AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 14, 1998
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Registration No.333-44409
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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PRE-EFFECTIVE AMENDMENT NO. 4 TO FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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HOME EQUITY SECURITIZATION CORP.
(Exact Name of Registrant as Specified in its Charter)
<S> <C> <C>
NORTH CAROLINA 301 South College Street 56-2064715
Charlotte, North Carolina 28202-6001
(State or other jurisdiction of (Address, including zip code, and I.R.S. Employer Identification Number)
incorporation or organization) telephone number, including area code, of
registrant's principal executive offices)
Marion A. Cowell, Jr., Esq.
Executive Vice President, Secretary and General Counsel
First Union Corporation
One First Union Center
301 South College Street
Charlotte, North Carolina 28202-6001
(Name, address, including zip code, and telephone number, including area code, of agent for service)
Copy to:
Christopher J. DiAngelo
Dewey Ballantine LLP
1301 Avenue of the Americas
New York, New York 10019-6092
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Approximate Date of Commencement of Proposed Sale to the Public: As
soon as practicable after the effective date of this Registration Statement.
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, 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 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.
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CALCULATION OF REGISTRATION FEE
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Title of each class of Amount to be Proposed Maximum Aggregate Proposed Maximum Aggregate Amount of
securities registered Registered Price Per Unit Offering Price Registration Fee
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Asset Backed Securities $1,000,000 100% $1,000,000(1) $295.00
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(1) Estimated solely for the purpose of calculating the registration fee.
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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, AS AMENDED, 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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HOME EQUITY SECURITIZATION CORP.
CROSS REFERENCE SHEET
(PURSUANT TO RULE 404(a) AND ITEM 501 OF REGULATION S-K)
Item Location in Form S-3
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1. Forepart of the Registration Statement and Outside Front Cover Page of
Prospectus........................................................... Forepart of Registration
Statement and Outside Front
Cover Page of Prospectus
2. Inside Front and Outside Back Cover Pages of Prospectus.............. Inside Front and Outside Back
Cover Pages**
3. Summary Information; Risk Factors and Ratio of Earnings to Fixed
Charges*............................................................. Prospectus Summary**; Risk
Factors**; *
4. Use of Proceeds...................................................... Use of Proceeds
5. Determination of Offering Price ..................................... *
6. Dilution............................................................. *
7. Selling Security Holders............................................. *
8. Plan of Distribution................................................. Underwriting**
9. Description of Securities to be Registered........................... Outside Front Cover Page**;
Prospectus Summary**;
The Trust Fund**; Description of
Certificates**
10. Interests of Named Experts and Counsel............................... *
11. Material Changes..................................................... *
12. Incorporation of Certain Information by Reference.................... Incorporation of Certain
Documents by Reference
13. Disclosure of Commission Position on Indemnification for Securities Act
Liabilities.......................................................... See Part II
</TABLE>
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* Answer negative or item inapplicable.
** To be completed from time to time by Prospectus Supplement
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PROSPECTUS
ASSET BACKED NOTES AND ASSET BACKED CERTIFICATES, ISSUABLE IN SERIES
HOME EQUITY SECURITIZATION CORP.
(DEPOSITOR)
Home Equity Securitization Corp. (the "Depositor") may offer from time
to time under this Prospectus and the related prospectus supplements (the
related "Prospectus Supplements") the Asset-Backed Notes (the "Notes") and the
Asset-Backed Certificates (the "Certificates" and, together with the Notes, the
"Securities") which may be sold from time to time in one or more series (each, a
"Series").
The Certificates of a Series will evidence undivided interests in
certain assets deposited into a trust (each, a "Trust Fund") by the Depositor
pursuant to a Pooling and Servicing Agreement or a Trust Agreement (an
"Agreement"), as described herein. The Notes of a Series will be issued and
secured pursuant to an Indenture and will represent indebtedness secured the
related Trust Fund. The Trust Fund for a Series of Securities will include
assets originated or acquired by the originator or originators (the
"Originator") specified in the related Prospectus Supplement composed of (a)
primary assets, which may include one or more pools (each, a "Pool") of (i)
mortgage loans (the "Mortgage Loans"), secured by mortgages on residential
properties and (ii) securities backed or secured by Mortgage Loans
(collectively, the "Primary Assets"), (b) all monies due thereunder net, if and
as provided in the related Prospectus Supplement, of certain amounts payable to
the servicer of the Mortgage Loans, which servicer may also be the related
Originator, specified in the related Prospectus Supplement (the "Servicer"), (c)
as more fully described in the related Prospectus Supplement, funds on deposit
in one or more pre-funding amounts and/or capitalized interest accounts and (d)
reserve funds, letters of credit, surety bonds, insurance policies or other
forms of credit support as described herein and in the related Prospectus
Supplement. 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.
Certain of the Primary Assets may be acquired from one or more
institutions which may be affiliated or unaffiliated with the Depositor.
(COVER CONTINUED ON NEXT PAGE)
NOTES OF A GIVEN SERIES REPRESENT OBLIGATIONS SECURED BY, AND
CERTIFICATES OF A SERIES EVIDENCE BENEFICIAL INTERESTS IN, THE RELATED TRUST
FUND ONLY AND ARE NOT GUARANTEED BY ANY GOVERNMENTAL AGENCY OR BY THE DEPOSITOR,
THE RELATED ORIGINATOR, THE TRUSTEE, THE SERVICER OR BY ANY OF THEIR RESPECTIVE
AFFILIATES. THE DEPOSITOR'S ONLY OBLIGATIONS WITH RESPECT TO ANY SERIES OF
SECURITIES WILL BE PURSUANT TO CERTAIN REPRESENTATIONS AND WARRANTIES SET FORTH
IN THE RELATED AGREEMENT AS DESCRIBED HEREIN OR IN THE RELATED PROSPECTUS
SUPPLEMENT.
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FOR A DISCUSSION OF MATERIAL RISKS ASSOCIATED WITH AN INVESTMENT IN THE
SECURITIES, SEE THE INFORMATION HEREIN UNDER "RISK FACTORS" BEGINNING ON PAGE
15.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS OR THE PROSPECTUS SUPPLEMENT. ANY
REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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The Securities offered by this Prospectus and by the related Prospectus
Supplement are offered by First Union Capital Markets Corp. and the other
underwriters set forth in the related Prospectus Supplement, if any, subject to
prior sale, to withdrawal, cancellation or modification of the offer without
notice, to delivery to and acceptance by First Union Capital Markets Corp. and
the other underwriters, if any, and certain further conditions. Retain this
Prospectus for future reference. This Prospectus may not be used to consummate
sales of the Securities offered hereby unless accompanied by a Prospectus
Supplement.
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FIRST UNION CAPITAL MARKETS CORP.
MAY __, 1998
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(CONTINUED FROM PREVIOUS PAGE)
Each Series of Securities will be issued in one or more classes (each,
a "Class"). Interest on and principal of the Securities of a Series will be
payable on each distribution date specified in the related Prospectus Supplement
(the "Distribution Date"), at the times, at the rates, in the amounts and in the
order of priority set forth in the related Prospectus Supplement.
If a Series includes multiple Classes, such Classes may vary with
respect to the amount, percentage and timing of distributions of principal,
interest or both and one or more Classes may be subordinated to other Classes
with respect to distributions of principal, interest or both as described herein
and in the related Prospectus Supplement. The Primary Assets and other assets
comprising the Trust Fund may be divided into one or more Asset Groups and each
Class of the related Series will evidence beneficial ownership of the
corresponding Asset Group, as applicable.
The rate of reduction of the aggregate principal balance of each Class
of a Series may depend principally upon the rate of payment (including
prepayments) with respect to the Mortgage Loans or Underlying Loans relating to
the Private Securities, as applicable. A rate of prepayment lower or higher than
anticipated will affect the yield on the Securities of a Series in the manner
described herein and in the related Prospectus Supplement. Under certain limited
circumstances described herein and in the related Prospectus Supplement, a
Series of Securities may be subject to termination or redemption under the
circumstances described herein and in the related Prospectus Supplement.
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PROSPECTUS SUPPLEMENT
The Prospectus Supplement relating to a Series of Securities to be
offered hereunder will, among other things, set forth with respect to such
Series of Securities: (i) the aggregate principal amount, interest rate, and
authorized denominations of each Class of such Securities; (ii) certain
information concerning the Primary Assets, the Originator and any Servicer;
(iii) the terms of any credit enhancement with respect to such Series; (iv) the
terms of any insurance related to the Primary Assets; (v) information concerning
any other assets in the related Trust Fund, including any Reserve Fund; (vi) the
final scheduled distribution date of each Class of such Securities; (vii) the
method to be used to calculate the amount of principal required to be applied to
the Securities of each Class of such Series on each Distribution Date, the
timing of the application of principal and the order of priority of the
application of such principal to the respective Classes and the allocation of
principal to be so applied; (viii) the Distribution Dates and any Assumed
Reinvestment Rate (as defined herein); (ix) additional information with respect
to the plan of distribution of such Securities; and (x) the federal income tax
characterization of the Securities.
REPORTS TO HOLDERS
Periodic and annual reports concerning the related Trust Fund for a
Series of Securities are required under the related Agreement to be forwarded to
holders of the related Series of Securities (the "Holders"). IF THE SECURITIES
ARE issued in book-entry form, (i) owners of beneficial interests in such
Securities will not be considered "Holders" under the Agreements and will not
receive such reports directly from the related Trust Fund; rather, such reports
will be furnished to such owners through the participants and indirect
participants of the applicable book-entry system and (ii) references herein to
the rights of "Holders" shall refer to the rights of such owners as they may be
exercised indirectly through such participants. See "THE AGREEMENTS-- Reports to
Holders" herein.
AVAILABLE INFORMATION
The Depositor 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 Securities. 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 documents
referred to herein and therein, but do not contain all of the information set
forth in the Registration Statement pursuant to the Rules and Regulations of the
Commission. For further information, reference is made to such Registration
Statement and the exhibits thereto. Such Registration Statement and exhibits can
be inspected and copied at prescribed rates at the public reference facilities
maintained by the Commission at its Public Reference Section, 450 Fifth Street,
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 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 Depositor, that file
electronically with the Commission.
Each Trust Fund will be required to file certain reports with the
Commission pursuant to the requirements of the Securities Exchange Act of 1934,
as amended. The Depositor intends to cause each Trust Fund to suspend filing
such reports if and when such reports are no longer required under said Act.
No person has been authorized to give any information or to make any
representation other than those contained in this Prospectus and any Prospectus
Supplement with respect hereto and, if given or made, such information or
representations must not be relied upon. This Prospectus and any Prospectus
Supplement with respect hereto do not constitute an offer to sell or a
solicitation of an offer to buy any securities other than the Securities offered
hereby and thereby nor an offer of the Securities to any person in any state or
other jurisdiction in which such offer would be unlawful. The delivery of this
Prospectus at any time does not imply that information herein is correct as of
any time subsequent to its date.
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INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All documents subsequently filed by or on behalf of the Trust Fund
referred to in the accompanying Prospectus Supplement with the Commission
pursuant to Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), after the date of this Prospectus and
prior to the termination of any offering of the Securities issued by such Trust
Fund shall be deemed to be incorporated by reference in this Prospectus and to
be a part of this Prospectus from the date of the filing of such documents. Any
statement contained in a document incorporated or deemed to be incorporated by
reference herein shall be deemed to be modified or superseded for all purposes
of this Prospectus to the extent that a statement contained herein (or in the
accompanying Prospectus Supplement) or in any other subsequently filed document
which also is or is deemed to be incorporated by reference modifies or replaces
such statement. Any such statement so modified or superseded shall not be
deemed, except as so modified or superseded, to constitute a part of this
Prospectus.
The Depositor on behalf of any Trust Fund will provide without charge
to each person to whom this Prospectus is delivered, on the written or oral
request of such person, a copy of any or all of the documents referred to above
that have been or may be incorporated by reference in this Prospectus (not
including exhibits to the information that is incorporated by reference unless
such exhibits are specifically incorporated by reference into the information
that this Prospectus incorporates). Such requests should be directed to the
Depositor at One First Union Center, 301 S. College Street, Charlotte, North
Carolina 28288-0630.
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SUMMARY OF PROSPECTUS
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE
DETAILED INFORMATION APPEARING ELSEWHERE IN THIS PROSPECTUS AND BY REFERENCE TO
THE INFORMATION WITH RESPECT TO EACH SERIES OF SECURITIES CONTAINED IN THE
PROSPECTUS SUPPLEMENT TO BE PREPARED AND DELIVERED IN CONNECTION WITH THE
OFFERING OF SECURITIES OF SUCH SERIES. CAPITALIZED TERMS USED AND NOT OTHERWISE
DEFINED HEREIN OR IN THE RELATED PROSPECTUS SUPPLEMENT SHALL HAVE THE MEANINGS
SET FORTH IN THE "GLOSSARY OF TERMS" HEREIN.
Securities Offered.......... Asset-Backed Certificates (the "Certificates") and
Asset-Backed Notes (the "Notes"). Certificates are
issuable from time to time in Series pursuant to a
Pooling and Servicing Agreement or Trust Agreement
(the related "Agreement"). Each Certificate of a
Series will evidence an interest in the Trust Fund
for such Series, or in an Asset Group specified in
the related Prospectus Supplement. Notes are
issuable from time to time in Series pursuant to
an Indenture between the Issuer and the related
trustee (the "Trustee") whereby the Issuer will
pledge the Trust Fund to secure the Notes under
the lien of the Indenture. Each series of Notes
will represent the indebtedness of the Issuer.
Each Series of Securities will consist of one or
more Classes, one or more of which may be Classes
of compound interest securities, planned
amortization class ("PAC") securities, variable
interest securities, zero coupon securities,
principal only securities, interest only
securities, participating securities, senior
securities or subordinate securities. Each Class
may differ in, among other things, the amounts
allocated to and the priority of principal and
interest payments, final scheduled distribution
dates, Distribution Dates and interest rates. The
Securities of each Class will be issued in fully
registered form in the denominations specified in
the related Prospectus Supplement. The Securities
or certain Classes of such Securities offered
thereby may be available in book-entry form only.
Depositor ....................Home Equity Securitization Corp. (the "Depositor")
was incorporated in the State of North Carolina in
December 1997, and is a wholly-owned, special
purpose subsidiary of First Union National Bank, a
national banking association with its headquarters
in Charlotte, North Carolina. Neither First Union
National Bank nor any other affiliate of the
Depositor, the Servicer, the Trustee or the
Originator has guaranteed or is otherwise
obligated with respect to the Securities of any
Series. See "THE DEPOSITOR" herein.
Issuer ...................... With respect to each series of Notes, the
issuer (the "Issuer") will be an owner trust (the
"Owner Trust") established for the purpose of
issuing such series of Notes. Each such Owner
Trust will be created pursuant to the Trust
Agreement (the "Trust Agreement") between the
Depositor and the Owner Trustee. With respect to
each series of Certificates, the Issuer will be
the Trust established pursuant to the related
Agreement.
Trustees .....................The trustee or indenture trustee (each,
the "Trustee") for each series of Certificates and
Notes, respectively, will be named in the related
Prospectus Supplement. The Owner Trustee (the
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"Owner Trustee") for each series of Notes will be
named in the related Prospectus Supplement. See
"The Agreements--The Trustee" herein.
Interest Payments ............Interest payments on the
Securities of a Series entitled by their terms to
receive interest will be made on each Distribution
Date, to the extent set forth in, and at the
applicable rate specified in (or determined in the
manner set forth in), the related Prospectus
Supplement. The interest rate on Securities of a
Series may be variable or change with changes in
the rates of interest on the related Mortgage
Loans, or Underlying Loans relating to the Private
Securities, as applicable and/or as prepayments
occur with respect to such Mortgage Loans or
Underlying Loans, as applicable. Interest Only
Securities may be assigned a "Notional Amount" set
forth in the related Prospectus Supplement which
is used solely for convenience in expressing the
calculation of interest and for certain other
purposes and does not represent the right to
receive any distributions allocable to principal.
Principal Only Securities may not be entitled to
receive any interest payments or may be entitled
to receive only nominal interest payments.
Interest payable on the Securities of a Series on
a Distribution Date will include all interest
accrued during the period specified in the related
Prospectus Supplement. See "DESCRIPTION OF THE
SECURITIES--Payments of Interest" herein.
Principal Payments ...........All payments of principal of a Series of
Securities will be made in an aggregate amount
determined as set forth in the related Prospectus
Supplement and will be paid at the times and will
be allocated among the Classes of such Series in
the order and amounts, and will be applied either
on a pro rata or a random lot basis among all
Securities of any such Class, all as specified in
the related Prospectus Supplement.
Final Scheduled
Distribution Date
of the Securities.............The "Final Scheduled Distribution Date" with
respect to each Class of Notes is the date no
later than which principal thereof will be fully
paid and with respect to each Class of
Certificates is the date after which no
Certificates of such Class are expected to remain
outstanding, in each case calculated on the basis
of the assumptions applicable to such Series
described in the related Prospectus Supplement.
The Final Scheduled Distribution Date of a Class
may equal the maturity date of the Primary Asset
in the related Trust Fund which has the latest
stated maturity or will be determined as described
herein and in the related Prospectus Supplement.
The actual final Distribution Date of the
Securities of a Series will depend primarily upon
the rate of payment (including prepayments,
liquidations due to default, the receipt of
proceeds from casualty insurance policies and
repurchases) of the Mortgage Loans or Underlying
Loans relating to the Private Securities, as
applicable, in the related Trust Fund. The actual
final Distribution Date of A Security may occur
substantially earlier or may occur later than its
Final Scheduled Distribution Date as a result of
the application of
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prepayments to the reduction of the principal
balances of the Securities and as a result of
defaults on the Primary Assets. The rate of
payments on the Mortgage Loans or Underlying Loans
relating to the Private Securities, as applicable,
in the Trust Fund for a Series will depend on a
variety of factors, including certain
characteristics of such Mortgage Loans or
Underlying Loans, as applicable, and the
prevailing level of interest rates from time to
time, as well as on a variety of economic,
demographic, tax, legal, social and other factors.
No assurance can be given as to the actual
prepayment experience with respect to a Series.
See "RISK FACTORS--Yield May Vary" and
"DESCRIPTION OF THE SECURITIES--Weighted Average
Life of the Securities" herein.
Optional Termination .........One or more Classes of Securities of any Series
may be redeemed or repurchased in whole or in
part, at such time, by such persons and under the
circumstances specified in the related Prospectus
Supplement, at the price set forth therein. Each
such redemption or repurchase may occur on or
after a specified date, or on or after such time
as the aggregate principal balance of the
Securities of the Series or the Primary Assets
relating to such Series is less than the amount or
percentage specified in the related Prospectus
Supplement. See "DESCRIPTION OF THE
SECURITIES--Optional Redemption, Purchase or
Termination" herein.
Mandatory Termination;
Auction Sale .................The Trustee, the Servicer or the related
ORIGINATOR may be required to effect early
retirement of a series of Securities by soliciting
competitive bids for the purchase of the related
Primary Assets or otherwise, under other
circumstances and in the manner specified in "THE
AGREEMENTS--Termination" and in the related
AGREEMENT.
A mandatory termination may take the form of an
auction sale. Within a certain period following
the first Distribution Date as of which the
aggregate Pool principal balance is less than 10%
or a percentage set forth in the related AGREEMENT
of the initial aggregate Pool principal balance,
if the optional termination right has not been
exercised by the parties having such right by such
date, the Trustee shall solicit bids for the
purchase of all Mortgage Loans remaining in the
Trust. In the event that satisfactory bids are
received , the net sale proceeds will be
distributed to Holders, in the same order of
priority as collections received in respect of the
Mortgage Loans. If satisfactory bids are not
received, the Trustee shall decline to sell the
Mortgage Loans and shall not be under any
obligation to solicit any further bids or
otherwise negotiate any further sale of the
Mortgage Loans. Such sale and consequent
termination of the Trust must constitute a
"qualified liquidation" of each REMIC established
by the Trust under Section 860F of the Internal
Revenue Code of 1986, as amended, including,
without limitation, the requirement that the
qualified liquidation takes place over a period
not to exceed 90 days.
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The Trust Fund................The Trust Fund for a Series of Securities will
consist of one or more of the assets described
below, as described in the related Prospectus
Supplement.
A. Primary Assets.......The Primary Assets for a Series may consist of any
combination of the following assets, to the extent
and as specified in the related Prospectus
Supplement. The Primary Assets will be acquired by
the related Trust Fund from the related
Originator, or may be acquired in the open market
or in privately negotiated transactions.
(1) Mortgage Loans.......The Primary Assets for a Series will consist, in
whole or in part, of mortgage loans secured by
mortgages on residential properties (the "Mortgage
Loans"). Some Mortgage Loans may be delinquent to
the extent specified in the related Prospectus
Supplement. The percentage of those Mortgage Loans
which are delinquent shall not exceed 10% of the
aggregate principal balance of the Primary Assets
as of the cut-off date for that Series (the
"Cut-Off Date").
THE MORTGAGE LOANS WILL GENERALLY CONSIST OF WHAT
ARE COMMONLY REFERRED TO AS "HOME EQUITY" LOANS,
AS DISTINGUISHED FROM "PURCHASE MONEY" LOANS. BOTH
OF THESE CONCEPTS REFER TO THE USE OF PROCEEDS
MADE BY THE RELATED BORROWER, RATHER THAN TO ANY
LEGAL OR OTHER DOCUMENTARY DIFFERENCES BETWEEN THE
TWO TYPES OF LOANS, EXCEPT THAT "HOME EQUITY"
LOANS ARE USUALLY (BUT NOT ALWAYS) SECURED BY
MORTGAGES WHICH ARE IN A SUBORDINATE LIEN POSITION
WHILE "PURCHASE MONEY" LOANS ARE USUALLY (BUT NOT
ALWAYS) SECURED BY MORTGAGES WHICH ARE IN A SENIOR
LIEN POSITION, AND "HOME EQUITY" LOANS ARE
TYPICALLY (BUT NOT ALWAYS) SHORTER IN MATURITY
THAN "PURCHASE MONEY" LOANS (I.E., FIFTEEN RATHER
THAN THIRTY YEARS).
A "HOME EQUITY" LOAN IS A MORTGAGE LOAN THE
PROCEEDS OF WHICH ARE NOT USED TO PURCHASE THE
RELATED MORTGAGED PROPERTY; THE PROCEEDS OF A
"PURCHASE MONEY" MORTGAGE ARE APPLIED TO THE
PURCHASE OF THE RELATED MORTGAGED PROPERTY.
TYPICAL USES OF PROCEEDS OF "HOME EQUITY" LOANS
WOULD BE HOME IMPROVEMENT, DEBT CONSOLIDATION AND
THE FUNDING OF LARGE EXPENSES SUCH AS COLLEGE
TUITION.
PAYMENT FEATURES OF MORTGAGE LOANS; BALLOON LOANS.
The Trust Fund may contain loans which have
various payment characteristics, including balloon
or other non-traditional payment features, and may
accrue interest at a fixed rate or an adjustable
rate. Balloon loans 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 (each such Mortgage Loan, a "Balloon
Loan"). See "RISK FACTORS--Balloon Loans" and
"DESCRIPTION OF THE SECURITIES--Weighted Average
Life of the Securities" herein.
The Mortgage Loans will be secured by mortgages
and deeds of trust or other similar security
instruments creating a lien on
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a Mortgaged Property, which may be subordinated to
one or more senior liens on the Mortgaged
Property. The related Prospectus Supplement will
describe certain characteristics of the Mortgage
Loans for a Series, including, without limitation,
and to the extent relevant: (a) the aggregate
unpaid principal balance of the Mortgage Loans (or
the aggregate unpaid principal balance included in
the Trust Fund for the related Series); (b) the
range and weighted average interest rate (the
"Loan Rate") on the loans and in the case of
adjustable rate loans, the range and weighted
average of the current rate of interest borne by
such loans (the "Current Interest Rates") and any
maximum lifetime interest rates thereon (the
"Lifetime Rate Caps"); (c) the range and the
average outstanding principal balance of the
Mortgage Loans; (d) the weighted average original
and remaining term-to-stated maturity of the
Mortgage Loans and the range of original and
remaining terms-to-stated maturity, if applicable;
(e) the range and combined loan-to-value ratios
(each a "Combined Loan-to-Value Ratio") or
loan-to-value ratios, (each a "Loan-to-Value
Ratio") as applicable, of the Mortgage Loans,
computed in the manner described in the related
Prospectus Supplement; (f) the percentage (by
principal balance as of the Cut-off Date) of
Mortgage Loans that accrue interest at adjustable
or fixed interest rates; (g) any Credit
Enhancement relating to the Mortgage Loans; (h)
the geographic distribution of any Mortgaged
Properties securing the Mortgage Loans; (I) the
use and type of each Mortgaged Property securing a
Mortgage Loan; (J) the lien priority of the
Mortgage Loans; and (K) the delinquency status and
year of origination of the Mortgage Loans.
