amounts 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 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 prices paid by
the holders of such bonds, 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
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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. None
of the initial mortgage loans are secured by junior liens on the related
mortgage properties. Generally, mortgage loans secured by junior liens are not
viewed by mortgagors as permanent financing. Accordingly, such mortgage loans
may experience a higher rate of prepayment than the first lien mortgage loans.
All of the mortgage loans 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. All of the 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 regulation; 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. 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
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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.
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 each class of 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) a portion of the pre-funded
amount remaining in the pre-funding account allocated to the related group and
(ii) the outstanding principal balance of such class of 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 original 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.
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
administrative fee rate. In such event, the resulting shortfall will only be
payable to the holders of the class A-1 bonds 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 (viii) under "Description of the Bonds--Priority
of Payment." There is no carry-forward feature with respect to the class A-2
bonds.
The class A-1 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 (the "indices") applicable to the
mortgage loans, six-month LIBOR and one-year CMT). The mortgage rate for each
adjustable rate mortgage loan in group I adjusts semi-annually or annually,
commencing after the initial period, based upon the related index, whereas the
bond interest rate on the class A-1 bonds adjusts monthly based upon one-month
LIBOR plus a spread as set forth 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).
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Thus, it is possible, for example, that 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, 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 the 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% (such model, a "prepayment
assumption"). With respect to the fixed rate mortgage loans, the prepayment
model assumes a constant CPR of 2.4% in the first month of the life of the fixed
rate mortgage loans and an additional 2.4% per annum in each month thereafter
until the tenth month; beginning in the tenth month and in each month
thereafter, the prepayment model assumes a CPR of 24% (such model, also a
"prepayment assumption"). The levels of CPR used above in defining the
prepayment assumptions represent 100% of the related prepayment assumption. To
assume a CPR percentage in either prepayment model is to assume that the stated
percentage of the outstanding principal
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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 tables set forth below have 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 tables assume, among other things, that: (i) the mortgage pool
consists of mortgage loans with the following characteristics:
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Group I
<TABLE>
<CAPTION>
Original Remaining Months to
Current Term to Term to Next Rate Gross Maximum Minimum Initial Periodic
Mortgage Maturity Maturity Adjustment Margin Mortgage Mortgage Periodic Rate
Principal Balance ($) Rate (%) (in Months) (in months) Date (%) Rate (%) Rate (%) Cap (%) Cap (%)
--------------------- -------- ----------- ----------- ---- --- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Six-Month LIBOR
Initial
Subsequent
One-Year CMT
Initial
Subsequent
Group II
<CAPTION>
Remaining
Original Term Remaining Term Amortization
Mortgage Rate to Maturity to Maturity Term
Principal Balance ($) (%) (in months) (in months) (in months) Amortization Type
--------------------- -------------- ------------- -------------- ------------ -----------------
<S> <C> <C> <C> <C> <C>
Fixed
Initial
Subsequent
</TABLE>
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(ii) one-month LIBOR, six-month LIBOR and one-year CMT remain constant at
________%, ______% and ___%, respectively; (iii) payments on the bonds are
received, in cash, on the 25th day of each month, commencing in _____________;
(iv) there are no delinquencies or losses on the mortgage loans, and scheduled
payments on the mortgage loans are timely received on the first day of each
month commencing in _____________; (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 amortization term
such that such mortgage loan will amortize in amounts sufficient to repay the
remaining principal balance of such mortgage loan by its remaining amortization
term; (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 and the related periodic rate cap listed above; (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 MI
premium is set forth in the MI insurance agreement, the bond administrator 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) no
miscellaneous servicing fees are passed through to the bondholders; (xiv) the
subsequent mortgage loans are acquired on ___________ with the characteristics
set forth in the previous tables, with their first scheduled payment due on
___________, resulting in no mandatory prepayment of the bonds on the
_____________ payment date; (xv) the bonds will be purchased on ______________;
(xvi) prepayments on the mortgage loans represent prepayments in full of
individual mortgage loans and are received on the last day of each month with 30
days' interest thereon beginning in ____________ (______________ with respect to
the subsequent mortgage loans); and (xvii) the required subordination amounts
are as set forth in the insurance agreement.
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.
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Percent of Initial Class A-1 Bond Principal Balance Outstanding (1)(4)
Prepayment Scenario(2)
--------------------------------------
Payment Date 0% 50% 75% 100% 125% 150%
Initial Percentage
Weighted Average Life in Years(3)(4)
Weighted Average Life in Years(3)(5)
_____________________
(1) Rounded to the nearest whole percentage.
(2) As a percentage of the related prepayment assumption for each group.
(3) 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.
(4) Assumes the servicer exercises its option to purchase the mortgage loans
when the principal balance of the mortgage loans is equal to or less than
10% of the sum of the principal balance of the initial mortgage loans as
of the cut-off date and the original pre-funded amount. See "Description
of the Bonds--Optional Termination" herein.
(5) Assumes that the bonds remain outstanding until maturity.
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Percent of Initial Class A-2 Bond Principal Balance Outstanding (1)(4)
Prepayment Scenario(2)
--------------------------------------
Payment Date 0% 50% 75% 100% 125% 150%
Initial Percentage
Weighted Average Life in Years(3)(4)
Weighted Average Life in Years(3)(5)
_______________
(1) Rounded to the nearest whole percentage.
(2) As a percentage of the related prepayment assumption for each group.
(3) 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.
(4) Assumes the servicer exercises its option to purchase the mortgage loans
when the principal balance of the mortgage loans is equal to or less than
10% of the sum of the principal balance of the initial mortgage loans as
of the cut-off date and the original pre-funded amount. See "Description
of the Bonds--Optional Termination" herein.
(5) Assumes that the bonds remain outstanding until maturity.
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These tables have been prepared based on the assumptions described in
the second paragraph preceding these tables (including the assumptions regarding
the characteristics and performance of the mortgage loans which differ from the
actual characteristics and performance thereof) and should be read in
conjunction therewith.
DESCRIPTION OF THE SERVICING AGREEMENT
The following summary describes certain terms of the servicing
agreement, dated as of _______________ (the "servicing agreement"), among the
issuer, the bond administrator, the indenture trustee, the servicer. 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. will act as servicer (acting in such capacity,
the "servicer") for the mortgage loans pursuant to the servicing agreement. For
a description of the servicer's operations, see "The Seller" herein. The
servicer's servicing portfolio currently includes only subprime residential
mortgage loans.
Foreclosure and Delinquency Experience with Subprime Mortgage Loans
The following table summarizes the delinquency and foreclosure
experience, respectively, as of the date indicated, of the subprime mortgage
loans serviced by the servicer. The information should not be considered as a
basis for assessing the likelihood, amount or severity of delinquencies or
foreclosures on the mortgage loans securing the bonds.
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Delinquency and Foreclosure
<TABLE>
<CAPTION>
December ________ December ________
-------------------------------- ------------------------------
Principal Principal
Balance(1) Ratio Balance(1) Ratio
------------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
Subprime Mortgage Loan Portfolio $
Delinquency Percentage(2)
30-59 Days
60-89 Days
90+ Days
------------ ------------ ------------ ------------
Total $ $
============ ============ ============ ============
Foreclosure Rate(3) $ $
REO $ $
Loss Rate(4) $ $
</TABLE>
_____________________
(1) Numbers in thousands.
(2) The period of delinquency is based on the number of days that payments are
contractually past due.
(3) "Foreclosure rate" is the dollar amount of the mortgage loans in the
process of foreclosure as a percentage of the total principal balance of the
mortgage loans outstanding as of the date indicated.
(4) "Loss rate" is the dollar amount of losses as a percentage of the total
principal balance of the mortgage loans outstanding as of the date indicated.
Losses are actual losses incurred on liquidated properties and shortfall payoffs
for each respective period. Losses on liquidated properties are calculated as
net sales proceeds less book value (exclusive of loan purchase premium or
discount). Shortfall payoffs are calculated as the difference between principal
payoff amount and unpaid principal at the time of payoff.
There can be no assurance that the delinquency experience of the
mortgage loans securing the bonds 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 securing
the bonds will depend on the results obtained over the life of the bonds. The
servicer's servicing portfolio may include subprime mortgage loans underwritten
pursuant to guidelines not necessarily representative of those applicable to the
mortgage loans securing the bonds. 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 mortgage loans and, accordingly, the actual rates of
delinquencies and foreclosures with respect to mortgage loans.
Servicing and Other Compensation
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
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mortgage loan as of such date. 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.
Purchase of Delinquent Mortgage Loans
The servicer has the right, but not the obligation, to purchase
mortgage loans from the issuer which are 90 days or more delinquent at a price
equal to 100% of the outstanding principal balance thereof, plus accrued
interest. It may purchase no more than __% of the sum of the aggregate principal
balance of the initial mortgage loans and the pre-funded amount, unless the bond
insurer consents to such greater purchase. In making any purchase, the servicer
is required to purchase the most delinquent mortgage loans first.
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.
See "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 insurer 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 the prior written consent of the
bond insurer. A "bond insurer default" means the existence and continuation of
(i) a failure of the bond insurer to make a
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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 for any class of bonds with
respect to a payment date on such payment date (provided that for purposes of
this clause, payment 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 carry-forward amount with respect to a class of
bonds, 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 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 pay the
outstanding principal balance of each class of bonds and subordinated bonds in
full; (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 the bond administrator or to the issuer, the bond administrator and
the indenture trustee by the bond insurer, or if a bond insurer default exists,
by the holders of at least __% of the aggregate bond principal balance of the
bonds and the subordinated 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 the bond administrator or to the
issuer, the bond administrator and the indenture trustee by the bond insurer,
or, if a bond insurer default exists, by bondholders representing at least __%
of the aggregate bond principal balance of the bonds and the subordinated 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 the
indenture trustee may (with the prior written consent of the bond insurer) and,
upon the written direction of the bond insurer or, if a bond insurer default
exists, bondholders representing more than __% of the bond principal balances of
the bonds and the subordinated bonds shall, declare the principal of such bonds
and subordinated 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 __% of the bond
principal balances of the bonds and the subordinated bonds.
If, following an event of default, the bonds have been declared to be
due and payable, the indenture trustee may (or, at the direction of the bond
insurer, shall), in its discretion (provided that the bond insurer or
bondholders (with the consent of the bond insurer) representing 100% of the bond
principal balances 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 and subordinated bonds in accordance with their terms, notwithstanding the
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acceleration of the maturity of such bonds and subordinated 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 and the bond administrator which have not been
previously paid; (ii) to the bond insurer, any premium then due; (iii) to the
bondholders, the amount of interest then due and unpaid on each class of bonds
(but not including any carry-forward amount), without preference or priority of
any kind; (iv) to the bondholders, the amount of principal then due and unpaid
on each class of 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 holders of the class A-1 and class A-2 bonds,
the amount of any carry-forward amount not previously paid; and (vii) to the
holder of the subordinated bonds.
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 complying with such
request or direction. Subject to such provisions for indemnification and certain
limitations contained in the indenture, the bond insurer, or if a bond insurer
default exists, bondholders representing more than 50% of the bond principal
balances 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 insurer, or if a bond insurer default exists,
bondholders representing more than 50% of the bond principal balances of the
bonds and the subordinated 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
and the subordinated bonds 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 balances 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 the 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 have 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
balances of the bonds; and (6) such bondholders have the consent of the bond
insurer, unless a bond insurer default exists.
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The Bond Administrator and the Indenture Trustee
Each of the bond administrator and the indenture trustee may resign at
any time, in which event the bond insurer may appoint (and if the bond insurer
fails to do so with in 60 days, the issuer will be obligated to appoint, with
the consent of the bond insurer), a successor bond administrator or indenture
trustee, as applicable. The bond administrator or 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 balances of
the bonds and the subordinated bonds. The issuer shall, with the consent of the
bond insurer, so long as no bond insurer default exists, remove the bond
administrator or the indenture trustee if the bond administrator or the
indenture trustee ceases to be eligible to continue as such under the indenture
or if the bond administrator or the indenture trustee becomes incapable of
acting, bankrupt, insolvent or if a receiver or public officer takes charge of
the bond administrator or the indenture trustee or its property. Any resignation
or removal of the bond administrator or the indenture trustee and appointment of
a successor bond administrator or the indenture trustee, as applicable, will not
become effective until acceptance of the appointment by the successor bond
administrator or indenture trustee. The indenture trustee may terminate the bond
administrator at any time for failure to perform its obligations under the
indenture or related agreements provided it or an acceptable successor bond
administrator assumes the obligations of the bond administrator.
FEDERAL INCOME TAX CONSEQUENCES
The following discussion of certain of the material anticipated
federal income tax consequences of the purchase, ownership and disposition of
the bonds is to be considered only in connection with "Material Federal Income
Tax Consequences" in the Prospectus. The discussion herein and in the Prospectus
is based upon laws, regulations, rulings and decisions now in effect, all of
which are subject to change. The discussion below and in the Prospectus does not
purport to deal with all federal tax consequences applicable to all categories
of investors, some of which may be subject to special rules. Investors should
consult their own tax advisors in determining the federal, state, local and any
other tax consequences to them of the purchase, ownership and disposition of the
class A bonds.
REMIC Elections
The owner trustee, on behalf of the issuer, will cause a REMIC
election to be made with respect to certain specified assets of the issuer for
federal income tax purposes. Qualification as a REMIC requires ongoing
compliance with certain conditions. Stinson, Mag & Fizzell, P.C., special tax
counsel, will advise that, in its opinion, for federal income tax purposes,
assuming the REMIC elections are made and compliance with the indenture and the
trust agreement, the issuer will be treated as a REMIC for federal income tax
purposes. Each of the bonds and the subordinated bonds will be a "regular
interest" in a REMIC, and the residual certificate will be a "residual interest"
in a REMIC.
For federal income tax purposes, regular interests in a REMIC are
treated as debt instruments issued by the REMIC on the date on which those
interests are created, and not as ownership interests in the REMIC or its
assets. Owners of the bonds that otherwise report income under a cash method of
accounting will be required to report income with respect to the bonds under an
accrual method. The bonds may be issued with "original issue discount" for
federal income tax purposes. The
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prepayment assumption that will be used in determining the rate of accrual of
original issue discount on the bonds is 100% of the "prepayment assumption". No
representation is made that any of the mortgage loans will prepay at such rates
or any other rate. See "Certain Yield and Prepayment Considerations" herein and
"Material Federal Income Tax Consequences--Discount and Premium" in the
Prospectus.
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in an underwriting
agreement, dated _______________ (the "underwriting agreement"), between
___________________________ ______________________ (the "underwriter") and the
company, 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, CEDEL S.A. and the Euroclear System, on or about _____________,
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. 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
purchased by them may be deemed to be underwriting discounts and commissions
under the Securities Act of 1933.
The underwriting agreement provides that the company will indemnify
the underwriter, and that under limited circumstances, the underwriter will
indemnify the company, against certain civil liabilities under the Securities
Act of 1933, or contribute to payments required to be made in respect thereof.
There can be no assurance that a secondary market for the 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.
The underwriter and the company are affiliates of the bond
administrator.
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CERTAIN LEGAL MATTERS
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 ______________________. Certain legal
matters regarding the enforceability of the bond insurance policy will be passed
upon for the bond insurer by the internal general counsel of the bond insurer.
RATINGS
It is a condition of the issuance of the bonds that the class A-1
bonds 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")] and the class A-2 bonds be rated "AAA" by [S&P] and "Aaa" by
[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
any prepayment interest shortfalls, any Relief Act shortfalls or the 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
the 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
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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 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
Section 406 of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA") and Section 4975 of the Code prohibit a pension, profit
sharing or other employee benefit plan (a "plan") and certain individual
retirement arrangements from engaging in certain transactions involving "plan
assets" with persons that are "parties in interest" under ERISA or "disqualified
persons" under the Code with respect to the plan, unless a statutory or
administrative exemption applies to the transaction. ERISA and the Code also
prohibit generally certain actions involving conflicts of interest by persons
who are fiduciaries of such plans or arrangements. A violation of these
"prohibited transaction" rules may generate excise tax and other liabilities
under ERISA and the Code for such persons. In addition, investments by plans are
subject to ERISA's general fiduciary requirements, including the requirement of
investment prudence and diversification and the requirement that a plan's
investments be made in accordance with the documents governing the plan.
Employee benefit plans that are governmental plans (as defined in Section 3(32)
of ERISA) and certain church plans (as defined in Section 3(33) of ERISA) are
not subject to ERISA. Accordingly, assets of such plans may be invested in bonds
without regard to the ERISA considerations discussed herein, subject to the
provisions of other applicable federal, state and local law.
The United States Department of Labor (the "DOL") has issued a
regulation (the "plan asset regulation") describing what constitutes the assets
of a plan when the plan acquires an equity interest in another entity. The plan
asset regulation states that, unless an exception described in the regulation is
applicable, the underlying assets of a corporation, partnership or trust in
which a plan makes an equity investment will be considered, for purposes of
ERISA, to be assets of the investing plan. Pursuant to the plan asset
regulation, if the assets of the issuer were deemed to be plan assets by reason
of a plan's investment in the bonds, such plan assets would include an undivided
interest in any assets included in the trust estate. Therefore, in the absence
of an exemption, the purchase, sale or holding of any bond by a plan (including
certain individual retirement arrangements) might result in prohibited
transactions and the imposition of excise taxes and civil penalties.
The DOL has issued to the underwriter an individual prohibited
transaction exemption, Prohibited Transaction Exemption 96-22 (the "Exemption"),
which generally exempts from the
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application of the prohibited transaction provisions of Section 406(a), Section
406(b)(1), Section 406(b)(2) and Section 407(a) of ERISA, and the excise taxes
imposed pursuant to Sections 4975(a) and (b) of the Code, certain transactions
with respect to the initial purchase, the holding and the subsequent resale by
plans of certificates denominated as debt instruments that (i) represent an
interest in a REMIC and (ii) are issued by and are obligations of a trust that
consists of certain receivables, loans and other obligations that meet the
conditions and requirements of the exemption. The loans covered by the exemption
include mortgage loans such as the mortgage loans.
Among the conditions that must be satisfied for the exemption to apply
are the following:
(1) the acquisition of bonds by a plan is on terms (including
the price for the bonds) that are at least as favorable to the plan as they
would be in an arm's-length transaction with an unrelated party;
(2) the rights and interests evidenced by the bonds acquired by the
plan are not subordinated to the rights and interests evidenced by other bonds
or certificates issued by the issuer;
(3) the bonds acquired by the plan have received a rating at the
time of such acquisition that is one of the three highest generic rating
categories from either S&P, Moody's, Fitch Investors Service, L.P. ("Fitch") or
Duff & Phelps Credit Rating Co. ("D&P");
(4) neither the owner trustee nor the indenture trustee is an
affiliate of any other member of the restricted group (as defined below);
(5) the sum of all payments made to and retained by the underwriter
in connection with the distribution of the bonds represents not more than
reasonable compensation for underwriting the bonds; the sum of all payments made
to and retained by the company pursuant to the assignment of the mortgage loans
to the issuer represents not more than the fair market value of such loans; the
sum of all payments made to and retained by the servicer represents not more
than reasonable compensation for such person's services under the servicing
agreement and reimbursement of such person's reasonable expenses in connection
therewith; and
(6) the plan investing in the bonds is an "accredited investor" as
defined in Rule 501(a)(1) of Regulation D of the Commission under the Securities
Act of 1933.
The trust estate must also meet the following requirements:
(i) the corpus of the trust estate must consist solely of
assets of the type that have been included in other investment pools;
(ii) certificates in such other investment pools must have
been rated in one of the three highest rating categories of S&P, Moody's, Fitch
or D&P for at least one year prior to the plan's acquisition of bonds; and
(iii) certificates evidencing interests in such other
investment pools must have been purchased by investors other than plans for at
least one year prior to the plan's acquisition of bonds.
Moreover, the exemption provides relief from certain
self-dealing/conflict of interest prohibited transactions that may occur when a
fiduciary causes a plan to acquire certificates in a trust in which the
fiduciary (or its affiliate) is an obligor on the receivables held in the trust;
provided that, among
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other requirements, (i) in the case of an acquisition in connection with the
initial issuance of certificates, at least fifty percent of each class of
certificates in which plans have invested is acquired by persons independent of
the restricted group and at least fifty percent of the aggregate interest in the
trust is acquired by persons independent of the restricted group; (ii) such
fiduciary (or its affiliate) is an obligor with respect to five percent or less
of the fair market value of the obligations contained in the trust; (iii) the
plan's investment in certificates of any class does not exceed twenty-five
percent of all of the certificates of that class outstanding at the time of the
acquisition; and (iv) immediately after the acquisition, no more than twenty-
five percent of the assets of the plan with respect to which such person is a
fiduciary are invested in certificates representing an interest in one or more
trusts containing assets sold or serviced by the same entity. The exemption does
not apply to plans sponsored by the underwriter, the bond insurer, the company,
the owner trustee, the indenture trustee, the servicer, any sub-servicer, any
obligor with respect to mortgage loans included in the trust estate constituting
more than five percent of the aggregate unamortized principal balance of the
assets in the trust estate, or any affiliate of such parties (the "restricted
group").
On July 21, 1997, the DOL published in the Federal Register amendments
to the exemption ("PTE 97-34"), which extend exemptive relief to certain
mortgage-backed securities transactions using pre-funding accounts for trusts
issuing REMIC certificates denominated as debt. With respect to the bonds, PTE
97-34 generally allows mortgage loans supporting payments to owners of the
bonds, and having a value equal to no more than 25% of the total principal
amount of the bonds offered by the issuer, to be transferred to the issuer
within a funding period no longer than 90 days or three months following the
closing date instead of requiring that all such mortgage loans be either
identified or transferred on or before the closing date. The relief will apply
to the purchase, sale and holding of the bonds, provided that the following
general conditions are met:
(1) the ratio of the amount allocated to the pre-funding account to
the total principal amount of the bonds and certificates being offered (the
"pre-funding limit") does not exceed 25%;
(2) all subsequent mortgage loans meet the same terms and
conditions for eligibility as the initial mortgage loans, which terms and
conditions have been approved by [S&P] or [Moody's] (the "rating agencies");
(3) the transfer of subsequent mortgage loans to the issuer
during the funding period does not result in the bonds receiving a lower credit
rating from a rating agency upon termination of the funding period than the
rating that was obtained at the time of the initial issuance of the bonds by the
issuer;
(4) solely as a result of the use of pre-funding, the weighted
average annual percentage interest rate (the "average interest rate") for all of
the mortgage loans in the trust estate at the end of the funding period is not
more than 100 basis points lower than the average interest rate for the initial
mortgage loans;
(5) either:
(i) the characteristics of the subsequent mortgage loans are
monitored by an insurer or other credit support provider which is independent of
the company; or
S-87
<PAGE>
(ii) an independent accountant retained by the company provides
the company with a letter (with copies provided to the rating agencies, the
underwriter and the indenture trustee) stating whether or not the
characteristics of the subsequent mortgage loans conform to the characteristics
described in the Prospectus Supplement and/or the indenture. In preparing such
letter, the independent accountant must use the same type of procedures as were
applicable to the initial mortgage loans;
(6) the funding period ends no later than three months or 90
days after the closing date or earlier in certain circumstances if the
pre-funding account falls below the minimum level specified in the indenture or
an event of default occurs;
(7) amounts transferred to the pre-funding account and the
interest coverage account may be invested only in investments which are
permitted by the rating agencies and:
(i) are direct obligations of, or obligations fully guaranteed
as to timely payment of principal and interest by, the United States or any
agency or instrumentality thereof (provided that such obligations are backed by
the full faith and credit of the United States); or
(ii) have been rated (or the obligor has been rated) in one of
the three highest generic rating categories by either S&P, Moody's, Fitch or
D&P;
(8) the Prospectus or Prospectus Supplement describes:
(i) the pre-funding account and interest coverage account;
(ii) the duration of the funding period;
(iii) the percentage and/or dollar amount of the pre-funding
limit for the pre-funding period that will be remitted to owners of bonds as
repayments of principal; and
(iv) that the amounts remaining in the pre-funding account at
the end of the pre-funding period will be remitted to owners of offered
certificates as repayments of principal; and
(9) the indenture describes the permitted investments for the
pre-funding account and interest coverage account and, if not disclosed in the
Prospectus or Prospectus Supplement, the terms and conditions for the
eligibility of subsequent mortgage loans.