(2) Private Securities.......Primary Assets for a Series may consist, in whole
or in part, of Private Securities which include
(a) pass-through certificates representing
beneficial interests in loans of the type that
would otherwise be eligible to be Mortgage Loans
(the "Underlying Loans") or (b) collateralized
obligations secured by Underlying Loans. Such
pass-through certificates or collateralized
obligations will have previously been (a) offered
and distributed to the public pursuant to an
effective registration statement or (b) acquired
in a transaction not involving any public offering
from a person who is not an affiliate of the
issuer of such securities at the time of transfer
(nor an affiliate thereof at any time during the
three preceding months); provided a period of
three years has elapsed since the later of the
date the securities were acquired from the issuer
or an affiliate thereof. Although individual
Underlying Loans may be insured or guaranteed by
the United States or an agency or instrumentality
thereof, they need not be, and the Private
Securities themselves will not be so insured or
guaranteed. See "THE TRUST FUNDS--Private
Securities" herein.
The related Prospectus Supplement for a Series
will specify (such disclosure may be on an
approximate basis, as described above and will be
as of the date specified in the related Prospectus
Supplement) to the extent relevant and to the
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extent such information is reasonably available to
the Depositor and the Depositor reasonably
believes such information to be reliable: (i) the
aggregate approximate principal amount and type of
any Private Securities to be included in the Trust
Fund for such Series; (ii) certain characteristics
of the Underlying Loans including (A) the payment
features of such Underlying Loans (i.e., whether
they are fixed rate or adjustable rate and whether
they provide for fixed level payments, negative
amortization or other payment features), (B) the
approximate aggregate principal amount of such
Underlying Loans which are insured or guaranteed
by a governmental entity, (C) the servicing fee or
range of servicing fees with respect to such
Underlying Loans, (D) the minimum and maximum
stated maturities of such Underlying Loans at
origination, (E) the lien priority of such
Underlying Loans, and (F) the delinquency status
and year of origination of such Underlying Loans;
(iii) the maximum original term-to-stated maturity
of the Private Securities; (iv) the weighted
average term-to-stated maturity of the Private
Securities; (v) the pass-through or certificate
rate or ranges thereof for the Private Securities;
(vi) the sponsor or depositor of the Private
Securities (the "PS Sponsor"), the servicer of the
Private Securities (the "PS Servicer") and the
trustee of the Private Securities (the "PS
Trustee"); (vii) certain characteristics of Credit
Enhancement, if any, such as reserve funds,
insurance policies, letters of credit or
guarantees, relating to the Mortgage Loans
underlying the Private Securities, or to such
Private Securities themselves; (viii) the terms on
which the Underlying Loans may, or are required
to, be repurchased prior to stated maturity; (ix)
the terms on which substitute Underlying Loans may
be delivered to replace those initially deposited
with the PS Trustee; and (x) a description of the
limited purpose and business of the issuer of the
Private Securities, the availability of public
information concerning such issuer and market
information with respect to the Private
Securities. See "THE TRUST FUNDS--Additional
Information" herein.
B. Collection and
Distribution
Accounts.............All payments on or with respect to the Primary
Assets for a Series will be remitted directly to
an account (the "Collection Account") to be
established for such Series with the Trustee or
the Servicer, in the name of the Trustee. The
Trustee shall be required to apply a portion of
the amount in the Collection Account, together
with reinvestment earnings from eligible
investments specified in the related Prospectus
Supplement, to the payment of certain amounts
payable to the Servicer under the related
Agreement and any other person specified in the
Prospectus Supplement, and to deposit a portion of
the amount in the Collection Account into a
separate account (the "Distribution Account") to
be established for such Series, each in the manner
and at the times established in the related
Prospectus Supplement. The amounts deposited in
such Distribution Account will be available for
(i) application to the payment of principal of and
interest on such Series of Securities on the next
Distribution Date, (ii) the making of adequate
provision for future payments on certain Classes
of Securities and (iii) any other purpose
specified in the related Prospectus Supplement.
After applying the funds in the Collection Account
as described above, any funds remaining in the
Collection Account may be paid over to the
Servicer, the Depositor, any provider of Credit
Enhancement with respect to such Series (a "Credit
Enhancer") or any other person entitled thereto in
the manner and at the times established in the
related Prospectus Supplement.
C. Pre-Funding and
Capitalized
Interest Accounts....A Trust Fund may include one or more segregated
trust accounts (each, a "Pre-Funding Account")
established and maintained with the Trustee for
the related Series. On the closing date for such
Series, a portion of the proceeds of the sale of
the Securities of such Series (such amount, the
"Pre-Funded Amount") will be deposited in the
Pre-Funding Account and may be used to purchase
additional Primary Assets during the period of
time specified in the related Prospectus
Supplement (the "Pre-Funding Period"). If any
Pre-Funded Amount remains on deposit in the
Pre-Funding Account at the end of the Pre-Funding
Period, such amount will be applied in the manner
specified in the related Prospectus Supplement to
prepay the Notes and/or the Certificates of the
applicable Series. 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 Holders of the
Securities of the related Series will receive a
prepayment of principal as and to the extent
described in the related Prospectus Supplement.
Any such principal prepayment may adversely affect
the yield to maturity of the applicable
Securities.
IF A Pre-Funding Account IS ESTABLISHED, (A) the
Pre-Funding Period will not exceed 90 days from
the related closing date, (b) 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 related Trust Fund on the
closing date, subject to such exceptions as are
expressly stated in such Prospectus Supplement,
(c) the Pre-Funding Amount will not exceed 25% of
the principal amount of the Securities issued
pursuant to a particular offering and (d) prior to
the investment of the Pre-Funded Amount in
additional Primary Assets, such Pre-Funded Amount
will be invested in one or more "Eligible
Investments" specified in the related Agreement
and described herein under "THE TRUST FUNDS --
Collection and Distribution Accounts." Any
Eligible Investment must mature no later than the
Business Day prior to the next Distribution Date.
"Business Day" means any day other than a
Saturday, Sunday or other day on which commercial
banking institutions or trust companies in New
York, New York or the principal place of business
of the Trustee are closed.
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If a Pre-Funding Account is established, one or
more segregated trust accounts (each, a
"Capitalized Interest Account") may be established
and maintained with the Trustee for the related
Series. On the closing date for such Series, a
portion of the proceeds of the sale of the
Securities of such Series will be deposited in the
Capitalized Interest Account and used to fund the
excess, if any, of (x) the sum of (i) the amount
of interest accrued on the Securities of such
Series and (ii) certain fees or expenses during
the Pre-Funding Period such as trustee fees and
credit enhancement fees, over (y) the amount of
interest available therefor from the Primary
Assets in the Trust Fund. Any amounts on deposit
in the Capitalized Interest Account at the end of
the Pre-Funding Period that are not necessary for
such purposes will be distributed to the person
specified in the related Prospectus Supplement.
See "THE TRUST FUNDS--Pre-Funding Account" herein.
Credit Enhancement............If stated in the Prospectus Supplement relating to
a Series, the Depositor will obtain an irrevocable
letter of credit, surety bond, certificate
insurance policy, insurance policy or other form
of credit support (collectively, "Credit
Enhancement") in favor of the Trustee on behalf of
the Holders of such Series and any other person
specified in such Prospectus Supplement from an
institution (a "Credit Enhancer") acceptable to
the rating agency or agencies identified in the
related Prospectus Supplement as rating such
Series of Securities (collectively, the "Rating
Agency") for the purposes specified in such
Prospectus Supplement. The Credit Enhancement will
support the payments on the Securities and may be
used for other purposes, to the extent and under
the conditions specified in such Prospectus
Supplement. See "CREDIT ENHANCEMENT" herein.
Credit Enhancement for a Series may include one or
more of the following types of Credit Enhancement,
or such other type of Credit Enhancement specified
in the related Prospectus Supplement.
A. Subordinate
Securities...........Credit Enhancement for a Series may consist of one
or more Classes of Subordinate Securities. The
rights of Holders of such 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, but only to the extent described in the
related Prospectus Supplement.
B. Insurance ...........Credit Enhancement for a Series may consist of
special hazard insurance policies, bankruptcy
bonds and other types of insurance supporting
payments on the Securities.
C. Reserve Funds .......If stated in the Prospectus Supplement, the
Depositor may deposit cash, a letter or letters of
credit, short-term investments, or other
instruments acceptable to the Rating Agency in one
or more reserve funds to be established in the
name of the Trustee (each a "Reserve Fund"), which
will be used by the Trustee to make required
payments of principal of or interest on the
Securities of such Series, to make adequate
provision for future payments on such Securities
or for any
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<PAGE>
other purpose specified in the Agreement, with
respect to such Series, to the extent that funds
are not otherwise available. In the alternative or
in addition to such deposit, a Reserve Fund for a
Series may be funded through application of all or
a portion of the excess cash flow from the Primary
Assets for such Series, to the extent described in
the related Prospectus Supplement.
D. Minimum Principal
Payment Agreement....If stated in the Prospectus Supplement relating to
a Series of Securities, the Depositor will enter
into a minimum principal payment agreement (the
"Minimum Principal Payment Agreement") with an
entity meeting the criteria of the Rating Agency,
pursuant to which such entity will provide funds
in the event that aggregate principal payments on
the Primary Assets for such Series are not
sufficient to make certain payments. See "CREDIT
ENHANCEMENT--Minimum Principal Payment Agreement"
herein.
E. Deposit Agreement....If stated in the Prospectus Supplement, the
Depositor and the Trustee will enter into a
guaranteed investment contract or an investment
agreement (the "Deposit Agreement") pursuant to
which all or a portion of amounts held in the
Collection Account, the Distribution Account or in
any Reserve Fund will be invested with the entity
specified in such Prospectus Supplement. The
Trustee will be entitled to withdraw amounts so
invested, plus interest at a rate equal to the
Assumed Reinvestment Rate, in the manner specified
in the Prospectus Supplement. See "CREDIT
ENHANCEMENT--Deposit Agreement" herein.
Servicing.....................The Servicer will be responsible for servicing,
managing and making collections on the Mortgage
Loans for a Series. In addition, the Servicer may
act as custodian and be responsible for
maintaining custody of the Mortgage Loans and
related documentation on behalf of the Trustee.
Advances with respect to delinquent payments of
principal or interest on a Mortgage Loan will be
made by the Servicer only to the extent described
in the related Prospectus Supplement. Such
advances will be intended to provide liquidity
only and the related Prospectus Supplement will
specify the extent to which they are reimbursable
to the Servicer from scheduled payments of
principal and interest, late collections, or from
the proceeds of liquidation of the related
Mortgage Loans or from other recoveries relating
to such Mortgage Loan (including any insurance
proceeds or payments from other credit support).
In performing these functions, the Servicer will
exercise the same degree of skill and care that it
customarily exercises with respect to similar
receivables or Mortgage Loans owned or serviced by
it. Under certain limited circumstances, the
Servicer may resign or be removed, in which event
either the Trustee or a third-party servicer will
be appointed as successor servicer. The Servicer
will receive a periodic fee as servicing
compensation (the "Servicing Fee") and may, as
specified herein and in the related Prospectus
Supplement, receive certain additional
compensation. See
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<PAGE>
"SERVICING OF MORTGAGE LOANS -- Servicing
Compensation and Payment of Expenses" herein.
Material Federal Income
Tax Consequences............Securities of each series offered hereby will, for
federal income tax purposes, constitute either (i)
interests ("Grantor Trust Securities") in a Trust
treated as a grantor trust under applicable
provisions of the Code, (ii) "regular interests"
("REMIC Regular Securities") or "residual
interests" ("REMIC Residual Securities") in a
Trust treated as a real estate mortgage investment
conduit ("REMIC") (or, in certain instances,
containing one or more REMIC's) under Sections
860A through 860G of the Code, (iii) debt issued
by an Issuer ("Debt Securities") (iv) interests in
an Issuer which is treated as a partnership
("Partnership Interests"), or (v) "regular
interests" ("FASIT Regular Securities"),
"high-yield interests" ("FASIT High-Yield
Securities") or an ownership interest ("FASIT
OWNERSHIP SECURITY") in a Trust treated as a
financial asset securitization investment conduit
("FASIT") (or, in certain circumstances containing
one or more FASITs) under Sections 860H through
860L of the Code. IN THE EVENT THAT FASIT
SECURITIES ARE ISSUED, ANY REVOLVING PERIOD, OR
ADDITION OR SUBSTITUTION OF COLLATERAL PROVISIONS
OTHERWISE AVAILABLE BY MEANS OF THE FASIT ELECTION
WILL BE RESTRICTED SO AS TO NOT RESULT IN THE
RELATED COLLATERAL POOL NOT BEING A "DISCRETE
POOL" OF ASSETS WITHIN THE MEANING OF THE
APPLICABLE REQUIREMENTS FOR THE USE OF A FORM S-3
REGISTRATION STATEMENT (I.E., THE REVOLVING
PERIOD, ADDITION AND SUBSTITUTION PENSIONS OF
FASITS WILL GENERALLY CONFORM TOT HE REQUIREMENTS
OF REMICS).
DEWEY BALLANTINE LLP, SPECIAL TAX COUNSEL TO THE
DEPOSITOR, WILL RENDER AN OPINION UPON ISSUANCE OF
A SERIES OF SECURITIES WHICH WILL BE FILED WITH
THE COMMISSION AS AN EXHIBIT TO A POST-EFFECTIVE
AMENDMENT OR IN A CURRENT REPORT ON FORM 8-K.
Investors are urged to consult their tax advisors
and to review "Material Federal Income Tax
Consequences" herein and in the related Prospectus
Supplement.
ERISA Considerations..........A fiduciary of any employee benefit plan subject
to the Employee Retirement Income Security Act of
1974, as amended ("ERISA"), or the Code should
carefully review with its own legal advisors
whether the purchase or holding of Securities
could give rise to a transaction prohibited or
otherwise impermissible under ERISA or the Code. A
violation of the prohibited transaction rules may
generate excise tax and other liabilities under
ERISA and the Code. If the Securities offered are
Certificates, an individual prohibited transaction
exemption issued by the Department of Labor to
various underwriters may exempt the purchase,
holding and resale of such Certificates. In
addition, Prohibited Transaction Class Exemption
83-1 may exempt the sale or exchange of the
Certificates. If the Securities offered are Notes
which are treated as indebtedness without
substantial equity features for purposes of ERISA,
various Department of Labor Class
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<PAGE>
Exemptions may exempt the purchase and holding of
such Notes, and each purchaser and transferee of
such Notes may be required to represent and
warrant that such an exemption is applicable to
its purchase and holding of the Notes. See "ERISA
CONSIDERATIONS" herein.
Legal Investment .............The related Prospectus Supplement will state
whether or not the Securities of each Series
offered by this Prospectus and the related
Prospectus Supplement will constitute "mortgage
related securities" under the Secondary Mortgage
Market Enhancement Act of 1984 ("SMMEA").
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. See "LEGAL INVESTMENT" herein.
Use of Proceeds ..............The net proceeds from the sale of each Series will
be applied to one or more of the following
purposes: (i) to the acquisition of the related
Primary Assets, (ii) to repay indebtedness which
has been incurred to obtain funds to acquire such
Primary Assets, (iii) to establish any Reserve
Funds described in the related Prospectus
Supplement and (iv) to pay costs of structuring
and issuing such 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
Originator of such Primary Assets. See "USE OF
PROCEEDS" herein.
Ratings ......................It will be a requirement for issuance of any
Series that the Securities offered by this
Prospectus and the related Prospectus Supplement
be rated by at least one Rating Agency in one of
its four highest applicable rating categories. The
rating or ratings applicable to Securities of each
Series offered hereby and by the related
Prospectus Supplement will be as set forth in the
related Prospectus Supplement. A securities rating
should be evaluated independently of similar
ratings on different types of securities. A
securities rating is not a recommendation to buy,
hold or sell securities and does not address the
effect that the rate of prepayments on Mortgage
Loans or Underlying Loans relating to Private
Securities, as applicable, for a Series may have
on the yield to investors in the Securities of
such Series. See "RISK FACTORS--Ratings Are Not
Recommendations" herein.
Absence of Market ............The Securities will be a new issue of securities
with no established trading market. The Issuer
does not expect to apply for listing of the
Securities on any national securities exchange or
quote the Securities in the automated quotation
system of a registered securities association. The
Underwriter(s) specified in the related Prospectus
Supplement expects to make a secondary market in
the Securities, but has no obligation to do so.
See "RISK FACTORS" herein.
Risk Factors..................There are material risks associated with an
investment in the Securities. For a discussion of
all material factors that should be considered by
prospective investors in the Securities, see
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<PAGE>
"RISK FACTORS" herein and in the related
Prospectus Supplement.
16
<PAGE>
RISK FACTORS
For a discussion of all material risk factors THAT COULD MAKE the
OFFERING of the Securities SPECULATIVE OR ONE OF HIGH RISK, Investors should
consider, among other things, the following factors and "Risk Factors" in the
related Prospectus Supplement.
AN INVESTMENT IN ANY SECURITY MAY BE AN ILLIQUID INVESTMENT, WHICH MAY RESULT IN
THE HOLDER HOLDING SUCH INVESTMENT TO MATURITY.
There will be no market for the Securities of any Series prior to the
issuance thereof, and there can be no assurance that a secondary market will
develop or, if it does develop, that it will provide Holders with liquidity of
investment or will continue for the life of the Securities of such Series. The
Underwriter(s) specified in the related Prospectus Supplement expects to make a
secondary market in the Securities, but has no obligation to do so.
THE ASSETS OF THE TRUST FUND, AS WELL AS ANY APPLICABLE CREDIT ENHANCEMENT, WILL
BE LIMITED AND, IF SUCH ASSETS AND/OR CREDIT ENHANCEMENT BECOME INSUFFICIENT TO
SERVICE THE RELATED SECURITIES, LOSSES MAY RESULT.
The Securities of a Series will be payable solely from the assets of
the Trust Fund for such Securities. There will be no recourse to the Depositor
or any other person for any default on the Notes or any failure to receive
distributions on the Certificates. Further, at the times and to the extent set
forth in the related Prospectus Supplement, certain Primary Assets and/or any
balance remaining in the Collection Account or Distribution Account immediately
after making all payments due on the Securities of such Series and other
payments specified in the related Prospectus Supplement, may be promptly
released or remitted to the Depositor, the Servicer, the Credit Enhancer or any
other person entitled thereto and will no longer be available for making
payments to Holders. Consequently, Holders of Securities of each Series must
rely solely upon payments with respect to the Primary Assets and the other
assets constituting the Trust Fund for a Series of Securities, including, if
applicable, any amounts available pursuant to any Credit Enhancement for such
Series, for the payment of principal of and interest on the Securities of such
Series.
Holders of Notes will be required under the Indenture to proceed only
against the Primary Assets and other assets constituting the related Trust Fund
in the case of a default with respect to such Notes and may not proceed against
any assets of the Depositor. There is no assurance that the market value of the
Primary Assets or any other assets for a Series will at any time be equal to or
greater than the aggregate principal amount of the Securities of such Series
then outstanding, plus accrued interest thereon. Moreover, upon an event of
default under the Indenture for a Series of Notes and a sale of the assets in
the Trust Fund or upon a sale of the assets of a Trust Fund for a Series of
Certificates, the Trustee, the Servicer, if any, the Credit Enhancer and any
other service provider specified in the related Prospectus Supplement generally
will be entitled to receive the proceeds of any such sale to the extent of
unpaid fees and other amounts owing to such persons under the related Agreement
prior to distributions to Holders of Securities. Upon any such sale, the
proceeds thereof may be insufficient to pay in full the principal of and
interest on the Securities of such Series.
The only obligations, if any, of the Depositor with respect to the
Securities of any Series will be pursuant to certain representations and
warranties. See "THE AGREEMENTS--Assignment of Primary Assets" herein.
CREDIT ENHANCEMENT WILL BE LIMITED IN AMOUNT AND SCOPE OF COVERAGE AND MAY NOT
BE SUFFICIENT TO COVER LOSSES.
Although any Credit Enhancement is intended to reduce the risk of
delinquent payments or losses to Holders entitled to the benefit thereof, the
amount of such Credit Enhancement will be limited and will decline and could be
depleted under certain circumstances prior to the payment in full of the related
Series of Securities, and as a result Holders may suffer losses. Furthermore,
such Credit Enhancement may provide only very limited coverage as to certain
types of losses and may provide no coverage as to certain other types of losses.
Generally, Credit Enhancements do not directly or indirectly guarantee to the
holders of Securities, any specific rate of prepayment. See "CREDIT ENHANCEMENT"
herein.
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<PAGE>
THE TIMING OF PRINCIPAL PAYMENTS MAY ADVERSELY AFFECT THE YIELD TO MATURITY OF
THE SECURITIES.
The yield to maturity experienced by a Holder of Securities may be
affected by the rate of payment of principal of the Mortgage Loans or Underlying
Loans relating to the Private Securities, as applicable. The timing of principal
payments of the Securities of a Series will be affected by a number of factors,
including the following: (i) the extent of prepayments of the Mortgage Loans or
Underlying Loans relating to the Private Securities, as applicable; (ii) the
manner of allocating principal payments among the Classes of Securities of a
Series as specified in the related Prospectus Supplement; (iii) the exercise by
the party entitled thereto of any right of optional termination; (iv)
liquidations due to defaults and (v) repurchases of Mortgage Loans or Underlying
Loans due to conversion of adjustable-rate mortgage loans ("ARM Loans") to
fixed-rate loans or breaches of the related Originator's or Servicer's
representations and warranties). See "DESCRIPTION OF THE SECURITIES--Weighted
Average Life of Securities.".
Interest payable on the Securities of a Series on a Distribution Date
will include all interest accrued during the period specified in the related
Prospectus Supplement. In the event interest accrues during the calendar month
prior to a Distribution Date, the effective yield to Holders will be reduced
from the yield that would otherwise be obtainable if interest payable on the
Security were to accrue through the day immediately preceding each Distribution
Date, and the effective yield (at par) to Holders will be less than the
indicated coupon rate. See "DESCRIPTION OF THE SECURITIES--Payments of
Interest."
PREPAYMENTS MAY ADVERSELY AFFECT THE YIELD TO MATURITY OF THE SECURITIES.
The yield to maturity of the Securities of each series may be adversely
affected by a higher or lower than anticipated rate of prepayments on the
related Mortgage Loans. The yield to maturity on interest-only Private
Securities or Private Securities purchased at premiums or discounted to par will
be extremely sensitive to the rate of prepayments on the related Mortgage Loans.
In addition, the yield to maturity on certain other types of classes of
Securities, including certain classes in a series including more than one class
of Securities, may be relatively more sensitive to the rate of prepayment on the
related Mortgage Loans than other classes of Securities.
The Mortgage Loans may be prepaid in full or in part at any time;
however, a prepayment penalty or premium may be imposed in connection therewith.
Unless so specified in the related Prospectus Supplement, such penalties will
not be property of the related Trust. The rate of prepayments of the Mortgage
Loans cannot be predicted and 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, no assurance can be given as to
the level of prepayments that a Trust will experience.
Prepayments may result from mandatory prepayments relating to unused
monies held in Pre-Funding Accounts, if any, voluntary early payments by
borrowers (including payments in connection with refinancings of the related
senior Mortgage Loan or Loans), sales of Mortgaged Properties subject to
"due-on-sale" provisions and liquidations due to default, as well as the receipt
of proceeds from physical damage, credit life and disability insurance policies.
In addition, repurchases or purchases from a Trust of Mortgage Loans or
substitution adjustments required to be made under the Pooling and Servicing
Agreement will have the same effect on the Securityholders as a prepayment of
such Mortgage Loans. The related Prospectus Supplement will specify whether any
or all of the Mortgage Loans contain "due-on-sale" provisions.
Collections on the Mortgage Loans may vary due to the level of
incidence of delinquent payments and of prepayments. Collections on the Mortgage
Loans may also vary due to seasonal purchasing and payment habits of borrowers.
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<PAGE>
AS A RESULT OF OPTIONAL REDEMPTION OR REPURCHASE OR AUCTION SALE, HOLDERS COULD
BE FULLY PAID SIGNIFICANTLY EARLIER THAN WOULD OTHERWISE BE THE CASE.
One or more Classes of Securities of any Series may be subject to
optional redemption or repurchase, in whole or in part, on or after a date
specified in the related Prospectus Supplement, or on or after such time as the
aggregate outstanding principal amount of the Primary Assets is less than the
amount or percentage specified in the related Prospectus Supplement, such amount
or percentage not to exceed 10% of the aggregate principal balance of the
Primary Assets as of the Cut-off Date for that Series. NEITHER THE TRUST NOR THE
HOLDERS WILL HAVE ANY CONTINUING LIABILITY UNDER SUCH OPTIONAL REDEMPTION OR
REPURCHASE. IF THE OPTIONAL TERMINATION IS NOT EXERCISED, THEN ONE OR MORE
CLASSES OF SECURITIES MAY BE SUBJECT TO EARLY RETIREMENT BY AN AUCTION SALE. SEE
"THE AGREEMENTS--TERMINATION" HEREIN. The risk of reinvesting unscheduled
distributions resulting from redemption or repurchase of the Securities will be
borne by the Holders. See "DESCRIPTION OF THE SECURITIES--Optional Redemption,
Purchase or Termination." THE OPTIONAL TERMINATION AND MANDATORY TERMINATION
DESCRIBED HEREIN ARE THE ONLY CIRCUMSTANCES IN WHICH THE SECURITIES COULD BE
RETIRED EARLIER THAN WOULD BE THE CASE IF THE TRUST WERE ALLOWED TO GO TO TERM.
MORTGAGE LOANS WITH BALLOON AND NON-TRADITIONAL PAYMENT METHODS MAY CREATE
GREATER DEFAULT RISK.
A portion of the aggregate principal balance of the Mortgage Loans at
any time may be Balloon Loans that provide for the payment of the unamortized
principal balance of such Mortgage Loan in a single payment at maturity Such
Balloon Loans provide for equal monthly payments, consisting of principal and
interest, generally based on a 30-year amortization schedule, and a single
payment of the remaining balance of the Balloon Loan generally 5, 7, 10, or 15
years after origination. Amortization of a Balloon Loan based on a scheduled
period that is longer than the term of the loan results in a remaining principal
balance at maturity that is substantially larger than the regular scheduled
payments. The Depositor does not have any information regarding the default
history or prepayment history of payments on Balloon Loans. Because borrowers of
Balloon Loans are required to make substantial single payments upon maturity, it
is possible that the default risk associated with the Balloon Loans is greater
than that associated with fully-amortizing Mortgage Loans.
Other types of loans that may be included in the Trust Fund may involve
additional uncertainties not present in traditional types of loans. For example,
certain of the Mortgage Loans may provide for escalating or variable payments by
the borrower under the Mortgage Loan, as to which the borrower is generally
qualified on the basis of the initial payment amount. In some instances the
borrower's income may not be sufficient to enable them to continue to make their
loan payments as such payments increase and thus the likelihood of default will
increase. The Depositor does not have any information regarding the default
history or prepayment history of payments on these non-traditional loans
JUNIOR LIENS MAY EXPERIENCE HIGHER RATES OF DELINQUENCIES AND LOSSES.
If the Mortgages in a Trust Fund are primarily junior liens subordinate
to the rights of the mortgagee under the related senior mortgage or mortgages,
the proceeds from any liquidation, insurance or condemnation proceedings will be
available to satisfy the outstanding balance of such junior mortgage only to the
extent that the claims of such senior mortgagees have been satisfied in full,
including any related foreclosure costs. In addition, a junior mortgagee may not
foreclose on the MORTGAGED Property securing a junior mortgage unless it
forecloses subject to the senior mortgages, in which case it must either pay the
entire amount due on the senior mortgages to the senior mortgagees at or prior
to the foreclosure sale or undertake the obligation to make payments on the
senior mortgages in the event the mortgagor is in default thereunder. The Trust
Fund will not have any source of funds to satisfy the senior mortgages or make
payments due to the senior mortgagees.
PROPERTY VALUES MAY DECLINE, LEADING TO HIGHER LOSSES.
There are several factors that could adversely affect the value of
MORTGAGED Properties such that the outstanding balance of the related Mortgage
Loan, together with any senior financing on the MORTGAGED Properties, would
equal or exceed the value of the MORTGAGED Properties. Among the factors that
could adversely affect the value of the MORTGAGED Properties are an overall
decline in the residential real estate market in the areas in which the
MORTGAGED Properties are located or a decline in the general condition of the
MORTGAGED Properties as a result
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of failure of borrowers to maintain adequately
the MORTGAGED Properties or of natural disasters that are not necessarily
covered by insurance, such as earthquakes and floods. Any such decline could
extinguish the value of a junior interest in a MORTGAGED Property before having
any effect on the related senior interest therein. If such a decline occurs, the
actual rates of delinquencies, foreclosure and losses on the junior loans could
be higher than those currently experienced in the mortgage lending industry in
general.
GEOGRAPHIC CONCENTRATION OF MORTGAGED PROPERTIES MAY RESULT IN HIGHER LOSSES, IF
PARTICULAR REGIONS EXPERIENCE DOWNTURNS.
Certain geographic regions from time to time will experience weaker
regional economic conditions and housing markets than will other regions, and,
consequently, will experience higher rates of loss and delinquency on mortgage
loans generally. The Mortgage Loans underlying certain Series of Securities may
be concentrated in such regions, and such concentrations may present risk
considerations in addition to those generally present for similar mortgage loan
asset-backed securities without such concentrations. . Information with respect
to geographic concentration of MORTGAGED Properties THAT IS KNOWN AT THE TIME OF
THE OFFERING will be specified in the related Prospectus Supplement .
PRE-FUNDING MAY ADVERSELY AFFECT INVESTMENT.
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 Holders of
the Securities of the related Series will receive a prepayment of principal as
and to the extent described in the related Prospectus Supplement. Any such
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
such a prepayment at yields equaling or exceeding the yields on the related
Securities. It is possible that the yield on any such reinvestment will be
lower, and may be significantly lower, than the yield on the related Securities.
Each additional Primary Asset must satisfy the eligibility criteria
specified in the related Prospectus Supplement and the related agreements. Such
eligibility criteria will be determined in consultation with each Rating Agency
(and/or Credit Enhancer) prior to the issuance of the related Series and are
designed to ensure that if such additional Primary Asset were included as part
of the initial Trust Fund, the credit quality of such assets would be consistent
with the initial rating of each Class of Securities of such Series. Following
the transfer of additional Primary Assets to the Trust, the aggregate
characteristics of the Primary Assets then held in the Trust may vary from those
of the initial Primary Assets of such Trust. As a result, the additional Primary
Assets may adversely affect the performance of the related Securities
The ability of a Trust to invest in additional Primary Assets during
the related Pre-Funding Period will be dependant on the ability of the
Originator to originate or acquire Primary Assets that satisfy the requirements
for transfer to the Trust Fund. The ability of the Originator to originate or
acquire such Primary Assets will be affected by a variety of social and economic
factors, including the prevailing level of market interest rates, unemployment
levels and consumer perceptions of general economic conditions.
ENVIRONMENTAL CONDITIONS ON THE MORTGAGED PROPERTY MAY GIVE RISE TO LIABILITY.
Real property pledged as security to a lender may be subject to certain
environmental risks. Under the laws of certain 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, such a lien has priority over the lien
of an existing mortgage or owner's interest against such MORTGAGED PROPERTY. In
addition, under the laws of some states and under the federal Comprehensive
Environmental Response, Compensation, and Liability Act of 1980 ("CERCLA"), a
lender may be liable, as an "owner" or "operator," for costs of addressing
releases or threatened releases of hazardous substances that require remedy at a
property, if agents or employees of the lender have become sufficiently involved
in the operations of the borrower, regardless of whether or not the
environmental damage or threat was caused by a prior owner. A lender also risks
such liability on foreclosure of the Mortgaged Property.
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STATE AND FEDERAL CREDIT PROTECTION LAWS MAY LIMIT COLLECTION OF PRINCIPAL AND
INTEREST ON THE MORTGAGE LOANS.
Applicable state laws generally regulate interest rates and other
charges and require certain disclosures. In addition, other state laws, public
policy and general principles of equity relating to the protection of consumers,
unfair and deceptive practices and debt collection practices may apply to the
origination, servicing and collection of the Mortgage Loans.
The Mortgage Loans may also be subject to Federal laws, including: (i)
the Federal Truth in Lending Act and Regulation Z promulgated thereunder, which
require certain disclosures to the borrowers regarding the terms of the Mortgage
Loans; (ii) the Equal Credit Opportunity Act and Regulation B promulgated
thereunder, which prohibit discrimination on the basis of age, race, color, sex,
religion, marital status, national origin, receipt of public assistance or the
exercise of any right under the Consumer Credit Protection Act, in the extension
of credit; and (iii) the Fair Credit Reporting Act, which regulates the use and
reporting of information related to the borrower's credit experience.
Depending on the provisions of the applicable law and the specific
facts and circumstances involved, violations of these laws, policies and
principles may limit the ability of the Servicer to collect all or part of the
principal of or interest on the Mortgage Loans, may entitle the borrower to a
refund of amounts previously paid and, in addition, could subject the owner of
the Mortgage Loan to damages and administrative enforcement.
See "CERTAIN LEGAL ASPECTS OF THE MORTGAGE LOANS" herein.
RATINGS ARE NOT RECOMMENDATIONS. A REDUCTION IN THE RATING OF ANY CREDIT
ENHANCER WOULD LIKELY ADVERSELY IMPACT THE RATING OF THE SECURITIES.
It will be a condition to the issuance of a Series of Securities that
they be rated in one of the four highest rating categories by the Rating Agency
identified in the related Prospectus Supplement. Any such rating would be based
on, among other things, the adequacy of the value of the Primary Assets and any
Credit Enhancement with respect to such Series. Such rating should not be deemed
a recommendation to purchase, hold or sell Securities, inasmuch as it does not
address market price or suitability for a particular investor.
A REDUCTION IN THE RATING OF ANY CREDIT ENHANCER WOULD LIKELY ADVERSELY IMPACT
THE RATING OF THE SECURITIES.
There is also no assurance that any such rating will remain in effect
for any given period of time or may not be lowered or withdrawn entirely by the
Rating Agency if in its judgment circumstances in the future so warrant. In
addition to being lowered or withdrawn due to any erosion in the adequacy of the
value of the Primary Assets, such rating might also be lowered or withdrawn,
among other reasons, because of an adverse change in the financial or other
condition of a Credit Enhancer or a change in the rating of such Credit
Enhancer'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 such plans. Due to the complexity of
regulations which govern such 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. See "ERISA
CONSIDERATIONS" herein.
PURCHASE OF MORTGAGE LOANS OR UNDERLYING LOANS FROM AFFILIATES MAY LEAD TO
CONFLICTS OF INTEREST.
The Depositor may acquire Mortgage Loans or Private Securities backed
by Underlying Loans from affiliated sellers. In such a transaction, the
Depositor could be thought to "stand on both sides" of the transaction, with the
resultant risk that the terms of the such transaction are otherwise then would
be the case in an arms-length transaction. The related Prospectus Supplement
will describe the terms of any such affiliated transaction.
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DESCRIPTION OF THE SECURITIES
GENERAL
Each Series of Notes will be issued pursuant to an indenture (the
"Indenture") between the related Issuer and the entity named in the related
Prospectus Supplement as trustee (the "Trustee") with respect to such Series. A
form of Indenture has been filed as an exhibit to the Registration Statement of
which this Prospectus forms a part. The Certificates will also be issued in
Series pursuant to separate agreements (each, a "Pooling and Servicing
Agreement" or a "Trust Agreement") among the Depositor, the Servicer, if the
Series relates to Mortgage Loans, and the Trustee. A form of Pooling and
Servicing Agreement has been filed as an exhibit to the Registration Statement
of which this Prospectus forms a part. A Series may consist of both Notes and
Certificates.
The Originator may agree to reimburse the Depositor for certain fees
and expenses of the Depositor incurred in connection with the offering of the
Securities.
The following summaries describe certain provisions in the Agreements
common to each Series of Securities. The summaries do not purport to be complete
and are subject to, and are qualified in their entirety by reference to, the
provisions of the Agreements and the Prospectus Supplement relating to each
Series of Securities. Where particular provisions or terms used in the
Agreements are referred to, the actual provisions (including definitions of
terms) are incorporated herein by reference as part of such summaries.
Each Series of Securities will consist of one or more Classes of
Securities, one or more of which may be compound interest securities, variable
interest securities, PAC securities, zero coupon securities, principal only
securities, interest only securities or participating securities. A Series may
also include one or more Classes of subordinate securities. The Securities of
each Series will be issued only in fully registered form, without coupons, in
the authorized denominations for each Class specified in the related Prospectus
Supplement. Upon satisfaction of the conditions, if any, applicable to a Class
of a Series, the transfer of the Securities may be registered and the Securities
may be exchanged at the office of the Trustee specified in the Prospectus
Supplement without the payment of any service charge other than any tax or
governmental charge payable in connection with such registration of transfer or
exchange. One or more Classes of a Series may be available in book-entry form
only.
PAYMENTS of principal of and interest on a Series of Securities will
be made on the Distribution Dates specified in the Prospectus Supplement
relating to such Series by check mailed to Holders of such Series, registered as
such at the close of business on the record date specified in the related
Prospectus Supplement applicable to such Distribution Dates at their addresses
appearing on the security register, except that (a) payments may be made by wire
transfer (at the expense of the Holder requesting payment by wire transfer) in
certain circumstances described in the related Prospectus Supplement and (b)
final payments of principal in retirement of each Security will be made only
upon presentation and surrender of such Security at the office of the Trustee
specified in the Prospectus Supplement. Notice of the final payment on a
Security will be mailed to the Holder of such Security before the Distribution
Date on which the final principal payment on any Security is expected to be made
to the holder of such Security.
Payments of principal of and interest on the Securities will be made by
the Trustee, or a paying agent on behalf of the Trustee, as specified in the
related Prospectus Supplement. PAYMENTS with respect to the Primary Assets for a
Series, together with reinvestment income thereon, amounts withdrawn from any
Reserve Fund, and amounts available pursuant to any other Credit Enhancement
will be deposited into the Collection Account. Such amounts may be net of
certain amounts payable to the related Servicer and any other person specified
in the Prospectus Supplement. Such amounts thereafter will be deposited into the
Distribution Account and will be available to make payments on the Securities of
such Series on the next Distribution Date. See "THE TRUST FUNDS--Collection and
Distribution Accounts" herein.
PAYMENTS OF INTEREST
The Securities of each Class by their terms entitled to receive
interest will bear interest from the date and at the rate per annum specified,
or calculated in the method described in the related Prospectus Supplement.
Interest
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on such Securities of a Series will be payable on the Distribution Date
specified in the related 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 Mortgage Loans or Underlying Loans relating to the
Private Securities, as applicable included in the related Trust Fund and/or as
prepayments occur with respect to such Mortgage Loans or Underlying Loans, as
applicable. Principal Only Securities may not be entitled to receive any
interest distributions or may be entitled to receive only nominal interest
distributions. Any interest on Zero Coupon Securities that is not paid on the
related Distribution Date will accrue and be added to the principal thereof on
such Distribution Date.
Interest payable on the Securities on a Distribution Date will include
all interest accrued during the period specified in the related 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 such Distribution Date.
PAYMENTS OF PRINCIPAL
On each Distribution Date for a Series, principal payments will be made
to the Holders of the Securities of such Series on which principal is then
payable, to the extent set forth in the related Prospectus Supplement. Such
payments will be made in an aggregate amount determined as specified in the
related Prospectus Supplement and will be allocated among the respective Classes
of a Series in the manner, at the times and in the priority (which may, in
certain cases, include allocation by random lot) set forth in the related
Prospectus Supplement.
FINAL SCHEDULED DISTRIBUTION DATE
The Final Scheduled Distribution Date with respect to each Class of
Notes is the date no later than which the principal thereof will be fully paid
and with respect to each Class of a Series of Certificates will be the date on
which the entire aggregate principal balance of such Class is expected to be
reduced to zero, in each case calculated on the basis of the assumptions
applicable to such Series described in the related Prospectus Supplement. The
Final Scheduled Distribution Date for each Class of a Series will be specified
in the related 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
such Class will occur earlier, and may occur substantially earlier, than its
Final Scheduled Distribution Date.
Furthermore, with respect to a Series of Certificates, as will be
further described in the related Prospectus Supplement, 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 with respect to a Series. See "Weighted Average
Life of the Securities" below.
SPECIAL REDEMPTION
ONE OR MORE CLASSES OF SECURITIES OF a Series of Securities having
other than monthly Distribution Dates may be subject to special redemption, in
whole or in part, on the day specified in the related Prospectus Supplement (a
"Special Redemption Date") if, as a consequence of prepayments on the Mortgage
Loans or Underlying Loans, as applicable, relating to such Securities or low
yields then available for reinvestment, the entity specified in the related
Prospectus Supplement determines, based on assumptions specified in the
applicable Agreement, that the amount available for the payment of interest that
will have accrued on such Securities (the "Available Interest Amount") through
the designated interest accrual date specified in the related Prospectus
Supplement is less than the amount of interest that will have accrued on such
Securities to such date. In such event and as further described in the related
Prospectus Supplement, the Trustee will redeem a principal amount of outstanding
Securities of such Series as will cause the Available Interest Amount to equal
the amount of interest that will have accrued through such designated interest
accrual date for such Series of Securities outstanding immediately after such
redemption.
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OPTIONAL REDEMPTION, PURCHASE OR TERMINATION
One or more Classes of Notes or purchase 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 under the circumstances, if any,
specified in the Prospectus Supplement relating to such Series. Such redemption
or repurchase may occur or on or after a date specified in the related
Prospectus Supplement, or on or after such time as the aggregate outstanding
principal amount of the Securities or Primary Assets, as specified in the
related Prospectus Supplement, is less than the amount or percentage specified
in the related Prospectus Supplement, such amount or percentage not to exceed
10% of the aggregate principal balance of the Primary Assets as of the Cut-off
Date for that Series . Notice of such redemption, purchase or termination must
be given by the Depositor or the Trustee prior to the related date. The
redemption, purchase or repurchase price will be set forth in the related
Prospectus Supplement. In the event that a REMIC election has been made, 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 Code. The risk of reinvesting
unscheduled distributions resulting form prepayments of the Securities will be
borne by the Holders. Neither the Trust nor the Holders will have any continuing
liability under such optional redemption or repurchase.
In addition, the Trustee, the Servicer or certain other entities
specified in the related Prospectus Supplement may be required to effect early
retirement of a series of Securities by soliciting competitive bids for the
purchase of the related Primary Assets or otherwise, under other circumstances
and in the manner specified in "THE AGREEMENTS--Termination " herein.
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
such 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.
Such 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 for a Series of
Securities 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 of such Series and the percentage of the original principal amount
of each Class of Securities of such Series that would be outstanding on
specified Distribution Dates for such Series based on the assumptions stated in
such Prospectus Supplement, including assumptions that prepayments on the
Mortgage Loans or Underlying Loans relating to the Private Securities, as
applicable, included in the related Trust Fund are made at rates corresponding
to various percentages of the prepayment standard or model specified in such
Prospectus Supplement.
There is, however, no assurance that prepayment of the Mortgage Loans
or Underlying Loans relating to the Private Securities, as applicable, included
in the related Trust Fund will conform to any level of any prepayment standard
or model specified in the related 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 such
Mortgage Loans or Underlying 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
Mortgage Loans or Underlying Loans relating to the Private Securities, as
applicable, for a Series, such loans are likely to prepay at rates higher than
if prevailing interest rates remain at or above the interest rates borne by such
loans. In this regard, it should be noted that the Mortgage Loans or Underlying
Loans, as applicable, for a Series
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may have different interest rates. In addition, the weighted average life of the
Securities may be affected by the varying maturities of the Mortgage Loans or
Underlying Loans relating to the Private Securities, as applicable. If any
Mortgage Loans or Underlying Loans relating to the Private Securities, as
applicable, for a Series have actual terms-to-stated maturity of less than those
assumed in calculating the Final Scheduled Distribution Date of the related
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
and a reinvestment return higher than the Assumed Reinvestment Rate.
THE TRUST FUNDS
GENERAL
The Notes of each Series will be secured by the pledge of the assets of
the related Trust Fund, and the Certificates of each Series will represent
interests in the assets of the related Trust Fund. The Trust Fund of each Series
will include assets acquired from the Originator composed of (i) the Primary
Assets, (ii) any Credit Enhancement, (iii) any MORTGAGED Property that secured a
Mortgage Loan but which is acquired by foreclosure or deed in lieu of
foreclosure or repossession and (iv) the amount, if any, initially deposited in
the Collection Account or Distribution Account for a Series as specified in the
related Prospectus Supplement. A MAXIMUM OF 5% (BY CUT-OFF DATE PRINCIPAL
BALANCE) OF THE AGGREGATE PRIMARY ASSETS THAT ARE INCLUDED IN A TRUST FUND AS
SUCH TRUST FUND WILL BE CONSTITUTED AT THE CLOSING DATE WILL DEVIATE FROM THE
CHARACTERISTICS THAT ARE DESCRIBED IN THE RELATED PROSPECTUS SUPPLEMENT.
The Securities will be non-recourse obligations secured by the related
Trust Fund. Holders of a Series of Notes may only proceed against such
collateral securing such Series of Notes in the case of a default with respect
to such Series of Notes and may not proceed against any assets of the Depositor
or the related Trust Fund not pledged to secure such Notes.
The Primary Assets for a Series will be acquired by the related Trust
Fund from the related Originator, or may be acquired in the open market or in
privately negotiated transactions. Mortgage Loans relating to a Series will be
serviced by the Servicer, which may be the Originator, specified in the related
Prospectus Supplement, pursuant to a Pooling and Servicing Agreement, with
respect to a Series of Certificates or a servicing agreement (each, a "Servicing
Agreement") between the Trust Fund and Servicer, with respect to a Series of
Notes.
As used herein, "Agreement" means, with respect to a Series of
Certificates, the Pooling and Servicing Agreement or Trust Agreement, and with
respect to a Series of Notes, the Indenture and the Servicing Agreement, as the
context requires.
A Trust Fund relating to a Series of Securities may be a business trust
formed under the laws of the state specified in the related Prospectus
Supplement pursuant to a trust agreement (each, a "Trust Agreement") between the
Depositor and the trustee of such Trust Fund specified in the related Prospectus
Supplement
With respect to each Trust Fund, prior to the initial offering of the
related Series of Securities, the Trust Fund will have no assets or liabilities.
No Trust Fund is expected to engage in any activities other than acquiring,
managing and holding the related Primary Assets and other assets contemplated
herein and in the related Prospectus Supplement and the proceeds thereof,
issuing Securities and making payments and distributions thereon and certain
related activities. No Trust Fund is expected to have any source of capital
other than its assets and any related Credit Enhancement.
Primary Assets included in the Trust Fund for a Series may consist of
any combination of Mortgage Loans and Private Securities, to the extent and as
specified in the related Prospectus Supplement. Some of the Mortgage Loans may
be delinquent to the extent and as specified in the related Prospectus
Supplement. The percentage of those Mortgage Loans which are delinquent shall
not exceed 10% of the aggregate principal balance of the Primary Assets as of
the Cut-off Date for that Series. The following is a brief description of the
Mortgage Loans expected to be included in the related Trusts.
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THE MORTGAGE LOANS
MORTGAGE LOANS. The Primary Assets for a Series may consist, in whole
or in part, of mortgage loans (the "Mortgage Loans") secured by mortgages on
one- to four-family residential housing ("Single Family Properties"), including
condominium units ("Condominium Units") and cooperative dwellings ("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 related Prospectus Supplement.
THE MORTGAGE LOANS WILL GENERALLY CONSIST OF WHAT ARE COMMONLY REFERRED
TO AS "HOME EQUITY" LOANS, AS DISTINGUISHED FROM "PURCHASE MONEY" LOANS. BOTH OF
THESE CONCEPTS REFER TO THE USE OF PROCEEDS MADE BY THE RELATED BORROWER, RATHER
THAN TO ANY LEGAL OR OTHER DOCUMENTARY DIFFERENCES BETWEEN THE TWO TYPES OF
LOANS, EXCEPT THAT "HOME EQUITY" LOANS ARE USUALLY (BUT NOT ALWAYS) SECURED BY
MORTGAGES WHICH ARE IN A SUBORDINATE LIEN POSITION WHILE "PURCHASE MONEY" LOANS
ARE USUALLY (BUT NOT ALWAYS) SECURED BY MORTGAGES WHICH ARE IN A SENIOR LIEN
POSITION, AND "HOME EQUITY" LOANS ARE TYPICALLY (BUT NOT ALWAYS) SHORTER IN
MATURITY THAN "PURCHASE MONEY" LOANS (I.E., FIFTEEN RATHER THAN THIRTY YEARS).
A "HOME EQUITY" LOAN IS A MORTGAGE LOAN THE PROCEEDS OF WHICH ARE NOT
USED TO PURCHASE THE RELATED MORTGAGED PROPERTY; THE PROCEEDS OF A "PURCHASE
MONEY" MORTGAGE ARE APPLIED TO THE PURCHASE OF THE RELATED MORTGAGED PROPERTY.
TYPICAL USES OF PROCEEDS OF "HOME EQUITY" LOANS WOULD BE HOME IMPROVEMENT, DEBT
CONSOLIDATION AND THE FUNDING OF LARGE EXPENSES SUCH AS COLLEGE TUITION.
The Mortgage Loans may be (i) "conventional" mortgage loans, that is,
they will not be insured or guaranteed by any governmental agency, (ii) insured
by the Federal Housing Authority ("FHA") or (iii) partially guaranteed by the
Veteran's Administration, as specified in the related Prospectus Supplement. THE
MORTGAGE LOANS MAY BE EITHER "CLOSED-END" LOANS (I.E., LOANS WHICH DO NOT PERMIT
THE RELATED BORROWER TO OBTAIN THE PROCEEDS OF FUTURE ADVANCES) OR "OPEN-END"
LOANS (I.E., LOANS STRUCTURED AS LINES OF CREDIT, WHICH PERMIT THE RELATED
BORROWER, SUBJECT TO A MAXIMUM DOLLAR AMOUNT, TO OBTAIN MORE THAN ONE ADVANCE OF
PROCEEDS). THE MORTGAGE LOANS will be secured by first, second or more 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, as described herein and in the related Prospectus Supplement. 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 such 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 related Prospectus Supplement
and may include any of the following features of combinations thereof or other
features described in the related Prospectus Supplement:
(a) Interest may be payable at a fixed rate, a rate
adjustable from time to time in relation to an index (which will be
specified in the related Prospectus Supplement), a rate that is fixed
for a period of time or under certain 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 such limitations.
Accrued interest may be deferred and added to the principal of a
Mortgage Loan for such periods and under such circumstances as may be
specified in the related Prospectus Supplement. Mortgage Loans may
provide for the payment of interest at a rate lower than the specified
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.