Prospective plan investors in the bonds should consult with their
legal advisors concerning the impact of ERISA and the Code, the applicability of
the exemption (as amended by PTE 97-34), and all of the potential consequences
in their specific circumstances prior to making an investment in the bonds. Each
plan fiduciary should determine whether under the general fiduciary standards of
investment prudence and diversification an investment in the bonds is
appropriate for the plan, taking into account the overall investment policy of
the plan and the composition of the plan's investment portfolio. In particular,
purchasers that are insurance companies should consult with their counsel with
respect to the United States Supreme Court case interpreting the fiduciary
responsibility rules of ERISA, John Hancock Mutual Life Insurance Co. v. Harris
Trust and Savings Bank, 510 U.S. 86 (1993). In John Hancock, the Supreme Court
ruled that assets held in an insurance company's general account may be deemed
to be "plan assets" for ERISA purposes under certain circumstances. Purchasers
should analyze whether the decision may have an impact with respect to purchases
of the bonds.
S-88
<PAGE>
The sale of bonds to a plan is in no respect a representation by the
issuer or the underwriter that this investment meets all relevant legal
requirements with respect to investments by plans generally or by any particular
plan or that this investment is appropriate for plans generally or any
particular plan.
S-89
<PAGE>
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION
PROCEDURES
Except in certain limited circumstances, the globally offered NovaStar
Home Equity Loan Asset-Backed Bonds, Series ______ (the "global bonds"), will be
available only in book-entry form. Investors in the global bonds may hold such
global bonds through any of The Depository Trust Company ("DTC"), CEDEL or
Euroclear. The global bonds will be tradable as home market instruments in both
the European and U.S. domestic markets. initial settlement and all secondary
trades will settle in same-day funds.
Secondary market trading between investors global bonds through CEDEL
and Euroclear will be conducted in the ordinary way in accordance with their
normal rules and operating procedures and in accordance with conventional
Eurobond practice (i.e., seven calendar day settlement).
Secondary market trading between investors holding global bonds
through DTC will be conducted according to the rules and procedures applicable
to U.S. corporate debt obligations and prior collateralized mortgage bond
issues.
Secondary cross-market trading between CEDEL or Euroclear and DTC
participants holding global bonds will be effected on a delivery-against-payment
basis through the respective depositories of CEDEL and Euroclear (in such
capacity) and as DTC participants.
Non-U.S. holders (as described below) of global bonds will be subject
to U.S. withholding taxes unless such holders meet certain requirements and
deliver appropriate U.S. tax documents to the securities clearing organizations
or their participants.
Initial Settlement
All global bonds will be held in book-entry form by DTC in the name of
Cede & Co. as nominee of DTC. Investors' interests in the global bonds will be
represented through financial institutions acting on their behalf as direct and
indirect participants in DTC (each, a "DTC participant"). As a result, CEDEL and
Euroclear will hold positions on behalf of their participants through their
respective depositories, which in turn will hold such positions in accounts as
DTC participants.
Investors electing to hold their global bonds through DTC will follow
the settlement practices applicable to other collateralized mortgage bond
issues. Investor securities custody accounts will be credited with their
holdings against payment in same-day funds on the settlement date.
Investors electing to hold their global bonds through CEDEL or
Euroclear accounts will follow the settlement procedures applicable to
conventional Eurobonds, except that there will be no temporary global security
and no "lock-up" or restricted period. Global bonds will be credited to the
securities custody accounts on the settlement date against payment in same-day
funds.
S-90
<PAGE>
Secondary Market Trading
Since the purchaser determines the place of delivery, it is important
to establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired value
date.
Trading Between DTC participants. Secondary market trading between DTC
participants will be settled using the procedures applicable to prior
collateralized mortgage bond issues in same-day funds.
Trading Between CEDEL and/or Euroclear participants. Secondary market
trading between CEDEL participants or Euroclear participants will be settled
using the procedures applicable to conventional Eurobonds in same-day funds.
Trading Between DTC Seller and CEDEL or Euroclear Purchaser. When
global bonds are to be transferred from the account of a DTC participant to the
account of a CEDEL participant or a Euroclear participant, the purchaser will
send instructions to CEDEL or Euroclear through a CEDEL participant or Euroclear
participant at least one business day prior to settlement. CEDEL or Euroclear
will instruct the respective depository, as the case may be, to receive the
global bonds against payment. Payment will include interest accrued on the
global bonds from and including the last coupon payment date to and excluding
the settlement date, on the basis of the actual number of days in such accrual
period and a year is assumed to consist of 360 days. For transactions settling
on the 31st of the month, payment will include interest accrued to and excluding
the first day of the following month. Payment will then be made by the
respective depository of the DTC participant's account against delivery of the
global bonds. After settlement has been completed, the global bonds will be
credited to the respective clearing system and by the clearing system, in
accordance with its usual procedures, to the CEDEL participant's or Euroclear
participant's account. The securities credit will appear the next day (European
time) and the cash debt will be back-valued to, and the interest on the global
bonds will accrue from, the value date (which would be the preceding day when
settlement occurred in New York). If settlement is not completed on the intended
value date (i.e., the trade fails), the CEDEL or Euroclear cash debt will be
valued instead as of the actual settlement date.
CEDEL participants and Euroclear participants will need to make
available to the respective clearing systems the funds necessary to process
same-day funds settlement. The most direct means of doing so is to preposition
funds for settlement, either from cash on hand or existing lines of credit, as
they would for any settlement occurring within CEDEL or Euroclear. Under this
approach, they may take on credit exposure to CEDEL or Euroclear until the
global bonds are credited to their accounts one day later.
As an alternative, if CEDEL or Euroclear has extended a line of credit
to them, CEDEL participants or Euroclear participants can elect not to
preposition funds and allow that credit line to be drawn upon the finance
settlement. Under this procedure, CEDEL participants or Euroclear participants
purchasing global bonds would incur overdraft charges for one day, assuming they
cleared the overdraft when the global bonds were credited to their accounts.
However, interest on the global bonds would accrue from the value date.
Therefore, in many cases the investment income on the global bonds earned during
that one-day period may substantially reduce or offset the amount of such
overdraft charges,
S-91
<PAGE>
although this result will depend on each CEDEL participant's or Euroclear
participant's particular cost of funds. Since the settlement is taking place
during New York business hours, DTC participants can employ their usual
procedures for sending global bonds to the respective European depository for
the benefit of CEDEL participants or Euroclear participants. The sale proceeds
will be available to the DTC seller on the settlement date. Thus, to the DTC
participants a cross-market transaction will settle no differently than a trade
between two DTC participants.
Trading between CEDEL or Euroclear Seller and DTC Purchaser. Due to
time zone differences in their favor, CEDEL participants and Euroclear
participants may employ their customary procedures for transactions in which
global bonds are to be transferred by the respective clearing system, through
the respective depository, to a DTC participant. The seller will send
instructions to CEDEL or Euroclear through a CEDEL participant or Euroclear
participant at least one business day prior to settlement. In these cases CEDEL
or Euroclear will instruct the respective depository, as appropriate, to deliver
the global bonds to the DTC participant's account against payment. Payment will
include interest accrued on the global bonds from and including the last coupon
payment to and excluding the settlement date on the basis of the actual number
of days in such accrual period and a year is assumed to consist of 360 days. For
transactions settling on the 31st of the month, payment will include interest
accrued to and excluding the first day of the following month. The payment will
then be reflected in the account of the CEDEL participant or Euroclear
participant the following day, and receipt of the cash proceeds in the CEDEL
participant's or Euroclear participant's account would be back-valued to the
value date (which would be the preceding day, when settlement occurred in New
York). Should the CEDEL participant or Euroclear participant have a line of
credit with its respective clearing system and elect to be in debt in
anticipation of receipt of the sale proceeds in its account, the back-valuation
will extinguish any overdraft incurred over that one-day period. If settlement
is not completed on the intended value date (i.e., the trade fails), receipt of
the cash proceeds in the CEDEL participant's or Euroclear participant's account
would instead be valued as of the actual settlement date.
Finally, day traders that use CEDEL or Euroclear and that purchase
global bonds from DTC participants for delivery to CEDEL participants or
Euroclear participants should note that these trades would automatically fail on
the sale side unless affirmative action were taken. At least three techniques
should be readily available to eliminate this potential problem:
(a) borrowing through CEDEL or Euroclear for one day (until
the purchase side of the day trade is reflected in their CEDEL or Euroclear
accounts) in accordance with the clearing system's customary procedures;
(b) borrowing the global bonds in the U.S. from a DTC participant no
later than one day prior to settlement, which would give the global bonds
sufficient time to be reflected in their CEDEL or Euroclear account in order to
settle the sale side of the trade; or
(c) staggering the value dates for the buy and sell sides of
the trade so that the value date for the purchase from the DTC participant is at
least one day prior to the value date for the sale to the CEDEL participant or
Euroclear participant.
S-92
<PAGE>
Certain U.S. Federal Income Tax Documentation Requirements
A beneficial owner of the global bonds holding securities through
CEDEL or Euroclear (or through DTC if the holder has an address outside the
U.S.) will be subject to the 30% U.S. withholding tax that generally applies to
payments of interest (including original issue discount) on registered debt
issued by U.S. Persons, unless (i) each clearing system, bank or other financial
institution that holds customers' securities in the ordinary course of its trade
or business in the chain of intermediaries between such beneficial owner and the
U.S. entity required to withhold tax complies with applicable certification
requirements, and (ii) such beneficial owner takes one of the following steps to
obtain an exemption or reduced tax rate:
Exemption For Non-U.S. Persons (Form W-8). Beneficial owners of the
global bonds that are non-U.S. Persons can obtain a complete exemption from the
withholding tax by filing a signed Form W-8 (Certificate of Foreign Status). If
the information shown on Form W-8 changes, a new Form W-8 must be filed within
30 days of such change.
Exemption For Non-U.S. Persons with Effectively Connected Income (Form
4224). A non-U.S. Person, including a non-U.S. corporation or bank with a U.S.
branch, for which the interest income is effectively connected with its conduct
of a trade or business in the United States, can obtain an exemption from the
withholding tax by filing Form 4224 (Exemption from Withholding of Tax on Income
Effectively Connected with the Conduct of a Trade or Business in the United
States).
Exemption or Reduced Rate For Non-U.S. Persons Resident in Treaty
Countries (Form 1001). Non-U.S. Persons that are bond owners residing in a
country that has a tax treaty with the United States can obtain an exemption or
reduced tax rate (depending on the treaty terms) by filing Form 1001 (Ownership,
Exemption or Reduced Rate Certificate). If the treaty provides only for a
reduced rate, withholding tax will be imposed at that rate unless the filer
alternatively files Form W-8. Form 1001 may be filed by the bond owner or his
agent.
Exemption For U.S. Persons (Form W-9). U.S. Persons can obtain
a complete exemption from the withholding tax by filing Form W-9 (Payer's
Request for Taxpayer Identification Number and Certification).
U.S. Federal Income Tax Reporting Procedure. The bond owner of a bond
or, in the case of a Form 1001 or a Form 4224 filer, his agent, files by
submitting the appropriate form to the person through whom it holds (the
clearing agency, in the case of persons holding directly on the books of the
clearing agency). Form W-8 and Form 1001 are effective for three calendar years
and Form 4224 is effective for one calendar year.
The term "U.S. Person" means a citizen or resident of the United
States, a corporation, partnership or other entity created or organized in or
under the laws of the United States or any political subdivision thereof, or an
estate whose income is subject to U.S. federal income tax regardless of its
source of income, or a trust if a court within the United States is able to
exercise primary supervision of the administration of the trust and one or more
United States fiduciaries have the authority to control all substantial
decisions of the trust. This summary does not deal with all aspects of U.S.
federal income tax withholding that may be relevant to foreign holders of the
global bonds. Investors are advised to consult their own tax advisors for
specific tax advice concerning their holding and disposing of the global bonds.
S-93
<PAGE>
Prospectus Supplement
(To prospectus dated _______________)
___________________
NovaStar Mortgage Funding Trust, Series _______
$_____________
NovaStar Home Equity Loan
Asset-Backed Certificates,
Series _______
NovaStar Mortgage, Inc.
Seller and Servicer
NovaStar Mortgage Funding Corporation
Company
___________________
The certificates will be backed by a pool of residential mortgage loans. The
pool contains both adjustable-rate mortgage loans and fixed-rate mortgage loans.
--------------------------------------------------------------------------------
Consider carefully the risk factors starting on page S-__ of this prospectus
supplement and page _ of the prospectus before making a decision to invest in
the certificates.
The offered certificates represent beneficial ownership interests in the trust
fund. The offered certificates are not interests in or obligations of any other
person.
No governmental agency or instrumentality has insured or guaranteed the offered
certificates or the underlying mortgage loans.
--------------------------------------------------------------------------------
The Certificates--
Interest and principal on each class of certificates is scheduled to be paid
monthly on the 25th day of the month or, if such day is not a business day, the
next succeeding business day. The first scheduled distribution date is October
25, 2000.
Credit Enhancement--
The more senior classes of certificates will have the benefit of the
subordination of the more subordinated classes.
All classes of underwritten certificates will be supported by
overcollateralization, which is available to absorb losses.
Most of the mortgage loans are covered by mortgage insurance policies.
Interest payments on all classes of underwritten certificates will be supported
by cash flows from certain interest rate cap agreements for a limited period of
time.
Pre-Funding--
The certificates have a pre-funding feature.
<TABLE>
<CAPTION>
Initial Aggregate
Certificate Pass-Through Price Underwriting Proceeds to the
Offering Information Balance Rate to Public Discount Company(2)
-------------------------- ----------------- ----------------- --------- ------------ ----------------
<S> <C> <C> <C> <C> <C>
Class A-1 Certificates $ LIBOR + ____% (1) 100.00% 0.__% $
Class M-1 Certificates $ LIBOR + ____% (1) 100.00% 0.__% $
Class M-2 Certificates $ LIBOR + ____% (1) 100.00% 0.__% $
Class M-3 Certificates $ LIBOR + ____% (1) 100.00% 0.__% $
------------------
Total $ 100.00% 0.__% $
</TABLE>
________________________
(1) Subject to an available funds cap.
(2) Before deducting expenses, estimated to be $_______.
Neither the Securities and Exchange commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus supplement or the prospectus is truthful or complete. Any
representation to the contrary is a criminal offense.
_________________________, as underwriter, will offer the underwritten
certificates only after the certificates have been issued, and delivered to
and accepted by the underwriter. The underwriter has the right to reject any
order. We expect to deliver the offered certificates on or about
____________ through The Depository Trust Company, Clearstream Banking,
societe anonyme or the Euroclear System.
The date of this prospectus supplement is _________________
<PAGE>
Important notice about the information presented in this
prospectus supplement and the accompanying prospectus
We provide information to you about the offered certificates in two
separate documents that progressively provide more detail: (1) the accompanying
prospectus, which provides general information, some of which may not apply to
your series of certificates, and (2) this prospectus supplement, which describes
the specific terms of your series of certificates.
This prospectus supplement does not contain complete information about
the offering of the certificates. Additional information is contained in the
prospectus. You are urged to read both this prospectus supplement and the
prospectus in full. We cannot sell the offered certificates to you unless you
have received both this prospectus supplement and the prospectus.
The prospectus contemplates several different types of securities,
some of which are not relevant to this offering. You should rely on the
information in this prospectus supplement with respect to the six classes of
certificates offered hereby.
The company has filed with the Securities and Exchange Commission a
registration statement under the Securities Act of 1933, as amended, with
respect to the certificates offered pursuant to this prospectus supplement.
This prospectus supplement and the prospectus, which form a part of the
registration statement, omit certain information contained in such registration
statement pursuant to the rules and regulations of the commission. You may
inspect and copy the registration statement at the Public Reference Room at the
commission at 450 Fifth Street, N.W., Washington, D.C. and the commission's
regional offices at Seven World Trade Center, 13th Floor, New York, New York,
10048 and Northwestern Atrium Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661. You can obtain copies of such materials at prescribed
rates from the Public Reference Section of the commission at 450 Fifth Street,
N.W., Washington, D.C. 20549. In addition, the commission maintains a site on
the World Wide Web containing reports, proxy materials, information statements
and other items. The address is http://www.sec.gov.
We include cross-references in this prospectus supplement and the
accompanying prospectus to captions in these materials where you can find
further related discussions. The following table of contents and the table of
contents included in the accompanying prospectus provide the pages on which
these captions are located.
S-2
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
Summary...................................................................
Description of the Offered Certificates..................................
Payments on the Certificates.............................................
Credit Enhancement.......................................................
Pre-Funding Feature......................................................
Clean-up Call............................................................
Federal Income Tax Consequences..........................................
ERISA Considerations.....................................................
Legal Investment.........................................................
Ratings..................................................................
Risk Factors..............................................................
Use of Proceeds...........................................................
Description of the Mortgage Pool..........................................
Prepayment Charges.......................................................
Adjustable Rate Feature of the ARM Loans.................................
Pool Stratifications.....................................................
Conveyance of Subsequent Mortgage Loans and the Pre-Funding Account......
Underwriting Standards for the Mortgage Loans............................
Private Mortgage Insurance Policies......................................
Additional Information...................................................
The Seller................................................................
The Company...............................................................
The Trustee...............................................................
The Certificate Administrator.............................................
Description of the Certificates...........................................
General..................................................................
Payments.................................................................
Available Funds..........................................................
Interest Payments on the Certificates....................................
Interest Allocations.....................................................
Principal Allocations....................................................
Credit Enhancement.......................................................
Overcollateralization Provisions, Allocation of Losses...................
Definitions..............................................................
Calculation of One-Month LIBOR...........................................
Advances.................................................................
Book-Entry Certificates..................................................
Assignment of Mortgage Loans.............................................
The Paying Agent.........................................................
Optional Termination.....................................................
Mandatory Prepayments on the Certificates................................
Interest Coverage Account................................................
Certain Yield and Prepayment Considerations...............................
The Pooling and Servicing Agreement.......................................
Servicing................................................................
Servicing Defaults.......................................................
Limitation on Suits......................................................
The Certificate Administrator and the Trustee............................
Certain Federal Income Tax Considerations.................................
ERISA Considerations......................................................
Method of Distribution....................................................
Certain Legal Matters.....................................................
Ratings...................................................................
Legal Investment..........................................................
Annex I Global Clearance, Settlement and Tax Documentation Procedures....
Initial Settlement.......................................................
Secondary Market Trading.................................................
Certain U.S. Federal Income Tax Documentation Requirements...............
</TABLE>
S-3
<PAGE>
Summary
. This summary highlights selected information from this prospectus supplement
and does not contain all of the information that you need to consider in
making your investment decision. To understand all of the terms of the
offering of the certificates, read carefully this entire prospectus
supplement and the accompanying prospectus.
. This summary provides an overview of certain calculations, cash flow
priorities and other information to aid your understanding and is qualified
by the full description of these calculations, cash flow priorities and other
information in this prospectus supplement and the accompanying prospectus.
Trust
NovaStar Mortgage Funding Trust, Series ________.
Seller and Servicer
NovaStar Mortgage, Inc., a Virginia corporation.
Company
NovaStar Mortgage Funding Corporation, a Delaware corporation.
Trustee
_____________________, a _____________________.
Certificate Administrator and Backup Servicer
__________________, a _______________. In its capacity as certificate
administrator, __________________________ will act as the initial certificate
registrar and custodian in addition to performing other administrative functions
on behalf of the trustee.
Description of the Offered Certificates
The trust will issue Home Equity Loan Asset Backed Certificates, Series _______,
in four classes of offered certificates: class A-1, which is the senior most
class, and three classes of subordinated, mezzanine certificates: class M-1,
class M-2 and class M-3. Class M-1 is senior to class M-2 and to class M-3.
Class M-2 is senior to class M-3. The initial principal amount of each class of
offered certificates is shown on the front cover.
The trust will also issue several other classes of certificates which are not
being offered.
The Trust Fund
The certificates will represent ownership interests in the trust fund, which
will consist primarily of:
. a pool of residential first lien, fixed and adjustable rate mortgage loans;
. a security interest in the properties securing the mortgage loans;
. collections on the mortgage loans;
. money on deposit in a pre-funding account which will be used to purchase
additional mortgage loans for inclusion in the pool;
. certain lender paid mortgage insurance policies and related proceeds; and
S-4
<PAGE>
Final Scheduled Distribution Date
The final scheduled distribution date for all the certificates is _____________.
We anticipate that the actual final payment on each class will occur
significantly earlier then the indicated date.
Book-Entry Format
The certificates will be issued, maintained and transferred on the book-entry
records of the Depository Trust Company. The certificates will be offered in
registered form, in minimum denominations of $25,000 and integral multiples of
$1,000 in excess thereof.
Payments on the Certificates
Distribution Dates
Payments on the certificates will be made on the 25th day of each month, or, if
that day is not a business day, on the next business day, commencing on
______________.
Record Dates
The trustee will make payments to the certificateholders of record as of the
prior record date. The record date is the last business day prior to the
distribution date, except that the record date for the first distribution date
is the closing date.
Payment Priorities
On each distribution date, the available funds representing interest collections
on the mortgage pool, plus cash flows from the cap agreements will be
distributed to pay interest on the certificates in the following order: first,
to class A-1, and then class M-1, class M-2, and class M-3 in that order.
On each distribution date, the available funds representing principal
collections will be distributed to pay principal on the certificates in the
following order: class A-1, class M-1, class M-2 and class M-3.
We refer you to "Description of the Certificates" in this prospectus supplement
for additional information.
Interest
Interest on the certificates will accrue at the interest rate for that class
during the prior accrual period. For each distribution date, the accrual period
will run from the prior distribution date to and including the day preceding the
applicable distribution date, except that for the first distribution date,
interest begins to accrue on the closing date.
Interest will be calculated on the basis of the actual number of days elapsed in
the accrual period in a year of 360 days.
Pass-Through Rates
The annual rate of interest on each class of offered certificates will be,
subject to the available funds cap rate, as follows:
S-5
<PAGE>
<TABLE>
<CAPTION>
Class Rate
----- -------------
<S> <C>
A-1 LIBOR + ____%
M-1 LIBOR + ____%
M-2 LIBOR + ____%
M-3 LIBOR + ____%
</TABLE>
If the certificates remain outstanding after the first distribution date on
which the clean-up call could be exercised, which is at a 10% level, then the
rates of interest on each class of certificates will increase to the following
rates:
<TABLE>
<CAPTION>
Class Rate Step Up
----- --------------
<S> <C>
A-1 LIBOR + _____%
M-1 LIBOR + _____%
M-2 LIBOR + _____%
M-3 LIBOR + _____%
</TABLE>
The stepped-up rates are also subject to the available funds cap rate.
Principal
On each distribution date, the certificateholders are scheduled to receive an
amount of principal generally equal to the sum of:
. the scheduled principal on the mortgage loans collected or advanced during
the related due period; and
. unscheduled principal on the mortgage loans collected during the prior
prepayment period.
The mezzanine certificates are unlikely to receive any principal payments until,
at the earliest, the distribution date occurring on _________________.
The principal will be distributed to the certificateholders of each class in
accordance with a payment priority which is designed to maintain a specified
level of support below each class. This support consists of the certificates
that are more subordinated to that class, as well as the overcollateralization,
which is subordinated to all classes of the underwritten certificates.
Credit Enhancement
Subordination
The rights of the holders of the mezzanine certificates to receive distributions
will be subordinated, to the extent described in this prospectus supplement, to
the rights of the holders of the class A-1 certificates.
In addition, the rights of the holders of mezzanine certificates with higher
numerical class designations will be subordinated to the rights of holders of
mezzanine certificates with lower numerical class designations.
Subordination is intended to enhance the likelihood of regular distributions on
the more senior certificates and to afford those certificates protection against
losses.
Overcollateralization
The trust will have an initial level of overcollateralization of approximately
___%. The overcollateralization is available for the benefit of all classes of
underwritten certificates.
S-6
<PAGE>
Overcollateralization, if reduced, will not hereafter be increased through the
application of "excess interest," or otherwise.
Mortgage Insurance
Approximately _____% of the mortgage loans with a loan-to-value ratio in excess
of __% are covered by a mortgage insurance policy issued by ___________________.
Each mortgage insurance policy insures losses to the extent that the uninsured
exposure of the related mortgage loan is reduced to an amount equal to __% of
the original loan-to-value ratio of such mortgage loan, as more fully described
in the policy.
Pre-Funding Feature
On the closing date, the trust will deposit $_______________ into a pre-funding
account which will be used from time to time on or before _______________ to
acquire subsequent mortgage loans.
To the extent that the trust does not fully use amounts on deposit in the pre-
funding account to purchase additional mortgage loans by ________________, the
trust will apply the remaining amounts as a prepayment of the principal of the
certificates on the distribution date on ______________. Although no assurance
is possible, we do not anticipate that a material amount of principal will be
prepaid on the certificates from amounts in the pre-funding account.
Clean-up Call
The servicer has a clean-up call option which, if exercised, would result in
early redemption of the certificates on any distribution date on or after the
date on which the aggregate principal balance of the mortgage loans has declined
to be __% or less of the sum of the principal balance of the initial mortgage
loans as of the cut-off date plus the original pre-funding amount.
Federal Income Tax Consequences
The trust will elect to be treated as one or more REMICs for federal income tax
purposes. The offered certificates will be designated as "regular interests" in
a REMIC. Certificateholders will include interest on the certificates in income
in accordance with an accrual method of accounting.
ERISA Considerations
The class A-1 certificates may be purchased by ERISA plans after the expiration
of the funding period, provided that certain conditions are satisfied. The
mezzanine certificates may be purchased by ERISA plans after the later of the
expiration of the funding period and the publication of final amendments to the
underwriter's exemption to extend exemptive relief to subordinate certificates,
provided that certain conditions are met. A fiduciary of any ERISA plan that is
considering a purchase of class A-1 certificates or mezzanine certificates
should, among other things, consult with experienced legal counsel in
determining whether all required conditions for purchase have been satisfied.
Legal Investment
The class A-1 and class M-1 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
S-7
<PAGE>
statistical rating agencies. Institutions whose investment activities are
subject to legal investment laws and regulations or to review by certain
regulatory authorities may be subject to restrictions on investment in the
certificates.
Ratings
The offered certificates must receive at least the following ratings from
[Standard & Poor's] and [Moody's] in order to be issued:
<TABLE>
<CAPTION>
Class Rating
----- --------------------
[S&P] [Moody's]
------- ---------
<S> <C> <C>
A-1
M-1
M-2
M-3
</TABLE>
A security rating is not a recommendation to buy, sell or hold securities and
may be subject to revision or withdrawal at any time by the assigning rating
agency. A security rating does not address the frequency of principal
prepayments, the corresponding effect on yield to investors or the payment of
any shortfall resulting from the effect of the available funds cap rate.
S-8
<PAGE>
Risk Factors
Prospective investors should consider, among other things, the items
discussed under "Risk Factors" in the prospectus and the following factors in
connection with the purchase of the certificates:
The loans in the mortgage pool were underwritten to non-conforming standards and
may experience higher delinquency and loss rates
The underwriting standards for the mortgage loans are described under
"Description of the Mortgage Pool--Underwriting Standards for the Mortgage
Loans", and 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 Fannie Mae or Freddie Mac due to credit
characteristics that do not meet the Fannie Mae or Freddie Mac underwriting
guidelines, for reasons such as creditworthiness and repayment ability, these
mortgagors may have a record of credit write-offs, outstanding judgments, prior
bankruptcies and other negative credit items. Accordingly, mortgage loans
underwritten to 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
Fannie Mae or Freddie Mac underwriting guidelines or to typical "A" credit
borrowers.
The mortgage pool contains delinquent loans which, if such loans do not become
current, could cause losses to holders of the offered certificates
Approximately ____% by principal balance of the initial mortgage loans
were thirty days or more but less than sixty days delinquent in their monthly
payments as of the cut-off date (all percentages in this section determined by
aggregate principal balance as of the cut-off date). Approximately ____% by
principal balance of the initial mortgage loans were sixty days or more but less
than ninety days delinquent as of the cut-off date. Approximately __% by
principal balance of the initial mortgage loans were ninety days or more but
less than one hundred and twenty days delinquent as of the cut-off date.
Approximately _____% of the initial mortgage loans with an original
loan-to-value ratio in excess of __% will be covered by a lender-paid mortgage
insurance policy.
Approximately _____% of the initial mortgage loans have original loan-
to-value ratios in excess of 80%. Mortgage loans with a loan-to-value ratio in
excess of 80% 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 property securing such mortgage loans. We can give no assurance 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.
S-9
<PAGE>
Potential inadequacy of credit enhancement
The overcollateralization, subordination, loss allocation and primary
mortgage insurance features described in this prospectus supplement are intended
to enhance the likelihood that the certificateholders will receive regular
payments of interest and principal, but such credit enhancements are limited in
nature and may be insufficient to cover all losses on the mortgage loans. The
credit enhancement does not include the subordination of excess interest to
payments of interest and principal on the class A-1 and mezzanine certificates.
Further, there is no provision for the application of excess interest to build
up overcollateralization, or to restore overcollateralization if it is depleted.
If the initial overcollateralization is depleted, it will not be restored out of
excess interest payments, or otherwise.
Further, because there will be no excess interest available for these
purposes, to the extent the full amount of interest payable on the mortgage
loans for a due period is not collected or advanced, there will not be
sufficient funds available to make the required distribution of interest on the
certificates. Such a shortfall would reduce the interest distributed to class
M-3, class M-2, class M-1 and class A-1, in that order.
The mortgage pool includes balloon loans, which can create increased risk of
losses
Approximately _____% by principal balance of the initial fixed-rate
mortgage loans are "balloon loans"; that is, they require monthly payments of
principal based on 30 year amortization schedules and have scheduled maturity
dates of 15 years from the due date of the first monthly payment, in each case
leaving a substantial portion of the original principal amount due and payable
on the respective scheduled maturity date. 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. No person is obligated to refinance any balloon
loan.
The mortgage loans have geographic concentrations which could cause losses to
the holders if certain events occur in such regions
Approximately _____% by principal balance of the initial mortgage
loans are secured by mortgaged properties located in the State of _________ and
approximately _____% by principal balance of the initial mortgage loans are
secured by mortgaged properties located in the State of __________. In the event
_________ or __________ experiences a decline in real estate values, losses on
the mortgage loans may be greater than otherwise would be the case.
The final mortgage pool will include mortgage loans which will differ from the
pool of initial mortgage loans described in this prospectus supplement
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 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 and must be underwritten in accordance
with
S-10
<PAGE>
the criteria described under "Description of the Mortgage Pool--Underwriting
Standards for the Mortgage Loans" herein.
The pre-funding feature could result in a significant payment on the
certificates at the end of the pre-funding period
If the pre-funding account moneys are not fully applied to the
purchase of subsequent mortgage loans by the end of the funding period, the
remaining funds will be used to make a principal payment on the certificates. No
assurances can be given that there will not be such a payment.
The rate and timing of principal prepayments on the mortgage loans could
adversely affect the yield on the offered certificates
The rate and timing of principal payments on the certificates will
depend on the rate and timing of principal payments (including prepayments,
defaults, liquidations, purchases of the mortgage loans due to a breach of a
representation or warranty and the servicer's limited right to purchase
delinquent mortgage loans) on the mortgage loans. Accordingly, the certificates
are subject to inherent cash-flow uncertainties because the mortgage loans may
be prepaid at any time. Generally, when prevailing interest rates increase,
prepayment rates on mortgage loans tend to decrease, resulting in a slower
return of principal to investors at a time when reinvestment at such higher
prevailing rates would be desirable. Conversely, when prevailing interest rates
decline, prepayment rates on mortgage loans tend to increase, resulting in a
faster return of principal to investors at a time when reinvestment at
comparable yields may not be possible.
Approximately _____% by principal balance of the initial mortgage
loans are subject to prepayment penalties. Of the _____%, _____% represented ARM
loans and _____% represented fixed-rate loans. Typically, the mortgage loans
with a prepayment penalty 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" in this prospectus
supplement and "Description of the Securities--Weighted Average Life of the
Securities" in the prospectus.
The yield to maturity on the certificates will depend on, among other
things, the rate and timing of principal payments (including prepayments,
defaults, liquidations, purchases of the mortgage loans due to a breach of a
representation or warranty and purchases of delinquent loans by the servicer) on
the mortgage loans. The yield to maturity on the certificates will also depend
on the related certificate interest rate and the purchase price for such
certificates.
If the certificates 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 certificates 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 certificates were structured assuming,
among other things, a prepayment rate and corresponding weighted average lives
as
S-11
<PAGE>
described herein. The prepayment, yield and other assumptions to be used for
pricing purposes for the certificates may vary as determined at the time of
sale.
See "Certain Yield and Prepayment Considerations" in this prospectus
supplement and "Description of the Securities--Weighted Average Life of the
Securities" in the prospectus.
The available funds cap rate can cause reductions in the amount of interest
payable on the underwritten certificates
Each class of underwritten certificates, bears interest at a rate
subject to an available funds cap rate. The fixed interest rate on a converted
mortgage loan in most cases may be lower than the variable rate that would have
been in effect on such loan if it had not been converted. The conversion of a
significant principal amount of such mortgage loans could cause the weighted
average coupon rate on the mortgage loans to decline, possibly significantly. In
such event, the interest rate on the certificates may be reduced through
operation of the available funds cap rate.
This risk would be exacerbated if the adjustable rate loans in the
pool were to be prepaid, increasing the proportion of fixed rate loans remaining
in the pool.
The conversion of mortgage loans to a fixed interest rate could reduce the
weighted average coupon rate of the pool
Approximately _____% of the initial mortgage loans are ARM loans which
may convert from an adjustable rate to a fixed rate at the option of the
borrower. Up to 100% of the subsequent mortgage loans which are ARM loans may be
convertible loans.
The fixed interest rate on a converted mortgage loan in most cases may
be lower than the adjustable rate that would have been in effect on such loan if
it had not been converted and the weighted average coupon rate on the mortgage
loans may decline.
The mezzanine certificates are particularly sensitive to the timing and amount
of losses and prepayments on the mortgage loans
The weighted average lives of, and the yields to maturity on, the
class M-1 certificates, the class M-2 certificates and the class M-3
certificates will be progressively more sensitive, in increasing order of their
numerical class designations, to the rate and timing of mortgagor defaults and
the severity of ensuing losses on the mortgage loans. If the actual rate and
severity of losses on the mortgage loans is higher than those assumed by an
investor in those certificates, the actual yield to maturity of such
certificates may be lower than the yield anticipated by such holder based on
such assumption. The timing of losses on the mortgage loans will also affect an
investor's actual yield to maturity, even if the rate of defaults and severity
of losses over the life of the mortgage pool are consistent with an investor's
expectations. In general, the earlier a loss occurs, the greater the effect on
an investor's yield to maturity. Realized losses on the mortgage loans, to the
extent they exceed the amount of overcollateralization following distributions
of principal on the related distribution date, will reduce the certificate
principal balance of the class of mezzanine certificate then outstanding with
the highest numerical class designation. As a result of such reductions, less
interest will accrue on such class of mezzanine
S-12
<PAGE>
certificates than would otherwise be the case. Once a realized loss is allocated
to a mezzanine certificate, no amounts will be distributable with respect to
such written down amount.
Unless the certificate balance of the class A-1 certificates has been
reduced to zero, the mezzanine certificates will not be entitled to any
principal distributions until at least ________________. Even after the date on
which the mezzanine certificates begin to amortize they may become locked out of
receiving principal distributions during periods in which delinquencies on the
mortgage loans exceed certain levels. As a result, the weighted average lives of
such certificates will be longer than would otherwise be the case if
distributions of principal were allocated among all of the certificates at the
same time. As a result of the longer weighted average lives of such
certificates, the holders of such certificates have a greater risk of suffering
a loss on their investments. Further, because such certificates might not
receive any principal if certain delinquency levels occur, it is possible for
such certificates, for so long as the class A-1 certificates are outstanding, to
receive no principal distributions even if no losses have occurred on the
mortgage pool.
The structure of the class M-1 certificates, the class M-2
certificates and the class M-3 certificates causes the yield of such classes to
be particularly sensitive to changes in the rates of prepayment of the mortgage
loans. Because distributions of principal will be made to the holders of such
certificates according to the priorities described in this prospectus
supplement, the yield to maturity on such classes of certificates will be
sensitive to the rates of prepayment on the mortgage loans experienced both
before and after the commencement of principal distributions on such classes.
Ratings on the offered certificates are dependent upon the creditworthiness of
the mortgage insurance provider.
The ratings assigned to the offered certificates by the rating
agencies will be based in part on the credit characteristics of the mortgage
loans and on ratings assigned to ______________________, the mortgage insurance
provider with respect to all of the mortgage loans having mortgage insurance
policies. Of the initial mortgage loans, _____% are covered by mortgage
insurance policies. Any reduction in the ratings assigned to the mortgage
insurance provider by the rating agencies could result in the reduction of the
ratings assigned to the offered certificates. This reduction in ratings could
adversely affect the liquidity and market value of the offered certificates.
Use of Proceeds
After deducting the estimated expenses of this offering, the net
proceeds to the depositor from the sale of the certificates offered hereby are
estimated to be $________. The company anticipates that the entire net proceeds
will be used to purchase the initial mortgage loans from the seller and to fund
the pre-funding account and the interest coverage account. The seller
anticipates that it will use the entire net proceeds to it to repay indebtedness
and accrued interest under its warehouse lines of credit. The depositor and the
seller believe that funds provided by the net proceeds of this offering will be
sufficient to accomplish the purposes set forth above.
S-13
<PAGE>
Description of the Mortgage Pool
The statistical information presented in this prospectus supplement
describes only the initial mortgage loans included in the trust estate on the
closing date and does not include the subsequent mortgage loans which may be
acquired through the pre-funding feature. All statistical information is stated
as of _______________ and all percentages, unless otherwise stated, are by
aggregate principal balance. The actual principal balances of the initial
mortgage loans as of the closing date will be lower, and may be significantly
lower, than the principal balances thereof as of the cut-off date.
Subsequent mortgage loans are intended to be purchased by the trust
from the seller from time to time on or before ___________________, from funds
on deposit in the pre-funding account. The subsequent mortgage loans must
conform to certain specified characteristics described below under "--Conveyance
of Subsequent Mortgage Loans and the Pre-Funding Account."
The mortgage pool will consist of conventional, monthly payment, first
lien mortgage loans with terms to maturity of not more than 30 years from the
date of origination or modification. The mortgage pool will consist of both
adjustable-rate mortgage loans ("ARMs") and fixed-rate mortgage loans.
NovaStar Mortgage, in its capacity as seller, will convey the mortgage
loans to the company pursuant to a mortgage loan purchase agreement. The company
will then convey the mortgage loans to the trust. All of the mortgage loans will
be serviced by NovaStar Mortgage, as the servicer. NovaStar Mortgage will make
various representations and warranties regarding the mortgage loans under the
purchase agreement and will have repurchase or substitution obligations if those
representations or warranties are violated. See "Description of the
Certificates--Assignment of Mortgage Loans" in this prospectus supplement.
Approximately _____% by principal balance of the initial mortgage
loans have loan-to-value ratios in excess of __%. Approximately _____% by
principal balance of the initial mortgage loans with a loan-to-value ratio in
excess of __% are covered by a lender-paid primary mortgage insurance policy
insuring first losses on the principal balance of each initial mortgage loan.
See "Description of the Mortgage Pool--Private Mortgage Insurance" herein. The
remainder of the initial mortgage loans will not be covered by a mortgage
insurance policy.
As of the cut-off date, the minimum loan-to-value ratio at origination
for the initial mortgage loans was approximately ____%, the maximum loan-to-
value ratio at origination was approximately _____%, respectively, and the
weighted average loan-to-value ratio at origination was approximately _____%.
All of the mortgage loans will contain a customary "due-on-sale"
clause, although the mortgage loans may be assumable if permitted by the
servicer 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 certificates.
Except for the balloon loans, the initial mortgage loans generally
have original terms to stated maturity of approximately 30 years.
S-14
<PAGE>
None of the initial mortgage loans are secured by junior liens on the
related mortgaged properties.
None of the initial mortgage loans are subject to temporary buydown
plans, pursuant to which the monthly payments made by the mortgage during the
early years of the loan are less than the scheduled monthly payments thereon.
The due date for all the initial mortgage loans is the first day of
the month.
Of the initial mortgage loans, _____% by principal balance are ARM
loans and _____% are fixed-rate loans. Of the _____% which are ARM loans, the
mortgage rate on _____% adjusts semi-annually, and the mortgage rate on ____%
adjusts annually.
Prepayment Charges
Of the initial mortgage loans, _____% by principal balance are subject
to prepayment penalties. Of such loans subject to prepayment penalties,
approximately _____% are initial ARM loans, and approximately _____% are initial
fixed-rate loans. The prepayment penalty provisions typically provide for
payment of a prepayment penalty 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.
Adjustable Rate Feature of the ARM Loans
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 initial ARM mortgage
loans is __ months.
Adjustments to the mortgage rates on substantially all of the ARM
loans commence after an initial period after origination of 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 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 and on each
adjustment date thereafter to a periodic rate cap. All of the ARM loans are also
subject to specified maximum and minimum lifetime mortgage rates. The initial
ARM 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 ARM loan, as adjusted on any related adjustment
date, may not equal the sum of the related index and the gross margin.
Substantially all of the initial ARM 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 initial periodic rate cap on their first
adjustment date.
S-15
<PAGE>
The index applicable to the determination of the mortgage rate on
approximately _____% by principal balance of the initial mortgage loans 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, and most recently available
as of the first business day generally 30 days prior to the adjustment date
("Six-Month LIBOR").
The index applicable to the determination of the mortgage rate on
approximately ____% by principal balance of the initial mortgage loans 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").
Approximately _____% of initial ARM loans are convertible mortgage
loans.
Pool Stratifications
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 sum to totals due to
rounding.
S-16
<PAGE>
Geographic Distribution of the Mortgaged Properties of All Initial Mortgage
Loans
<TABLE>
<CAPTION>
Percentage of All Initial
Mortgage Loans by
Number of Aggregate Aggregate Principal
State Mortgage Loans Principal Balance Balance
-------------------- -------------- ----------------- -------------------------
<S> <C> <C> <C>
Alabama $ %
Alaska
Arizona
Arkansas
California
Colorado
Connecticut
District of Columbia
Florida
Georgia
Idaho
Illinois
Indiana
Kansas
Kentucky
Louisiana
Maine
Maryland
Massachusetts
Michigan
Minnesota
Mississippi
Missouri
Montana
Nebraska
Nevada
New Hampshire
New Jersey
New Mexico
New York
North Carolina
Ohio
Oklahoma
Oregon
Pennsylvania
Rhode Island
South Carolina
Tennessee
Texas
Utah
Virginia
Washington
West Virginia
Wisconsin
Wyoming
-------------- ----------------- -------------------------
Totals $ 100.00%
-------------- ----------------- -------------------------
</TABLE>
S-17
<PAGE>
No more than approximately ____% of the initial mortgage loans will be
secured by mortgaged properties located in any one zip code.
Types of Mortgage Properties of All Initial Mortgage Loans
<TABLE>
<CAPTION>
Percentage of All
Initial Mortgage
Number of Aggregate Loans by Aggregate
Property Type Mortgage Loans Principal Balance Principal Balance
----------------------- -------------- ----------------- ------------------
<S> <C> <C> <C>
Condo Hi-Rise $ %
Condo Low-Rise
Manufactured
Multi-Unit
PUD
Single Family Residence
-------------- ----------------- ------------------
Total $ 100.00%
-------------- ----------------- ------------------
</TABLE>
Use of Proceeds of All Initial Mortgage Loans
<TABLE>
<CAPTION>
Percentage of All
Initial Mortgage
Number of Aggregate Loans by Aggregate
Use of Proceeds Mortgage Loans Principal Balance Principal Balance
--------------------- -------------- ----------------- ------------------
<S> <C> <C> <C>
Purchase $ %
Refinance (cash-out)
Refinance (rate term)
Construction
-------------- ----------------- ------------------
Total $ 100.00%
-------------- ----------------- ------------------
</TABLE>
In general, in the case of a mortgage loan made for "rate term"
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 the related mortgaged property and to pay associated origination and closing
costs. Mortgage loans made for "cash-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
these proceeds retained by the mortgagor may be substantial.