(b) Principal may be payable on a level debt service
basis to fully amortize the Mortgage Loan over its term, may be
calculated on the basis of an 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
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principal may be due on maturity. Principal may include interest that
has been deferred and added to the principal balance of the Mortgage
Loan.
(c) Monthly Payments of principal and interest may be
fixed for the life of the Mortgage Loan, may increase over a specified
period of time or may change from period to period. Mortgage Loans may
include limits on periodic increases or decreases in the amount of
Monthly Payments and may include maximum or minimum amounts of Monthly
Payments.
(d) Prepayments of principal may be subject to a
prepayment fee, which may be fixed for the life of the Mortgage Loan or
may decline over time, and may be prohibited for the life of the
Mortgage Loan or for certain periods. Certain Mortgage Loans may permit
prepayments after expiration of the applicable lockout period and may
require the payment of a prepayment fee in connection with any such
subsequent prepayment. Other Mortgage Loans may permit prepayments
without payment of a fee unless the prepayment occurs during specified
time periods. The Mortgage Loans may include "due on sale" clauses
which permit the mortgagee to demand payment of the entire Mortgage
Loan in connection with the sale or certain transfers of the related
Mortgaged Property. Other Mortgage Loans may be assumable by persons
meeting the then applicable underwriting standards of the Originator.
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 (an "Actuarial Mortgage Loan"), the simple interest method (a
"Simple Interest Mortgage Loan") or the "Rule of 78s" method (a "Rule of 78s
Mortgage Loan"), as set forth in the related Prospectus Supplement. The related
Prospectus Supplement will set forth 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 such payment applied to
principal.
A Simple Interest Mortgage Loan provides for the amortization of the
amount financed under such 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 such 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 such 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 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.
Certain of the Mortgage Loans contained in a Trust may be loans insured
under the FHA Title I credit insurance program created pursuant to Sections 1
and 2(a) of the National Housing Act of 1934 (the "Title I Program"). Under the
Title I Program, the FHA is authorized and empowered to insure qualified lending
institutions against losses on eligible loans. The Title I Program operates as a
coinsurance program in which the FHA insures
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up to 90% of certain losses incurred on an individual insured loan, including
the unpaid principal balance of the loan, but only to the extent of the
insurance coverage available in the lender's FHA insurance coverage reserve
account. The owner of the loan bears the uninsured loss on each loan.
The Mortgaged Properties will include Single Family Property (i.e.,
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 ten years (unless
otherwise provided in the related Prospectus Supplement) greater than the term
of the related 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 related Prospectus Supplement will specify whether or not Mortgages
on Cooperative Dwellings consist of a lien on the shares issued by such
Cooperative Dwelling and the proprietary lease or occupancy agreement relating
to such Cooperative Dwelling.
The aggregate principal balance of Mortgage Loans secured by Mortgaged
Properties that are owner-occupied will be disclosed in the related 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 (i) 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 (ii)
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 related 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 related Prospectus Supplement, taking into
account the amounts of any related senior mortgage loans.
ADDITIONAL INFORMATION. The selection criteria which will apply with
respect to the Mortgage Loans, including, but not limited to, the Combined
Loan-to-Value Ratios or Loan-to-Value Ratios, as applicable, original terms to
maturity and delinquency information, will be specified in the related
Prospectus Supplement.
The Mortgage Loans for a Series 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, as specified in the related Prospectus Supplement. The
Mortgage Loans for a Series may include loans that do not have a specified
stated maturity.
The related Prospectus Supplement for each Series will provide
information with respect to the Mortgage Loans that are Primary Assets as of the
Cut-off Date, including, among other things, and to the extent relevant: (a) the
aggregate unpaid principal balance of the Mortgage Loans; (b) the range and
weighted average Loan Rate on the Mortgage Loans, 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; (c) the range and average outstanding principal
balance of the Loans; (d) the weighted average original and remaining
term-to-stated maturity of the Mortgage Loans and the range of original and
remaining terms-to-stated maturity, if applicable; (e) the range and weighted
average of Combined Loan-to-Value Ratios or Loan-to-Value Ratios for the
Mortgage Loans, as applicable; (f) the percentage (by outstanding principal
balance as of the Cut-off Date) of Mortgage Loans that accrue interest at
adjustable or fixed interest rates; (g) any special hazard insurance policy or
bankruptcy bond or other Credit Enhancement relating to the Mortgage Loans; (h)
the GEOGRAPHIC DISTRIBUTION OF ANY MORTGAGED PROPERTIES SECURING THE MORTGAGE
LOANS; (I) THE PERCENTAGE OF MORTGAGE LOANS (by principal balance as of the
Cut-off Date) that are secured by Single Family MORTGAGED Properties, shares
relating to Cooperative Dwellings, Condominium Units, investment property and
vacation or second homes; (J) the lien priority of the Mortgage Loans; (K) year
of origination of the Mortgage Loans; and (L) the delinquency status of Mortgage
Loans, including the duration and history of such delinquencies and the
percentage of the of Mortgage Loans (by principal balance as of the Cut-off
Date) that are delinquent. The
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related Prospectus Supplement will also specify any other limitations on the
types or characteristics of Mortgage Loans for a Series.
If specific information respecting the Mortgage Loans is not known at
the time the related series of Securities initially is offered, information of
the nature described above will be provided in the Prospectus Supplement, and
specific information will be set forth in a report on Form 8-K to be filed with
the Commission within fifteen days after the initial issuance of such
Securities. A copy of the Pooling and Servicing Agreement with respect to each
Series of Securities will be attached to the Form 8-K and will be available for
inspection at the corporate trust office of the Trustee specified in the related
Prospectus Supplement. A schedule of the Mortgage Loans relating to such Series
will be attached to the Pooling and Servicing Agreement delivered to the Trustee
upon delivery of the Securities.
PRIVATE SECURITIES
GENERAL. Primary Assets for a Series may consist, in whole or in part,
of Private Securities which include pass-through certificates representing
beneficial interests in loans of the type that would otherwise be eligible to be
Mortgage Loans (the "Underlying Loans") or (b) collateralized obligations
secured by Underlying Loans. Such pass-through certificates or collateralized
obligations will have previously been (a) offered and distributed to the public
pursuant to an effective registration statement or (b) acquired in a transaction
not involving any public offering from a person who is not an affiliate of the
issuer of such securities at the time of transfer (nor an affiliate thereof at
any time during the three preceding months); provided a period of three years
elapsed since the later of the date the securities were acquired from the issuer
or an affiliate thereof. 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 pursuant to a pooling and
servicing agreement, a trust agreement or similar agreement (a "PS Agreement").
The seller/servicer of the Underlying Loans will have entered into the PS
Agreement with the trustee under such PS Agreement (the "PS Trustee"). The PS
Trustee or its agent, or a custodian, will possess the Underlying Loans.
Underlying Loans will be serviced by a servicer (the "PS Servicer") directly or
by one or more sub-servicers who may be subject to the supervision of the PS
Servicer.
The sponsor of the Private Securities (the "PS Sponsor") 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 such
trusts, and selling beneficial interests in such trusts. The PS Sponsor may be
an affiliate of the Depositor. The obligations of the PS Sponsor will generally
be limited to certain representations and warranties with respect to the assets
conveyed by it to the related 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 related 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 PS Trustee or the PS
Servicer. The PS Sponsor or the PS Servicer may have the right to repurchase the
Underlying Loans after a certain date or under other circumstances specified in
the related Prospectus Supplement.
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. Such 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 PS Agreement, guarantees, letters of credit, 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
certain characteristics of the Underlying Loans and other factors and will have
been established for the
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Private Securities on the basis of requirements of the nationally recognized
statistical rating organization that rated the Private Securities.
ADDITIONAL INFORMATION. The Prospectus Supplement for a Series for
which the Primary Assets include Private Securities will specify (such
disclosure may be on an approximate basis and will be as of the date specified
in the related Prospectus Supplement), to the extent relevant and to the extent
such information is reasonably available to the Depositor and the Depositor
reasonably believes such information to be reliable: (i) the aggregate
approximate principal amount and type of the Private Securities to be included
in the Trust Fund for such Series; (ii) certain characteristics of the
Underlying Loans including (A) the payment features of such Underlying Loans
(i.e., whether they are fixed rate or adjustable rate and whether they provide
for fixed level payments or other payment features), (B) the approximate
aggregate principal balance, if known, of such Underlying Loans insured or
guaranteed by a governmental entity, (C) the servicing fee or range of servicing
fees with respect to the Underlying Loans, (D) the minimum and maximum stated
maturities of such Underlying Loans at origination, (E) the lien priority of
such Underlying Loans, and (F) the delinquency status and year of origination of
such Underlying Loans; (iii) the maximum original term-to-stated maturity of the
Private Securities; (iv) the weighted average term-to-stated maturity of the
Private Securities; (v) the pass-through or certificate rate or ranges thereof
for the Private Securities; (vi) the PS Sponsor, the PS Servicer (if other than
the PS Sponsor) and the PS Trustee for such Private Securities; (vii) certain
characteristics of credit support if any, such as Reserve Funds, insurance
policies, letters of credit or guarantees relating to such Mortgage Loans
underlying the Private Securities or to such Private Securities themselves;
(viii) 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;
and (ix) the terms on which Underlying Loans may be substituted for those
originally underlying the Private Securities.
If information of the nature described above representing the Private
Securities is not known to the Depositor at the time the Securities are
initially offered, approximate or more general information of the nature
described above will be provided in the Prospectus Supplement and the additional
information, if available, will be set forth in a Current Report on Form 8-K to
be available to investors on the date of issuance of the related Series and to
be filed with the Commission within 15 days of the initial issuance of such
Securities.
COLLECTION AND DISTRIBUTION ACCOUNTS
A separate Collection Account will be established by the Trustee or the
Servicer, in the name of the Trustee, for each Series of Securities for receipt
of the amount of cash, if any, specified in the related Prospectus Supplement to
be initially deposited therein by the Depositor, all amounts received on or with
respect to the Primary Assets and any income earned thereon. Certain amounts on
deposit in such Collection Account and certain amounts available pursuant to any
Credit Enhancement will be deposited in a related Distribution Account, which
will also be established by the Trustee for each such Series of Securities, for
distribution to the related Holders. The TRUSTEE MAY invest the funds in the
Collection and Distribution Accounts in eligible investments maturing, with
certain exceptions, not later, in the case of funds in the Collection Account,
than the day preceding the date such funds are due to be deposited in the
Distribution Account or otherwise distributed and, in the case of funds in the
Distribution Account, than the day preceding the next Distribution Date for the
related Series of Securities. "Eligible Investments" include, among other
investments, obligations of the United States and certain agencies thereof,
federal funds, certificates of deposit, commercial paper, demand and time
deposits and banker's acceptances, certain repurchase agreements of United
States government securities and certain guaranteed investment contracts, in
each case, acceptable to the Rating Agency.
Notwithstanding any of the foregoing, amounts may be deposited and
withdrawn pursuant to any Deposit Agreement or Minimum Principal Payment
Agreement as specified in the related Prospectus Supplement.
PRE-FUNDING ACCOUNTS
A Trust Fund may include one or more segregated trust accounts (each, a
"Pre-Funding Account") established and maintained with the Trustee for the
related Series. On the closing date for such Series, a portion of the proceeds
of the sale of the Securities of such Series (such amount, the "Pre-Funded
Amount") will be deposited in the Pre-Funding Account and may be used to acquire
additional Primary Assets during the period of time specified in the related
Prospectus Supplement (the "Pre-Funding Period"). If any Pre-Funded Amount
remains on
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deposit in the Pre-Funding Account at the end of the Pre-Funding
Period, such amount will be applied in the manner specified in the related
Prospectus Supplement to prepay the Notes and/or the Certificates of the
applicable Series.
IF A Pre-Funding Account IS ESTABLISHED, (A) the Pre-Funding Period
will not exceed 90 days from the related closing date, (b) 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 related Trust Fund on the
closing date, subject to such exceptions as are expressly stated in such
Prospectus Supplement, (c) the Pre-Funding Amount will not exceed 25% of the
principal amount of the Securities issued pursuant to a particular offering and
(d) prior to the investment of the Pre-Funded Amount in additional Primary
Assets, such Pre-Funded Amount will be invested in one or more Eligible
Investments. Any Eligible Investment must mature no later than the Business Day
prior to the next Distribution Date.
If a Pre-Funding Account is established, one or more segregated trust
accounts (each, a "Capitalized Interest Account") may be established and
maintained with the Trustee for the related Series. On the closing date for such
Series, a portion of the proceeds of the sale of the Securities of such Series
will be deposited in the Capitalized Interest Account and used to fund the
excess, if any, of the sum of (i) the amount of interest accrued on the
Securities of such Series and (ii) certain fees or expenses during the
Pre-Funding Period, over the amount of interest available therefor from the
Primary Assets in the Trust Fund. Any amounts on deposit in the Capitalized
Interest Account at the end of the Pre-Funding Period that are not necessary for
such purposes will be distributed to the person specified in the related
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 Holders of
the Securities of the related Series will receive a prepayment of principal as
and to the extent described in the related Prospectus Supplement. Any such
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
such a prepayment at yields equaling or exceeding the yields on the related
Securities. It is possible that the yield on any such reinvestment will be
lower, and may be significantly lower, than the yield on the related Securities.
CREDIT ENHANCEMENT
If stated in the Prospectus Supplement relating to a Series of
Securities, simultaneously with the Depositor's assignment of the Primary Assets
to the Trustee, the Depositor will obtain an irrevocable letter of credit,
surety bond or insurance policy, issue Subordinate Securities or obtain any
other form of credit enhancement or combination thereof (collectively, "Credit
Enhancement") in favor of the Trustee on behalf of the Holders of the related
Series or designated Classes of such Series from an institution or by other
means acceptable to the Rating Agency. The Credit Enhancement will support the
payment of principal and interest on the Securities, and may be applied for
certain other purposes to the extent and under the conditions set forth in such
Prospectus Supplement. Credit Enhancement for a Series may include one or more
of the following forms, or such other form as may be specified in the related
Prospectus Supplement. Credit Enhancement may be structured so as to protect
against losses relating to more than one Trust Fund, in the manner described
therein.
SUBORDINATE SECURITIES
Credit Enhancement for a Series may consist of one or more Classes of
Subordinate Securities. The rights of holders of such 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, but only
to the extent described in the related Prospectus Supplement.
INSURANCE
Credit Enhancement for a Series may consist of special hazard insurance
policies, bankruptcy bonds and other types of insurance relating to the Primary
Assets, as described below and in the related Prospectus Supplement.
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POOL INSURANCE POLICY. The related Prospectus Supplement will describe
ANY pool insurance policy OBTAINED BY THE DEPOSITOR for the Mortgage Loans in
the related Trust Fund. The pool insurance policy will cover any loss (subject
to the limitations described in a related Prospectus Supplement) by reason of
default. but will not cover the portion of the principal balance of any Mortgage
Loan that is required to be covered by any primary mortgage insurance policy.
The amount and terms of any such coverage will be set forth in the related
Prospectus Supplement.
SPECIAL HAZARD INSURANCE POLICY. Although the terms of such policies
vary to some degree, a special hazard insurance policy typically provides that,
where there has been damage to MORTGAGED Property securing a defaulted or
foreclosed Mortgage Loan (title to which has been acquired by the insured) and
to the extent such damage is not covered by the standard hazard insurance policy
or any flood insurance policy, if applicable, required to be maintained with
respect to such MORTGAGED Property, 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 (i) the cost of repair
or replacement of such MORTGAGED Property or (ii) upon transfer of such
MORTGAGED Property to the special hazard insurer, the unpaid principal balance
of such Mortgage Loan at the time of acquisition of such MORTGAGED Property by
foreclosure or deed in lieu of foreclosure, plus accrued interest to the date of
claim settlement and certain expenses incurred by the Servicer with respect to
such MORTGAGED Property. If the unpaid principal balance plus accrued interest
and certain expenses is paid by the special hazard insurer, the amount of
further coverage under the special hazard insurance policy will be reduced by
such amount less any net proceeds from the sale of such MORTGAGED Property. Any
amount paid as the cost of repair of such MORTGAGED Property will reduce
coverage by such amount. Special hazard insurance policies typically do not
cover losses occasioned by war, civil insurrection, certain governmental
actions, errors in design, faulty workmanship or materials (except under certain
circumstances), nuclear reaction, flood (if the MORTGAGED PROPERTY is in a
federally designated flood area), chemical contamination and certain other
risks.
Restoration of the MORTGAGED Property with the proceeds described under
(i) above is expected to satisfy the condition under any pool insurance policy
that such MORTGAGED Property be restored before a claim under such pool
insurance policy may be validly presented with respect to the defaulted Mortgage
Loan secured by such MORTGAGED Property. The payment described under (ii) above
will render unnecessary presentation of a claim in respect of such Mortgage Loan
under any pool insurance policy. Therefore, so long as such 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 related Mortgage Loan plus
accrued interest and certain expenses will not affect the total insurance
proceeds paid to Holders of the Securities, 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 securing the
related Mortgage Loan at an amount less than the then-outstanding principal
balance of such Mortgage Loan. The amount of the secured debt could be reduced
to such value, and the holder of such Mortgage Loan thus would become an
unsecured creditor to the extent the outstanding principal balance of such
Mortgage Loan exceeds the value so assigned to the MORTGAGED Property by the
bankruptcy court. In addition, certain other modifications of the terms of a
Mortgage Loan can result from a bankruptcy proceeding. See "CERTAIN LEGAL
ASPECTS OF MORTGAGE LOANS" herein. If so provided in the related Prospectus
Supplement, the Depositor or other entity specified in the related Prospectus
Supplement will obtain a bankruptcy bond or similar insurance contract (the
"bankruptcy bond") covering losses resulting from proceedings with respect to
borrowers under the Bankruptcy Code. The bankruptcy bond will cover certain
losses resulting from a reduction by a bankruptcy court of scheduled payments of
principal of and interest on a Mortgage Loan or a reduction by such court of the
principal amount of a Mortgage Loan and will cover certain unpaid interest on
the amount of such a principal reduction from the date of the filing of a
bankruptcy petition.
The bankruptcy bond will provide coverage in the aggregate amount
specified in the related Prospectus Supplement for all Mortgage Loans in the
Trust Fund for such Series. Such amount will be reduced by payments made under
such bankruptcy bond in respect of such Mortgage Loans, and will not be
restored.
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RESERVE FUNDS
The Depositor may deposit into one or more funds to be established with
the Trustee as part of the Trust Fund for such Series or for the benefit of any
Credit Enhancer with respect to such Series (the "Reserve Funds") 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 of the
Securities in the amount specified in such Prospectus Supplement. In the
alternative or in addition to such deposit, a Reserve Fund for a Series may be
funded over time through application of all or a portion of the excess cash flow
from the Primary Assets for such Series, to the extent described in the related
Prospectus Supplement. If applicable, the initial amount of the Reserve Fund and
the Reserve Fund maintenance requirements for a Series of Securities will be
described in the related 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, in the manner and to the extent
specified in the related Prospectus Supplement.
Amounts deposited in a Reserve Fund will be invested by the Trustee, in
Eligible Investments maturing no later than the day specified in the related
Prospectus Supplement.
MINIMUM PRINCIPAL PAYMENT AGREEMENT
If stated in the Prospectus Supplement relating to a Series of
Securities, the Depositor will enter into a Minimum Principal Payment Agreement
with an entity meeting the criteria of the Rating Agency pursuant to which such
entity will provide certain payments on the Securities of such Series in the
event that aggregate scheduled principal payments and/or prepayments on the
Primary Assets for such Series are not sufficient to make certain payments on
the Securities of such Series, as provided in the Prospectus Supplement.
DEPOSIT AGREEMENT
The Depositor and the Trustee for such Series of Securities will enter
into a Deposit Agreement with the entity specified in such Prospectus Supplement
on or before the sale of such Series of Securities. The purpose of a Deposit
Agreement would be to accumulate available cash for investment so that such
cash, together with income thereon, can be applied to future distributions on
one or more Classes of Securities. The Prospectus Supplement for a Series of
Securities pursuant to which a Deposit Agreement is used will contain a
description of the terms of such Deposit Agreement.
SERVICING OF MORTGAGE LOANS
GENERAL
Customary servicing functions with respect to Mortgage Loans comprising
the Primary Assets in the Trust Fund will be provided by the Servicer directly
pursuant to the related Servicing Agreement or Pooling and Servicing Agreement,
as the case may be, with respect to a Series of Securities.
COLLECTION PROCEDURES; ESCROW ACCOUNTS
The Servicer will make reasonable efforts to collect all payments
required to be made under the Mortgage Loans and will, consistent with the terms
of the related Agreement for a Series and any applicable Credit Enhancement,
follow such collection procedures as it follows with respect to comparable loans
held in its own portfolio. Consistent with the above, the Servicer may, in its
discretion, (i) waive any assumption fee, late payment charge, or other charge
in connection with a Mortgage Loan and (ii) to the extent provided in the
related Agreement arrange with an obligor a schedule for the liquidation of
delinquencies by extending the dates on which the related payments (the
"Scheduled Payments") are due (the "Due Dates") on such Mortgage Loan.
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The Servicer, to the extent permitted by law, will establish and
maintain escrow or impound accounts ("Escrow Accounts") with respect to Mortgage
Loans in which payments by obligors to pay taxes, assessments, mortgage and
hazard insurance premiums, and other comparable items will be deposited.
Mortgage Loans may not require such payments under the loan related documents,
in which case the Servicer would not be required to establish any Escrow Account
with respect to such Mortgage Loans. 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 securing the related
Mortgage Loan and to clear and terminate such Escrow Account. The Servicer will
be responsible for the administration of the Escrow Accounts and generally will
make advances to such accounts when a deficiency exists therein.
DEPOSITS TO AND WITHDRAWALS FROM THE COLLECTION ACCOUNT
The Trustee or the Servicer will establish a separate account (the
"Collection Account") in the name of the Trustee. Unless otherwise indicated in
the related Prospectus Supplement, the Collection Account will be an account
maintained (i) at a depository institution, the long-term unsecured debt
obligations of which at the time of any deposit therein are rated by each Rating
Agency rating the Securities of such Series at levels satisfactory to each
Rating Agency or (ii) in an account or accounts the deposits in which are
insured to the maximum extent available by the Federal Deposit Insurance
Corporation ("FDIC") or which are secured in a manner meeting requirements
established by each Rating Agency.
The funds held in the Collection Account may be invested, pending
remittance to the Trustee, in Eligible Investments. The Servicer will be
entitled to receive as additional compensation any interest or other income
earned on funds in the Collection Account.
The Servicer, the Depositor, the Trustee or the Originator, as
appropriate, will deposit into the Collection Account for each Series on the
Business Day following the Closing Date any amounts representing Scheduled
Payments due after the related Cut-off Date but received by the Servicer on or
before the Closing Date, and thereafter, within two business days after the date
of receipt thereof, the following payments and collections received or made by
it (other than, unless otherwise provided in the related Prospectus Supplement,
in respect of principal of and interest on the related Primary Assets due on or
before such Cut-off Date):
(i) All payments on account of principal, including
prepayments, on such Primary Assets;
(ii) All payments on account of interest on such Primary
Assets after deducting therefrom, at the discretion of the Servicer but
only to the extent of the amount permitted to be withdrawn or withheld
from the Collection Account in accordance with the related Agreement,
the Servicing Fee in respect of such Primary Assets;
(iii) 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 such Primary Assets received from
the obligor, other than amounts required to be paid or refunded to the
obligor pursuant to the terms of the applicable loan documents or
otherwise pursuant to law ("Liquidation Proceeds"), exclusive of, in
the discretion of the Servicer, but only to the extent of the amount
permitted to be withdrawn from the Collection Account in accordance
with the related Agreement, the Servicing Fee, if any, in respect of
the related Primary Asset;
(iv) All proceeds under any title insurance, hazard
insurance or other insurance policy covering any such Primary Asset,
other than proceeds to be applied to the restoration or repair of the
related MORTGAGED Property or released to the obligor in accordance
with the related Agreement;
(v) All amounts required to be deposited therein from any
applicable Reserve Fund for such Series pursuant to the related
Agreement;
(vi) All Advances made by the Servicer required pursuant
to the related Agreement; and
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(vii) All repurchase prices of any such Primary Assets
repurchased by the Depositor, the Servicer or the Originator pursuant
to the related Agreement.