S-18
<PAGE>
Occupancy Status of the Mortgaged Properties of All Initial Mortgage Loans
<TABLE>
<CAPTION>
Percentage of All
Initial Mortgage
Number of Aggregate Loans by Aggregate
Occupancy Status Mortgage Loans Principal Balance Principal Balance
----------------------------- -------------- ----------------- ------------------
<S> <C> <C> <C>
Investment Non-Owner Occupied $ %
Investment Owner Occupied
Primary
Second Home
-------------- ----------------- ------------------
Total $ 100.00%
-------------- ----------------- ------------------
</TABLE>
Documentation Type of All Initial Mortgage Loans
<TABLE>
<CAPTION>
Percentage of All
Initial Mortgage
Number of Aggregate Loans by Aggregate
Documentation Mortgage Loans Principal Balance Principal Balance
------------- -------------- ----------------- ------------------
<S> <C> <C> <C>
Full $ %
Limited
Stated
-------------- ----------------- ------------------
Total $ 100.00%
-------------- ----------------- ------------------
</TABLE>
Risk Classifications of All Initial Mortgage Loans
<TABLE>
<CAPTION>
Percentage of All
Initial Mortgage
Number of Aggregate Loans by Aggregate
Grade Mortgage Loans Principal Balance Principal Balance
----- -------------- ----------------- ------------------
<S> <C> <C> <C>
AAA $ %
AA
A
A-
B
C
C-
-------------- ----------------- ------------------
Total $ 100.00%
-------------- ----------------- ------------------
</TABLE>
S-19
<PAGE>
Delinquencies of All Initial Mortgage Loans
<TABLE>
<CAPTION>
Percentage of All
Initial Mortgage
Number of Aggregate Loans by Aggregate
Number of Days Delinquent Mortgage Loans Principal Balance Principal Balance
------------------------- -------------- ----------------- ------------------
<S> <C> <C> <C>
Less than 30 $ %
30 - 59
60 - 89
90 - 120
-------------- ----------------- ------------------
Total $ 100.00%
-------------- ----------------- ------------------
</TABLE>
Initial Periodic Rate Cap of the Initial ARM Loans
<TABLE>
<CAPTION>
Percentage of Initial
ARM Loans by
Initial Periodic Rate Number of Aggregate Aggregate Principal
Cap (%) Mortgage Loans Principal Balance Balance
--------------------- -------------- ----------------- ---------------------
<S> <C> <C> <C>
1.000 $ %
2.000
3.000
-------------- ----------------- ---------------------
Total $ 100.00%
-------------- ----------------- ---------------------
</TABLE>
Periodic Rate Cap of the Initial ARM Loans
<TABLE>
<CAPTION>
Percentage of Initial
ARM Loans by
Number of Aggregate Aggregate Principal
Periodic Rate Cap (%) Mortgage Loans Principal Balance Balance
--------------------- -------------- ----------------- ---------------------
<S> <C> <C> <C>
1.000 $ %
2.000
-------------- ----------------- ---------------------
Total $ 100.00%
-------------- ----------------- ---------------------
</TABLE>
S-20
<PAGE>
Lifetime Caps of the Initial ARM Loans
<TABLE>
<CAPTION>
Percentage of Initial
ARM Loans by
Number of Aggregate Aggregate Principal
Range of Lifetime Caps (%) Mortgage Loans Principal Balance Balance
-------------------------- -------------- ----------------- ---------------------
<S> <C> <C> <C>
12.125 - 12.500 $ %
12.501 - 13.000
13.001 - 13.500
14.001 - 14.500
14.501 - 15.000
15.001 - 15.500
15.501 - 16.000
16.001 - 16.500
16.501 - 17.000
17.001 - 17.500
17.501 - 18.000
18.001 - 18.500
18.501 - 19.000
19.001 - 19.500
19.501 - 19.990
-------------- ----------------- ---------------------
Total $ 100.00%
-------------- ----------------- ---------------------
</TABLE>
Minimum: %
Maximum: %
Weighted Average: %
S-21
<PAGE>
Next Interest Adjustment Date of the Initial ARM Loans
<TABLE>
<CAPTION>
Percentage of Initial
ARM Loans by
Number of Aggregate Aggregate Principal
Next Adjustment Date Mortgage Loans Principal Balance Balance
-------------------- -------------- ----------------- ---------------------
<S> <C> <C> <C>
October 2000 $ %
November 2000
December 2000
February 2001
August 2001
November 2001
March 2002
April 2002
May 2002
June 2002
July 2002
August 2002
September 2002
October 2002
November 2002
December 2002
January 2003
March 2003
April 2003
May 2003
June 2003
July 2003
August 2003
September 2003
August 2004
-------------- ----------------- ---------------------
Total $ 100.00%
-------------- ----------------- ---------------------
</TABLE>
The weighted average remaining months to the next adjustment date of
the initial ARM loans as of the cut-off date will be approximately __ months.
S-22
<PAGE>
Gross Margins of the Initial ARM Loans
<TABLE>
<CAPTION>
Percentage of Initial
Range of Gross Number of Aggregate ARM Loans by Aggregate
Margins (%) Mortgage Loans Principal Balance Principal Balance
------------------------------ ------------------------------ ------------------------------ ------------------------------
<S> <C> <C> <C>
2.501 - 3.000 $ %
3.001 - 3.500
3.501 - 4.000
4.001 - 4.500
4.501 - 5.000
5.001 - 5.500
5.501 - 6.000
6.001 - 6.500
6.501 - 7.000
7.001 - 7.500
8.001 - 8.500
------------------------------ ------------------------------ ------------------------------
Total $ 100.00%
============================== ============================== ==============================
Minimum: %
Maximum: %
Weighted Average: %
</TABLE>
Mortgage Loan Types of the Initial ARM Loans
<TABLE>
<CAPTION>
Percentage of Initial ARM
Number of Aggregate Loans by Aggregate
Mortgage Loan Type Mortgage Loans Principal Balance Principal Balance
------------------------------ ------------------------------ ------------------------------ ------------------------------
<S> <C> <C> <C>
1.75/28.25 6-month LIBOR $ %
2/28 6-month LIBOR
3/27 6-month LIBOR
5YR 1 YEAR - CMT
7YR 1 YEAR - CMT
10YR 1 YEAR - CMT
------------------------------ ------------------------------ ------------------------------
Total $ 100.00%
============================== ============================== ==============================
</TABLE>
S-23
<PAGE>
Original Loan-to-Value Ratios of the Initial ARM Loans
<TABLE>
<CAPTION>
Range of Loan-to-Value Percentage of Initial ARM
Ratios at Origination Number of Aggregate Loans by Aggregate
(%) Mortgage Loans Principal Balance Principal Balance
------------------------------ ------------------------------ ------------------------------ ------------------------------
<S> <C> <C> <C>
20.001 - 25.000 $ %
30.001 - 35.000
40.001 - 45.000
45.001 - 50.000
50.001 - 55.000
55.001 - 60.000
60.001 - 65.000
65.001 - 70.000
70.001 - 75.000
75.001 - 80.000
80.001 - 85.000
85.001 - 90.000
90.001 - 95.000
------------------------------ ------------------------------ ------------------------------
Total $ 100.00%
============================== ============================== ==============================
Minimum: %
Maximum: %
Weighted Average: %
</TABLE>
S-24
<PAGE>
Principal Balances of the Initial ARM Loans
<TABLE>
<CAPTION>
Percentage of Initial
Range of Principal Number of Aggregate ARM Loans by Aggregate
Balances ($) Mortgage Loans Principal Balance Principal Balance
------------------------------ ------------------------------ ------------------------------ ------------------------------
<S> <C> <C> <C>
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 - 375,000.00
375,000.01 - 400,000.00
400,000.01 - 425,000.00
425,000.01 - 450,000.00
450,000.01 - 475,000.00
475,000.01 - 500,000.00
500,000.01 - 525,000.00
550,000.01 - 575,000.00
575,000.01 - 600,000.00
625,000.01 - 650,000.00
675,000.01 - 700,000.00
------------------------------ ------------------------------ ------------------------------
Total $ 100.00%
============================== ============================== ==============================
Minimum: $
Maximum: $
Average: $
</TABLE>
S-25
<PAGE>
Remaining Terms to Maturity of the Initial ARM Loans
<TABLE>
<CAPTION>
Percentage of Initial ARM
Remaining Term Number of Aggregate Loans by Aggregate
(months) Mortgage Loans Principal Balance Principal Balance
------------------------------ ------------------------------ ------------------------------ ------------------------------
<S> <C> <C> <C>
286 - 290 $ %
291 - 295
306 - 310
316 - 320
321 - 325
326 - 330
331 - 335
336 - 340
351 - 355
356 - 360
------------------------------ ------------------------------ ------------------------------
Total $ 100.00%
============================== ============================== ==============================
Minimum: ___ months
Maximum: ___ months
Weighted Average: ___ months
</TABLE>
Original Terms to Maturity of the Initial ARM Loans
<TABLE>
<CAPTION>
Percentage of Initial ARM
Original Term Number of Aggregate Loans by Aggregate
(months) Mortgage Loans Principal Balance Principal Balance
------------------------------ ------------------------------ ------------------------------ ------------------------------
<S> <C> <C> <C>
360 $ 100.00%
------------------------------ ------------------------------ ------------------------------
Total $ 100.00%
============================== ============================== ==============================
</TABLE>
S-26
<PAGE>
Current Mortgage Rates for Initial ARM Loans
<TABLE>
<CAPTION>
Percentage of Initial ARM
Range of Mortgage Rates Number of Aggregate Loans by Aggregate
(%) Mortgage Loans Principal Balance Principal Balance
----------------------- -------------- ----------------- -------------------------
<S> <C> <C> <C>
6.001 - 6.500 $ %
6.501 - 7.000
7.001 - 7.500
7.501 - 8.000
8.001 - 8.500
8.501 - 9.000
9.001 - 9.500
9.501 - 10.000
10.001 - 10.500
10.501 - 11.000
11.001 - 11.500
11.501 - 12.000
12.001 - 12.500
12.501 - 13.000
13.501 - 14.000
-------------- --------------- -------------------------
Total $ 100.00%
-------------- --------------- -------------------------
</TABLE>
Minimum: %
Maximum: %
Weighted Average: %
S-27
<PAGE>
Mortgage Loan Type of Initial Fixed-Rate Mortgage Loans
<TABLE>
<CAPTION>
Percentage of Initial
Fixed-Rate Mortgage
Number of Aggregate Loans by Aggregate
Loan Type Mortgage Loans Principal Balance Principal Balance
------------------- -------------- ----------------- ---------------------
<S> <C> <C> <C>
15 Year Balloon $ %
10 Year Fixed-Rate
15 Year Fixed-Rate
20 Year Fixed-Rate
25 Year Fixed-Rate
30 Year Fixed-Rate
-------------- ----------------- ---------------------
Total $ 100.00%
-------------- ----------------- ---------------------
</TABLE>
Original Loan-to-Value Ratios of the Initial Fixed-Rate Mortgage Loans
<TABLE>
<CAPTION>
Percentage of Initial
Range of Loan-to-Value Fixed-Rate Mortgage
Ratios at Origination Number of Aggregate Loans by Aggregate
(%) Mortgage Loans Principal Balance Principal Balance
---------------------- -------------- ------------------ ---------------------
<S> <C> <C> <C>
5.001 - 10.000 $ %
25.001 - 30.000
35.001 - 40.000
45.001 - 50.000
50.001 - 55.000
55.001 - 60.000
60.001 - 65.000
65.001 - 70.000
70.001 - 75.000
75.001 - 80.000
80.001 - 85.000
85.001 - 90.000
90.001 - 95.000
95.001 - 100.000
-------------- ----------------- ---------------------
Total $ 100.00%
-------------- ----------------- ---------------------
</TABLE>
Minimum: %
Maximum: %
Weighted Average: %
S-28
<PAGE>
Mortgage Rates of the Initial Fixed-Rate Mortgage Loans
<TABLE>
<CAPTION>
Percentage of Initial
Fixed-Rate Mortgage
Range of Mortgage Rates Number of Aggregate Loans By Aggregate
(%) Mortgage Loans Principal Balance Principal Balance
----------------------- -------------- ----------------- ---------------------
<S> <C> <C> <C>
8.501 - 9.000 $ %
9.001 - 9.500
9.501 - 10.000
10.001 - 10.500
10.501 - 11.000
11.001 - 11.500
11.501 - 12.000
12.001 - 12.500
12.501 - 13.000
13.001 - 13.500
-------------- ----------------- ---------------------
Total $ 100.00%
-------------- ----------------- ---------------------
</TABLE>
Minimum: %
Maximum: %
Weighted Average: %
Principal Balances of the Initial Fixed-Rate Mortgage Loans
<TABLE>
<CAPTION>
Percentage of Initial
Fixed-Rate Mortgage
Range of Principal Number of Aggregate Loans by Aggregate
Balances ($) 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
375,000.01 - 400,000.00
450,000.01 - 475,000.00
-------------- ----------------- ---------------------
Total $ 100.00%
-------------- ----------------- ---------------------
</TABLE>
Minimum: $
Maximum: $
Weighted Average: $
S-29
<PAGE>
Remaining Terms to Maturity of the Initial Fixed-Rate Mortgage Loans
<TABLE>
<CAPTION>
Percentage of Initial
Fixed-Rate Mortgage
Remaining Term Number of Aggregate Loans by Aggregate
(months) Mortgage Loans Principal Balance Principal Balance
-------------- -------------- ----------------- ---------------------
<S> <C> <C> <C>
116 - 120 $
156 - 160
176 - 180
236 - 240
296 - 300
356 - 360
-------------- ----------------- --------------------
Total $ 100.00%
-------------- ----------------- --------------------
</TABLE>
Minimum: ___ months
Maximum: ___ months
Weighted Average: ___ months
Conveyance of Subsequent Mortgage Loans and the Pre-Funding Account
On the closing date, approximately $______________ will be deposited
in a pre-funding account which account will be in the name of the trustee and
shall be part of the trust estate and which amount will be used to acquire
subsequent mortgage loans. Of that amount, a minimum of $______________ will be
used to acquire subsequent ARM loans and the remaining amount will be used to
acquire subsequent fixed-rate loans. During the funding period, the related
original pre-funded amount will be reduced by the amount 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 Pre-Funding Account is less than $10,000 and (ii)
____________________.
The purchase price for such subsequent mortgage loan will be 100% of
par.
Each subsequent mortgage loan will have been underwritten in
accordance with the criteria described under "Description of the Mortgage Pool--
Underwriting Standards for the Mortgage Loans."
Each subsequent mortgage loan will satisfy the following criteria:
. the subsequent mortgage loan may not be 30 or more days delinquent;
. the remaining stated term to maturity will not exceed 360 months;
. the lien securing the subsequent mortgage loan must be first
priority;
. the subsequent mortgage loan must have an outstanding principal
balance of at least $10,000;
. the subsequent mortgage loan will be underwritten in accordance
with the criteria described under "Description of the Mortgage
Pool--Underwriting Standards for the Mortgage Loans" herein;
S-30
<PAGE>
. the subsequent mortgage loan must have a loan-to-value ratio
equal to or less than 100%;
. the stated maturity of the subsequent mortgage loan will be no
later than _________________;
. the subsequent mortgage loan shall not provide for negative
amortization;
. the subsequent mortgage loan if it is a fixed rate loan, must
have a fixed mortgage rate of at least ____% or, if an ARM loan,
a gross margin of at least ____% over the related index; and
. a minimum of __% of the subsequent mortgage loans that are
underwritten to the seller's underwriting standards for all
credit risks will be covered by the _______ mortgage insurance
policy if their loan-to-value ratios are greater than __%.
Following the purchase of the subsequent mortgage loans by the trust,
all mortgage loans must have a weighted average interest rate and a weighted
average loan-to-value ratio which will not vary materially from those statistics
with respect to the pool of initial mortgage loans.
In addition, the certificate administrator shall not agree to any
transfer of subsequent mortgage loans without a confirmation from the rating
agencies that the acquisition of those subsequent mortgage loans will not result
in a downgrade, withdrawal or qualification of the ratings then in effect for
the outstanding certificates.
Underwriting Standards for the Mortgage Loans
All of the initial mortgage loans were originated or purchased by the
seller in the ordinary course of business on a loan by loan basis directly from
mortgage brokers and mortgage loan originators.
The underwriting guidelines of the seller 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.
Prior to issuing an approval on the loan, the underwriter runs an independent
credit report which provides detailed information concerning the payment history
of the borrower on all of their debts 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 underwriter's 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 Fannie Mae and Freddie Mac. 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.
S-31
<PAGE>
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 verification of employment and most
recent pay stub or prior two years W-2 forms and most recent pay stub. Under
the Limited Documentation program, no such verification is required, however,
bank statements for the most recent consecutive 12-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. Given that the seller 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 seller 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
judgment of the underwriter warrants an exception. All loans in excess of
$350,000 currently require the approval of the underwriting supervisor and all
loans over $500,000 require the approval of the Chief Credit Officer. In
addition, the President of the seller approves all loans in excess of $750,000.
The initial mortgage loans were underwritten by the seller using the
following categories and criteria 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.
S-32
<PAGE>
<TABLE>
<CAPTION>
AAA Risk AA Risk A Risk A- Risk B Risk C Risk C- Risk
-------- ------- ------ ------- ------ ------ -------
<S> <C> <C> <C> <C> <C> <C> <C>
Mortgage No 30-day late Maximum one 30-day Maximum one Maximum two Maximum three Maximum Max two
History within last 24 late within last 24 30-day late 30-day late 30-day late and five 30-day 90-day late
months. months. (must be within last 12 within last 12 one 60-day late or late,two 60- within
0x30 in the most months. months. four 30-day late day late, and 12 months.
recent 12 months). within last 12 one 90-day
If 4x30 or 1x60, late within
reduce LTV by 5%. last 12
months. If
x90, reduce
LTV by 5%.
Consumer Minimum 640 Maximum three Maximum three Maximum three Maximum five Maximum four Discretionary
Credit FICO. 30-day late three 30-day 30-day late 30-day late, two 60-day late, Credit it
Minimum 660 within last 24 late within last and one 60-day 60-day late, and two 90-day generally
for 85 LTV. months. 12 months. late, or five one 90-day late, late, or six expected to
FICO 30-day late or six 30-day 60-day late, be late pay.
Minimum 680 within last late and three and one 90-day
FICO for 90 to 12 months. 60-day late late within
97 LTV. within last 12 last 12 months.
months.
If 1x90 is a
major (*$5000),
reduce LTV by 5%.
Bankruptcy Chapter 7: Chapter 7: Chapter 7: Chapter 7: Chapter 7: Chapter 7: Chapter 7:
Filings 3 years since 3 years since 3 years since 2 years since 18 months since 1 year since discharged
discharge date. discharge date. discharge date. discharge date. discharge date. discharge date. Chapter 13:
Chapter 13: Chapter 13: Chapter 13: Chapter 13: Chapter 13: Chapter 13: No seasoning
2 years since 2 years since 2 years since 1 year since 1 year since 12 month required;
discharge date. discharge date. discharge date. discharge date. discharge date. satisfactory buy out
pay history; required.
buy out
required.
Prior 60 Months 60 Months 60 Months 36 Months 24 months 24 months 12 months
Foreclosure
/NOD
</TABLE>
* Greater than
S-33
<PAGE>
<TABLE>
<CAPTION>
AAA Risk AA Risk A Risk A- Risk B Risk C Risk C- Risk
-------- ------- ------ ------- ------ -------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Adverse All adverse All adverse All adverse All adverse All adverse All adverse All Adverse
Accounts accounts in the accounts in the accounts in the accounts in the accounts in the accounts in accounts in
last 24 months last 24 months last 24 months last 24 months last 24 months not the last 24 the last 24
must be must be satisfied. must be satisfied. not to exceed to exceed $25000. months not months not
satisfied. None>$1500 in None>$1500 $1000. exceed $5000. to exceed
None>$1500 in last 12 months. in last 12 $5000.
last 12 months. months.
Debt-to- 45% 45% 45% 45% for any LTV 50% 55% 55%
Income less than 85%.
Ratio For LTVs greater
than or equal to
85%, Debt Service
Ratio of 50%.
Maximum 97% 95% 90% 90% 85% 75% 65%
Loan-to-
Value
Ratio
Maximum 100% 100% 100% 100% 90% 80% No junior
Combined liens
Loan-to- permitted.
Value
Ratio
</TABLE>
S-34
<PAGE>
Close attention is paid to geographic diversification in managing
credit risk. The seller believes one of the best tools for managing credit risk
is to diversify the markets in which it originates and purchases mortgage loans.
The seller 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 seller higher than twice that market's
percentage of the total national market share.
Quality control reviews are conducted to ensure that all mortgage
loans 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 seller reviews a high percentage of
mortgage loans with
. principal balances in excess of $250,000,
. non owner occupied properties,
. loans that have been assigned a "C" or "C-" credit grade, or
. the first three loans submitted by any new broker.
The seller also performs appraisal reviews and compliance reviews as
part of the quality control process to ensure adherence to state and federal
regulations.
Private Mortgage Insurance Policies
Approximately _____% by principal balance of the initial mortgage
loans with a loan-to-value ratio in excess of __% are covered by mortgage
insurance policies issued by __________________. ______, an __________
corporation with its administrative offices in _______________. ____________ is
a private mortgage insurance company founded in ____. ____ is rated "___" by
[S&P] and "___" by [Moody's] with respect to its claims-paying ability. The
remainder of the initial mortgage loans will not be covered by a mortgage
insurance policy or are below the __% LTV coverage limit. In addition, most of
the subsequent mortgage loans with an original loan-to-value ratio in excess of
__% will be covered by a mortgage insurance policy.
The servicer follows specified procedures for making a claim on an
insured mortgage loan. When an insured mortgage loan becomes materially
delinquent and satisfactory arrangements to bring the loan current are not made,
the servicer will initiate foreclosure proceedings. The servicer is required to
file a claim with the mortgage insurer no later than 60 days after the earlier
of acquiring marketable title to the mortgaged property or a pre-arranged sale
of the mortgaged property. If a claim filed by the servicer is incomplete,
within 20 days of receipt of a claim the mortgage insurer is required to notify
the servicer of all items needed to perfect the claim. If no notice of
deficiency is sent by the mortgage insurer within such 20 day period, then the
claim will be deemed to be a perfected claim as of the date of receipt. Subject
to the conditions and exclusions of the mortgage insurance policy, the mortgage
insurer is required to process and pay a perfected claim within 60 days.
Each mortgage insurance policy insures a portion of the loss on the
mortgage loan covered by such policy to the extent that the uninsured exposure
of the related mortgage loan is reduced to an amount equal to 50% of the
original loan-to-value ratio of such mortgage loan, as more fully
S-35
<PAGE>
described in the policy. Under the mortgage insurance policies, the mortgage
insurer covers an amount generally equal to, at the option of the mortgage
insurer, either:
. the outstanding principal balance of the mortgage loan, together with
certain accrued interest due on the mortgage loan and certain advances
made by the servicer (such as hazard insurance, taxes, maintenance
expenses and foreclosure costs), reduced by certain amounts such as
escrow deposits (collectively, the "Claim Amount"), in which case the
mortgage insurer would take title to the related mortgaged property,
or
. an amount equal to the product of (i) the Claim Amount and (ii) the
coverage percentage specified in the mortgage insurance policy, in
which case the issuer would retain title to (and the proceeds obtained
in a foreclosure and sale of) the mortgaged property.
The coverage percentage is a percentage equal to (i) the original
loan-to-value ratio of the mortgage loan (expressed as a percentage) minus 50%
divided by (ii) the original loan-to-value ratio of the mortgage loan (expressed
as a percentage). Thus, the covered portion of any loss will be different
depending upon the original loan-to-value ratio of the mortgage loan. Mortgage
loans with higher original loan-to-value ratios will have a higher coverage
percentage and mortgage loans with lower original loan-to-value ratios will have
a lower coverage percentage.
Each mortgage loan covered by a mortgage insurance policy is covered
by the mortgage insurance policy for losses up to the policy limits, although
the mortgage insurance policy will not cover special hazard, bankruptcy, fraud
losses and certain other types of losses as described in the policy. Claims on
insured mortgage loans will reduce uninsured exposure to an amount equal to 50%
of the lesser of the appraised value or purchase price, as the case may be, of
the related mortgaged property, in each case, at the time of the applicable
effective date of the mortgage insurance policy.
Claims payments under a mortgage insurance policy will be made to the
servicer, deposited in the collection account and treated in the same manner as
a prepayment of the related mortgage loan. Premiums payable on the mortgage
insurance policies will be paid monthly by the servicer with funds withdrawn
from the collection account with respect to the related mortgage loans.
Additional Information
Prior to the issuance of the certificates, certain of the 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 certificates. The company believes
that the information set forth herein will be substantially representative of
the characteristics of the mortgage pool as it will be constituted at the time
the certificates are issued, although the range of mortgage rates and maturities
and certain other characteristics of the mortgage loans in the mortgage pool may
vary, although such variance will not be material.
The Seller
The Seller, NovaStar Mortgage, Inc., is a Virginia corporation and a
wholly-owned subsidiary of NFI Holding Corporation, Inc., a Delaware
corporation.
S-36
<PAGE>
The seller originates subprime residential mortgage loans through a
network of unaffiliated wholesale loan brokers. The seller utilizes a network of
approximately 2,500 wholesale loan brokers in 48 different states. In addition,
the seller services loans nationwide, and is licensed to do business as a
foreign corporation in 49 states. The seller's principal executive offices are
located at 1900 W. 47th Place, Suite 205, Westwood, Kansas 66205. The principal
office for the seller's mortgage lending operations are in Irvine, California.
The seller is an approved HUD lender.
The seller has only limited assets available to perform the 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 generate operating earnings, or that it
will be successful under its current business plan. Therefore, prospective
investors in the certificates should consider the possibility that the seller
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.
NovaStar Mortgage will also act as the servicer of the mortgage loans.
See "Description of the Servicing Agreement--The Servicer" herein.
The Company
NovaStar Mortgage Funding Corporation, a Delaware corporation, was
incorporated in the State of Delaware on January 7, 1998. The principal
executive offices of NovaStar Mortgage Funding Corporation are located at 1901
W. 47th Place, Suite 105, Westwood, Kansas, 66205. The company is a wholly-
owned subsidiary of the seller.
The seller will convey the initial mortgage loans and the related
mortgage insurance policies to the company, who will in turn convey the initial
mortgage loans, the related mortgage insurance policies to the trustee.
The Trustee
________________________, a ___________________________, will act as
trustee. A copy of the pooling and servicing agreement will be provided by the
trustee without charge upon written request. Requests should be addressed to the
trustee at ________________________________________, Attention: NovaStar
Mortgage Funding Trust, Series ______. ________will act as initial paying
agent.
The Certificate Administrator
______________________, a ___________________, will act as certificate
administrator and backup servicer. In its capacity as certificate
administrator, ____________________ shall perform certain administrative
functions on behalf of the trustee and shall act as the initial certificate
registrar and custodian. As the backup servicer, ____________________ shall
assume the function of
S-37
<PAGE>
servicer if NovaStar Mortgage, Inc. has been removed as such and another
successor servicer has not been appointed under the pooling and servicing
agreement.
Description of the Certificates
General
The certificates will be issued pursuant to a pooling and servicing
agreement among the company, the servicer, the trustee and the certificate
administrator.
The trust will issue:
. the class A-1 certificates;
. the class M-1 certificates, the class M-2 certificates and the
class M-3 certificates (collectively, the "mezzanine
certificates");
. the residual certificates.
The class A-1 certificates, the mezzanine certificates, and the
residual certificates are collectively referred to as the "certificates." The
class A-1 certificates and the mezzanine certificates are the "offered
certificates" which are offered hereby.
The mezzanine certificates are collectively referred to as the
"subordinate certificates".
The class A-1 certificates and the mezzanine certificates will have
the original certificate principal balances specified on the cover, subject to a
permitted variance of plus or minus five percent.
The offered certificates will be issued in book-entry form as
described below. The offered certificates will be issued in minimum dollar
denominations of $25,000 and integral multiples of $1,000 in excess thereof.
The assumed final maturity date for the certificates is the distribution date in
________________.
The certificates will be backed by the trust fund created by the
pooling and servicing agreement (which may include one or more subtrusts), which
consists of the following:
. the mortgage loans;
. collections in respect of principal and interest of the mortgage
loans received after the cut-off date (other than payments due on
or before the cut-off date);
. the amounts on deposit in the collection account, including the
payment account in which amounts are deposited prior to payment
to the certificateholders, including net investment earnings;
. the mortgage insurance policy and certain other insurance
policies maintained by the mortgagors or by or on behalf of the
servicer or any subservicer;
. an assignment of the company's rights under the purchase
agreement;
. amounts on deposit in the interest coverage account and the pre-
funding account; and
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. proceeds of the above.
Payments
Payments on the certificates will be made by the paying agent on each
"distribution date," which is the 25th day of each month or, if such day is not
a business day, then the next succeeding business day, commencing on
______________. Payments on the certificates will be made to the persons in
whose names such certificates are registered on the record date. The record date
is the business day prior to the distribution date. In each case, the record
date for the initial distribution date is the closing date. 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 a class of
certificates having denominations aggregating at least $5,000,000, by wire
transfer) to the address of the holder (which, in the case of book-entry
certificates, will be DTC or its nominee) as it appears on the certificate
register on the related record date. However, the final payment in respect of
the certificates will be made only upon presentation and surrender of the
certificates at the office or the agency of the 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,
California, Kansas, North Carolina or Delaware or in the city in which the
corporate trust office of the trustee or the certificate administrator are
located, is required or authorized by law to be closed.
Available Funds
The available funds for each distribution date will equal the amount
received by the trustee and available in the certificate account on that
distribution date. The available funds will generally be equal to the sum of,
net of administrative fees and amounts reimbursable to the servicer, the
following amounts:
. the aggregate amount of scheduled payments on the mortgage loans
due on the prior due date and received on or prior to the
determination date;
. investment earnings on amounts in the payment account, plus
miscellaneous fees and collections, including assumption fees and
prepayment penalties, but excluding late fees;
. any unscheduled payments and receipts, including mortgagor
prepayments on the mortgage loans, received during the prior
prepayment period and proceeds of repurchases, and adjustments in
the case of substitutions and terminations, net liquidation
proceeds, insurance proceeds, and proceeds from any mortgage
insurance policy;
. all advances made for that distribution date; on the distribution
date which follows the termination of the funding period, the
remaining amount on deposit in the pre-funding account at that
time; during the pre-funding period, the withdrawn amount from
the interest coverage account; and
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For any distribution date, the due date is the first day of the month
in which the distribution date occurs, and the determination date is the 15th
day of the month in which the distribution date occurs, or if such day is not a
business day, the immediately preceding business day.
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Available Funds Cap Rate
------------------------
To Call @ __%
Period Date AFC Rate Period Date AFC Rate Period Date AFC Rate
0 35 70
1 36 71
2 37 72
3 38 73
4 39 74
5 40 75
6 41 76
7 42 77
8 43 78
9 44 79
10 45 80
11 46 81
12 47 82
13 48 83
14 49 84
15 50 85
16 51 86
17 52 87
18 53 88
19 54 89
20 55 90
21 56 91
22 57 92
23 58
24 59
25 60
26 61
27 62
28 63
29 64
30 65
31 66
32 67
33 68
34 69
The table set forth above was prepared on the basis of the following
assumptions: (i) the Modeling Assumptions, (ii) a prepayment assumption of
100%, (iii) the clean-up call is exercised by the servicer and (iv) three month
LIBOR is equal to ____% in all periods.
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Interest Payments on the Certificates
On each distribution date, the holders of each class of certificates
will be entitled to receive an interest payment amount equal to interest accrued
on the related certificate principal balance immediately prior to such
distribution date at the related pass-through rate for the related accrual
period.
The pass-through rate for each class and distribution date is the
lesser of (1) the formula rate for that class and distribution date and (2) the
available funds cap rate for that distribution date.
The formula rate for each class is as follows:
Prior to the rate step up date
Class Rate
----- ----
A-1 LIBOR plus ____%
M-1 LIBOR plus ____%
M-2 LIBOR plus ____%
M-3 LIBOR plus ____%
On or after the rate step up date
Class Rate
----- ----
A-1 LIBOR plus _____%
M-1 LIBOR plus _____%
M-2 LIBOR plus _____%
M-3 LIBOR plus _____%
The "rate step up date" is the first distribution date to occur after
the clean-up call date.
The "available funds cap rate" for each distribution date is the
percentage equivalent of a fraction, the numerator of which is equal to the
Interest Remittance Formula Amount for that distribution date, less the
administrative fees for that distribution date, and the denominator of which is
the product of (1) the actual number of days in the related accrual period,
divided by 360 and (2) the aggregate certificate principal balance of the
offered certificates immediately prior to that distribution date.
With respect to each class of offered certificates and any
distribution date, to the extent that the amount of interest paid to a class is
reduced because the formula rate exceeds the available funds cap rate (such
excess amount, the related "Available Funds Cap Carry-Forward Amount"), such
amount will be carried forward and distributed to the holders of that class,
together with interest on that amount at the related formula rate applicable
from time to time.
Interest on the certificates will accrue during each accrual period.
The accrual period is the period from the prior distribution date through and
including the day preceding the related distribution date. In the case of the
first distribution date, interest begins to accrue on the closing date.
Interest will accrue on the basis of the actual number of days in the accrual
period and a 360 day year.
Interest Allocations
On each distribution date the trustee will first distribute the
prepayment penalties collected during the prior prepayment period to the holders
of the class R certificates. After making that
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distribution, the trustee will apply that portion of the available funds which
represents the Interest Remittance Amount for that distribution date, to the
payment of any administrative fees of the trust which are due on that
distribution date and will then apply the remaining Interest Remittance Amount
to the payment of interest then due on the certificates in the following order
of priority:
(i) first, to the holders of the class A-1 certificates, the
-----
Monthly Interest Distributable Amount for such class;
(ii) second, to the holders of the class M-1 certificates, the
------
Monthly Interest Distributable Amount for class M-1;
(iii) third, to the holders of the class M-2 certificates, the
-----
Monthly Interest Distributable Amount for class M-2;
(iv) fourth, to the holders of the class M-3 certificates, the
------
Monthly Interest Distributable Amount for class M-3;
(v) fifth, to the holders of each class of offered certificates,
-----
the Available Funds Cap Carry-Forward Amount for that class, such amount to be
paid in the following order of priority: class A-1, class M-1, class M-2 and
class M-3; and
(vi) sixth, to the holders of the residual certificates, any
-----
remainder.
On any distribution date, any shortfalls resulting from the
application of the Relief Act and any prepayment interest shortfalls to the
extent not covered by compensating interest paid by the servicer will be applied
to reduce the Monthly Interest Distributable Amounts with respect to the class
A-1, class M-1, class M-2 and class M-3 certificates on a pro rata basis, based
on the respective amounts of interest accrued on such certificates for such
distribution date. The holders of the certificates will not be entitled to
reimbursement for any such interest shortfalls.
Principal Allocations
On each distribution date (a) prior to the Crossover Date or (b) on
which a Trigger Event is in effect, the holders of each class of certificates
shall be entitled to receive distributions in respect of principal to the extent
of the Principal Remittance Amount in the following amounts and order of
priority:
(i) first, to the holders of the class A-1 certificates, the entire
-----
amount of the Principal Remittance Amount, until the Certificate Balance of the
class A-1 certificates has been reduced to zero;
(ii) second, to the holders of the class M-1 certificates, the
------
entire remaining amount of the Principal Remittance Amount until the Certificate
Balance of the class M-1 certificates has been reduced to zero;
(iii) third, to the holders of class M-2 certificates, the entire
-----
remaining amount of the Principal Remittance Amount until the Certificate
Balance of the class M-2 certificates has been reduced to zero;
(iv) fourth, to the holders of the class M-3 certificates, the
------
entire remaining amount of the Principal Remittance Amount until the Certificate
Balance of the class M-3 certificates has been reduced to zero; and
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(v) fifth, to the holders of the class R certificates, any
-----
remainder.
On each distribution date (a) on or after the Crossover Date and (b)
on which a Trigger Event is not in effect, the holders of each class of
certificates shall be entitled to receive distributions in respect of principal
to the extent of the Principal Remittance Amount in the following amounts and
order of priority:
(i) first, to the holders of the class A-1 certificates, the Class
-----
A-1 Principal Distribution Amount, until the Certificate Balance of the class A-
1 certificates has been reduced to zero;
(ii) second, to the holders of the class M-1 certificates, the Class
------
M-1 Principal Distribution Amount, until the Certificate Balance of the class M-
1 certificates has been reduced to zero;
(iii) third, to the holders of the class M-2 certificates, the Class
-----
M-2 Principal Distribution Amount, until the Certificate Balance of the class M-
2 certificates has been reduced to zero;
(iv) fourth, to the holders of the class M-3 certificates, the Class
------
M-3 Principal Distribution Amount, until the Certificate Balance of the class M-
3 certificates has been reduced to zero; and
(v) fifth, to the holders of the class R certificates, any
-----
remainder.
The allocation of principal with respect to the class A-1 certificates
on each distribution date prior to the Crossover Date or on which a Trigger
Event has occurred will have the effect of accelerating the amortization of the
class A-1 certificates while, in the absence of realized losses, increasing the
relative proportion of the trust's assets represented by the mezzanine
certificates and the class O certificates. Increasing the relative proportion
of the trust's assets in the mezzanine certificates relative to that of the
class A-1 certificates is intended to preserve the availability of the
subordination provided by the mezzanine certificates.
Credit Enhancement
The credit enhancement provided for the benefit of the holders of the
class A-1 certificates consists of subordination, as described below, and
overcollateralization, as described under "--Overcollateralization Provisions,
Allocation of Losses" and "Private Mortgage Insurance Policies".
The rights of the holders of the subordinate certificates to receive
distributions will be subordinated, to the extent described herein, to the
rights of the holders of the class A-1. This subordination is intended to
enhance the likelihood of regular receipt by the holders of the class A-1
certificates of the full amount of their scheduled monthly payments of interest
and principal, as applicable, and to afford such holders protection against
realized losses.
The protection afforded to the holders of the class A-1 by means of
the subordination of the subordinate certificates will be accomplished by (i)
the preferential right of the holders of the class A-1 certificates to receive
on any distribution date, prior to distribution on the subordinate certificates,
distributions in respect of interest and principal, subject to funds available
for such distributions and (ii) if necessary, the right of the holders of the
class A-1 to future distributions of amounts that would otherwise be payable to
the holders of the subordinate certificates.
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In addition, the rights of the holders of mezzanine certificates with
lower numerical class designations will be senior to the rights of holders of
mezzanine certificates with higher numerical class designations, and the rights
of the holders of the mezzanine certificates to receive distributions in respect
of the mortgage loans will be senior to the rights of the holders of the class O
certificates. This subordination is intended to enhance the likelihood of
regular receipt by the holders of more senior certificates of distributions in
respect of interest and principal and to afford such holders protection against
realized losses.
Overcollateralization Provisions, Allocation of Losses
The trust will initially have an overcollateralization level of ____%,
meaning that, ignoring the effect of the pre-funding account, the initial
aggregate certificate principal amount of the class A-1 and mezzanine
certificates equals _____% of the initial aggregate principal balance of the
mortgage loans plus the initial deposit to the pre-funding account.
Correspondingly, the trust will pay 100% of the par amount for each subsequent
mortgage loan acquired by the trust through the pre-funding feature, thus
maintaining the level of overcollateralization.
The dollar amount of the difference between the aggregate principal
balance of the mortgage loans (plus, during the pre-funding period, the amount
on deposit in the pre-funding account) and the initial aggregate certificate
principal amount of the class A-1 and mezzanine certificates is the
"Overcollateralization Amount". Realized losses on the mortgage loan pool will
be allocated to the Overcollateralization Amount until it is reduced to zero.
The class R certificates will receive distributions of that portion of the
Principal Remittance Amount not required to be distributed to any other class.
The Overcollateralization Amount, if reduced, will not thereafter be
increased through the application of "excess interest", or otherwise.
Any realized losses on the mortgage loans will be allocated first, to
the Overcollateralization Amount, second, to the class M-3 certificates, third,
to the class M-2 certificates, and fourth, to the class M-1 certificates.
The pooling and servicing agreement does not permit the allocation of
realized losses to the class A-1 certificates. Investors in the class A-1
certificates should note that although realized losses cannot be allocated to
the class A-1 certificates, under certain loss scenarios there will not be
enough principal and interest on the mortgage loans to pay the class A-1
certificates all interest and principal amounts to which they are then entitled.
Once realized losses have been allocated to the mezzanine
certificates, such amounts with respect to such certificates will no longer
accrue interest nor will such amounts thereafter be reinstated.
Any allocation of a realized loss to a class of certificates will be
made by reducing that certificate's certificate principal balance by the amount
allocated to that class as of the distribution date in the month following the
calendar month in which the realized loss was incurred.
Definitions
An "Allocated Realized Loss Amount" with respect to any class of the
mezzanine certificates and any distribution date is an amount equal to the sum
of any realized loss allocated to that
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class of certificates on the distribution date and any Allocated Realized Loss
Amount for that class's remaining unpaid from the previous distribution date.
The "Certificate Balance" of any class A-1 certificate or mezzanine
certificate immediately prior to any distribution date will be equal to the
Certificate Balance of that certificate on the Closing Date reduced by the sum
of all amounts actually distributed as principal to that class and, in the case
of a mezzanine certificate, realized losses allocated to that certificate on all
prior distribution dates.
The "Class A-1 Principal Distribution Amount" is an amount equal to
the excess of (x) the Certificate Balance of the class A-1 certificates
immediately prior to that distribution date over (y) the lesser of (A) the
product of (i) _____% and (ii) the aggregate principal balance of the mortgage
loans as of the last day of the related due period (after giving effect to
scheduled payments of principal due during the related due period, to the extent
received or advanced, and unscheduled collections of principal received during
the related prepayment period) and (B) the aggregate principal balance of the
mortgage loans as of the last day of the related due period (after giving effect
to scheduled payments of principal due during the related due period, to the
extent received or advanced, and unscheduled collections of principal received
during the related prepayment period) minus __________.
The "Class AIO Current Interest" as of any distribution date is equal
to the excess of (x) Interest Remittance Formula Amount for that distribution
date less (y) the sum of the administrative fees, the Current Interest for the
class A-1 certificates, the class M-1 certificates, the class M-2 certificates
and the class M-3 certificates, and the Available Funds Cap Carry-Forward
Amounts for each of the offered certificates. The "Current Interest" on each
of the class A-1, class M-1, class M-2 and class M-3 certificates will be
calculated for this purpose by determining the available funds cap rate without
regard to any Supplemental Interest Payment.
The "Class M-1 Principal Distribution Amount" is an amount equal to
the excess of (x) the sum of (i) the Certificate Balance of the class A-1
certificates (after taking into account the payment of the Class A-1 Principal
Distribution Amount on such distribution date) and (ii) the Certificate Balance
of the class M-1 certificates immediately prior to such distribution date over
(y) the lesser of (A) the product of (i) _____% and (ii) the aggregate principal
balance of the mortgage loans as of the last day of the related due period
(after giving effect to scheduled payments of principal due during the related
due period, to the extent received or advanced, and unscheduled collections of
principal received during the related prepayment period) and (B) the aggregate
principal balance of the mortgage loans as of the last day of the related due
period (after giving effect to scheduled payments of principal due during the
related due period, to the extent received or advanced, and unscheduled
collections of principal received during the related prepayment period) minus
$__________.
The "Class M-2 Principal Distribution Amount" is an amount equal to
the excess of (x) the sum of (i) the Certificate Balance of the class A-1
certificates (after taking into account the payment of the Class A-1 Principal
Distribution Amount on such distribution date), (ii) the Certificate Balance of
the class M-1 certificates (after taking into account the payment of the Class
M-1 Principal Distribution Amount on such distribution date) and (iii) the
Certificate Balance of the class M-2 certificates immediately prior to that
distribution date over (y) the lesser of (A) the product of (i) _____% and (ii)
the aggregate principal balance of the mortgage loans as of the last day of the
related due period (after giving effect to scheduled payments of principal due
during the related due period, to the extent received or
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advanced, and unscheduled collections of principal received during the related
prepayment period) and (B) the aggregate principal balance of the mortgage loans
as of the last day of the related due period (after giving effect to scheduled
payments of principal due during the related due period, to the extent received
or advanced, and unscheduled collections of principal received during the
related prepayment period) minus $___________.
The "Class M-3 Principal Distribution Amount" is an amount equal to
the excess of (x) the sum of (i) the Certificate Balance of the class A-1
certificates (after taking into account the payment of the Class A-1 Principal
Distribution Amount on such distribution date), (ii) the Certificate Balance of
the class M-1 certificates (after taking into account the payment of the Class
M-1 Principal Distribution Amount on such distribution date), (iii) the
Certificate Balance of the class M-2 certificates (after taking into account the
payment of the Class M-2 Principal Distribution Amount on such date) and (iv)
the Certificate Balance of the class M-3 certificates immediately prior to such
distribution date over (y) the lesser of (A) the product of (i) _____% and (ii)
the aggregate principal balance of the mortgage loans as of the last day of the
related due period (after giving effect to scheduled payments of principal due
during the related due period, to the extent received or advanced, and
unscheduled collections of principal received during the related prepayment
period) and (B) the aggregate principal balance of the mortgage loans as of the
last day of the related due period (after giving effect to scheduled payments of
principal due during the related due period, to the extent received or advanced,
and unscheduled collections of principal received during the related prepayment
period) minus $__________.
The "Credit Enhancement Percentage" for any distribution date is the
percentage obtained by dividing (x) the aggregate Certificate Balance of the
subordinate certificates by (y) the aggregate principal balance of the mortgage
loans and any remaining funds in the pre-funding account (calculated for this
purpose only after taking into account distributions of principal on the
mortgage loans but prior to distributions of principal on the certificates) on
such distribution date.
The "Crossover Date" means the later to occur of (x) the distribution
date occurring in _____________ and (y) the first distribution date on which the
Credit Enhancement Percentage (calculated for this purpose only after taking
into account distributions of principal on the mortgage loans but prior to
distributions of principal on the certificates) is greater than or equal to
_____%.
The "Current Interest" for any distribution date and each class of
offered certificates equals the amount of interest accrued during the related
accrual period at the related pass-through rate on the Certificate Balance of
such class immediately prior to such distribution date, in each case, reduced by
any prepayment interest shortfalls allocated to that class and shortfalls
resulting from the application of the Relief Act (allocated to each certificate
based on its respective entitlements to interest irrespective of any prepayment
interest shortfalls or shortfalls resulting from the application of the Relief
Act for that distribution date).
A mortgage loan is "delinquent" if any monthly payment due on a due
date is not made by the close of business on the next scheduled due date. A
mortgage loan is "30 days delinquent" if such monthly payment has not been
received by the close of business on the corresponding day of the month
immediately succeeding the month in which such monthly payment was due or, if
there was no such corresponding day (e.g., as when a 30-day month follows a 31-
day month in which a payment was due on
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the 31st day of such month), then on the last day of such immediately succeeding
month; and similarly for "60 days delinquent" and "90 days delinquent," etc.
A "due period" with respect to any distribution date is the period
commencing on the second day of the month preceding the month in which such
distribution date occurs and ending on the first day of the month in which such
distribution date occurs.
The "Interest Remittance Amount" for any distribution date is that
portion of the Available Funds for that distribution date allocable to interest.
The "Interest Remittance Formula Amount" as of any distribution date
is an amount equal to (1) the product of (x) 1/12 of the weighted average coupon
rate of the mortgage loan pool as of the beginning of the related due period and
(y) the aggregate principal balances of the mortgage loans as of the beginning
of the related due period minus (2) the aggregate amount of Relief Act
shortfalls and prepayment interest shortfalls for the related prepayment period.