The SERVICER MAY BE permitted, from time to time, to make withdrawals
from the Collection Account for each Series for the following purposes:
(i) to reimburse itself for Advances for such Series made
by it pursuant to the related Agreement; the Servicer's right to
reimburse itself is limited to amounts received on or in respect of
particular Mortgage Loans (including, for this purpose, Liquidation
Proceeds and amounts representing proceeds of insurance policies
covering the related MORTGAGED Property) which represent late
recoveries of Scheduled Payments respecting which any such Advance was
made;
(ii) to the extent provided in the related Agreement, to
reimburse itself for any Advances for such Series that the Servicer
determines in good faith it will be unable to recover from amounts
representing late recoveries of Scheduled Payments respecting which
such Advance was made or from Liquidation Proceeds or the proceeds of
insurance policies;
(iii) to reimburse itself from Liquidation Proceeds for
liquidation expenses and for amounts expended by it in good faith in
connection with the restoration of damaged MORTGAGED Property and, in
the event deposited in the Collection Account and not previously
withheld, and to the extent that Liquidation Proceeds after such
reimbursement exceed the outstanding principal balance of the related
Mortgage Loan, together with accrued and unpaid interest thereon to the
Due Date for such Mortgage Loan next succeeding the date of its receipt
of such Liquidation Proceeds, to pay to itself out of such excess the
amount of any unpaid Servicing Fee and any assumption fees, late
payment charges, or other charges on the related Mortgage Loan;
(iv) 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 Mortgage
Loan prior to the deposit of such Scheduled Payment, late payment or
recovery into the Collection Account, to pay to itself the Servicing
Fee, as adjusted pursuant to the related Agreement, from any such
Scheduled Payment, late payment or such other recovery, to the extent
permitted by the related Agreement;
(v) to reimburse itself for expenses incurred by and
recoverable by or reimbursable to it pursuant to the related Agreement;
(vi) to pay to the applicable person with respect to each
Primary Asset or Mortgaged Properties acquired through or in lieu of
foreclosure (each, an "REO Property") acquired in respect thereof that
has been repurchased or removed from the Trust Fund by the Depositor,
the Servicer or the Originator pursuant to the related Agreement, all
amounts received thereon and not distributed as of the date on which
the related repurchase price was determined;
(vii) to make payments to the Trustee of such Series for
deposit into the Distribution Account, if any, or for remittance to the
Holders of such Series in the amounts and in the manner provided for in
the related Agreement; and
(viii) to clear and terminate the Collection Account
pursuant to the related Agreement.
In addition, if the Servicer deposits in the Collection Account for a
Series any amount not required to be deposited therein, it may, at any time,
withdraw such amount from such Collection Account.
ADVANCES AND LIMITATIONS THEREON
The related Prospectus Supplement will describe the circumstances, if
any, under which the Servicer will make Advances with respect to delinquent
payments on Mortgage Loans. The Servicer will be obligated to make Advances, and
such obligation may be limited in amount, or may not be activated until a
certain portion of a
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specified Reserve Fund is depleted. Advances are intended
to provide liquidity and, except to the extent specified in the related
Prospectus Supplement, not to guarantee or insure against losses. Accordingly,
any funds advanced are recoverable by the Servicer out of amounts received on
particular Mortgage Loans which represent late recoveries of principal or
interest, proceeds of insurance policies or Liquidation Proceeds respecting
which any such 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 related Mortgage 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 related Prospectus Supplement.
MAINTENANCE OF INSURANCE POLICIES AND OTHER SERVICING PROCEDURES
STANDARD HAZARD INSURANCE; FLOOD INSURANCE. The related Prospectus
Supplement will SPECIFY THE EXTENT TO WHICH the Servicer will be required to
maintain or to cause the obligor on each Mortgage Loan to maintain a standard
hazard insurance policy providing coverage of the standard form of fire
insurance with extended coverage for certain other hazards as is customary in
the state in which the related MORTGAGED Property 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 related Mortgage Loans. In general, the
standard form of fire and extended coverage policy will cover physical damage to
or destruction of, the related MORTGAGED Property 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 Mortgage Loans will be
underwritten by different hazard insurers and will cover MORTGAGED Properties
located in various states, such 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 such 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 certain cases, vandalism. The foregoing list is
merely indicative of certain 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 HUD pursuant to the Flood Disaster Protection Act of
1973, as amended, the Servicer will be required to cause flood insurance to be
maintained with respect to such MORTGAGED Property, to the extent available.
The standard hazard insurance policies covering MORTGAGED Properties
securing Mortgage Loans 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, including the improvements on any MORTGAGED Property, in
order to recover the full amount of any partial loss. If the insured's coverage
falls below this specified percentage, such clause will provide that the hazard
insurer's liability in the event of partial loss will not exceed the greater of
(i) the actual cash value (the replacement cost less physical depreciation) of
the MORTGAGED Property, including the improvements, if any, damaged or destroyed
or (ii) such 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 such MORTGAGED Property and improvements. Since the amount
of hazard insurance to be maintained on the improvements securing the Mortgage
Loans declines as the principal balances owing thereon decrease, and since the
value of the MORTGAGED Properties 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.
Generally, coverage will be in an amount at least equal to the greater
of (i) the amount necessary to avoid the enforcement of any co-insurance clause
contained in the policy or (ii) the outstanding principal balance of the related
Mortgage 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 such REO
Property. No earthquake or other additional insurance will be required of any
obligor or will be maintained on REO Property acquired in respect of a defaulted
Mortgage Loan, other than pursuant to such applicable laws and regulations as
shall at any time be in force and shall require such additional insurance.
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Any amounts collected by the Servicer under any such policies of
insurance (other than amounts to be applied to the restoration or repair of the
MORTGAGED Property, released to the obligor in accordance with normal servicing
procedures or used to reimburse the Servicer for amounts to which it is entitled
to reimbursement) will be deposited in the Collection Account. In the event that
the Servicer obtains and maintains a blanket policy insuring against hazard
losses on all of the Mortgage Loans, written by an insurer then acceptable to
each Rating Agency which assigns a rating to such 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 related REO Property. This blanket
policy may contain a deductible clause, in which case the Servicer will be
required, in the event that there has been a loss that would have been covered
by such policy absent such deductible clause, to deposit in the Collection
Account the amount not otherwise payable under the blanket policy because of the
application of such 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 securing the related Mortgage Loans as come into and continue in
default and as to which no satisfactory arrangements can be made for collection
of delinquent payments. In connection with such foreclosure or other conversion,
the Servicer will follow such practices and procedures as 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 towards the
restoration of the MORTGAGED Property unless it determines that (i) such
restoration or foreclosure will increase the Liquidation Proceeds in respect of
the related Mortgage Loan available to the Holders after reimbursement to itself
for such expenses and (ii) such expenses will be recoverable by it either
through Liquidation Proceeds or the proceeds of insurance. Notwithstanding
anything to the contrary herein, 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 beneficial ownership of such 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 Depositor will be
required to do so.
The Servicer may arrange with the obligor on a defaulted Mortgage Loan
a modification of such Mortgage Loan (a "Modification") to the extent provided
in the related Prospectus Supplement. Such 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 set forth in the related Prospectus Supplement.
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 such prospective conveyance
and prior to the time of the consummation of such conveyance, exercise its
rights to accelerate the maturity of the related Mortgage Loan under the
applicable "due-on-sale" clause, if any, unless it reasonably believes that such
clause is not enforceable under applicable law or if the enforcement of such
clause would result in loss of coverage under any primary mortgage insurance
policy. In such event, the Servicer is authorized to accept from or enter into
an assumption agreement with the person to whom such MORTGAGED PROPERTY has been
or is about to be conveyed, pursuant to which such person becomes liable under
the Mortgage Loan and pursuant to which the original obligor is released from
liability and such person is substituted as the obligor and becomes liable under
the Mortgage Loan. Any fee collected in connection with an assumption will be
retained by the Servicer as additional servicing compensation. The terms of a
Mortgage Loan may not be changed in connection with an assumption.
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
The Servicer will be entitled to a periodic fee as servicing
compensation (the "Servicing Fee") in an amount to be determined as specified in
the related Prospectus Supplement. The Servicing Fee may be fixed or variable,
as specified in the related Prospectus Supplement. In addition, the Servicer
will 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, as will be
further specified in the related Prospectus Supplement,.
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The SERVICER MAY pay certain 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 related Mortgage 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 related 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 related Mortgage Loan (less the Servicing Fee). If the aggregate
amount of such shortfalls in a month exceeds the Servicing Fee for such month, a
shortfall to Holders may occur.
The Servicer will be entitled to reimbursement for certain expenses
incurred by it in connection with the liquidation of defaulted Mortgage Loans.
The related Holders will suffer no loss by reason of such expenses to the extent
expenses are covered under related 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 related 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 related Mortgage 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 Mortgage Loan, such right of reimbursement being prior to
the rights of the Holders to receive any related proceeds of insurance policies,
Liquidation Proceeds or amounts derived from other Credit Enhancement. The
Servicer is generally also entitled to reimbursement from the Collection Account
for Advances.
The rights of the Servicer 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, MAY BE subordinate to the
rights of Holders of such Series AS SET FORTH IN THE RELATED AGREEMENT.
EVIDENCE AS TO COMPLIANCE
The applicable Agreement for each Series will provide that each year, a
firm of independent public accountants will furnish a statement to the Trustee
to the effect that such firm has examined certain documents and records relating
to the servicing of the Mortgage Loans by the Servicer and that, on the basis of
such examination, such firm is of the opinion that the servicing has been
conducted in compliance with such Agreement, except for (i) such exceptions as
such firm believes to be immaterial and (ii) such other exceptions as are set
forth in such statement.
The applicable Agreement for each Series will also provide for delivery
to the Trustee for such Series of an annual statement signed by an officer of
the Servicer to the effect that the Servicer has fulfilled its obligations under
such Agreement throughout the preceding calendar year.
CERTAIN MATTERS REGARDING THE SERVICER
The Servicer for each Series will be identified in the related
Prospectus Supplement. The Servicer may be an affiliate of the Depositor and may
have other business relationships with the Depositor and its affiliates.
If an event of default ("Event of Default") occurs under either a
Servicing Agreement or a Pooling and Servicing Agreement, the Servicer may be
replaced by the Trustee or a successor Servicer. Such Events of Default and the
rights of the Trustee upon such a default under the Agreement for the related
Series will be substantially similar to those described under "THE AGREEMENTS--
Events of Default; Rights Upon Events of Default--Pooling and Servicing
Agreement; Servicing Agreement" herein.
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The related 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 such assignment or delegation (i) services similar loans in
the ordinary course of its business, (ii) is reasonably satisfactory to the
Trustee for the related Series, (iii) has a net worth of not less than the
amount specified in the related Prospectus Supplement, (iv) would not cause any
Rating Agency's rating of the Securities for such Series in effect immediately
prior to such assignment, sale or transfer to be qualified, downgraded or
withdrawn as a result of such assignment, sale or transfer and (v) executes and
delivers to the Trustee an agreement, in form and substance reasonably
satisfactory to the Trustee, which contains an assumption by such Servicer of
the due and punctual performance and observance of each covenant and condition
to be performed or observed by the Servicer under the related Agreement from and
after the date of such agreement. No such assignment will become effective until
the Trustee or a successor Servicer has assumed the servicer's obligations and
duties under the related Agreement. To the extent that the Servicer transfers
its obligations to a wholly-owned subsidiary or affiliate, such subsidiary or
affiliate need not satisfy the criteria set forth above; however, in such
instance, the assigning Servicer will remain liable for the servicing
obligations under the related 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
related Agreement provided that such successor or surviving entity meets the
requirements for a successor Servicer set forth above.
Except to the extent otherwise provided therein, each Agreement will
provide that neither the Servicer, nor any director, officer, employee or agent
of the Servicer, will be under any liability to the related Trust Fund, the
Depositor or the Holders for any action taken or for failing to take any action
in good faith pursuant to the related Agreement, or for errors in judgment;
provided, however, that neither the Servicer nor any such person will be
protected against any breach of warranty or representations made under such
Agreement or the failure to perform its obligations in compliance with any
standard of care set forth in such Agreement, 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 thereunder. Each Agreement will further provide that the
Servicer and any director, officer, employee or agent of the Servicer is
entitled to indemnification from the related Trust Fund and will be held
harmless against any loss, liability or expense incurred in connection with any
legal action relating to the 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 related
Agreement will provide that 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 such Agreement which, in its opinion, may
involve it in any expense or liability. The Servicer may, in its discretion,
undertake any such action which it may deem necessary or desirable with respect
to the related Agreement and the rights and duties of the parties thereto and
the interests of the Holders thereunder. In such event the legal expenses and
costs of such action and any liability resulting therefrom may be expenses,
costs, and liabilities of the Trust Fund and the Servicer may be entitled to be
reimbursed therefor out of the Collection Account.
THE AGREEMENTS
The following summaries describe certain 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, such
provisions or terms are as specified in the related Agreements.
ASSIGNMENT OF PRIMARY ASSETS
GENERAL. At the time of issuance of the Securities of a Series, the
Originator will transfer, convey and assign to the Trust Fund all right, title
and interest of the Originator in the Primary Assets and other property to be
transferred to the Trust Fund for a Series. Such assignment will include all
principal and interest due on or with respect to the Primary Assets after the
Cut-off Date specified in the related Prospectus Supplement (except for any
interests in the Trust Fund retained by the Depositor or its affiliate
("Retained Interests")). The Trustee will, concurrently with such assignment,
execute and deliver the Securities.
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ASSIGNMENT OF MORTGAGE LOANS. The Depositor will, as to each Mortgage
Loan, deliver or cause to be delivered to the Trustee, or, as specified in the
related Prospectus Supplement a custodian on behalf of the Trustee (the
"Custodian"), 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 such Mortgage will be delivered, together with a
certificate that the original of such Mortgage was delivered to such recording
office) and an assignment of the Mortgage in recordable form. The Trustee or the
Custodian will hold such documents in trust for the benefit of the Holders.
With respect to Mortgage Loans secured by Mortgages and to the extent
described in the related Prospectus Supplement, the Depositor will, at the time
of issuance of the Securities, cause assignments to the Trustee of the Mortgages
relating to the Mortgage Loans for a Series 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, such recording is not required to protect
the Trustee's interest in the related Mortgage Loans. The Depositor will cause
such assignments to be so recorded within the time after issuance of the
Securities as is specified in the related Prospectus Supplement, in which event,
the Agreement may require the Originator to repurchase from the Trustee any
Mortgage Loan the related Mortgage of which is not recorded within such time, at
the price described below with respect to repurchases by reason of defective
documentation. The related Prospectus Supplement will specify whether or not the
enforcement of the repurchase obligation would constitute the sole remedy
available to the Holders or the Trustee for the failure of a Mortgage to be
recorded.
Each Mortgage Loan will be identified in a schedule appearing as an
exhibit to the related Agreement (the "Loan Schedule"). Such Loan Schedule will
specify with respect to each Mortgage 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,
of the related Mortgage Note; if the Mortgage Loan is an adjustable rate
Mortgage Loan, the Lifetime Rate Cap, if any, and the current index.
ASSIGNMENT OF PRIVATE SECURITIES. The Depositor 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. The related Prospectus
Supplement will specify whether or not the Trustee will be in possession of or
be assignee of record of any underlying assets for a Private Security. See "THE
TRUST FUNDS--Private Securities" herein. Each Private Security will be
identified in a schedule appearing as an exhibit to the related Agreement (the
"Certificate Schedule"), which will specify the original principal amount,
outstanding principal balance as of the Cut-off Date, annual pass-through rate
or interest rate and maturity date for each Private Security conveyed to the
Trust Fund. In the Agreement, the Depositor will represent and warrant to the
Trustee regarding the Private Securities: (i) that the information contained in
the Certificate Schedule is true and correct in all material respects; (ii)
that, immediately prior to the conveyance of the Private Securities, the
Depositor had good title thereto, and was the sole owner thereof (subject to any
Retained Interest); (iii) that there has been no other sale by it of such
Private Securities; and (iv) that there is no existing lien, charge, security
interest or other encumbrance (other than any Retained Interest) on such Private
Securities.
REPURCHASE AND SUBSTITUTION OF NON-CONFORMING PRIMARY ASSETS. Unless
otherwise provided in the related Prospectus Supplement, if any document in the
file relating to the Primary Assets delivered by the Depositor to the Trustee
(or Custodian) is found by the Trustee within 90 days of the execution of the
related Agreement (or promptly after the Trustee's receipt of any document
permitted to be delivered after the Closing Date) to be defective in any
material respect and the Depositor or Originator does not cure such defect
within 90 days, or within such other period specified in the related Prospectus
Supplement, the Depositor or Originator will, not later than 90 days or within
such other period specified in the related Prospectus Supplement, after the
Trustee's notice to the Depositor or the Originator, as the case may be, of the
defect, repurchase the related Primary Asset or any property acquired in respect
thereof from the Trustee at a price generally equal to, (a) the lesser of (i)
the outstanding principal balance of such Primary Asset and (ii) the Trust
Fund's federal income tax basis in the Primary Asset and (b) accrued and unpaid
interest to the date of the next scheduled payment on such Primary Asset at the
rate set forth in the related Agreement, provided, however, the purchase price
shall not be limited in (i) above to the Trust Fund's federal income tax basis
if the repurchase at a price equal to the outstanding principal balance of such
Primary Asset will not result in any prohibited transaction tax under Section
860F(a) of the Code.
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The Depositor or Originator, as the case may be, may, rather than
repurchase the Primary Asset as described above, remove such Primary Asset from
the Trust Fund (the "Deleted Primary Asset") and substitute in its place one or
more other Primary Assets (each, a "Qualifying Substitute Primary Asset")
provided, however, that (i) with respect to a Trust Fund for which no REMIC
election is made, such substitution must be effected within 120 days of the date
of initial issuance of the Securities and (ii) 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 such 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.
ANY Qualifying Substitute Primary Asset will have, on the date of
substitution, (i) 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 (the amount of any
shortfall to be deposited to the Collection Account in the month of substitution
for distribution to Holders), (ii) an interest rate not less than the interest
rate of the Deleted Primary Asset, (iii) 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 set forth 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 Depositor or another entity will make representations and
warranties with respect to Primary Assets for a Series. If the Depositor or such
entity cannot cure a breach of any such representations and warranties in all
material respects within the time period specified in the related Prospectus
Supplement after notification by the Trustee of such breach, and if such breach
is of a nature that materially and adversely affects the value of such Primary
Asset, the Depositor or such entity is obligated to repurchase the affected
Primary Asset or, if provided in the related Prospectus Supplement, provide a
Qualifying Substitute Primary Asset therefor, subject to the same conditions and
limitations on purchases and substitutions as described above.
The Depositor's only source of funds to effect any cure, repurchase or
substitution will be through the enforcement of the corresponding obligations,
if any, of the responsible originator or Originator of such Primary Assets. See
"SPECIAL CONSIDERATIONS--Limited Assets" herein.
No Holder of Securities of a Series, solely by virtue of such Holder's
status as a Holder, will have any right under the applicable Agreement for such
Series to institute any proceeding with respect to such Agreement, unless such
Holder previously has given to the Trustee for such Series written notice of
default and unless the Holders of Securities evidencing not less than 51% of the
aggregate voting rights of the Securities for such Series have made written
request upon the Trustee to institute such proceeding in its own name as Trustee
thereunder and have offered to the Trustee reasonable indemnity, and the Trustee
for 60 days has neglected or refused to institute any such proceeding.
REPORTS TO HOLDERS
The Trustee or other entity specified in the related 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:
(i) the amount of principal distributed to Holders of the
related Securities and the outstanding principal balance of such
Securities following such distribution;
(ii) the amount of interest distributed to Holders of the
related Securities and the current interest on such Securities;
(iii) the amounts of (a) any overdue accrued interest
included in such distribution, (b) any remaining overdue accrued
interest with respect to such Securities or (c) any current shortfall
in amounts to be distributed as accrued interest to Holders of such
Securities;
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(iv) the amounts of (a) any overdue payments of scheduled
principal included in such distribution, (b) any remaining overdue
principal amounts with respect to such Securities, (c) any current
shortfall in receipt of scheduled principal payments on the related
Primary Assets or (d) any realized losses or Liquidation Proceeds to be
allocated as reductions in the outstanding principal balances of such
Securities;
(v) the amount received under any related Credit
Enhancement, and the remaining amount available under such Credit
Enhancement;
(vi) the amount of any delinquencies with respect to
payments on the related Primary Assets;
(vii) the book value of any REO Property acquired by the
related Trust Fund; and
(viii) such other information as specified in the related
Agreement.
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 such calendar year (a) the aggregate of amounts reported pursuant to (i),
(ii), and (iv)(d) above for such calendar year and (b) such information
specified in the related Agreement to enable Holders to prepare their tax
returns including, without limitation, the amount of original issue discount
accrued on the Securities, if applicable. 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. However, the Servicer will
provide to the Trustee a report by independent public accountants with respect
to the Servicer's servicing of the Mortgage Loans. See "SERVICING OF MORTGAGE
LOANS --Evidence as to Compliance" herein.
A Series of Securities or one or more Classes of such Series may be
issued in book-entry form. In such event, owners of beneficial interests in such
Securities will not be considered Holders and will not receive such reports
directly from the Trustee. The Trustee will forward such reports only to the
entity or its nominee which is the registered holder of the global certificate
which evidences such book-entry securities. Beneficial owners will receive such
reports from the participants and indirect participants of the applicable
book-entry system in accordance with the practices and procedures of such
entities.
EVENTS OF DEFAULT; RIGHTS UPON EVENT OF DEFAULT
POOLING AND SERVICING AGREEMENT; SERVICING AGREEMENT. Events of Default
under the Pooling and Servicing Agreement for each Series of Certificates
relating to Mortgage Loans generally include (i) any failure by the Servicer to
deposit amounts in the Collection Account and Distribution Account to enable the
Trustee to distribute to Holders of such Series any required payment, which
failure continues unremedied for the number of days specified in the related
Prospectus Supplement after the giving of written notice of such failure to the
Servicer by the Trustee for such Series, or to the Servicer and the Trustee by
the Holders of such Series evidencing not less than 25% of the aggregate voting
rights of the Securities for such Series, (ii) any failure by the Servicer duly
to observe or perform in any material respect any other of its covenants or
agreements in the applicable Agreement which continues unremedied for the number
of days specified in the related Prospectus Supplement after the giving of
written notice of such failure to the Servicer by the Trustee, or to the
Servicer and the Trustee by the Holders of such Series evidencing not less than
25% of the aggregate voting rights of the Securities for such Series, and (iii)
certain events of insolvency, readjustment of debt, marshalling of assets and
liabilities or similar proceedings and certain actions by the Servicer
indicating its insolvency, reorganization or inability to pay its obligations.
The related 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
Mortgage Loans (other than its right to recovery of other expenses and amounts
advanced pursuant to the terms of such 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 such 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 such
Agreement.
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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 related Prospectus Supplement to act as successor Servicer under the
provisions of the applicable Agreement. The successor Servicer would be entitled
to reasonable servicing compensation in an amount not to exceed the Servicing
Fee as set forth in the related Prospectus Supplement, together with the other
servicing compensation in the form of assumption fees, late payment charges or
otherwise, as provided in such Agreement.
During the continuance of any Event of Default of a Servicer under an
Agreement for a Series of Securities, the Trustee for such Series will have the
right to take action to enforce its rights and remedies and to protect and
enforce the rights and remedies of the Holders of such Series, and Holders of
Securities evidencing not less than 51% of the aggregate voting rights of the
Securities for such Series may direct the time, method and place of conducting
any proceeding for any remedy available to the Trustee or exercising any trust
or power conferred upon that Trustee. However, the Trustee will not be under any
obligation to pursue any such remedy or to exercise any of such trusts or powers
unless such Holders have offered the Trustee reasonable security or indemnity
against the cost, expenses and liabilities which may be incurred by the Trustee
therein or thereby. The Trustee may decline to follow any such 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
Notes generally include: (i) a default in the payment of any principal of or
interest on any Note of such Series, which continues for the period of time
specified in the related Prospectus Supplement; (ii) failure to perform any
other covenant of the Depositor or the Trust Fund in the Indenture which
continues for the period of time specified in the related Prospectus Supplement
after notice thereof is given in accordance with the procedures described in the
related Prospectus Supplement; (iii) any representation or warranty made by the
Depositor or the Trust Fund in the Indenture or in any certificate or other
writing delivered pursuant thereto or in connection therewith with respect to or
affecting such Series having been incorrect in a material respect as of the time
made, and such breach is not cured within the period of time specified in the
related Prospectus Supplement after notice thereof is given in accordance with
the procedures described in the related Prospectus Supplement; (iv) certain
events of bankruptcy, insolvency, receivership or liquidation of the Depositor
or the Trust Fund; or (v) any other Event of Default provided with respect to
Notes of that Series.
If an Event of Default with respect to the Notes of any Series at the
time outstanding occurs and is continuing, either the Trustee or the Holders of
a majority of the then aggregate outstanding amount of the Notes of such Series
may declare the principal amount (or, if the Notes of that Series are Zero
Coupon Securities, such portion of the principal amount as may be specified in
the terms of that Series, as provided in the related Prospectus Supplement) of
all the Notes of such Series to be due and payable immediately. Such declaration
may, under certain circumstances, be rescinded and annulled by the Holders of a
majority in aggregate outstanding amount of the Notes of such Series.
If, following an Event of Default with respect to any Series of Notes,
the Notes of such Series have been declared to be due and payable, the Trustee
may, in its discretion, notwithstanding such acceleration, elect to maintain
possession of the collateral securing the Notes of such Series and to continue
to apply distributions on such collateral as if there had been no declaration of
acceleration if such collateral continues to provide sufficient funds for the
payment of principal of and interest on the Notes of such Series as they would
have become due if there had not been such a declaration. In addition, the
Trustee may not sell or otherwise liquidate the collateral securing the Notes of
a Series following an Event of Default other than a default in the payment of
any principal or interest on any Note of such Series for thirty (30) days or
more, unless (a) the Holders of 100% of the then aggregate outstanding amount of
the Notes of such Series consent to such sale, (b) the proceeds of such sale or
liquidation are sufficient to pay in full the principal of and accrued interest
due and unpaid on the outstanding Notes of such Series at the date of such sale
or (c) the Trustee determines that such collateral would not be sufficient on an
ongoing basis to make all payments on such Notes as such payments would have
become due if such Notes had not been declared due and payable, and the Trustee
obtains the consent of the Holders of 66 2/3% of the then aggregate outstanding
amount of the Notes of such Series.