The "Monthly Interest Distributable Amount" for any distribution date
and class of offered certificates is the sum of (1) the Unpaid Interest
Shortfall Amount for that class and distribution date and (2) the Current
Interest for that class and distribution date. In the event of a shortfall in
the full amount necessary to pay both the Unpaid Interest Shortfall Amount and
the Current Interest for a class, distributions will first be applied to the
Unpaid Interest Shortfall Amount and then to the Current Interest.
The "prepayment period" for any distribution date is the period
commencing on the day after the determination date in the month preceding the
month in which such distribution date falls (or, in the case of the first
distribution date, from the cut-off date) and ending on the determination date
of the calendar month in which such distribution date falls.
The "Principal Remittance Amount" means with respect to any
distribution date, the sum of (i) all scheduled payments of principal collected
or advanced on the mortgage loans by the servicer that were due during the
related due period, (ii) the principal portion of all partial and full principal
prepayments of the mortgage loans applied by the servicer during such prepayment
period, (iii) the principal portion of all related net liquidation proceeds and
insurance proceeds received during such prepayment period, (iv) that portion of
the purchase price, representing principal of any repurchased mortgage loan,
deposited to the collection account during such prepayment period, (v) the
principal portion of any related substitution adjustments deposited in the
collection account during such prepayment period, (vi) in the case of the
distribution date immediately following the end of the funding period, any
amount remaining in the pre-funding account and not used by the trustee to
purchase subsequent mortgage loans and (vii) on the distribution date on which
the trust is to be terminated that portion of the termination price relating to
principal.
A "Trigger Event" is in effect with respect to any Distribution Date
if the three-month rolling average of mortgage loans delinquent 60 days or more
exceeds __% of the aggregate principal balance at the end of the due period.
The "Unpaid Interest Shortfall Amount" means (i) for each class of
offered certificates and the first distribution date, zero, and (ii) with
respect to each class of offered certificates and any distribution date after
the first distribution date, the amount, if any, by which (a) the Monthly
Interest Distributable Amount for such class for the immediately preceding
distribution date exceeds (b) the
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aggregate amount distributed on such class in respect of interest on such
preceding distribution date, plus interest on that amount to the extent
permitted by law, at the pass-through rate for such class for the related
accrual period.
Certain Administrative Fees
With respect to each distribution date, the certificate administrator
and the trustee will be entitled to a fee equal, in the aggregate, to 1/12 of
______% per annum times the sum of the aggregate principal balance of the
mortgage loans and the pre-funded amount as of such date. With respect to each
distribution date, the servicer is entitled to retain out of collections its
servicing fee, which is equal to 1/12 of ____% per annum times the aggregate
principal balance of the mortgage loans as of such date. The certificate
administrator will be responsible for paying the fee due to the trustee. For
any distribution date, the mortgage insurance premiums, the servicing fee and
the certificate administrator fee with respect to the trust is the
"Administrative Fee".
Calculation of One-Month LIBOR
The certificate administrator will determine the London interbank
offered rate for one-month United States dollar deposits for each accrual period
for the certificates on the second London business day preceding such accrual
period (each such date, an "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 accrual
period (commencing on the first day of such accrual period). The certificate
administrator will request the principal London office of each of the reference
banks to provide a quotation of its rate. If at least two such quotations are
provided, the rate for that day will be the arithmetic mean of the quotations.
If fewer than two quotations are provided as requested, the rate for that day
will be the arithmetic mean of the rates quoted by major banks in New York City,
selected by the certificate administrator, at approximately 11:00 a.m., New York
City time, on that day for loans in United States dollars to leading European
banks for a period equal to the relevant accrual period (commencing on the first
day of such accrual period).
"Telerate Page 3750" means the display page currently so designated on
the Bridge 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 certificate administrator and engaged
in transactions in European deposits in the international Eurocurrency market.
The establishment of one-month LIBOR on each Interest determination
date by the certificate administrator and the certificate administrator's
calculation of the rate of interest applicable to the certificates for the
related accrual period shall (in the absence of manifest error) be final and
binding.
Advances
Prior to each distribution date, the servicer is required under the
pooling and servicing agreement to make "advances" (out of its own funds, or
funds held in the collection account for future
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payment or withdrawal) with respect to any payments of principal and interest
(net of the servicing fee) 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 certificateholders, rather than to
guarantee or insure against losses. Any failure by the servicer to make an
advance as required under the pooling and servicing agreement will constitute an
event of default thereunder, in which case the successor servicer will be
obligated to make any such advance, in accordance with the terms of the pooling
and servicing agreement.
The Servicer may fund an Advance from its own corporate funds,
advances made by any subservicer or funds held in the Collection Account for
future payment or withdrawal.
Advances made from funds held in the collection account may be made by
the servicer from subsequent collections of principal and interest received on
other mortgage loans and deposited into the collection account. Advances made
from the collection account are not limited to subsequent collections of
principal and interest received on the delinquent mortgage loan with respect to
which an advance is made. If on the fourth business day prior to any
distribution date funds in the collection account are less than the amount
required to be paid to the certificateholders on such distribution date, then
the servicer will deposit its own funds into the collection account in the
amount of the lesser of (i) any unreimbursed advances previously made by the
servicer with funds held in the collection account or (ii) the shortfall in the
collection account; but in no event will the servicer deposit into the
collection account an amount that is less than any shortfall in the collection
account attributable to delinquent payments on mortgage loans which the servicer
deems to be recoverable and which has not been covered by an advance from the
servicer's own corporate funds.
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 certificates.
Book-Entry Certificates
The offered certificates will be book-entry certificates. Persons
acquiring beneficial ownership interests in the certificates may elect to hold
their certificates through the Depository Trust Company ("DTC") in the United
States, or Clearstream Banking, societe anonyme or Euroclear (in Europe) if they
are participants of such systems, or indirectly through organizations which are
participants in such systems. Each class of book-entry certificates will be
issued in one or more certificates which equal the aggregate principal amount of
the certificates of each class and will initially be registered in the name of
Cede & Co., the nominee of DTC. Clearstream and Euroclear will hold omnibus
positions on behalf of their participants through customers' securities accounts
in Clearstream's and Euroclear's names on the books of their respective
depositaries which in turn will hold such positions in customers' securities
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accounts in the depositaries' names on the books of DTC. Citibank, N.A. will
act as depositary for Clearstream and The Chase Manhattan Bank will act as
depositary for Euroclear. Investors may hold such beneficial interests in the
book-entry certificates in minimum denominations representing Certificate
Balances of $25,000 and in multiples of $1,000 in excess thereof. Except as
described below, no beneficial owner acquiring a book-entry certificate will be
entitled to receive a physical certificate representing such certificate. Unless
and until definitive certificates are issued, it is anticipated that the only
"certificateholders" of the certificates will be Cede & Co., as nominee of DTC.
Certificate owners will not be certificateholders as that term is used in the
pooling and servicing agreement. Certificate owners are only permitted to
exercise their rights indirectly through the participating organizations that
utilize the services of DTC, including securities brokers and dealers, banks and
trust companies and clearing corporations and certain other organizations and
DTC.
A certificate owner's ownership of a book-entry certificate will be
recorded on the records of the brokerage firm, bank, thrift institution or other
financial intermediary that maintains the beneficial owner's account for such
purpose. In turn, the financial intermediary's ownership of such book-entry
certificate will be recorded on the records of DTC (or of a participating firm
that acts as agent for the financial intermediary, whose interests will in turn
be recorded on the records of DTC, if the beneficial owner's financial
intermediary is not a DTC participant, and on the records of Clearstream or
Euroclear, as appropriate). Certificate owners will receive all payments of
principal of, and interest on, the certificates from the trustee through DTC and
DTC participants. While the certificates are outstanding (except under the
circumstances described below), 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
certificates and is required to receive and transmit payments of principal of,
and interest on, the certificates. Participants and indirect participants which
have indirect access to the DTC system, such as banks, brokers, dealers and
trust companies that clear through or maintain a custodial relationship with a
participant, either directly or indirectly, with whom certificate owners have
accounts with respect to certificates are similarly required to make book-entry
transfers and receive and transmit such payments on behalf of their respective
certificate owners. Accordingly, although certificate owners will not possess
certificates, the rules provide a mechanism by which certificate owners will
receive payments and will be able to transfer their interest.
Certificate owners will not receive or be entitled to receive
certificates representing their respective interests in the certificates, except
under the limited circumstances described below. Unless and until definitive
certificates are issued, certificate owners who are not participants may
transfer ownership of certificates only through participants and indirect
participants by instructing such participants and indirect participants to
transfer certificates, by book-entry transfer, through DTC for the account of
the purchasers of such certificates, which account is maintained with their
respective participants. Under the rules and in accordance with DTC's normal
procedures, transfers of ownership of certificates will be executed through DTC
and the accounts of the respective participants at DTC will be debited and
credited. Similarly, the participants and indirect participants will make debits
or credits, as the case may be, on their records on behalf of the selling and
purchasing certificate owners.
Because of time zone differences, credits of securities received in
Clearstream or Euroclear as a result of a transaction with a participant will be
made during subsequent securities settlement processing and dated the business
day following the DTC settlement date. Such credits or any
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transactions in such securities settled during such processing will be reported
to the relevant Euroclear or Clearstream participants on such business day. Cash
received in Clearstream or Euroclear as a result of sales of securities by or
through a Clearstream participant or Euroclear participant to a DTC participant
will be received with value on the DTC settlement date but will be available in
the relevant Clearstream or Euroclear cash account only as of the business day
following settlement in DTC. For information relating to tax documentation
procedures relating to the certificates, see "Material Federal Income Tax
Consequences--Foreign Investors" in the prospectus and "Global Clearance,
Settlement and Tax Documentation Procedures--Certain U.S. Federal Income Tax
Documentation Requirements" in Annex I hereto.
Transfers between participants will occur in accordance with DTC
Rules. Transfers between Clearstream participants and Euroclear participants
will occur in accordance with their respective rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through Clearstream
participants or Euroclear participants, on the other, will be effected in DTC in
accordance with DTC rules on behalf of the relevant European international
clearing system by the relevant depository; however, such cross-market
transactions will require delivery of instructions to the relevant European
international clearing system by the counterparty in such system in accordance
with its rules and procedures and within its established deadlines (European
time). The relevant European international clearing system will, if the
transaction meets its settlement requirements, deliver instructions to the
relevant depository to take action to effect final settlement on its behalf by
delivering or receiving securities in DTC, and making or receiving payment in
accordance with normal procedures for same day fund settlement applicable to
DTC. Clearstream participants and Euroclear participants may not deliver
instructions directly to the European Depositaries.
DTC, which is a New York-chartered limited purpose trust company,
performs services for its participants, some of which (and/or their
representatives) own DTC. In accordance with its normal procedures, DTC is
expected to record the positions held by each DTC participant in the book-entry
certificates, whether held for its own account or as nominee for another person.
In general, beneficial ownership of book-entry certificates will be subject to
the rules, regulation and procedures governing DTC and DTC participants as in
effect from time to time.
Clearstream is incorporated under the laws of Luxembourg as a
professional depository. Clearstream holds securities for its participating
organizations and facilitates the clearance and settlement of securities
transactions between Clearstream participants through electronic book-entry
changes in accounts of Clearstream participants, thereby eliminating the need
for physical movement of certificates. Transactions may be settled in
Clearstream in any of 28 currencies, including United States dollars.
Clearstream provides to its Clearstream participants, among other things,
services for safekeeping, administration, clearance and settlement of
internationally traded securities and securities lending and borrowing.
Clearstream interfaces with domestic markets in several countries. As a
professional depository, Clearstream is subject to regulation by the Luxembourg
Monetary Institute. Clearstream participants are recognized financial
institutions around the world, including underwriters, securities brokers and
dealers, banks, trust companies, clearing corporations and certain other
organizations. Indirect access to Clearstream is also available to others, such
as banks, brokers, dealers and trust
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companies that clear through or maintain a custodial relationship with a
Clearstream participant, either directly or indirectly.
Euroclear was created in 1968 to hold securities for its participants
and to clear and settle transactions between Euroclear participants through
simultaneous electronic book-entry delivery against payment, thereby eliminating
the need for physical movement of certificates and any risk from lack of
simultaneous transfers of securities and cash. Transactions may be settled in
any of 32 currencies, including United States dollars. Euroclear includes
various other services, including securities lending and borrowing and
interfaces with domestic markets in several countries generally similar to the
arrangements for cross-market transfers with DTC described above. Euroclear is
operated by the Brussels, Belgium office of Morgan Guaranty Trust Company of New
York, under contract with Euroclear Clearance Systems S.C., a Belgian
cooperative corporation. All operations are conducted by Morgan, and all
Euroclear securities clearance accounts and Euroclear cash accounts are accounts
with the Euroclear operator, not the Belgian cooperative. The Belgian
cooperative establishes policy for Euroclear on behalf of Euroclear
participants. Euroclear participants include banks (including central banks),
securities brokers and dealers and other professional financial intermediaries.
Indirect access to Euroclear is also available to other firms that clear through
or maintain a custodial relationship with a Euroclear participant, either
directly or indirectly.
The Euroclear operator is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. As such, it is
regulated and examined by the Board of Governors of the Federal Reserve System
and the New York State Banking Department, as well as the Belgian Banking
commission.
Securities clearance accounts and cash accounts with Morgan are
governed by the terms and conditions Governing Use of Euroclear and the related
Operating Procedures of the Euroclear System and applicable Belgian law. The
terms and conditions govern transfers of securities and cash within Euroclear,
withdrawals of securities and cash from Euroclear, and receipts of payments with
respect to securities in Euroclear. All securities in Euroclear are held on a
fungible basis without attribution of specific certificates to specific
securities clearance accounts. The Euroclear operator acts under the terms and
conditions only on behalf of Euroclear participants, and has no record of or
relationship with persons holding through Euroclear participants.
Payments on the book-entry certificates will be made on each
distribution date by the trustee to DTC. DTC will be responsible for crediting
the amount of such payments to the accounts of the applicable DTC participants
in accordance with DTC's normal procedures. Each DTC participant will be
responsible for disbursing such payments to the beneficial owners of the book-
entry certificates that it represents and to each financial intermediary for
which it acts as agent. Each such financial intermediary will be responsible for
disbursing funds to the beneficial owners of the book-entry certificates that it
represents.
Under a book-entry format, beneficiary owners of the book-entry
certificates may experience some delay in their receipt of payments, since such
payments will be forwarded by the trustee to Cede & Co., as nominee of DTC.
Payments with respect to certificates held through Clearstream or Euroclear will
be credited to the cash accounts of Clearstream participants or Euroclear
participants in accordance with the relevant system's rules and procedures, to
the extent received by the relevant
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depository. Such payments will be subject to tax reporting in accordance with
relevant United States tax laws and regulations. See "Material Federal Income
Tax Consequences--Foreign Investors" and "--Backup Withholding" in the
prospectus. Because DTC can only act on behalf of financial intermediaries, the
ability of a beneficial owner to pledge book-entry certificates to persons or
entities that do not participate in the depository system, or otherwise take
actions in respect of such book-entry certificate, may be limited due to the
lack of physical certificates for such book-entry certificates. In addition,
issuance of the book-entry certificates in book-entry form may reduce the
liquidity of such certificates in the secondary market since certain potential
investors may be unwilling to purchase certificates for which they cannot obtain
physical certificates.
Monthly and annual reports on the issuer will be provided to Cede &
Co., as nominee of DTC, and may be made available by Cede & Co., to beneficial
owners upon request, in accordance with the rules, regulations and procedures
creating and affecting DTC or the relevant depository, and to the financial
intermediaries to whose DTC accounts the book-entry certificates of such
beneficial owners are credited.
DTC has advised the trustee that, unless and until definitive
certificates are issued, DTC will take any action permitted to be taken by the
holders of the book-entry certificates under the pooling and servicing agreement
only at the direction of one or more financial intermediaries to whose DTC
accounts the book-entry certificates are credited, to the extent that such
actions are taken on behalf of financial intermediaries whose holdings include
such book-entry certificates. Clearstream or the Euroclear operator, as the case
may be, will take any other action permitted to be taken by a certificateholder
under the pooling and servicing agreement on behalf of a Clearstream participant
or Euroclear participant only in accordance with its relevant rules and
procedures and subject to the ability of the relevant depository to effect such
actions on its behalf through DTC. DTC may take actions, at the direction of the
related participants, with respect to some certificates which conflict with
actions taken with respect to other certificates.
Definitive certificates will be issued to beneficial owners of the
book-entry certificates, or their nominees rather than to DTC, only if (a) DTC
or the issuer advises the trustee in writing that DTC is no longer willing,
qualified or able to discharge properly its responsibilities as nominee and
depositary with respect to the book-entry certificates and the issuer or the
trustee is unable to locate a qualified successor or (b) the issuer, at its sole
option, elects to terminate a book-entry system through DTC.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the certificate administrator, on behalf of the trustee,
will be required to notify all beneficial owners of the occurrence of such event
and the availability through DTC of the definitive certificates. Upon surrender
by DTC of the global note or notes representing the book-entry certificates and
instructions for re-registration, the certificate administrator, as registrar,
will issue definitive certificates, and thereafter the trustee and the
certificate administrator will recognize the holders of such definitive
certificates as certificateholders under the pooling and servicing agreement.
Although DTC, Clearstream and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of certificates among participants
of DTC, Clearstream and Euroclear, they are under no obligation to perform or
continue to perform such procedures and such procedures may be discontinued at
any time.
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None of the company, the servicer, the certificate administrator or
the trustee will have any responsibility for any aspect of the records relating
to or payments made on account of beneficial ownership interests of the book-
entry certificates held by Cede & Co., as nominee of DTC, or for maintaining,
supervising or reviewing any records relating to such beneficial ownership
interests.
For additional information regarding DTC and the book-entry
certificates, see Annex I hereto and "The Agreements--Form of the Securities" in
the prospectus.
Assignment of Mortgage Loans
The seller will deliver to the certificate administrator the mortgage
files, which consist of the mortgage notes endorsed by the seller, or the last
holder of record, without recourse to the trustee, the related mortgages or
deeds of trust, all intervening mortgage assignments, if any, and certain other
documents relating to the mortgage loans. The seller will be required to cause
to be prepared and recorded, at its expense and within the time period specified
in the purchase agreement, assignments of the mortgages from the seller, or the
last holder of record, to the trustee.
The certificate administrator will review the mortgage files delivered
to it within 45 days after delivery, and if any document required to be included
in any mortgage file is found to be missing or to be defective in any material
respect and such defect is not cured within 45 days following notification
thereof to the seller, the certificate administrator will require either that
the related mortgage loan be removed from the mortgage pool or that a mortgage
loan conforming to the requirements of the pooling and servicing agreement be
substituted for the related mortgage loan within 90 days.
In connection with the transfer of the mortgage loans pursuant to the
purchase agreement, the seller will make certain representations and warranties
as to the accuracy in all material respects of the information set forth on a
schedule identifying and describing each mortgage loan. In addition, the seller
will make certain other representations and warranties regarding the mortgage
loans, including, for instance, that each mortgage loan, at its origination,
complied in all material respects with applicable state and federal laws, that
each mortgage is a valid first priority lien, that, as of the applicable cut-off
date, no mortgage loan included in the mortgage pool as of the closing date was
more than 89 days past due, that each mortgaged property consists of a
manufactured dwelling, a multi-unit dwelling, unit in a condominium, planned
unit development or a single family residence, that the seller had good title to
each mortgage loan prior to such transfer and that the originator was authorized
to originate each mortgage loan. The certificate administrator will be entitled
on behalf of the trustee to enforce remedies for breaches of these
representations and warranties.
If with respect to any mortgage loan (1) a defect in any document
constituting a part of the related mortgage file remains uncured within the
specified period and materially and adversely affects the value of the mortgage
loan or materially and adversely affects the interest of the trustee, or the
certificateholders in that mortgage loan or (2) a breach of any representation
or warranty made by the seller relating to the mortgage loan occurs and such
breach materially and adversely affects the value of the mortgage loan or
materially and adversely affects the interests of the trustee or the
certificateholders in that mortgage loan, then the certificate administrator
will enforce on behalf of the trustee the remedies for such defects or breaches
against the seller by requiring the seller to purchase the defective mortgage
loan from the trust at a price of par plus accrued interest at the mortgage rate
(net of the applicable
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servicing fee rate). The seller will also have the option, but not the
obligation, to substitute for such defective mortgage loan a qualified
replacement mortgage loan, but only if such substitution is made within two
years after the closing date.
The obligation of the seller to cure, purchase or substitute any
defective mortgage loan as described above will constitute the sole remedy
available to certificateholders or the trustee for a defective mortgage loan.
The Paying Agent
The paying agent shall initially be the trustee. The paying agent
shall have the revocable power to withdraw funds from the payment account for
the purpose of making payments to the certificateholders.
Optional Termination
The mortgage loans may be purchased by the servicer on any
distribution date on or after the distribution date on which the aggregate
principal balance of the mortgage loans is equal to or less than __% of the sum
of the principal balance of the initial mortgage loans as of their cut-off dates
and the original pre-funded amount. This will result in a redemption of the
certificates. The purchase price for the mortgage loans will be an amount
sufficient to pay 100% of the aggregate outstanding certificate principal
balance of each class of certificates and accrued and unpaid interest thereon at
the related pass-through rate through the date on which the trust is terminated
together with all amounts due and owing to the servicer, the certificate
administrator and the trustee.
Mandatory Prepayments on the Certificates
Each class of certificates will be partially prepaid on the
distribution 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
distribution date. Although no assurance can be given, it is anticipated that
the principal amount of subsequent mortgage loans sold to the trust 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 certificates 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
for each class of certificates.
Interest Coverage Account
On the closing date, a portion of the sales proceeds of the
certificates will be deposited in an interest coverage account for application
to cover shortfalls in interest attributable to the pre-funding feature during
the funding period. This shortfall will exist during the funding period because
the aggregate certificate principal balance of the certificates, 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 termination of the funding
period, funds on deposit in the interest coverage account will be deposited in
the payment account.
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Certain Yield and Prepayment Considerations
The yield to maturity of the certificates will depend on the prices
paid by the holders of such certificates, the pass-through 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 certificates.
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. None
of the initial mortgage loans are secured by junior liens on the related
mortgage properties. Generally, mortgage loans secured by junior liens are not
viewed by mortgagors as permanent financing. Accordingly, such mortgage loans
may experience a higher rate of prepayment than the first lien mortgage loans.
All of the mortgage loans 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. All of the 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 regulation. 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
certificates and may result in a prepayment experience on the mortgage loans
that differs from that on other conventional mortgage loans. Prepayments,
liquidations and purchases of the mortgage loans will result in payments to
holders of the certificates of principal amounts which would otherwise be
distributed over the remaining terms of the mortgage loans. Factors affecting
prepayment (including defaults and liquidations) of mortgage loans include
changes in mortgagors' housing needs, job transfers, unemployment, mortgagors'
net equity in the mortgaged properties, changes in the value of the mortgaged
properties, mortgage market interest rates 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
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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.
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 each class of certificates will receive on
the first distribution date following the termination of the funding period a
prepayment of principal in an amount equal to the lesser of (i) the amount
remaining in the pre-funding account and (ii) the outstanding Certificate
Balance of such class of certificates. 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
certificateholders. 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.
In addition, the yield to maturity of the certificates will depend on,
among other things, the price paid by the holders of the certificates and the
then applicable pass-through rate. The extent to which the yield to maturity of
a certificate is sensitive to prepayments will depend, in part, upon the degree
to which it is purchased at a discount or premium. In general, if a certificate
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 certificate 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.
Furthermore, the yield to maturity on the certificates may be affected
by the limitation posed by the available funds cap rate.
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 certificates will be
influenced by, among other things, the rate at which the 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
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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 27% (such model, a "prepayment
assumption"). With respect to the fixed rate mortgage loans, the prepayment
model assumes a constant CPR of 2.3% in the first month of the life of the fixed
rate mortgage loans and an additional 2.3% per annum in each month thereafter
until the tenth month; beginning in the tenth month and in each month
thereafter, the prepayment model assumes a CPR of 23% (such model, also a
"prepayment assumption"). The levels of CPR used above in defining the
prepayment assumptions represent 100% of the related 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 tables set forth below have 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 tables assume, among other things, that: (i) the mortgage pool
consists of mortgage loans with the following characteristics:
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ARM Loans
<TABLE>
<CAPTION>
Original Remaining Gross Months to
Current Term to Term to Margin Next Rate Initial Ongoing
Initial or Principal Mortgage Maturity Maturity ------ Adjustment Periodic Periodic Rate
Subsequent Index Balances ($) Rate (%) (months) (months) (%) Date Cap (%) Cap (%)
---------- ----- ----------- -------- -------- ------- --- ---- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
</TABLE>
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Fixed-Rate Loans
<TABLE>
<CAPTION>
Current Original Remaining Remaining
Initial or Principal Mortgage Amortizing Term Amortizing Term Balloon Term
Subsequent Balance ($) Rate (%) (months) (months) (months)
-------------- -------------- ------------ ----------------- ------------------- ---------------
<S> <C> <C> <C> <C> <C>
Initial
Initial
Initial
Initial
Initial
Initial
Subsequent
Subsequent
Subsequent
Subsequent
Subsequent
Subsequent
</TABLE>
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(ii) one-month LIBOR, Six-Month LIBOR and One-Year CMT remain constant
at ____%, ____% and ____%, respectively; (iii) payments on the certificates are
received, in cash, on the 25th day of each month, commencing in ____________;
(iv) there are no delinquencies or losses on the mortgage loans, and scheduled
payments on the mortgage loans are timely received on the first day of each
month commencing in _________ (__________ with respect to the subsequent
mortgage loans); (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 amortization term such that such
mortgage loan will amortize in amounts sufficient to repay the remaining
principal balance of such mortgage loan by its remaining amortization term;
(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 and
the related periodic rate cap listed above; (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 rate
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 mortgage insurance premium
is as set forth in the mortgage insurance agreements, the certificate
administrator fee rate and the trustee fee rate are, in the aggregate, _______%
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) no miscellaneous
servicing fees are passed through to the certificateholders; and (xiv) the
subsequent mortgage loans are acquired on ______________ with the
characteristics set forth in the previous tables, with their first scheduled
payment due in ____________, resulting in no mandatory prepayment of the
certificates on the _____________ distribution date; (xv) the certificates will
be purchased on _______________; (xvi) prepayments on the mortgage loans
represent prepayments in full of individual mortgage loans and are received on
the last day of each month with 30 days' interest thereon beginning in
_______________ (_____________ with respect to the subsequent mortgage loans)
(collectively, the "Modeling Assumptions").
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
Certificate Balance outstanding over time and the weighted average life of the
certificates. Subject to the foregoing discussion and assumptions, the following
table indicates the weighted average life of the certificates, and sets forth
the percentages of the initial Certificate Balance of the certificates that
would be outstanding after each of the dates shown at various percentages of the
related prepayment assumption.
S-62
<PAGE>
Percent of Initial Class A-1 Certificate Balance Outstanding (1)(5)
<TABLE>
<CAPTION>
Prepayment Scenario(2)
---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Distribution date 0% 50% 75% 100% 125% 150%
Initial Percentage 100% 100% 100% 100% 100% 100%
</TABLE>
Weighted Average Life in Years(3)(5)
Weighted Average Life in Years(3)(4)
____________________________
(1) Rounded to the nearest whole percentage.
(2) As a percentage of the related prepayment assumption.
(3) The weighted average life of a certificate is determined by (i) multiplying
the amount of each distribution of principal on a certificate by the number
of years from the date of issuance of the certificate to the related
distribution date, (ii) adding the results, and (iii) dividing the sum by
the initial Certificate Balance of the certificate.
(4) Assumes the servicer exercises its option to purchase the mortgage loans
when the principal balance of the mortgage loans is equal to or less than
10% of the sum of the principal balance of the initial mortgage loans as of
the cut-off date and the original pre-funded amount. See "Description of
the Certificates--Optional Termination" herein.
(5) Assumes that the certificates remain outstanding until maturity.
S-63
<PAGE>
Percent of Initial Class M-1 Certificate Balance Outstanding (1)(5)
<TABLE>
<CAPTION>
Prepayment Scenario(2)
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Distribution date 0% 50% 75% 100% 125% 150%
Initial Percentage 100% 100% 100% 100% 100% 100%
</TABLE>
Weighted Average Life in Years(3)(5)
Weighted Average Life in Years(3)(4)
___________________________
(1) Rounded to the nearest whole percentage.
(2) As a percentage of the related prepayment assumption.
(3) The weighted average life of a certificate is determined by (i) multiplying
the amount of each distribution of principal on a certificate by the number
of years from the date of issuance of the certificate to the related
distribution date, (ii) adding the results, and (iii) dividing the sum by
the initial Certificate Balance of the certificate.
(4) Assumes the servicer exercises its option to purchase the mortgage loans
when the principal balance of the mortgage loans is equal to or less than
10% of the sum of the principal balance of the initial mortgage loans as of
the cut-off date and the original pre-funded amount. See "Description of
the Certificates--Optional Termination" herein.
(5) Assumes that the certificates remain outstanding until maturity.
S-64
<PAGE>
Percent of Initial Class M-2 Certificate Balance Outstanding (1)(5)
<TABLE>
<CAPTION>
Prepayment Scenario(2)
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Distribution date 0% 50% 75% 100% 125% 150%
Initial Percentage 100% 100% 100% 100% 100% 100%
</TABLE>
Weighted Average Life in Years(3)(5)
Weighted Average Life in Years(3)(4)
___________________________
(1) Rounded to the nearest whole percentage.
(2) As a percentage of the related prepayment assumption.
(3) The weighted average life of a certificate is determined by (i) multiplying
the amount of each distribution of principal on a certificate by the number
of years from the date of issuance of the certificate to the related
distribution date, (ii) adding the results, and (iii) dividing the sum by
the initial Certificate Balance of the certificate.
(4) Assumes the servicer exercises its option to purchase the mortgage loans
when the principal balance of the mortgage loans is equal to or less than
10% of the sum of the principal balance of the initial mortgage loans as of
the cut-off date and the original pre-funded amount. See "Description of
the Certificates--Optional Termination" herein.
(5) Assumes that the certificates remain outstanding until maturity.
S-65
<PAGE>
Percent of Initial Class M-3 Certificate Balance Outstanding (1)(5)
<TABLE>
<CAPTION>
Prepayment Scenario(2)
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Distribution date 0% 50% 75% 100% 125% 150%
Initial Percentage 100% 100% 100% 100% 100% 100%
</TABLE>
Weighted Average Life in Years(3)(5)
Weighted Average Life in Years(3)(4)
_______________
(1) Rounded to the nearest whole percentage.
(2) As a percentage of the related prepayment assumption.
(3) The weighted average life of a certificate is determined by (i) multiplying
the amount of each distribution of principal on a certificate by the number
of years from the date of issuance of the certificate to the related
distribution date, (ii) adding the results, and (iii) dividing the sum by
the initial Certificate Balance of the certificate.
(4) Assumes the servicer exercises its option to purchase the mortgage loans
when the principal balance of the mortgage loans is equal to or less than
10% of the sum of the principal balance of the initial mortgage loans as of
the cut-off date and the original pre-funded amount. See "Description of
the Certificates--Optional Termination" herein.
(5) Assumes that the certificates remain outstanding until maturity.
These tables have been prepared based on the assumptions described in
the second paragraph preceding these tables (including the assumptions regarding
the characteristics and
S-66
<PAGE>
performance of the mortgage loans which differ from the actual characteristics
and performance thereof) and should be read in conjunction therewith.
The Pooling and Servicing Agreement
The following summary describes certain terms of the pooling and
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 pooling
and servicing agreement.
Servicing
NovaStar Mortgage, Inc., will act as servicer for the mortgage loans
pursuant to the Pooling and Servicing Agreement. For a description of the
servicer's operations, see "The Seller" herein. The servicer's servicing
portfolio currently includes only subprime residential mortgage loans.
Foreclosure and Delinquency Experience with Subprime Mortgage Loans
The following table summarizes the delinquency and foreclosure
experience, respectively, as of the date indicated, of the subprime mortgage
loans serviced by the servicer. The information should not be considered as a
basis for assessing the likelihood, amount or severity of delinquencies or
foreclosures on the mortgage loans securing the certificates.
Delinquency and Foreclosure
<TABLE>
<CAPTION>
------------------------- ---------------------------- ----------------------------
Principal Principal Principal
Balance(1) Ratio Balance(1) Ratio Balance(1) Ratio
-------------- --------- --------------- ------------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Subprime Mortgage Loan
Portfolio $ $ $
Delinquency Percentage(2)
30-59 Days
60-89 Days
90+ Days
-------------- --------- --------------- ------------- -------------- ------------
Total $ $ $
============== ========= =============== ============= ============== ============
Foreclosure Rate(3) $ % $ % $ %
REO $ % $ % $ %
Loss Rate(4) $ % $ % $ %
</TABLE>
____________________
(1) Numbers in thousands.
(2) The period of delinquency is based on the number of days that payments
are contractually past due.
(3) "Foreclosure Rate" is the dollar amount of the mortgage loans in the
process of foreclosure as a percentage of the total principal balance
of the mortgage loans outstanding as of the date indicated.
(4) "Loss Rate" is the dollar amount of losses as a percentage of the
total principal balance of the mortgage loans outstanding as of the
date indicated. Losses are actual losses incurred on liquidated
properties and shortfall payoffs for each respective period. Losses on
liquidated properties are calculated as net sales proceeds less book
value (exclusive of loan purchase premium or discount). Shortfall
payoffs are calculated as the difference between principal payoff
amount and unpaid principal at the time of payoff.
S-67
<PAGE>
There can be no assurance that the delinquency experience of the
mortgage loans securing the certificates 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 securing
the certificates will depend on the results obtained over the life of the
certificates. The servicer's servicing portfolio may include subprime mortgage
loans underwritten pursuant to guidelines not necessarily representative of
those applicable to the mortgage loans securing the certificates. 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 mortgage loans and, accordingly,
the actual rates of delinquencies and foreclosures with respect to mortgage
loans.
Servicing and Other Compensation
With respect to each mortgage loan and each distribution date, the
servicer will be entitled to a servicing fee equal to 1/12 of the servicing fee
rate times the principal balance of such mortgage loan as of such date. 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 distribution 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 with respect to
such distribution date. These payments are referred to as "compensating
interest". The "prepayment interest shortfall" for any distribution 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 distribution date.
Purchase of Delinquent Mortgage Loans
The servicer has the right, but not the obligation, to purchase
mortgage loans from the issuer which are 90 days or more delinquent at a price
equal to 100% of the outstanding principal balance thereof, plus accrued
interest.
Servicing Defaults
The following events constitute servicing defaults:
S-68
<PAGE>
(i) any failure by the servicer to make any deposit required to be
made under the pooling and servicing agreement, which continues unremedied for a
period of three business days after written notice has been given; 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 the pooling and servicing agreement, which failure, in each case,
materially and adversely affects the interests of certificateholders or the
breach of any representation or warranty of the Servicer in the pooling and
servicing agreement which materially and adversely affects the interests of the
certificateholders, and which in either case continues unremedied for a period
of 30 days after the date on which written notice has been given; or
(iii) the entry against the servicer of an order for the appointment
of a trustee in any insolvency or similar proceeding, and the continuance of
this order 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 or similar person in any insolvency or similar
proceeding relating to the servicer or all or substantially all of its property;
or the servicer shall admit 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.
So long as a servicing default shall not have been remedied within the
applicable grace period, with respect to a failure to make a required advance,
if such advance is not made by 5:00 P.M., New York time, on the business day
immediately following the date the servicer was required to make such advance,
the trustee shall terminate the servicer.
In the case of all other servicing defaults, the trustee shall, at the
direction of the majority holders, by notice then given in writing to the
servicer, terminate the servicer. Upon the termination of the servicer, the
certificate administrator, or another successor servicer, shall assume the
duties of a successor servicer.
Notice, as required above, may be given (i) to the servicer by the
trustee or the certificate administrator or (ii) to the servicer, the trustee
and the certificate administrator by the holders of certificates evidencing at
least 51% of the voting rights.
If the certificate administrator is unwilling or is legally unable to
act as successor servicer, the certificate administrator shall appoint or
petition a court of competent jurisdiction to appoint a successor servicer
satisfying the requirements set forth in the pooling and servicing agreement.
Pending appointment of a successor to the servicer, unless the certificate
administrator is prohibited by law from so acting, the certificate administrator
shall act as successor servicer.
The majority holders may waive any events permitting removal of the
servicer, although the majority holders may not waive a default in making a
required distribution on a certificate without the consent of the holder of such
certificate.
The "majority holders" are holders of certificates evidencing at least
51% of the voting rights. Voting rights are allocated as follows:
S-69
<PAGE>
. the class A-1 certificates and the mezzanine certificates will
have __% of the voting rights (allocated in proportion to the
respective then outstanding certificate balances);
. the class R certificates will have __% of the voting rights; and
. when none of the class A-1 and mezzanine certificates are
outstanding, 100% of the voting rights will be allocated among
holders of the class R certificates.
Limitation on Suits
No certificateholder will have any right to institute any proceedings
with respect to the pooling and servicing agreement unless:
. such certificateholder has previously given written notice to the
trustee of a continuing event of default;
. certificateholders representing not less than 51% of the
Certificate Balances of the certificates have made written
request to the trustee to institute proceedings in respect of
such event of default in its own name as the trustee;
. such certificateholders have offered to the trustee reasonable
indemnity satisfactory to it against the costs, expenses and
liabilities to be incurred in compliance with such request;
. for 60 days after its receipt of such notice of, request and
offer of indemnity the trustee have failed to institute any such
proceedings; and
. no direction inconsistent with such written request has been
given to the trustee during such 60-day period by the
certificateholders representing more than 50% of the Certificate
Balances of the certificates.
The Certificate Administrator and the Trustee
The certificate administrator or the trustee also may be removed at
any time by the Majority Certificateholders. The certificate administrator or
the trustee shall be removed if the certificate administrator or the trustee
ceases to be eligible to continue as such under the pooling and servicing
agreement or if the certificate administrator or the trustee becomes incapable
of acting, bankrupt, insolvent or if a receiver or public officer takes charge
of the certificate administrator or the trustee or its property. Any resignation
or removal of the certificate administrator or the trustee and appointment of a
successor certificate administrator or the trustee, as applicable, will not
become effective until acceptance of the appointment by the successor
certificate administrator or trustee. The trustee may terminate the certificate
administrator at any time for failure to perform its obligations under the
pooling and servicing agreement or related agreements provided it or an
acceptable successor certificate administrator assumes the obligations of the
certificate administrator.
S-70
<PAGE>
Certain Federal Income Tax Considerations
The following discussion of certain material federal income tax
consequences of the purchase, ownership and disposition of the certificates is
to be considered only in connection with "Material Federal Income Tax
Consequences" in the accompanying prospectus. The discussion in this prospectus
supplement and in the accompanying prospectus is based upon laws, regulations,
rulings and decisions now in effect, all of which are subject to change. The
discussion below and in the accompanying prospectus does not purport to deal
with all federal tax consequences applicable to all categories of investors,
some of which may be subject to special rules. Investors should consult their
own tax advisors in determining the federal, state, local and any other tax
consequences to them of the purchase, ownership and disposition of the
certificates.
An election will be made to treat the trust as one or more REMICs for
federal income tax purposes. Stinson, Mag & Fizzell, P.C., special tax counsel,
will deliver its opinion that, assuming compliance with the Pooling and
Servicing Agreement, the trust will be treated as one or more REMICs for federal
income tax purposes. The class R certificates will be designated as the sole
"residual interest" in the REMIC. The class R certificates are "REMIC Residual
Certificates" for purposes of the prospectus.
The purchase price of the offered certificate will be the issue price
of the offered certificates for calculating accruals of original issue discount
("OID"). The offered certificates may be issued with OID. See "Material Federal
Income Tax Consequences--Discount and Premium" in the prospectus. The prepayment
assumption for calculating original issue discount is 100% of the Prepayment
Assumption. See "Prepayment and Yield Considerations" herein.
The REMIC Regular Interests possess certain special tax attributes by
virtue of the REMIC provisions of the Code. See "Material Federal Income Tax
Consequences-- REMIC Securities" in the prospectus.
If an offered certificate is sold or retired, the seller will
recognize gain or loss equal to the difference between the amount realized on
the sale and such holder's adjusted basis in the certificate. See "Material
Federal Income Tax Consequences--REMIC Securities--Sale or Exchange of
Securities" in the prospectus.
For a discussion of backup withholding and taxation of foreign
investors in the certificates, see "Material Federal Income Tax Consequences-
Backup Withholding" and "-Foreign Investors-Grantor Trust, REMIC Regular and
Debt Securities" in the prospectus.
The REMIC Regular Interests generally will be treated as debt
instruments for federal income tax purposes. Beneficial owners, or registered
holders, in the case of definitive certificates, of the REMIC Regular Interests
will be required to report income on such certificates in accordance with the
accrual method of accounting.
ERISA Considerations
Investors may wish to review the material set forth in this section
together with the information in the section "ERISA Considerations" in the
prospectus.
S-71
<PAGE>
A fiduciary of any pension, profit sharing and other employee benefit
plans subject to ERISA, or any other person investing plan assets of any such
plan, including an insurance company investing through its general or separate
accounts, may wish to review with its legal advisors whether the purchase or
holding of class A-1 certificates or mezzanine certificates could give rise to a
transaction prohibited or not otherwise permissible under ERISA or section 4975
of the code.
The Department of Labor has issued to the underwriter an individual
prohibited transaction exemption which, as described under the section "ERISA
Considerations--Certificates" in the prospectus, provides exemptive relief for
certain transactions relating to investments in pass-through certificates issued
by trusts which hold obligations such as the mortgage loans. The underwriter's
exemption will not apply until the expiration of the pre-funding period.
Accordingly, until such time, class A-1 certificates may not be purchased with
plan assets. Any investor purchasing class A-1 certificates prior to the
expiration of such period is hereby deemed to represent that it is not
purchasing such certificates with plan assets. Before purchasing a class A-1
certificate following the expiration of the pre-funding period based on the
underwriter's exemption, a fiduciary of a plan should itself confirm (1) that
such certificate constitutes a certificate for purposes of the underwriter's
exemption and (2) that the conditions and other requirements set forth in the
underwriter's exemption would be satisfied.
As of the date of this prospectus supplement, the underwriter's
exemption does not currently provide exemptive relief for the mezzanine
certificates because of the subordinate nature of these certificates. On August
23, 2000, the Department of Labor published in the Federal Register (65 Fed.
Reg. 51454 (August 23, 2000)) proposed amendments to the underwriter's exemption
which will extend preemptive relief to certain subordinate certificates,
provided that the conditions imposed by the exemption are met. If the proposed
amendments are finalized in the form proposed, investors using plan assets may
be permitted to purchase the mezzanine certificates upon the publication of the
final amendments to the underwriter's exemption in the Federal Register or, if
later, upon the expiration of the pre-funding period. Before purchasing a
mezzanine certificate on or after the later of such dates based on the
underwriter's exemption, a fiduciary of a plan should confirm that the
conditions and other requirements set forth in the underwriter's exemption would
be satisfied. Any investor purchasing mezzanine certificates prior to the later
of such dates is hereby deemed to represent that it is not purchasing such
certificates with plan assets.
Any plan fiduciary considering the purchase of class A-1 certificates
or mezzanine certificates may wish to consult with its counsel as to the
potential applicability of ERISA, the Internal Revenue Code, the underwriter's
exemption and other administrative exemptions prior to making an investment in
these certificates. Moreover, each plan fiduciary may wish to determine whether,
under the general fiduciary standards of investment prudence and
diversification, an investment in the class A-1 certificates or the mezzanine
certificates is appropriate for the plan, taking into account the overall
investment policy of the plan and the composition of the plan's investment
portfolio.
The sale of the class A-1 certificates or the mezzanine certificates
to a plan is in no respect a representation by us that this investment meets all
relevant legal requirements with respect to investments by plans generally or by
any particular plan or that this investment is appropriate for plans generally
or any particular plan.
S-72
<PAGE>
Method of Distribution
Subject to the terms and conditions set forth in an underwriting
agreement, dated _______________, between __________________, the company and
NovaStar Mortgage, the underwriter has agreed to purchase and the company has
agreed to sell to the underwriter the offered certificates, consisting of the
class A-1, class M-1, class M-2 and class M-3 certificates. It is expected that
delivery of the offered certificates will be made only in book-entry form
through the Same Day Funds Settlement System of DTC, Clearstream S.A. and the
Euroclear System, on or about __________________, against payment therefor in
immediately available funds.
The offered certificates will be purchased from the company by the
underwriter and will be offered by the underwriter from time to time to the
public in negotiated transactions or otherwise at varying prices to be
determined at the time of sale. The proceeds to the company from the sale of the
offered certificates are expected to be approximately $__________, before the
deduction of expenses. The underwriter may effect such transactions by selling
the offered certificates 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 offered certificates,
the underwriter may be deemed to have received compensation from the company in
the form of underwriting compensation. The underwriter and any dealers that
participate with the underwriter in the distribution of the offered certificates
may be deemed to be underwriters and any profit on the resale of the offered
certificates purchased by them may be deemed to be underwriting discounts and
commissions under the Securities Act of 1933.
The underwriting agreement provides that the company will indemnify
the underwriter, and that under limited circumstances, the underwriter will
indemnify the company, against certain civil liabilities under the Securities
Act of 1933, or contribute to payments required to be made in respect thereof.
There can be no assurance that a secondary market for the offered
certificates will develop or, if it does develop, that it will continue or
provide the certificateholders with sufficient liquidity of investment. The
primary source of information available to investors concerning the offered
certificates will be the monthly statements discussed in the prospectus under
"Description of the Certificates-Reports to Certificateholders," which will
include information as to the outstanding principal balance (or notional
balance) of the offered certificates. There can be no assurance that any
additional information regarding the offered certificates will be available
through any other source. In addition, the company is not aware of any source
through which price information about the offered certificates will be generally
available on an ongoing basis. The limited nature of such information regarding
the offered certificates may adversely affect the liquidity of the offered
certificates, even if a secondary market for the offered certificates becomes
available.
Certain Legal Matters
Certain legal matters relating to the certificates 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 _____________________________.
S-73
<PAGE>
Ratings
It is a condition to the issuance of the offered certificates that the
class A-1 certificates be rated "___" by [Moody's Investors Service, Inc.] and
"___" by [Standard and Poor's Corporation], that the that the class M-1
certificates be rated "___" by [Moody's] and "__" by [S&P], that the class M-2
certificates be rated "__" by [Moody's] and "__" by [S&P] and that the class M-3
certificates be rated "____" by [Moody's] and "___" by [S&P].