In the event that the Trustee liquidates the collateral in connection
with an Event of Default involving a default for thirty (30) days or more in the
payment of principal of or interest on the Notes of a Series, the Indenture
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provides that the Trustee will have a prior lien on the proceeds of any such
liquidation for unpaid fees and expenses. As a result, upon the occurrence of
such an Event of Default, the amount available for distribution to the
Noteholders may be less than would otherwise be the case. However, the Trustee
may not institute a proceeding for the enforcement of its lien except in
connection with a proceeding for the enforcement of the lien of the Indenture
for the benefit of the Noteholders after the occurrence of such an Event of
Default.
In the event the principal of the Notes of a Series is declared due and
payable, as described above, the Holders of any such Notes issued at a discount
from par may be entitled to receive no more than an amount equal to the unpaid
principal amount thereof less the amount of such discount which is unamortized.
Subject to the provisions of the Indenture relating to the duties of
the Trustee, in case an Event of Default shall occur and be continuing with
respect to a Series of Notes, the Trustee will be under no obligation to
exercise any of the rights or powers under the Indenture at the request or
direction of any of the Holders of Notes of such Series, unless such Holders
offered to the Trustee security or indemnity satisfactory to it against the
costs, expenses and liabilities which might be incurred by it in complying with
such request or direction. Subject to such provisions for indemnification and
certain limitations contained in the Indenture, the Holders of a majority of the
then aggregate outstanding amount of the Notes of such Series shall have the
right to direct the time, method and place of conducting any proceeding for any
remedy available to the Trustee or exercising any trust or power conferred on
the Trustee with respect to the Notes of such Series, and the Holders of a
majority of the then aggregate outstanding amount of the Notes of such Series
may, in certain cases, waive any default with respect thereto, except a default
in the payment of principal or interest or a default in respect of a covenant or
provision of the Indenture that cannot be modified without the waiver or consent
of all the Holders of the outstanding Notes of such Series affected thereby.
THE TRUSTEE
The identity of the commercial bank, savings and loan association or
trust company named as the Trustee for each Series of Securities will be set
forth in the related Prospectus Supplement. The entity serving as Trustee may
have normal banking relationships with the Depositor or the Servicer. In
addition, for the purpose of meeting the legal requirements of certain 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 such appointment, all rights, powers, duties and
obligations conferred or imposed upon the Trustee by the Agreement relating to
such Series will be conferred or imposed upon the Trustee and each such separate
trustee or co-trustee jointly, or, in any jurisdiction in which the Trustee
shall be incompetent or unqualified to perform certain acts, singly upon such
separate trustee or co-trustee who will exercise and perform such rights,
powers, duties and obligations 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 such appointment; provided that
the Trustee will continue to be responsible for its duties and obligations under
the Agreement.
DUTIES OF THE TRUSTEE
The Trustee will not make any representations as to the validity or
sufficiency of the Agreement, the Securities or of any Primary Asset or related
documents. If no Event of Default (as defined in the related 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 required to be furnished to it, the
Trustee is required to examine them to determine whether they are in the form
required by the related Agreement. However, the Trustee will not be responsible
for the accuracy or content of any such documents furnished to it by the Holders
or the Servicer under the Agreement.
The Trustee may be held liable for its own negligent action or failure
to act, or for its own misconduct; provided, however, that the Trustee will not
be personally liable 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 or risk its own funds or
otherwise incur any financial liability in the performance of any of its duties
under the Agreement, or in the exercise of any of its rights or powers, if it
has reasonable grounds for believing that repayment of such funds or adequate
indemnity against such risk or liability is not reasonably assured to it.
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RESIGNATION OF TRUSTEE
The Trustee may, upon written notice to the Depositor, resign at any
time, in which event the Depositor 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 such 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 (i) if the Trustee ceases to be eligible to continue as such
under the Agreement, (ii) if the Trustee becomes insolvent or (iii) by the
Holders of Securities evidencing over 50% of the aggregate voting rights of the
Securities in the Trust Fund upon written notice to the Trustee and to the
Depositor. 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
The Agreement for each Series of Securities may be amended by the
Depositor, the Servicer (with respect to a Series relating to Mortgage Loans),
and the Trustee with respect to such Series, without notice to or consent of the
Holders (i) to cure any ambiguity, (ii) to correct any defective provisions or
to correct or supplement any provision therein, (iii) to add to the duties of
the Depositor, the Trust Fund or Servicer, (iv) to add any other provisions with
respect to matters or questions arising under such Agreement or related Credit
Enhancement, (v) to add or amend any provisions of such Agreement as required by
a Rating Agency in order to maintain or improve the rating of the Securities (it
being understood that none of the Depositor, the Originator, the Servicer or
Trustee is obligated to maintain or improve such rating), or (vi) to comply with
any requirements imposed by the Code; provided that any such amendment except
pursuant to clause (vi) above will not adversely affect in any material respect
the interests of any Holders of such Series, as evidenced by an opinion of
counsel. Any such amendment except pursuant to clause (vi) of the preceding
sentence shall be deemed not to adversely affect in any material respect the
interests of any Holder if the Trustee receives written confirmation from each
Rating Agency rating such Securities that such amendment will not cause such
Rating Agency to reduce the then current rating thereof. The Agreement for each
Series may also be amended by the Trustee, the Servicer, if applicable, and the
Depositor with respect to such Series with the consent of the Holders possessing
not less than 66 2/3% of the aggregate outstanding principal amount of the
Securities of such Series or, if only certain Classes of such Series are
affected by such amendment, 66 2/3% of the aggregate outstanding principal
amount of the Securities of each Class of such Series affected thereby, for the
purpose of adding any provisions to or changing in any manner or eliminating any
of the provisions of such Agreement or modifying in any manner the rights of
Holders of such Series; provided, however, that no such amendment may (a) reduce
the amount or delay the timing of payments on any Security without the consent
of the Holder of such Security; or (b) reduce the aforesaid percentage of the
aggregate outstanding principal amount of Securities of each Class, the Holders
of which are required to consent to any such amendment without the consent of
the Holders of 100% of the aggregate outstanding principal amount of each Class
of Securities affected thereby.
VOTING RIGHTS
The related Prospectus Supplement will set forth the method of
determining allocation of voting rights with respect to a Series.
LIST OF HOLDERS
Upon written request of three or more Holders of record of a Series for
purposes of communicating with other Holders with respect to their rights under
the Agreement, which request is accompanied by a copy of the communication which
such Holders propose to transmit, the Trustee will afford such Holders access
during business hours to the most recent list of Holders of that Series held by
the Trustee.
No Agreement will provide for the holding of any annual or other
meeting of Holders.
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FORM OF SECURITIES
The SECURITIES IN EACH SERIES WILL EITHER be issued as physical
CERTIFICATES OR IN UNCERTIFICATED BOOK-ENTRY FORM. PHYSICAL certificates
("Physical Certificates") in fully registered form only in the denominations
specified in the related Prospectus Supplement, and will be transferable and
exchangeable at the corporate trust office of the registrar of the Securities
(the "Security Registrar") named in the related 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.
If so specified in the related Prospectus Supplement, specified classes
of a series of Securities will be issued in uncertificated book-entry form
("Book-Entry Securities"), and will be registered in the name of Cede & Co.
("Cede"), the nominee of DTC. DTC is a limited purpose trust company organized
under the laws of the State of New York, a member of the Federal Reserve System,
a "clearing corporation" within the meaning of the Uniform Commercial Code
("UCC") and a "clearing agency" registered pursuant to the provisions of Section
17A of the Securities Exchange Act of 1934, as amended. DTC was created to hold
securities for its participating organizations ("Participants") and facilitate
the clearance and settlement of securities transactions between Participants
through electronic book-entry changes in their accounts, thereby eliminating the
need for physical movement of certificates. Participants include securities
brokers and dealers, banks, trust companies and clearing corporations and may
include certain other organizations. Indirect access to the DTC system also is
available to others such as brokers, dealers, banks and trust companies that
clear through or maintain a custodial relationship with a Participant, either
directly or indirectly ("Indirect Participant").
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, as nominee of DTC,
may do so only through Participants and Indirect Participants. In addition, such
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 the related Payment Date because,
while payments are required to be forwarded to Cede, as nominee for DTC, on each
such date, DTC will forward such payments to its Participants, which thereafter
will be required to forward such payments to Indirect Participants or Holders.
Unless and until Physical Securities are issued, it is anticipated that the only
Holder will be Cede, as nominee of DTC, and that the beneficial holders of
Securities will not be recognized by the Trustee as Holders under the Pooling
and Servicing Agreement. The beneficial holders of such Securities will only be
permitted to exercise the rights of Holders under the Pooling and Servicing
Agreement indirectly through DTC and its Participants who in turn will exercise
their rights through DTC.
Under the rules, regulations and procedures creating and affecting DTC
and its operations, DTC is required to make book-entry transfers among
Participants on whose behalf it acts with respect to the Securities and is
required to receive and transmit payments of principal of and interest on the
Securities. Participants and Indirect Participants with which Holders have
accounts with respect to their Securities similarly are required to make
book-entry transfers and receive and transmit such 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 such Participants to transfer Securities, by book-entry transfer,
through DTC for the account of the purchasers of such Securities, which account
is maintained with their respective Participants. Under the Rules and 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 certain banks, the ability of a Holder to
pledge Securities to persons or entities that do not participate in the DTC
system, or otherwise take actions in respect of such Securities may be limited
due to the lack of a Physical Certificate for such Securities.
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DTC in general advises that it will take any action permitted to be
taken by a Holder under a Pooling and Servicing Agreement only at the direction
of one or more Participants to whose account with DTC the related Securities are
credited. Additionally, DTC in general advises that it will take such actions
with respect to specified percentages of the Holders only at the direction of
and on behalf of Participants whose holdings include current principal amounts
of outstanding Securities that satisfy such specified percentages. DTC may take
conflicting actions with respect to other current principal amounts of
outstanding Securities to the extent that such actions are taken on behalf of
Participants whose holdings include such current principal amounts of
outstanding Securities.
Any Securities initially registered as Physical Certificates in the
name of Cede, 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 related Pooling and Servicing
Agreement and described in the related Prospectus Supplement. Upon the
occurrence of any of the events specified in the related Pooling and Servicing
Agreement 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 reregistration, the Trustee will take the Securities in the form of Physical
Certificates, and thereafter the Trustee will recognize the holders of such
Physical Certificates as Holders. Thereafter, payments of principal of and
interest on the Securities will be made by the Trustee directly to Holders in
accordance with the procedures set forth herein and in the Pooling and Servicing
Agreement. The final distribution of any Security (whether Physical Certificates
or Securities registered in the name of Cede), however, will be made only upon
presentation and surrender of such Securities on the final Payment Date at such
office or agency as is specified in the notice of final payment to Holders.
REMIC ADMINISTRATOR
For any Series with respect to which a REMIC election is made,
preparation of certain reports and certain other administrative duties with
respect to the Trust Fund may be performed by a REMIC administrator, who may be
an affiliate of the Depositor.
TERMINATION
POOLING AND SERVICING AGREEMENT; TRUST AGREEMENT. The obligations
created by the Pooling and Servicing Agreement or Trust Agreement for a Series
will terminate upon the distribution to Holders of all amounts distributable to
them pursuant to such Agreement after the earlier of (i) the later of (a) the
final payment or other liquidation of the last Primary Asset remaining in the
Trust Fund for such Series and (b) the disposition of all property acquired upon
foreclosure or deed in lieu of foreclosure or repossession in respect of any
Primary Asset; (ii) the repurchase, as described below, by the Servicer or other
entity specified in the related Prospectus Supplement from the Trustee for such
Series of all Primary Assets and other property at that time subject to such
Agreement; or (iii) the mandatory termination of the Trust by the Trustee, the
Servicer or certain other entities specified in the related Prospectus
Supplement by soliciting competitive bids for the purchase of the Primary Assets
of the related Trust Fund
REPURCHASE OF THE REMAINING PRIMARY ASSETS. The Agreement for each
Series may permit, but not require, the Servicer or other entity specified in
the related Prospectus Supplement to purchase from the Trust Fund for such
Series all remaining Primary Assets at a price equal to 100% of the aggregate
Principal Balance of such Primary Assets plus, with respect to any property
acquired in respect of a Primary Asset, if any, the outstanding Principal
Balance of the related Primary Asset at the time of foreclosure, less, in either
case, related unreimbursed Advances (in the case of the Primary Assets, only to
the extent not already reflected in the computation of the aggregate Principal
Balance of such Primary Assets) and unreimbursed expenses (that are reimbursable
pursuant to the terms of the Pooling and Servicing Agreement) plus, in either
case, accrued interest thereon at the weighted average rate on the related
Primary Assets through the last day of the Due Period in which such repurchase
occurs; provided, however, that if an election is made for treatment as a REMIC
under the Code, the repurchase price may equal the greater of (a) 100% of the
aggregate Principal Balance of such Primary Assets, plus accrued interest
thereon at the applicable net rates on the Primary Assets through the last day
of the month of such repurchase and (b) the aggregate fair market value of such
Primary Assets plus the fair market value of any property acquired in respect of
a Primary Asset and remaining in the Trust Fund. The exercise of such right will
effect early retirement of the Securities of such Series, but such entity's
right to so purchase is subject to the aggregate Principal Balance of the
Primary Assets
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at the time of repurchase being less than a fixed percentage, to
be set forth in the related Prospectus Supplement, of the aggregate Principal
Balance of the Primary Assets as of the Cut-off Date.
MANDATORY TERMINATION; AUCTION SALE. The Trustee, the Servicer or
certain other entities specified in the related Prospectus Supplement may be
required to effect early retirement of a series of Securities by soliciting
competitive bids for the purchase of the related Trust Estate.
THE mandatory termination may take the form of an auction sale. Within
a certain period following the first Distribution Date as of which the aggregate
Pool principal balance is less than 10% or a percentage set forth in the related
Prospectus Supplement of the initial aggregate Pool principal balance, if the
optional termination right has not been exercised by the parties having such
right by such date, the Trustee shall solicit bids for the purchase of all
Mortgage Loans remaining in the Trust. In the event that satisfactory bids are
received as specified in the related Pooling and Servicing Agreement, the net
sale proceeds will be distributed to Holders, in the same order of priority as
collections received in respect of the Mortgage Loans. If satisfactory bids are
not received, the Trustee shall decline to sell the Mortgage Loans and shall not
be under any obligation to solicit any further bids or otherwise negotiate any
further sale of the Mortgage Loans. Such sale and consequent termination of the
Trust must constitute a "qualified liquidation" of each REMIC established by the
Trust under Section 860F of the Internal Revenue Code of 1986, as amended,
including, without limitation, the requirement that the qualified liquidation
takes place over a period not to exceed 90 days.
In no event, however, will the trust created by the Agreement continue
beyond the expiration of 21 years from the death of the last survivor of certain
persons identified therein. 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. The Depositor or another entity may effect an optional termination
of the Trust Fund under the circumstances described in such Prospectus
Supplement. See "DESCRIPTION OF THE SECURITIES--Optional Redemption, Purchase or
Termination" herein.
INDENTURE. The Indenture will be discharged with respect to a Series of
Notes (except with respect to certain continuing rights specified in the
Indenture) upon the delivery to the Trustee for cancellation of all the Notes of
such Series or, with certain limitations, upon deposit with the Trustee of funds
sufficient for the payment in full of all of the Notes of such Series.
In addition to such discharge with certain limitations, the Indenture
will provide that, if so specified with respect to the Notes of any Series, the
related Trust Fund will be discharged from any and all obligations in respect of
the Notes of such Series (except for certain obligations relating to temporary
Notes and exchange of Notes, to register the transfer of or exchange Notes of
such Series, to replace stolen, lost or mutilated Notes of such Series, to
maintain paying agencies and to hold monies for payment in trust) upon the
deposit with the Trustee, in trust, of money and/or direct obligations of or
obligations guaranteed by the United States of America which, through the
payment of interest and principal in respect thereof in accordance with their
terms, will provide money in an amount sufficient to pay the principal of and
each installment of interest on the Notes of such Series on the Final Scheduled
Distribution Date for such Notes and any installment of interest on such Notes
in accordance with the terms of the Indenture and the Notes of such Series. In
the event of any such defeasance and discharge of Notes of such Series, holders
of Notes of such Series would be able to look only to such money and/or direct
obligations for payment of principal and interest, if any, on their Notes until
maturity.
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS
The following discussion contains summaries of certain legal aspects of
mortgage loans, which are general in nature. Because certain of such legal
aspects are governed by applicable state law (which laws may differ
substantially), the summaries do not purport to be complete nor reflect the laws
of any particular state, nor encompass the laws of all states in which the
properties securing the Mortgage Loans are situated.
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GENERAL
THE MORTGAGE LOANS WILL BE REPRESENTED BY A NOTE AND AN ACCOMPANYING
MORTGAGE. PURSUANT TO THE NOTE, THE RELATED BORROWER IS PERSONALLY LIABLE TO
REPAY THE INDEBTEDNESS EVIDENCED BY THE MORTGAGE LOAN; PURSUANT TO THE MORTGAGE,
SUCH INDEBTEDNESS IS SECURED BY A LIEN ON THE RELATED MORTGAGED PROPERTY.
ENFORCEMENT OF THE NOTE
PURSUANT TO THE NOTE, THE RELATED BORROWER IS PERSONALLY LIABLE TO
REPAY THE INDEBTEDNESS EVIDENCED BY THE MORTGAGE LOAN. IN CERTAIN 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 SUCH
SECURITY; HOWEVER, IN SOME OF THESE STATES THE LENDER, FOLLOWING JUDGMENT ON
SUCH PERSONAL ACTION, MAY BE DEEMED TO HAVE ELECTED A REMEDY AND MAY BE
PRECLUDED FROM EXERCISING REMEDIES WITH RESPECT TO THE RELATED PROPERTY
SECURITY. CONSEQUENTLY, THE PRACTICAL EFFECT OF THE ELECTION REQUIREMENT, IN
THOSE STATES PERMITTING SUCH ELECTION, IS THAT LENDERS WILL USUALLY PROCEED
AGAINST THE PROPERTY FIRST RATHER THAN BRINGING A PERSONAL ACTION AGAINST THE
BORROWER ON THE NOTE.
CERTAIN STATES HAVE IMPOSED STATUTORY PROHIBITIONS THAT LIMIT THE
REMEDIES OF A BENEFICIARY UNDER A DEED OF TRUST OR A MORTGAGEE UNDER A MORTGAGE.
IN SOME STATES, 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. IN THE CASE OF A MORTGAGE LOAN SECURED BY A PROPERTY OWNED BY A TRUST
WHERE THE MORTGAGE NOTE IS EXECUTED ON BEHALF OF THE TRUST, A DEFICIENCY
JUDGMENT AGAINST THE TRUST FOLLOWING FORECLOSURE OR SALE UNDER A DEED OF TRUST,
EVEN IF OBTAINABLE UNDER APPLICABLE LAW, MAY BE OF LITTLE VALUE TO THE MORTGAGEE
OR BENEFICIARY IF THERE ARE NO TRUST ASSETS AGAINST WHICH SUCH DEFICIENCY
JUDGMENT MAY BE EXECUTED. 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 CERTAIN OTHER STATES, STATUTORY PROVISIONS LIMIT ANY
DEFICIENCY JUDGMENT AGAINST THE FORMER BORROWER FOLLOWING A FORECLOSURE TO THE
EXCESS OF THE OUTSTANDING DEBT OVER THE FAIR VALUE OF THE PROPERTY AT THE TIME
OF THE PUBLIC SALE. THE PURPOSE OF THESE STATUTES IS GENERALLY TO PREVENT A
BENEFICIARY OR MORTGAGEE FROM OBTAINING A LARGE DEFICIENCY JUDGMENT AGAINST THE
FORMER BORROWER AS A RESULT OF LOW OR NO BIDS AT THE JUDICIAL SALE.
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 IN RESPECT OF A MORTGAGE LOAN ON A DEBTOR'S RESIDENCE BY PAYING
ARREARAGES WITHIN A REASONABLE TIME PERIOD AND REINSTATING THE ORIGINAL MORTGAGE
LOAN PAYMENT SCHEDULE EVEN THOUGH THE LENDER ACCELERATED THE MORTGAGE LOAN AND
FINAL JUDGMENT OF FORECLOSURE HAD BEEN ENTERED IN STATE COURT (PROVIDED NO SALE
OF THE RESIDENCE HAD YET OCCURRED) PRIOR TO THE FILING OF THE DEBTOR'S PETITION.
SOME COURTS WITH FEDERAL BANKRUPTCY JURISDICTION HAVE APPROVED PLANS, BASED ON
THE PARTICULAR FACTS OF THE REORGANIZATION CASE, THAT EFFECTED THE CURING OF A
MORTGAGE LOAN DEFAULT BY PAYING ARREARAGES OVER A NUMBER OF YEARS.
COURT WITH FEDERAL BANKRUPTCY JURISDICTION ALSO HAVE INDICATED THAT THE
TERMS OF A MORTGAGE LOAN SECURED BY PROPERTY OF THE DEBTOR MAY BE MODIFIED.
THESE COURTS HAVE ALLOWED MODIFICATIONS THAT INCLUDE REDUCING THE AMOUNT OF EACH
MONTHLY PAYMENT, CHANGING THE RATE OF INTEREST, ALTERING THE REPAYMENT SCHEDULE,
FORGIVING ALL OR A PORTION OF THE DEBT AND REDUCING THE LENDER'S SECURITY
INTEREST TO THE VALUE OF THE RESIDENCE, THUS LEAVING THE LENDER A GENERAL
UNSECURED CREDITOR FOR THE DIFFERENCE BETWEEN THE VALUE OF THE RESIDENCE AND THE
OUTSTANDING BALANCE OF THE LOAN.
CERTAIN STATES HAVE IMPOSED GENERAL EQUITABLE PRINCIPLES UPON JUDICIAL
FORECLOSURE. THESE EQUITABLE PRINCIPLES ARE GENERALLY DESIGNED TO RELIEVE THE
BORROWER FROM THE LEGAL EFFECT OF THE BORROWER'S DEFAULT UNDER THE RELATED LOAN
DOCUMENTS. EXAMPLES OF JUDICIAL REMEDIES THAT HAVE BEEN FASHIONED INCLUDE
JUDICIAL REQUIREMENTS THAT THE LENDER UNDERTAKE AFFIRMATIVE AND EXPENSIVE
ACTIONS TO DETERMINE THE CAUSES FOR THE
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BORROWER'S DEFAULT AND THE LIKELIHOOD THAT THE BORROWER WILL BE ABLE TO
REINSTATE THE LOAN. IN SOME CASES, LENDER HAVE BEEN REQUIRED TO REINSTATE LOANS
OR RECAST PAYMENT SCHEDULES IN ORDER TO ACCOMMODATE BORROWERS WHO ARE SUFFERING
FROM TEMPORARY FINANCIAL DISABILITIES. IN OTHER CASES, SUCH COURTS HAVE LIMITED
THE RIGHT OF THE LENDER TO FORECLOSE IF THE DEFAULT UNDER THE LOAN IS NOT
MONETARY, SUCH AS THE BORROWER FAILING TO ADEQUATELY MAINTAIN THE PROPERTY OR
THE BORROWER EXECUTING A SECOND DEED OF TRUST AFFECTING THE PROPERTY.
CERTAIN TAX LIENS ARISING UNDER THE INTERNAL REVENUE CODE OF 1986, AS
AMENDED, MAY IN CERTAIN CIRCUMSTANCES PROVIDE PRIORITY OVER THE LIEN OF A
MORTGAGE OR DEED OF TRUST. IN ADDITION, SUBSTANTIVE REQUIREMENTS ARE IMPOSED
UPON MORTGAGE LENDERS IN CONNECTION WITH THE ORIGINATION AND THE SERVICING OF
MORTGAGE LOANS BY NUMEROUS FEDERAL AND SOME STATE CONSUMER PROTECTION LAWS.
THESE LAWS INCLUDE, 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 A S THE
CALIFORNIA FAIR DEBT COLLECTION PRACTICES ACT. THESE LAWS AND REGULATIONS IMPOSE
SPECIFIC STATUTORY LIABILITIES UPON LENDERS WHO ORIGINATE MORTGAGE LOANS AND
FAIL TO COMPLY WITH THE PROVISIONS OF THE LAW. IN SOME CASES, THIS LIABILITY MAY
AFFECT ASSIGNEES OF THE MORTGAGE 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
such 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 pursuant to
the laws of the jurisdiction in which the Mortgaged Property is located.
Priority with respect to such 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
(as described below), and the mortgagee, who is the lender. Under the mortgage
instrument, the mortgagor delivers to the mortgagee a note or bond and the
mortgage. 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 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,
pursuant to 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 certain states, such
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
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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 such as to warrant a court of equity to
refuse affirmative relief to the mortgagee. Under certain circumstances a court
of equity may relieve the mortgagor from an entirely technical default where
such 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 such 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 potential third party purchasers
at the sale 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
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 such a 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 such 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 pursuant to 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
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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 Fund (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 such default and bring the senior loan current, in either event adding the
amounts expended to the balance due on the junior loan. In most states, absent a
provision in the 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 such proceeds and awards to any indebtedness secured
by the mortgage, in such 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 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 given the right under certain mortgages 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
(the "Garn-St. Germain Act") preempts state constitutional, statutory and case
law that prohibits the enforcement of due-on-sale clauses and permits lenders to
enforce these clauses in accordance with their terms, subject to certain
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 such clauses with respect to mortgage loans that were (i)
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 (ii) originated by
lenders other than national banks, federal savings institutions and federal
credit unions. The Federal Home Loan Mortgage Corporation ("FHLMC") has taken
the position in its published mortgage servicing standards that, out of a total
of eleven "window period states," five states (Arizona, Michigan, Minnesota, New
Mexico and Utah) have enacted statutes extending, on various terms and for
varying periods, the prohibition on enforcement of due-on-sale clauses with
respect to certain categories of window period loans. Also, the Garn-St. Germain
Act does "encourage"
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lenders to permit assumption of loans at the original rate of interest or at
some other rate less than the average of the original rate and the market rate.
In addition, under federal bankruptcy law, due-on-sale clauses may not
be enforceable in bankruptcy proceedings and may, under certain circumstances,
be eliminated in any modified mortgage resulting from such 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 certain states, there are or may be specific
limitations, upon the late charges which a lender may collect from a borrower
for delinquent payments. Certain states also limit the amounts that a lender may
collect from a borrower as an additional charge if the loan is prepaid. Late
charges and prepayment fees are typically retained by servicers as additional
servicing compensation.
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.
Most conventional single-family mortgage loans may be prepaid in full
or in part without penalty. The regulations of the Office of Thrift Supervision
(the "OTS") 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 mortgage loans having higher mortgage rates, may
increase the likelihood of refinancing or other early retirements of such
mortgage loans.
APPLICABILITY OF USURY LAWS. Title V of the Depository Institutions
Deregulation and Monetary Control Act of 1980, enacted in March 1980 ("Title
V"), provides that state usury limitations shall not apply to certain types of
residential first mortgage loans originated by certain lenders after March 31,
1980. Similar federal statutes were in effect with respect to mortgage loans
made during the first three months of 1980. The OTS, as successor to the Federal
Home Loan Bank Board, is authorized to issue rules and regulations and to
publish interpretations governing implementation of Tide V. Tide 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 such 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 mortgage 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. Such purchase
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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 such
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 such PERSONAL PROPERTY must generally be
perfected by a timely fixture filing. In general, under the UNIFORM COMMERCIAL
CODE (THE "UCC"), a security interest does not exist under the UCC 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 such characterization, upon incorporation of such
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 SUCH PROPERTY securing a contract by voluntary surrender, by
"self-help" repossession that is "peaceful" (i.e., without breach of the peace)
or, in the absence of voluntary surrender and the ability to repossess without
breach of the peace, by judicial process. The holder of a contract must give the
debtor a number of days' notice, which varies from 10 to 30 days depending on
the state, prior to commencement of any repossession. The UCC and consumer
protection laws in most states place restrictions on repossession sales,
including requiring prior notice to the debtor and commercial reasonableness in
effecting such a sale. The law in most states also requires that the debtor be
given notice of any sale prior to resale of the unit that the debtor may redeem
it at or before such resale.
Under the laws applicable in most states, a creditor is entitled to
obtain a deficiency judgement 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 judgements, and in many cases
the defaulting borrower would have no assets with which to pay a judgement.
Certain other statutory provisions, including federal and state
bankruptcy and insolvency laws and general equitable principles, may limit or
delay the ability of a lender to repossess and resell collateral or enforce a
deficiency judgement.
CONSUMER PROTECTION LAWS. The so-called "Holder-in-Due-Course" rule of
the Federal Trade Commission is intended to defeat the ability of the transferor
of a consumer credit contract which is the seller of goods which gave rise to
the transaction (and certain related lenders and assignees) to transfer such
contract free of notice of claims by the debtor thereunder. The effect of this
rule is to subject the assignee of such a contract to all claims and defenses
which the debtor could assert against the seller of goods. Liability under this
rule is limited to amounts paid under a contract; however, the obligor also may
be able to assert the rule to set off remaining amounts due as a defense against
a claim brought by the Trustee against such obligor. Numerous other federal and
state consumer protection laws impose requirements applicable to the origination
and lending pursuant to the contracts, including the Truth in Lending Act, the
Federal Trade Commission Act, the Fair Credit Billing Act, the Fair Credit
Reporting Act, the Equal Credit Opportunity Act, the Fair Debt Collection
Practices Act and the Uniform Consumer Credit Code. In the case of some of these
laws, the failure to comply with their provisions may affect the enforceability
of the related contract.
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, (i) are entitled to have interest rates reduced 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, (ii) may
be entitled to a stay of proceedings on any kind of foreclosure or repossession
action in the case of defaults on such obligations entered into prior to
military service for the duration of military service and (iii) may have the
maturity of such 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 (i), (ii), or (iii)
above are subject to challenge by creditors and if, in the opinion of the court,
the ability of a person to comply with such 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 pursuant to the
Soldiers' and Sailors' Civil Relief
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Act of 1940, none of the Trust Fund, the Servicer, the Depositor nor the Trustee
will be required to advance such amounts, and any loss in respect thereof may
reduce the amounts available to be paid to the Holders of the Securities of such
Series. Any shortfalls in interest collections on Mortgage Loans or Underlying
Loans relating to the Private Securities, as applicable, included in a Trust
Fund for a Series resulting from application of the Soldiers' and Sailors' Civil
Relief Act of 1940 will be allocated in the manner set forth in the related
Agreement.
THE DEPOSITOR
GENERAL
The Depositor was incorporated in the State of North Carolina. in
December 1997, and is a wholly-owned subsidiary of First Union National Bank, a
national banking association with its headquarters in Charlotte, North Carolina.
The Depositor's principal executive offices are located at One First Union
Center, 301 S. College Street, Charlotte, North Carolina 28288-0630. Its
telephone number is (704) 373-6611.
The Depositor will not engage in any activities other than to
authorize, issue, sell, deliver, purchase and invest in (and enter into
agreements in connection with), and/or to engage in the establishment of one or
more trusts which will issue and sell, bonds, notes, debt or equity securities,
obligations and other securities and instruments ("Depositor Securities")
collateralized or otherwise secured or backed by, or otherwise representing an
interest in, among other things, receivables or pass-through certificates, or
participations or certificates of participation or beneficial ownership in one
or more pools of receivables, and the proceeds of the foregoing, that arise in
connection with loans secured by certain first or junior mortgages on real
estate or manufactured housing and any and all other commercial transactions and
commercial, sovereign, student or consumer loans or indebtedness and, in
connection therewith or otherwise, purchasing, acquiring, owning, holding,
transferring, conveying, servicing, selling, pledging, assigning, financing and
otherwise dealing with such receivables, pass-through certificates, or
participations or certificates of participation or beneficial ownership. Article
Third of the Depositor's Certificate of Incorporation limits the Depositor's
activities to the above activities and certain related activities, such as
credit enhancement with respect to such Depositor Securities, and to any
activities incidental to and necessary or convenient for the accomplishment of
such purposes.
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: (i) to acquire the related
Primary Assets, (ii) to repay indebtedness which has been incurred to obtain
funds to acquire such Primary Assets, (iii) to establish any Reserve Funds
described in the related Prospectus Supplement and (iv) to pay costs of
structuring and issuing such 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 Originator of such Primary
Assets.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
GENERAL
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.
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The following discussion addresses securities of FIVE general types:
(i) securities ("Grantor Trust Securities") representing interests in a Trust (a
"Grantor Trust") which the Company will covenant not to elect to have treated as
a real estate mortgage investment conduit ("REMIC") OR A FINANCIAL ASSET
SECURITIZATION INVESTMENT TRUST ("FASIT"); (ii) securities ("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 of
the Internal Revenue Code of 1986, as amended (the "Code"); (iii) securities
("Debt Securities") that are intended to be treated for federal income tax
purposes as indebtedness secured by the underlying loans; (IV) SECURITIES
("PARTNERSHIP INTERESTS") REPRESENTING INTERESTS IN A TRUST (A "PARTNERSHIP")
THAT IS INTENDED TO BE TREATED AS A PARTNERSHIP UNDER THE CODE; AND (V)
SECURITIES ("FASIT SECURITIES") REPRESENTING INTERESTS IN A TRUST, OR PORTION
THEREOF, WHICH THE COMPANY WILL COVENANT TO ELECT TO HAVE TREATED AS A FASIT
UNDER SECTIONS 860H THROUGH 860L OF THE CODE. The Prospectus Supplement for each
series of Securities will indicate whether a REMIC or FASIT election (or
elections) will be made for the related Trust and, if a REMIC or FASIT election
is to be made, will identify all "regular interests" and "residual interests" in
the REMIC or all "regular interests," "high-yield interests" or THE"OWNERSHIP
interest" in the FASIT.
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 certain transactions or series of such
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, Dewey
Ballantine LLP, special tax counsel to the Company, will deliver its opinion to
the Company that (unless otherwise limited in the related Prospectus Supplement)
the related Grantor Trust will be classified as a grantor trust and not as a
partnership or an association taxable as a corporation. Such opinion shall be
attached on Form 8-K to be filed with the Commission within fifteen days after
the initial issuance of such Securities or filed with the Commission as a
post-effective amendment to the Prospectus. Accordingly, each BENEFICIAL OWNER
of a Grantor Trust Security will generally be treated as the owner of an
interest in the Mortgage 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
Mortgage 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 Mortgage
Loans constituting the related Grantor Trust and interest paid to the BENEFICIAL
OWNERS of Grantor Trust Fractional Interest Securities issued with respect to
such Grantor Trust will be referred to as a "Grantor Trust Strip Security."
Special Tax Attributes
Unless otherwise disclosed in a related Prospectus Supplement, Dewey
Ballantine LLP, special tax counsel to the Company, will deliver its opinion to
the Company that (a) Grantor Trust Fractional Interest Securities will represent
interests in (i) "loans . . . secured by an interest in real property" within
the meaning of section 7701(a)(19)(C)(v) of the Code; and (ii) "obligations
(including any participation or certificate of beneficial ownership therein)
which . . . are principally secured by an interest in real property" within the
meaning of section 860G(a)(3)(A) of the Code; and (b) interest on Grantor Trust
Fractional Interest Securities will be considered "interest on obligations
secured by mortgages on real property or on interests in real property" within
the meaning of section 856(c)(3)(B) of the Code. In addition, the Grantor Trust
Strip Securities will be "obligations (including any participation or
certificate of beneficial ownership therein) . . . principally secured by an
interest in real property" within the meaning of section 860G(a)(3)(A) of the
Code. Such opinion shall be attached on Form 8-K to be filed with the Commission
within fifteen days after the initial issuance of such Securities or filed with
the Commission as a post-effective amendment to the Prospectus.
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 Mortgage Loans (including amounts
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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 such 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 certain pass-through entities will be allowed a deduction for such
reasonable servicing fees and expenses only to the extent that the aggregate of
such BENEFICIAL OWNER'S miscellaneous itemized deductions exceeds 2% of such
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 such Securities as "stripped coupons" under section 1286 of
the Code. Accordingly, such a BENEFICIAL OWNER will be required to treat the
excess of the total amount of payments on such a Security over the amount paid
for such Security as original issue discount and to include such discount in
income as it accrues over the life of such 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 such a 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 Mortgage Loans and (ii) the difference between the outstanding
principal balance on the Security and the amount paid for such Security is less
than 0.25% of such 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 such 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) of the Code. The adjusted
basis of a Grantor Trust Security will generally equal its cost, increased by
any income reported by the Originator (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 such distribution allocable to principal on the underlying
Mortgage Loans and to interest thereon at the related interest rate. In
addition, within a reasonable time after the end of each calendar year, based on
information provided by the Master Servicer, the Trustee will furnish to each
BENEFICIAL OWNER during such year such customary factual information as the
Master 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 related Prospectus Supplement, an election will be
made to treat a Trust as a REMIC under the Code. Qualification as a REMIC
requires ongoing compliance with certain conditions. With respect to each series
of Securities for which such an election is made, Dewey Ballantine LLP, special
tax counsel to the Company, will deliver its opinion to the Company that (unless
otherwise limited in the related Prospectus Supplement), 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 herein 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
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Securities will state whether Securities of each class will constitute a regular
interest (a REMIC Regular Security) or a residual interest (a REMIC Residual
Security). Such opinion shall be attached on Form 8-K to be filed with the
Commission within fifteen days after the initial issuance of such Securities or
filed with the 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 certain 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 certain 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) of the Code and "real estate assets" within the meaning of
section 856(c)(5)(A) of the Code. 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) of the Code) then the portion of the REMIC
Regular Securities and REMIC Residual Securities that are qualifying assets
under those sections during such calendar year may be limited to the portion of
the assets of such 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) of the Code, subject to the same limitation as
set forth 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 Estate 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 of the Code applies will
be treated as evidences of indebtedness for purposes of section 582(c)(1) of the
Code. 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 date such Securities are first sold
to the public (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 such Securities under an accrual 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 such 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 such quarter and by allocating
the amount so allocated among the Residual BENEFICIAL OWNERS (on such day) in
accordance with their percentage interests on such day. Any amount included in
the gross income or allowed as a loss of any Residual BENEFICIAL OWNER 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.
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The Trustee will provide to BENEFICIAL OWNERS of REMIC Residual
Securities of each series of Securities (i) such information as is necessary to
enable them to prepare their federal income tax returns and (ii) any reports
regarding the Securities of such 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. Such
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 certain 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) of the Code) 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 therein 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 Related 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) of the Code. Finally, the limitation
on miscellaneous itemized deductions imposed on individuals by section 67 of the
Code 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, such
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 qualified mortgage or "permitted
investment" (as defined in section 860G(a)(5) of the Code) 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 such 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 such
REMIC Residual Security. Such 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 such 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 such 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 such net loss
exceeds such BENEFICIAL OWNER'S adjusted basis in its REMIC
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Residual Security as of the close of such calendar quarter (determined without
regard to such 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 certain 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 such
quarter that such REMIC Residual Security was held by such 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 such 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 such REMIC
Residual Security before the beginning of such 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 was 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 such 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 of the Code), an excess inclusion of such
BENEFICIAL OWNER is treated as unrelated business taxable income. With respect
to variable contracts (within the meaning of section 817 of the Code), 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 members of the
affiliated group. For a discussion of the effect of excess inclusions on certain
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 such a rule. If such a rule were adopted, it is unclear
how significant value would be determined for these purposes. If no such 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 such
REMIC Residual Securities reduced (but not below zero) by the real estate
investment trust taxable income (within the meaning of section 857(b)(2) of the
Code, excluding any net capital gain) will be allocated among the shareholders
of such trust in proportion to the dividends received by such shareholders from
such trust, and any amount so allocated will be treated as an excess inclusion
with respect to a REMIC Residual Security as if held directly by such
shareholder. Similar rules will apply in the case of regulated investment
companies, common trust funds and certain 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 such fees will be allowed to such BENEFICIAL OWNER only to the
extent that such fees, along with certain of such BENEFICIAL OWNER'S other
miscellaneous itemized deductions exceed 2% of such 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 such fees in computing such BENEFICIAL
OWNER'S alternative minimum tax liability. A BENEFICIAL OWNER'S share of such
fees will generally be determined by (i) allocating the amount of such 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 such day.
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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
pursuant to certain specified exceptions, the receipt of investment income from
a source other than a Mortgage Loan or certain 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
GENERAL. Except as provided below, if a Regular or REMIC 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
such Security to the seller, increased by any original issue discount or market
discount included in the seller's gross income with respect to such Security and
reduced by distributions on such 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 such 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) of the Code, any such gain or loss
will be capital gain or loss, provided such Security is held as a "capital
asset" (generally, property held for investment) within the meaning of section
1221 of the Code.
Gain from the sale of a REMIC Regular Security that might otherwise be
capital gain will be treated as ordinary income to the extent that such gain
does not exceed the excess, if any, of (i) the amount that would have been
includible in the 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 such BENEFICIAL OWNER'S
income. In addition, gain recognized on such a sale by a BENEFICIAL OWNER of a
REMIC Regular Security who purchased such a Security at a market discount would
also be taxable as ordinary income in an amount not exceeding the portion of
such discount that accrued during the period such Security was held by such
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, such BENEFICIAL
OWNER purchases another residual interest in any REMIC or any interest in a
taxable mortgage pool (as defined in section 7701(i) of the Code) comparable to
a residual interest in a REMIC. Such 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) of the Code
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
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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, certain cooperatives, and nominees) that owns a REMIC Residual
Security if such 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 pursuant to a purchase, a
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 certain 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 such 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 such entity are not held by disqualified organizations and (ii)
information necessary for the application of the tax described herein will be
made available. Restrictions on the transfer of a REMIC Residual Security and
certain 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 related 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 record-holder therein. 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 such 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 such tax will be imposed on a
pass-through entity for a period with respect to an interest therein owned by a
disqualified organization if (i) the record-holder of such interest furnishes to
the pass-through entity an affidavit that it is not a disqualified organization,
and (ii) during such 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 Residual Certificate, 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) of the Code. An exception to this
tax, otherwise available to a pass-through entity that is furnished certain
affidavits by record holders of interests in the entity and that does not know
such 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 such 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 such
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
such 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 certain representations to the transferor in the affidavit
relating to
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disqualified organizations discussed above. Transferors of a REMIC Residual
Security should consult with their own tax advisors for further information
regarding such transfers.
REPORTING AND OTHER ADMINISTRATIVE MATTERS. For purposes of the
administrative provisions of the Code, 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 such year a statement setting forth the portions of any such
distributions that constitute interest distributions, original issue discount,
and such other information as is 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 such REMIC Trust for each day during such 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 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 Estate. If a BENEFICIAL OWNER of a REMIC Residual Security's
adjusted basis in its REMIC Residual Security at the time such termination
occurs exceeds the amount of cash distributed to such 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 such excess.
DEBT SECURITIES
General
With respect to each series of Debt Securities, Dewey Ballantine LLP,
special tax counsel to the Company, will deliver its opinion to the Company that
(unless otherwise limited in the related Prospectus Supplement) the Securities
will be classified as debt of the Company secured by the related Mortgage Loans.
Consequently, the Debt Securities will not be treated as ownership interests in
the Mortgage 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, Grantor Trust Securities will possess certain
special tax attributes by virtue of their being ownership interests in the
underlying Mortgage Loans. Similarly, REMIC Securities will possess similar
attributes by virtue of the REMIC provisions of the Code. In general, Debt
Securities will not possess such special tax attributes. Investors to whom such
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 such
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.
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In general (except as described in "--Discount and Premium--Market
Discount," below), except for certain financial institutions subject to section
582(c) of the Code, 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 of the Code), 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, DEWEY
BALLANTINE LLP, SPECIAL TAX COUNSEL TO THE COMPANY, WILL DELIVER ITS OPINION TO
THE COMPANY THAT (UNLESS OTHERWISE LIMITED IN THE RELATED PROSPECTUS SUPPLEMENT)
THE TRUST WILL BE TREATED AS A PARTNERSHIP AND NOT AN ASSOCIATION TAXABLE AS A
CORPORATION FOR FEDERAL INCOME TAX PURPOSES. SUCH OPINION SHALL BE ATTACHED ON
FORM 8-K TO BE FILED WITH THE COMMISSION WITHIN FIFTEEN DAYS AFTER THE INITIAL
ISSUANCE OF SUCH SECURITIES OR FILED WITH THE COMMISSION AS A POST-EFFECTIVE
AMENDMENT TO THE PROSPECTUS. ACCORDINGLY, EACH BENEFICIAL OWNER OF A PARTNERSHIP
INTEREST WILL GENERALLY BE TREATED AS THE OWNER OF AN INTEREST IN THE MORTGAGE
LOANS.
SPECIAL TAX ATTRIBUTES
AS DESCRIBED ABOVE, GRANTOR TRUST SECURITIES WILL POSSESS
CERTAIN SPECIAL TAX ATTRIBUTES BY VIRTUE OF THEIR BEING OWNERSHIP INTERESTS IN
THE UNDERLYING MORTGAGE LOANS. SIMILARLY REMIC SECURITIES AND FASIT SECURITIES
WILL POSSESS SIMILAR ATTRIBUTES BY VIRTUE OF THE REMIC AND FASIT PROVISIONS OF
THE CODE. IN GENERAL, PARTNERSHIP INTERESTS WILL NOT POSSESS SUCH SPECIAL TAX
ATTRIBUTES. INVESTORS TO WHOM SUCH ATTRIBUTES ARE IMPORTANT SHOULD CONSULT THEIR
OWN TAX ADVISORS REGARDING INVESTMENT IN PARTNERSHIP INTERESTS.
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.
IN CERTAIN INSTANCES, 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 SUCH A HOLDER UNDER THE CODE.
UNDER SECTION 708 OF THE CODE, 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
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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 SUCH 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 SUCH PARTNERSHIP INTEREST, AND UPON
SALE OR OTHER DISPOSITION OF SOME OF THE PARTNERSHIP INTERESTS, ALLOCATE A
PORTION OF SUCH 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, SUCH 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 OF
THE CODE.
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 INFORMATION TO NOMINEES THAT FAIL TO PROVIDE THE
TRUST WITH THE INFORMATION STATEMENT DESCRIBED BELOW AND SUCH NOMINEES WILL BE
REQUIRED TO FORWARD SUCH 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 SUCH INCONSISTENCIES.
UNDER SECTION 6031 OF THE CODE, 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 CERTAIN INFORMATION ON
THE NOMINEE, THE BENEFICIAL OWNERS AND THE PARTNERSHIP INTERESTS SO HELD. SUCH
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 SUCH PERSON, (Y) WHETHER SUCH 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) CERTAIN INFORMATION ON PARTNERSHIP INTERESTS THAT WERE HELD,
BOUGHT OR SOLD ON BEHALF OF SUCH 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 EXCHANGE ACT 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, UNDER CERTAIN
CIRCUMSTANCES, 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 NOTE RELATED TO THE
INCOME AND LOSSES OF THE TRUST.
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FASIT SECURITIES
IF PROVIDED IN A RELATED PROSPECTUS SUPPLEMENT, AN ELECTION
WILL BE MADE TO TREAT THE TRUST AS A FASIT WITHIN THE MEANING OF CODE SECTION
860L(A). QUALIFICATION AS A FASIT REQUIRES ONGOING COMPLIANCE WITH CERTAIN
CONDITIONS. WITH RESPECT TO EACH SERIES OF SECURITIES FOR WHICH AN ELECTION IS
MADE, DEWEY BALLANTINE LLP, SPECIAL TAX COUNSEL TO THE COMPANY, WILL DELIVER ITS
OPINION TO THE COMPANY THAT (UNLESS OTHERWISE LIMITED IN THE RELATED PROSPECTUS
SUPPLEMENT), ASSUMING COMPLIANCE WITH THE POOLING AND SERVICING AGREEMENT, THE
TRUST WILL BE TREATED AS A FASIT FOR FEDERAL INCOME TAX PURPOSES. A TRUST FOR
WHICH A FASIT ELECTION IS MADE WILL BE REFERRED TO HEREIN AS A "FASIT TRUST."
THE SECURITIES OF EACH CLASS WILL BE DESIGNATED AS "REGULAR INTERESTS" OR
"HIGH-YIELD REGULAR INTERESTS" IN THE FASIT TRUST EXCEPT THAT ONE SEPARATE CLASS
WILL BE DESIGNATED AS THE "OWNERSHIP INTEREST" IN THE FASIT TRUST. THE
PROSPECTUS SUPPLEMENT FOR EACH SERIES OF SECURITIES WILL STATE WHETHER
SECURITIES OF EACH CLASS WILL CONSTITUTE EITHER A REGULAR INTEREST OR A
HIGH-YIELD REGULAR INTEREST (A FASIT REGULAR SECURITY) OR AN OWNERSHIP INTEREST
(A FASIT OWNERSHIP SECURITY). SUCH OPINION SHALL BE ATTACHED ON FORM 8-K TO BE
FILED WITH THE COMMISSION WITHIN FIFTEEN DAYS AFTER THE INITIAL ISSUANCE OF SUCH
SECURITIES OR FILED WITH THE COMMISSION AS A POST-EFFECTIVE AMENDMENT TO THE
PROSPECTUS.