[S&P's] ratings on mortgage pass-through certificates address the
likelihood of the receipt by certificateholders of payments required under the
pooling and servicing agreement. [S&P's] ratings take into consideration the
credit quality of the mortgage pool, structural and legal aspects associated
with the certificates, and the extent to which the payment stream in the
mortgage pool is adequate to make payments required under the certificates.
[S&P's] rating on the certificates does not, however, constitute a statement
regarding frequency of prepayments on the mortgages. See "Certain Yield and
Prepayment Considerations" herein. The ratings issued by [S&P] on payment of
principal and interest do not cover the payment of any prepayment interest
shortfalls, any Relief Act shortfalls or the carry-forward amount.
The rating process of [Moody's] addresses the structural and legal
aspects associated with the certificates, including the nature of the underlying
mortgage loans. The ratings assigned to the certificates do not represent any
assessment of the likelihood or rate of principal prepayments. The ratings do
not address the possibility that certificateholders might suffer a lower than
anticipated yield. The ratings do not address the likelihood that
certificateholders will be paid the carry-forward amount. The ratings also do
not address the ability of the converted loan purchaser to purchase the
converted mortgage loans.
The company has not requested a rating on the certificates 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 certificates, or, if it
does, what rating would be assigned by any such other rating agency. A rating on
the certificates by another rating agency, if assigned at all, may be lower than
the ratings assigned to the certificates 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 certificates are subsequently lowered for any reason,
no person or entity is obligated to provide any additional support or credit
enhancement with respect to the certificates.
Legal Investment
The class A-1 and the class M-1 certificates will constitute "mortgage
related securities" for the 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
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restrict or condition investment in mortgage related securities by taking
statutory action on or prior to October 31, 1991.
We make no representations as to the proper characterization of the
certificates for legal investment or other purposes, or as to the ability of
particular investors to purchase the certificates under applicable legal
investment restrictions. These uncertainties may adversely affect the liquidity
of the certificates. Accordingly, all institutions whose investment activities
are subject to legal investment laws and regulations, regulatory capital
requirements or review by regulatory authorities should consult with their legal
advisors in determining whether and to what extent the certificates constitute a
legal investment or are subject to investment, capital or other restrictions.
See "Legal Investment" in the prospectus.
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Annex I
Global Clearance, Settlement and Tax Documentation Procedures
Except in certain limited circumstances, the globally offered NovaStar
Home Equity Loan Asset-Backed Certificates, Series ______, will be available
only in book-entry form. Investors in the global certificates may hold such
global certificates through any of The Depository Trust Company, Clearstream or
Euroclear. The global certificates will be tradable as home market instruments
in both the European and U.S. domestic markets. Initial settlement and all
secondary trades will settle in same-day funds.
Secondary market trading between investors global certificates through
Clearstream and Euroclear will be conducted in the ordinary way in accordance
with their normal rules and operating procedures and in accordance with
conventional Eurocertificate practice (i.e., seven calendar day settlement).
Secondary market trading between investors holding global certificates
through DTC will be conducted according to the rules and procedures applicable
to U.S. corporate debt obligations and prior collateralized mortgage certificate
issues.
Secondary cross-market trading between Clearstream or Euroclear and
DTC participants holding global certificates will be effected on a delivery-
against-payment basis through the respective depositories of Clearstream and
Euroclear (in such capacity) and as DTC participants.
Non-U.S. holders (as described below) of global certificates will be
subject to U.S. withholding taxes unless such holders meet certain requirements
and deliver appropriate U.S. tax documents to the securities clearing
organizations or their participants.
Initial Settlement
All global certificates will be held in book-entry form by DTC in the
name of Cede & Co. as nominee of DTC. Investors' interests in the global
certificates will be represented through financial institutions acting on their
behalf as direct and indirect participants in DTC. As a result, Clearstream and
Euroclear will hold positions on behalf of their participants through their
respective Depositaries, which in turn will hold such positions in accounts as
DTC participants.
Investors electing to hold their global certificates through DTC will
follow the settlement practices applicable to other collateralized mortgage
certificate issues. Investor securities custody accounts will be credited with
their holdings against payment in same-day funds on the settlement date.
Investors electing to hold their global certificates through
Clearstream or Euroclear accounts will follow the settlement procedures
applicable to conventional Eurocertificates, except that there will be no
temporary global security and no "lock-up" or restricted period. global
certificates will be credited to the securities custody accounts on the
settlement date against payment in same-day funds.
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Secondary Market Trading
Since the purchaser determines the place of delivery, it is important
to establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired value
date.
Trading between DTC participants. Secondary market trading between DTC
participants will be settled using the procedures applicable to prior
collateralized mortgage certificate issues in same-day funds.
Trading between Clearstream and/or Euroclear participants. Secondary
market trading between Clearstream participants or Euroclear participants will
be settled using the procedures applicable to conventional Eurocertificates in
same-day funds.
Trading between DTC seller and Clearstream or Euroclear purchaser.
When global certificates are to be transferred from the account of a DTC
participant to the account of a Clearstream participant or a Euroclear
participant, the purchaser will send instructions to Clearstream or Euroclear
through a Clearstream participant or Euroclear participant at least one business
day prior to settlement. Clearstream or Euroclear will instruct the respective
Depositary, as the case may be, to receive the global certificates against
payment. Payment will include interest accrued on the global certificates from
and including the last coupon distribution date to and excluding the settlement
date, on the basis of the actual number of days in such accrual period and a
year is assumed to consist of 360 days. For transactions settling on the 31st of
the month, payment will include interest accrued to and excluding the first day
of the following month. Payment will then be made by the respective Depositary
of the DTC participant's account against delivery of the global certificates.
After settlement has been completed, the global certificates will be credited to
the respective clearing system and by the clearing system, in accordance with
its usual procedures, to the Clearstream participant's or Euroclear
participant's account. The securities credit will appear the next day (European
time) and the cash debt will be back-valued to, and the interest on the global
certificates will accrue from, the value date (which would be the preceding day
when settlement occurred in New York). If settlement is not completed on the
intended value date (i.e., the trade fails), the Clearstream or Euroclear cash
debt will be valued instead as of the actual settlement date.
Clearstream participants and Euroclear participants will need to make
available to the respective clearing systems the funds necessary to process
same-day funds settlement. The most direct means of doing so is to preposition
funds for settlement, either from cash on hand or existing lines of credit, as
they would for any settlement occurring within Clearstream or Euroclear. Under
this approach, they may take on credit exposure to Clearstream or Euroclear
until the global certificates are credited to their accounts one day later.
As an alternative, if Clearstream or Euroclear has extended a line of
credit to them, Clearstream participants or Euroclear participants can elect not
to preposition funds and allow that credit line to be drawn upon the finance
settlement. Under this procedure, Clearstream participants or Euroclear
participants purchasing global certificates would incur overdraft charges for
one day, assuming they cleared the overdraft when the global certificates were
credited to their accounts. However, interest on the global certificates would
accrue from the value date. Therefore, in many cases the investment income on
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the global certificates earned during that one-day period may substantially
reduce or offset the amount of such overdraft charges, although this result will
depend on each Clearstream participant's or Euroclear participant's particular
cost of funds. Since the settlement is taking place during New York business
hours, DTC participants can employ their usual procedures for sending global
certificates to the respective European depository for the benefit of
Clearstream participants or Euroclear participants. The sale proceeds will be
available to the DTC seller on the settlement date. Thus, to the DTC
participants a cross-market transaction will settle no differently than a trade
between two DTC participants.
Trading between Clearstream or Euroclear seller and DTC purchaser. Due
to time zone differences in their favor, Clearstream participants and Euroclear
participants may employ their customary procedures for transactions in which
global certificates are to be transferred by the respective clearing system,
through the respective Depositary, to a DTC participant. The seller will send
instructions to Clearstream or Euroclear through a Clearstream participant or
Euroclear participant at least one business day prior to settlement. In these
cases Clearstream or Euroclear will instruct the respective Depositary, as
appropriate, to deliver the global certificates to the DTC participant's account
against payment. Payment will include interest accrued on the global
certificates from and including the last coupon payment to and excluding the
settlement date on the basis of the actual number of days in such accrual period
and a year is assumed to consist of 360 days. For transactions settling on the
31st of the month, payment will include interest accrued to and excluding the
first day of the following month. The payment will then be reflected in the
account of the Clearstream participant or Euroclear participant the following
day, and receipt of the cash proceeds in the Clearstream participant's or
Euroclear participant's account would be back-valued to the value date (which
would be the preceding day, when settlement occurred in New York). Should the
Clearstream participant or Euroclear participant have a line of credit with its
respective clearing system and elect to be in debt in anticipation of receipt of
the sale proceeds in its account, the back-valuation will extinguish any
overdraft incurred over that one-day period. If settlement is not completed on
the intended value date (i.e., the trade fails), receipt of the cash proceeds in
the Clearstream participant's or Euroclear participant's account would instead
be valued as of the actual settlement date.
Finally, day traders that use Clearstream or Euroclear and that
purchase global certificates from DTC participants for delivery to Clearstream
participants or Euroclear participants should note that these trades would
automatically fail on the sale side unless affirmative action were taken. At
least three techniques should be readily available to eliminate this potential
problem:
(a) borrowing through Clearstream or Euroclear for one day (until the
purchase side of the day trade is reflected in their Clearstream or Euroclear
accounts) in accordance with the clearing system's customary procedures;
(b) borrowing the global certificates in the U.S. from a DTC
participant no later than one day prior to settlement, which would give the
global certificates sufficient time to be reflected in their Clearstream or
Euroclear account in order to settle the sale side of the trade; or
(c) staggering the value dates for the buy and sell sides of the
trade so that the value date for the purchase from the DTC participant is at
least one day prior to the value date for the sale to the Clearstream
participant or Euroclear participant.
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Certain U.S. Federal Income Tax Documentation Requirements
The IRS has issued new withholding regulations (the "withholding
regulations"), which make certain modifications to withholding, backup
withholding and information reporting rules. The withholding regulations attempt
to unify certification requirements and modify certain reliance standards. The
withholding regulations will generally be effective for payments made after
December 31, 2000, although taxpayers may begin compliance with the withholding
regulations immediately. This summary does not deal with all aspects of U.S.
federal income tax withholding that may be relevant to foreign holders of the
securities as well as the application of the withholding regulations.
Prospective investors are urged to consult their own tax advisors for specific
advice regarding their holding and disposing of the securities.
A beneficial owner of the global certificates holding securities
through Clearstream or Euroclear (or through DTC if the holder has an address
outside the U.S.) will be subject to the 30% U.S. withholding tax that generally
applies to payments of interest (including original issue discount) on
registered debt issued by U.S. Persons, unless (i) each clearing system, bank or
other financial institution that holds customers' securities in the ordinary
course of its trade or business in the chain of intermediaries between such
beneficial owner and the U.S. entity required to withhold tax complies with
applicable certification requirements, and (ii) such beneficial owner takes one
of the following steps to obtain an exemption or reduced tax rate:
Exemption for Non-U.S. Persons. Under the existing rules, beneficial
certificate owners of global securities that are Non-U.S. Persons (as defined
below) can obtain a complete exemption from the withholding tax by filing a
signed Form W-8 (Certificate of Foreign Status). Under the withholding
regulations, a non-U.S. person may claim beneficial owner status by filing Form
W-8BEN, Certificate of Foreign Status of Beneficial Owner for United States Tax
Withholding. The old Form W-8 is valid until the earlier of (i) three years
beginning on the date that the form is signed, or (ii) December 31, 2000. The
new Form W-8BEN is valid for a period of three years beginning on the date that
the form is signed. If the information shown on Form W-8 or Form W-8BEN changes,
a new Form W-8 or Form W-8BEN must be filed within 30 days of the change.
Exemption for Non-U.S. Persons with effectively connected income.
Under the existing rules, a Non-U.S. Person (as defined below), including a non-
U.S. corporation or bank with a U.S. branch, for which the interest income is
effectively connected with its conduct of a trade or business in the United
States, can obtain an exemption from the withholding tax by filing Form 4224
(Exemption from Withholding of Tax on Income Effectively Connected with the
Conduct of a Trade or Business in the United States). Under the withholding
regulations, a non-U.S. person may claim an exemption from U.S. withholding on
income effectively connected with the conduct of a trade or business in the
United States by filing Form W-8ECI, Certificate of Foreign Person's Claim for
Exemption from Withholding on Income Effectively Connected with the Conduct of a
Trade or Business in the United States. The old Form 4224 is valid until the
earlier of (i) one year beginning on the date that the form is signed, or (ii)
December 31, 2000. The new Form W-8ECI is valid for a period of three years
beginning on the date that the form is signed.
Exemption or reduced rate for non-U.S. Persons resident in treaty
countries. Under the existing rules, non-U.S. Persons residing in a country that
has a tax treaty with the United States can
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obtain an exemption or reduced tax rate (depending on the treaty terms) by
filing Form 1001 (Ownership, Exemption or Reduced Rate Certificate). If the
treaty provides only for a reduced rate, withholding tax will be imposed at that
rate unless the filer alternatively files Form W-8. Under the withholding
regulations, a non-U.S. person may claim treaty benefits by filing Form W-8BEN,
Certificate of Foreign Status of Beneficial Owner for United States Tax
Withholding. The old Form 1001 is valid until the earlier of (i) three years
beginning on the date that the form is signed, or (ii) December 31, 2000. The
new Form W-8BEN is valid for a period of three years beginning on the date that
the form is signed.
Exemption for U.S. Persons. U.S. Persons can obtain a complete
exemption from the withholding tax by filing Form W-9 (Payer's Request for
Taxpayer Identification Number and Certification).
U.S. Federal Income Tax Reporting Procedure. Under the existing rules,
the beneficial owner of a global security or his agent files by submitting the
appropriate form to the person through whom it holds (the clearing agency, in
the case of persons holding directly on the books of the clearing agency). The
withholding regulations revise the procedures that withholding agents and payees
must follow to comply with, or to establish an exemption from, withholding for
payments made after December 31, 2000. Each foreign holder of securities should
consult its own tax advisor regarding compliance with these procedures under the
withholding regulations.
A "U.S. Person" is:
(i) a citizen or resident of the United States;
(ii) a corporation, partnership or other entity organized in or
under the laws of the United States or any political subdivision thereof;
(iii) an estate that is subject to U.S. federal income tax regardless
of the source of its income; or
(iv) a trust if a court within the United States can exercise
primary supervision over its administration and at least one United States
person has the authority to control all substantial decisions of the trust.
The term "Non-U.S. Person" means any person who is not a U.S. Person.
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________________________________________________________________________________
NovaStar Mortgage Funding Trust, Series ________
NovaStar Mortgage, Inc.
Seller and Servicer
NovaStar Mortgage Funding Corporation
Company
$_____________
NovaStar Home Equity Loan
Asset-Backed Certificates,
Series ______
__________________
Prospectus Supplement
__________________
__________________________
Underwriter
__________________
We suggest that you rely on the information contained or incorporated by
reference in this prospectus supplement and the accompanying prospectus. We have
not authorized anyone to provide you with different information.
We are not offering the securities offered hereby in any state where the offer
is not permitted.
Dealers will be required to deliver a prospectus supplement and prospectus when
acting as underwriters of the securities offered hereby and with respect to
their unsold allotments or subscriptions. In addition, all dealers selling the
securities, whether or not participating in this offering, may be required to
deliver a prospectus supplement and prospectus until ninety days after the date
of this prospectus supplement.
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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 the securities 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........................... $167,640
Legal Fees and Expenses......................................... 200,000
Accounting Fees and Expenses.................................... 100,000
Trustee's Fees and Expenses..................................... 5,000
Printing and Engraving Fees..................................... 78,000
Rating Agency Fees.............................................. 100,000
Miscellaneous................................................... 200,000
--------
Total....................................................... $850,640
========
</TABLE>
Item 15. Indemnification of Directors and Officers
Delaware General Corporation Law
Section 145(a) of the General Corporation Law of the State of Delaware (the
"DGCL") provides that a corporation may indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative
or investigative (other than an action by or in the right of the corporation)
by reason of the fact that the person is or was a director, officer, employee
or agent of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by the person in connection with such action,
suit or proceeding if the person acted in good faith and in a manner the person
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 the person's conduct was unlawful. The termination
of any action, suit or proceeding by judgment, order, settlement, conviction,
or upon 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 the person 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 reasonable cause to believe that the person's conduct was
unlawful.
Section 145(b) of the DGCL states that a corporation may indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that the
person is or was a director, officer, employee or agent of the corporation, or
is or was serving at the request of the corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise against expenses (including attorneys' fees) actually and
reasonably incurred by the person in connection with the defense or settlement
of such action or suit if the person acted in good faith and in a manner the
person reasonably believed to be in or not opposed to the best interests of the
corporation and except that no indemnification 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 of
Chancery or the court in which such action or suit was brought shall determine
upon application that, despite the adjudication of liability but in view of all
the circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses which the Court of Chancery or such other court
shall deem proper.
Section 145(c) of the DGCL provides that to the extent that a present or
former director or officer of a corporation has been successful on the merits
or otherwise in defense of any action, suit or proceeding referred
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to in subsections (a) and (b) of Section 145, or in defense of any claim, issue
or matter therein, the person shall be indemnified against expenses (including
attorneys' fees) actually and reasonably incurred by the person in connection
therewith.
Section 145(d) of the DGCL states that any indemnification under subsections
(a) and (b) of Section 145 (unless ordered by a court) shall be made by the
corporation only as authorized in the specific case upon a determination that
indemnification of the present or former director, officer, employee or agent
is proper in the circumstances because the person has met the applicable
standard of conduct set forth in subsections (a) and (b) of Section 145. Such
determination shall be made, with respect to a person who is a director or
officer at the time of such determination, (1) by a majority vote of the
directors who are not parties to such action, suit or proceeding, even though
less than a quorum, or (2) by a committee of such directors designated by
majority vote of such directors, even though less than a, or (3) if there are
no such directors, or if such directors so direct, by independent legal counsel
in a written opinion, or (4) by the stockholders.
Section 145(e) of the DGCL provides that expenses (including attorneys'
fees) incurred by an officer or director in defending any civil, criminal,
administrative or investigative action, suit or proceeding may 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 director or
officer to repay such amount if it shall ultimately be determined that the
person is not entitled to be indemnified by the corporation as authorized in
Section 145. Such expenses (including attorneys' fees) incurred by former
directors and officers or other employees and agents may be so paid upon such
terms and conditions, if any, as the corporation deems appropriate.
Section 145(f) of the DGCL states that the indemnification and advancement
of expenses provided by, or granted pursuant to, the other subsections of
Section 145 shall not be deemed exclusive of any other rights to which those
seeking indemnification or advancement of expenses may be entitled under any
bylaw, agreement, vote of stockholders or disinterested directors or otherwise,
both as to action in the person's official capacity and as to action in another
capacity while holding such office.
Section 145(g) of the DGCL provides that a corporation shall have the power
to purchase and maintain insurance on behalf of any person who is or was a
director, officer, employee or agent of the corporation, or is or was serving
at the request of the corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise
against any liability asserted against the person and incurred by the person in
any such capacity, or arising out of the person's status as such, whether or
not the corporation would have the power to indemnify the person against such
liability under the provisions of Section 145.
Section 145(j) of the DGCL states that the indemnification and advancement
of expenses provided by, or granted pursuant to, Section 145 shall, unless
otherwise provided when authorized or ratified, continue as to a person who has
ceased to be a director, officer, employee or agent and shall inure to the
benefit of the heirs, executors and administrators of such a person.
Section 102(b)(7) of the DGCL provides that a certificate of incorporation
may contain a provision eliminating or limiting the personal liability of a
director to the corporation or its stockholders for monetary damages for breach
of fiduciary duty as a director provided that shall not eliminate or limit the
liability of a director (i) for any breach of the director's duty of loyalty to
the corporation or its stockholders, (ii) for acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law,
(iii) under Section 174 of the DGCL, or (iv) for any transaction from which the
director derived an improper personal benefit.
Certificate of Incorporation and Bylaws
Article Nine of the Registrant's Certificate of Incorporation (Exhibit 3.1
hereto) limits the liability of directors of the Registrant to the Registrant
or its stockholders to the fullest extent permitted by Delaware law, provided,
however, that the Registrant's indemnification liabilities shall be fully
subordinate to indebtedness of the Registrant relating to bonds issued by the
Registrant.
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Section 5.2 of the Registrant's Bylaws (Exhibit 3.2 hereto) provides for
indemnification of the directors and officers of the Registrant to the full
extent permitted by the laws of the State of Delaware. In addition to the
rights to indemnification provided by Delaware law, Article V of the
Registrant's Bylaws sets forth specific indemnification provisions and rights
in actions by third parities (See Section 5.3), derivative actions (See Section
5.4), indemnification for expenses (See Section 5.5), determination of the
right to indemnification (See Section 5.6) and the advancement of expenses (See
Section 5.7).
Insurance
The Registrant intends to maintain liability insurance for the benefit of
its directors and officers.
Item 16. Exhibits
The following exhibits are filed herewith or incorporated herein by
reference.
<TABLE>
<CAPTION>
Exhibits
--------
<C> <S>
1.1 Form of Underwriting Agreement
3.1 Certificate of Incorporation
3.2 Bylaws
4.1 Form of Mortgage Loan Purchase Agreement
4.2 Form of Trust Agreement
4.3 Form of Indenture
4.4 Form of Servicing Agreement
4.5 Form of Pooling and Servicing Agreement
Opinion of Stinson, Mag & Fizzell, P.C. with respect to the
5.1 legality of the securities
Opinion of Stinson, Mag & Fizzell, P.C. with respect to tax
8.1 matters
Consent of Stinson, Mag & Fizzell, P.C. (included in exhibits 5.1
23.1 and 8.1)
24.1 Power of Attorney (included on signature page)
25.1 Form T-1 Statement of Eligibility
</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
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<PAGE>
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.
(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.
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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 Amendment to the
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Westwood, State of Kansas, on the 20th day of
November, 2000.
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 and Rodney Schwatken the true and lawful attorney-in-fact and
agents 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 attorneys-in-
fact and agents, full power and authority together or individually 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 attorneys-in-fact and
agents, or their substitutes, may lawfully do or cause to be done by virtue
hereof.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Scott F. Hartman Director and President November 20, 2000
____________________________________ (Principal Executive
Scott F. Hartman Officer)
/s/ Rodney Schwatken Secretary and Treasurer November 20, 2000
____________________________________ (Principal Financial Officer
Rodney Schwatken and
Principal Accounting
Officer)
/s/ W. Lance Anderson Director November 20, 2000
____________________________________
W. Lance Anderson
/s/ Mark Herpich Director November 20, 2000
____________________________________
Mark Herpich
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II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibits
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<C> <S>
1.1 Form of Underwriting Agreement
3.1 Certificate of Incorporation
3.2 Bylaws
4.1 Form of Mortgage Loan Purchase Agreement
4.2 Form of Trust Agreement
4.3 Form of Indenture
4.4 Form of Servicing Agreement
4.5 Form of Pooling and Servicing Agreement
Opinion of Stinson, Mag & Fizzell, P.C. with respect to the legality
5.1 of the securities
8.1 Opinion of Stinson, Mag & Fizzell, P.C. with respect to tax matters
Consent of Stinson, Mag & Fizzell, P.C. (included in exhibits 5.1 and
23.1 8.1)
24.1 Power of Attorney (included on signature page)
25.1 Form T-1 Statement of Eligibility
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II-6