SPECIAL TAX ATTRIBUTES
FASIT SECURITIES HELD BY A REAL ESTATE INVESTMENT TRUST WILL
CONSTITUTE "REAL ESTATE ASSETS" WITHIN THE MEANING OF CODE SECTIONS 856(C)(5)(A)
AND 856(C)(6) AND INTEREST ON THE FASIT REGULAR SECURITIES WILL BE CONSIDERED
"INTEREST ON OBLIGATIONS SECURED BY MORTGAGES ON REAL PROPERTY OR ON INTERESTS
IN REAL PROPERTY" WITHIN THE MEANING OF CODE SECTION 856(C)(3)(B) IN THE SAME
PROPORTION THAT, FOR BOTH PURPOSES, THE ASSETS OF THE FASIT TRUST AND THE INCOME
THEREON WOULD BE SO TREATED. FASIT REGULAR SECURITIES HELD BY A DOMESTIC
BUILDING AND LOAN ASSOCIATION WILL BE TREATED AS "REGULAR INTEREST[S] IN A
FASIT" UNDER CODE SECTION 7701(A)(19)(C)(XI), BUT ONLY IN THE PROPORTION THAT
THE FASIT TRUST HOLDS "LOANS . . . SECURED BY AN INTEREST IN REAL PROPERTY WHICH
IS . . . RESIDENTIAL REAL PROPERTY" WITHIN THE MEANING OF CODE SECTION
7701(A)(19)(C)(V). IF AT ALL TIMES 95% OR MORE OF THE ASSETS OF THE FASIT TRUST
OR THE INCOME THEREON QUALIFY FOR THE FOREGOING TREATMENTS, THE FASIT REGULAR
SECURITIES WILL QUALIFY FOR THE CORRESPONDING STATUS IN THEIR ENTIRETY. FOR
PURPOSES OF CODE SECTION 856(C)(5)(A), PAYMENTS OF PRINCIPAL AND INTEREST ON A
MORTGAGE LOAN THAT ARE REINVESTED PENDING DISTRIBUTION TO HOLDERS OF FASIT
REGULAR SECURITIES SHOULD QUALIFY FOR SUCH TREATMENT. FASIT REGULAR SECURITIES
HELD BY A REGULATED INVESTMENT COMPANY WILL NOT CONSTITUTE "GOVERNMENT
SECURITIES" WITHIN THE MEANING OF CODE SECTION 851(B)(4)(A)(I). FASIT REGULAR
SECURITIES HELD BY CERTAIN FINANCIAL INSTITUTIONS WILL CONSTITUTE AN "EVIDENCE
OF INDEBTEDNESS" WITHIN THE MEANING OF CODE SECTION 582(C)(1).
TAXATION OF BENEFICIAL OWNERS OF FASIT REGULAR SECURITIES
A FASIT TRUST WILL NOT BE SUBJECT TO FEDERAL INCOME TAX EXCEPT
WITH RESPECT TO INCOME FROM PROHIBITED TRANSACTIONS AND IN CERTAIN OTHER
INSTANCES AS DESCRIBED BELOW. THE FASIT REGULAR SECURITIES GENERALLY WILL BE
TREATED FOR FEDERAL INCOME TAX PURPOSES AS NEWLY-ORIGINATED DEBT INSTRUMENTS. IN
GENERAL, INTEREST, ORIGINAL ISSUE DISCOUNT ("OID") AND MARKET DISCOUNT ON A
FASIT REGULAR SECURITY WILL BE TREATED AS ORDINARY INCOME TO THE BENEFICIAL
OWNER, AND PRINCIPAL PAYMENTS (OTHER THAN PRINCIPAL PAYMENTS THAT DO NOT EXCEED
ACCRUED MARKET DISCOUNT) ON AN FASIT REGULAR SECURITY WILL BE TREATED AS A
RETURN OF CAPITAL TO THE EXTENT OF THE BENEFICIAL OWNER'S BASIS ALLOCABLE
THERETO. BENEFICIAL OWNERS MUST USE THE ACCRUAL METHOD OF ACCOUNTING WITH
RESPECT TO FASIT REGULAR SECURITIES, REGARDLESS OF THE METHOD OF ACCOUNTING
OTHERWISE USED BY SUCH BENEFICIAL OWNERS. SEE DISCUSSION OF "DISCOUNT AND
PREMIUM" BELOW.
IN ORDER FOR THE FASIT TRUST TO QUALIFY AS A FASIT, THERE MUST
BE ONGOING COMPLIANCE WITH THE REQUIREMENTS SET FORTH IN THE CODE. THE FASIT
MUST FULFILL AN ASSET TEST, WHICH REQUIRES THAT SUBSTANTIALLY ALL THE ASSETS OF
THE FASIT, AS OF THE CLOSE OF THE THIRD CALENDAR MONTH BEGINNING AFTER THE
"STARTUP DAY" (WHICH FOR PURPOSES OF THIS DISCUSSION IS THE DATE OF THE INITIAL
ISSUANCE OF THE FASIT SECURITIES) AND AT ALL TIMES THEREAFTER, MUST CONSIST OF
CASH OR CASH EQUIVALENTS, CERTAIN DEBT INSTRUMENTS (OTHER THAN DEBT INSTRUMENTS
ISSUED BY THE OWNER OF THE FASIT OR A RELATED PARTY) AND HEDGES (AND CONTRACTS
TO ACQUIRE THE SAME), FORECLOSURE PROPERTY AND REGULAR INTERESTS IN ANOTHER
FASIT OR IN A REMIC. BASED ON IDENTICAL STATUTORY LANGUAGE APPLICABLE TO REMICS,
IT APPEARS THAT THE "SUBSTANTIALLY ALL" REQUIREMENT SHOULD BE MET IF AT ALL
TIMES THE AGGREGATE ADJUSTED BASIS OF THE NONQUALIFIED ASSETS IS LESS THAN ONE
PERCENT OF THE AGGREGATE ADJUSTED BASIS OF ALL THE FASIT'S ASSETS. THE FASIT
PROVISIONS OF THE CODE (SECTIONS 860H THROUGH 860L) ALSO
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REQUIRE THE FASIT OWNERSHIP INTEREST AND CERTAIN "HIGH-YIELD REGULAR INTERESTS"
(DESCRIBED BELOW) TO BE HELD ONLY BY CERTAIN FULLY TAXABLE DOMESTIC
CORPORATIONS.
PERMITTED DEBT INSTRUMENTS MUST BEAR INTEREST, IF ANY, AT A
FIXED OR QUALIFIED VARIABLE RATE. PERMITTED HEDGES INCLUDE INTEREST RATE OR
FOREIGN CURRENCY NOTIONAL PRINCIPAL CONTRACTS, LETTERS OF CREDIT, INSURANCE,
GUARANTEES OF PAYMENT DEFAULT AND SIMILAR INSTRUMENTS TO BE PROVIDED IN
REGULATIONS, AND WHICH ARE REASONABLY REQUIRED TO GUARANTEE OR HEDGE AGAINST THE
FASIT'S RISKS ASSOCIATED WITH BEING THE OBLIGOR ON INTERESTS ISSUED BY THE
FASIT. FORECLOSURE PROPERTY IS REAL PROPERTY ACQUIRED BY THE FASIT IN CONNECTION
WITH THE DEFAULT OR IMMINENT DEFAULT OF A QUALIFIED MORTGAGE, PROVIDED THE
DEPOSITOR HAD NO KNOWLEDGE OR REASON TO KNOW AS OF THE DATE SUCH ASSET WAS
ACQUIRED BY THE FASIT THAT SUCH A DEFAULT HAD OCCURRED OR WOULD OCCUR.
IN ADDITION TO THE FOREGOING REQUIREMENTS, THE VARIOUS
INTERESTS IN A FASIT ALSO MUST MEET CERTAIN REQUIREMENTS. ALL OF THE INTERESTS
IN A FASIT MUST BE EITHER OF THE FOLLOWING: (A) ONE OR MORE CLASSES OF REGULAR
INTERESTS OR (B) A SINGLE CLASS OF OWNERSHIP INTEREST. A REGULAR INTEREST IS AN
INTEREST IN A FASIT THAT IS ISSUED ON OR AFTER THE STARTUP DAY WITH FIXED TERMS,
IS DESIGNATED AS A REGULAR INTEREST, AND (I) UNCONDITIONALLY ENTITLES THE HOLDER
TO RECEIVE A SPECIFIED PRINCIPAL AMOUNT (OR OTHER SIMILAR AMOUNT), (II) PROVIDES
THAT INTEREST PAYMENTS (OR OTHER SIMILAR AMOUNTS), IF ANY, AT OR BEFORE MATURITY
EITHER ARE PAYABLE BASED ON A FIXED RATE OR A QUALIFIED VARIABLE RATE, (III) HAS
A STATED MATURITY OF NOT LONGER THAN 30 YEARS, (IV) HAS AN ISSUE PRICE NOT
GREATER THAN 125% OF ITS STATED PRINCIPAL AMOUNT, AND (V) HAS A YIELD TO
MATURITY NOT GREATER THAN 5 PERCENTAGE POINTS HIGHER THAN THE RELATED APPLICABLE
FEDERAL RATE (AS DEFINED IN CODE SECTION 1274(D)). IN ORDER TO MEET THE 30 YEAR
MATURITY REQUIREMENT, THE FASIT REGULAR SECURITIES WILL BE RETIRED AND REPLACED,
TO THE EXTENT THEN-OUTSTANDING, WITH NEW REGULAR INTERESTS ON THE 30TH
ANNIVERSARY OF THE DATE OF ISSUANCE OF THE FASIT REGULAR SECURITIES. A REGULAR
INTEREST THAT IS DESCRIBED IN THE PRECEDING SENTENCE EXCEPT THAT IF FAILS TO
MEET ONE OR MORE OF REQUIREMENTS (I), (II) (IV) OR (V) IS A "HIGH-YIELD REGULAR
INTEREST." A HIGH-YIELD REGULAR INTEREST THAT FAILS REQUIREMENT (II) MUST
CONSIST OF A SPECIFIED, NONVARYING PORTION OF THE INTEREST PAYMENTS ON THE
PERMITTED ASSETS, BY REFERENCE TO THE REMIC RULES. AN OWNERSHIP INTEREST IS AN
INTEREST IN A FASIT OTHER THAN A REGULAR INTEREST THAT IS ISSUED ON THE STARTUP
DAY, IS DESIGNATED AN OWNERSHIP INTEREST AND IS HELD BY A SINGLE, FULLY-TAXABLE,
DOMESTIC CORPORATION. AN INTEREST IN A FASIT MAY BE TREATED AS A REGULAR
INTEREST EVEN IF PAYMENTS OF PRINCIPAL WITH RESPECT TO SUCH INTEREST ARE
SUBORDINATED TO PAYMENTS ON OTHER REGULAR INTERESTS OR THE OWNERSHIP INTEREST IN
THE FASIT, AND ARE DEPENDENT ON THE ABSENCE OF DEFAULTS OR DELINQUENCIES ON
PERMITTED ASSETS LOWER THAN REASONABLY EXPECTED RETURNS ON PERMITTED ASSETS,
UNANTICIPATED EXPENSES INCURRED BY THE FASIT OR PREPAYMENT INTEREST SHORTFALLS.
IF AN ENTITY FAILS TO COMPLY WITH ONE OR MORE OF THE ONGOING
REQUIREMENTS OF THE CODE FOR STATUS AS A FASIT DURING ANY TAXABLE YEAR, THE CODE
PROVIDES THAT THE ENTITY OR APPLICABLE POTION THEREOF WILL NOT BE TREATED AS A
FASIT THEREAFTER. IN THIS EVENT, ANY ENTITY THAT HOLDS MORTGAGE LOANS AND IS THE
OBLIGOR WITH RESPECT TO DEBT OBLIGATIONS WITH TWO OR MORE MATURITIES, SUCH AS
THE TRUST FUND, MAY BE TREATED AS A SEPARATE ASSOCIATION TAXABLE AS A
CORPORATION, AND THE FASIT REGULAR SECURITIES MAY BE TREATED AS EQUITY INTERESTS
THEREIN. THE LEGISLATIVE HISTORY TO THE FASIT PROVISIONS INDICATES, HOWEVER,
THAT AN ENTITY CAN CONTINUE TO BE A FASIT IF LOSS OF ITS STATUS WAS INADVERTENT,
IT TAKES PROMPT STEPS TO REQUALIFY AND OTHER REQUIREMENTS THAT MAY BE PROVIDED
IN TREASURY REGULATIONS ARE MET. LOSS OF FASIT STATUS RESULTS IN RETIREMENT OF
ALL REGULAR INTERESTS AND THEIR REISSUANCE. IF THE RESULTING INSTRUMENTS WOULD
BE TREATED AS EQUITY UNDER GENERAL TAX PRINCIPLES, CANCELLATION OF DEBT INCOME
MAY RESULT.
TAXES ON A FASIT TRUST
INCOME FROM CERTAIN TRANSACTIONS BY A FASIT, CALLED PROHIBITED
TRANSACTIONS, ARE TAXABLE TO THE HOLDER OF THE OWNERSHIP INTEREST IN A FASIT AT
A 100% RATE. PROHIBITED TRANSACTIONS GENERALLY INCLUDE (I) THE DISPOSITION OF A
PERMITTED ASSET OTHER THAN FOR (A) FORECLOSURE, DEFAULT, OR IMMINENT DEFAULT OF
A QUALIFIED MORTGAGE, (B) BANKRUPTCY OR INSOLVENCY OF THE FASIT, (C) A QUALIFIED
(COMPLETE) LIQUIDATION, (D) SUBSTITUTION FOR ANOTHER PERMITTED DEBT INSTRUMENT
OR DISTRIBUTION OF THE DEBT INSTRUMENT TO THE HOLDER OF THE OWNERSHIP INTEREST
TO REDUCE OVERCOLLATERALIZATION, BUT ONLY IF A PRINCIPAL PURPOSE OF ACQUIRING
THE DEBT INSTRUMENT WHICH IS DISPOSED OF WAS NOT THE RECOGNITION OF GAIN (OR THE
REDUCTION OF A LOSS) ON THE WITHDRAWN ASSET AS A RESULT OF AN INCREASE IN THE
MARKET VALUE OF THE ASSET AFTER ITS ACQUISITION BY THE FASIT OR (E) THE
RETIREMENT OF A CLASS OF FASIT REGULAR INTERESTS; (II) THE RECEIPT OF INCOME
FROM NONPERMITTED ASSETS; (III) THE RECEIPT OF COMPENSATION FOR SERVICES; OR
(IV) THE RECEIPT OF ANY INCOME DERIVED FROM A LOAN ORIGINATED BY THE FASIT. IT
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IS UNCLEAR THE EXTENT TO WHICH TAX ON SUCH TRANSACTIONS COULD BE COLLECTED FROM
THE FASIT TRUST DIRECTLY UNDER THE APPLICABLE STATUTES RATHER THAN FROM THE
HOLDER OF THE FASIT RESIDUAL SECURITY.
DUE TO THE COMPLEXITY OF THESE RULES, THE ABSENCE OF TREASURY
REGULATIONS AND THE CURRENT UNCERTAINTY AS TO THE MANNER TO THEIR APPLICATION TO
THE TRUST AND TO HOLDERS OF FASIT SECURITIES, IT IS PARTICULARLY IMPORTANT THAT
POTENTIAL INVESTORS CONSULT THEIR OWN TAX ADVISORS REGARDING THE TAX TREATMENT
OF THEIR ACQUISITION OWNERSHIP AND DISPOSITION OF THE FASIT REGULAR SECURITIES.
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 certain
Grantor Trust Fractional Interest Securities will be treated as having original
issue discount by virtue of the coupon stripping rules in section 1286 of the
Code. In very general terms, (i) 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; (ii) 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 (iii) 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 such 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 Payment Date
over the interest that accrues for the period from the Settlement Date to the
first Payment Date.
Notwithstanding the general definition, original issue discount will be
treated as zero if such 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 (i) the number of complete years (rounding down for
partial years) from the Settlement Date until the date on which each such
distribution is expected to be made under the assumption that the Mortgage Loans
prepay at the rate specified in the related Prospectus Supplement (the
"Prepayment Assumption") by (ii) a fraction, the numerator of which is the
amount of such 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 such
distribution is received, gain equal to the discount allocated to such
distribution will be recognized.
Section 1272(a)(6) of the Code 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 the Grantor
Trust Securities for tax years beginning after August 5, 1997. Under these rules
(described in greater detail below), (i) 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 such
variable rate is based remains equal to the value of that rate on the Settlement
Date, and (ii) 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.
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Section 1272(a)(6)(B)(iii) of the Code 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 Sponsor anticipates that the Prepayment Assumption
for each series of Securities will be consistent with this standard. The Sponsor
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 such 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. Unless otherwise disclosed
in the related Prospectus Supplement, the Trustee will report original issue
discount based on accrual periods of one month, each beginning on a payment date
(or, in the case of the first such period, the Settlement Date) and ending on
the day before the next payment date.
Under section 1272(a)(6) of the Code, the portion of original issue
discount treated as accruing for any accrual period will equal the excess, if
any, of (i) 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 such Security during the accrual period of amounts
included in the stated redemption price at maturity, over (ii) the adjusted
issue price of such 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 (i) the yield to maturity of the Security, calculated as
of the Settlement Date, giving effect to the Prepayment Assumption, (ii) events
(including actual prepayments) that have occurred prior to the end of the
accrual period, (iii) the Prepayment Assumption, and (iv) in the case of a
Security calling for a variable rate of interest, an assumption that the value
of the index upon which such variable rate is based remains the same as its
value on the Settlement Date over the entire life of such Security. The adjusted
issue price of a Security at any time will equal the issue price of such
Security, increased by the aggregate amount of previously accrued original issue
discount with respect to such Security, and reduced by the amount of any
distributions made on such 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 certain 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 such negative
amounts. The legislative history to section 1272(a)(6) indicates that such
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
such Securities should consult their own tax advisors concerning the treatment
of such negative accruals.
A subsequent purchaser of a Security that purchases such 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 such
Security, the daily portion of original issue discount with respect to such
Security (but reduced, if the cost of such Security to such purchaser exceeds
its adjusted issue price, by an amount equal to the product of (i) such daily
portion and (ii) a constant fraction, the numerator of which is such excess and
the denominator of which is the sum of the daily portions of original issue
discount on such 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 such 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 such distribution does not exceed the aggregate
amount of accrued market discount on such Security not previously included in
income. With respect to
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Securities that have unaccrued original issue discount, such 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 such 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 (i) under a constant yield method or
(ii) 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 such discount is less than 0.25% of the remaining
stated redemption price at maturity of such 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 such distribution is received, gain equal to the discount allocated to such
distribution will be recognized.
Securities Purchased at a Premium
A purchaser of a Security that purchases such Security at a cost
greater than its remaining stated redemption price at maturity will be
considered to have purchased such Security (a "Premium Security") at a premium.
Such a purchaser need not include in income any remaining original issue
discount and may elect, under section 171(c)(2) of the Code, to treat such
premium as "amortizable bond premium." If a BENEFICIAL OWNER makes such an
election, the amount of any interest payment that must be included in such
BENEFICIAL OWNER'S income for each period ending on a Payment Date will be
reduced by the portion of the premium allocable to such period based on the
Premium Security's yield to maturity. SUCH premium amortization should be made
USING CONSTANT YIELD PRINCIPLES. If such 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 ("fully taxable bonds") held by the BENEFICIAL
OWNER at the beginning of the first taxable year to which the election applies
and to all such fully taxable bonds thereafter acquired by it, and is
irrevocable without the consent of the IRS. If such an election is not made, (i)
such a BENEFICIAL OWNER must include the full amount of each interest payment in
income as it accrues, and (ii) the premium must be allocated to the principal
distributions on the Premium Security and, when each such distribution is
received, a loss equal to the premium allocated to such 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
Premium Security.
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 such Securities from
the rules generally applicable to debt instruments issued at a premium. In
particular, it is possible that such 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 such event, section 1272(a)(6) of the Code
would govern the accrual of such 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) of the Code. Unless
and until the Treasury Department or the IRS publishes specific guidance
relating to the tax treatment of such Securities, the Trustee intends to furnish
tax information to BENEFICIAL OWNERS of such 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.
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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 of the Code at a rate of 31% if recipients of such
distributions fail to furnish to the payor certain information, including their
taxpayer identification numbers, or otherwise fail to establish an exemption
from such tax. Any amounts deducted and withheld from a distribution to a
recipient would be allowed as a credit against such recipient's federal income
tax. Furthermore, certain penalties may be imposed by the IRS on a recipient of
distributions that is required to supply information but that does not do so in
the proper manner.
THE INTERNAL REVENUE SERVICE RECENTLY ISSUED FINAL REGULATIONS (THE
"WITHHOLDING REGULATIONS"), WHICH CHANGE CERTAIN OF THE RULES RELATING TO
CERTAIN 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, 1999, ALTHOUGH VALID
WITHHOLDING CERTIFICATES THAT ARE HELD ON DECEMBER 31, 1998 REMAIN VALID UNTIL
THE EARLIER OF DECEMBER 31, 1999 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 CERTAIN 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.
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 such BENEFICIAL OWNER is not a U.S. Person, and provides the
name and address of such BENEFICIAL OWNER, and (c) the last U.S. Person in the
chain of payment to the BENEFICIAL OWNER receives such statement from such
BENEFICIAL OWNER or a financial institution holding on its behalf and does not
have actual knowledge that such 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) of the Code.
REMIC Residual Securities AND FASIT OWNERSHIP 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 OR A FASIT OWNERSHIP 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 OR FASIT Trust that issued the REMIC Residual
Security OR FASIT OWNERSHIP SECURITY (e.g., Mortgage Loans or regular interests
in another REMIC OR FASIT) were issued after July 18, 1984. In no case will any
portion of REMIC OR FASIT income that constitutes an excess inclusion be
entitled to any
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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" herein.
PARTNERSHIP INTERESTS
DEPENDING UPON THE PARTICULAR TERMS OF THE TRUST AGREEMENT AND
SALE 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 SUCH 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 SUCH 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.
FASIT REGULAR SECURITIES
CERTAIN "HIGH-YIELD" FASIT REGULAR SECURITIES MAY NOT BE SOLD
TO OR BENEFICIALLY OWNED BY NON-U.S. PERSONS. ANY SUCH PURPORTED TRANSFER WILL
BE NULL AND VOID AND, UPON THE TRUSTEE'S DISCOVERY OF ANY PURPORTED TRANSFER IN
VIOLATION OF THIS REQUIREMENT, THE LAST PRECEDING OWNER OF SUCH HIGH-YIELD FASIT
REGULAR SECURITIES WILL BE RESTORED TO OWNERSHIP THEREOF AS COMPLETELY AS
POSSIBLE. SUCH LAST PRECEDING OWNER WILL, IN ANY EVENT, BE TAXABLE ON ALL INCOME
WITH RESPECT TO SUCH HIGH-YIELD FASIT REGULAR SECURITIES FOR FEDERAL INCOME TAX
PURPOSES. THE POOLING AND SERVICING AGREEMENT WILL PROVIDE THAT, AS A CONDITION
TO TRANSFER OF A HIGH-YIELD FASIT REGULAR SECURITY, THE PROPOSED TRANSFEREE MUST
FURNISH AN AFFIDAVIT AS TO ITS STATUS AS A U.S. PERSON AND OTHERWISE AS A
PERMITTED TRANSFEREE.
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.
ERISA CONSIDERATIONS
GENERAL
Section 406 of 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 requirements. Accordingly, assets of such 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 such plan which is qualified and exempt from taxation under Section
401(a) and 501(a) of the Code, however, is subject to the prohibited transaction
rules set forth in Section 503 of the Code.
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Certain transactions involving the Trust might be deemed to constitute
prohibited transactions under ERISA and the Code with respect to a Plan
(including an individual retirement arrangement) that purchased Securities, if
the assets of the Trust were deemed to be assets of the Plan. Under a regulation
(the "Plan Assets Regulation") issued by the United States Department of Labor
(the "DOL"), the assets of the Trust would be treated as plan assets of a Plan
for the purposes of ERISA and the 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. In addition, 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 under certain circumstances. Therefore, in the
absence of an exemption, the purchase, sale or holding of a Security by a Plan
(including certain individual retirement arrangements) subject to Section 406 of
ERISA or Section 4975 of the Code might result in prohibited transactions and
the imposition of excise taxes and civil penalties.
CERTIFICATES
The DOL has issued to various underwriters individual prohibited
transaction exemptions (the "Underwriter Exemptions"), which generally exempt
from the 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 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:
(1) 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;
(2) 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;
(3) the certificates 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 Standard & Poor's,
Moody's, Duff & Phelps Credit Rating Co. ("D&P") or Fitch;
(4) the Trustee is not 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
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 sponsor
pursuant to the assignment of the loans to the trust estate
represents not more than the fair market value of such loans;
the sum of all payments made to and retained by any servicer
represents not more than reasonable compensation for such
person's services under the pooling and servicing agreement
and reimbursement of such person's reasonable expenses in
connection therewith;
(6) the Plan investing in the certificates is an "accredited
investor" as defined in Rule 501(a)(1) of Regulation D of the
Commission under the Securities Act of 1933; and
(7) 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
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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:
(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
Standard & Poor's, Moody's, Fitch or D&P for at least one year
prior to the Plan's acquisition of certificates; 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
certificates.
Moreover, the Underwriter Exemptions provide relief from certain
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;
provided that, among 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
Underwriter Exemptions do not apply to Plans sponsored by the Sponsor, the
Underwriters, the Trustee, the Master Servicer, any other 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").
In addition to the Underwriter Exemptions, the DOL has issued
Prohibited Transaction Class Exemption ("PTCE") 83-1 which provides an exemption
for certain transactions involving the sale or exchange of certain residential
mortgage pool pass-through certificates by Plans and for transactions in
connection with the servicing and operation of the mortgage pool.
NOTES
The Underwriter Exemptions will not be available for Securities which
are Notes. However, if the Notes are treated as indebtedness without substantial
equity features, the Trust's assets would not be deemed assets of a Plan. If the
Notes are treated as having substantial equity features, the purchase, holding
and resale of the Notes could result in a transaction that is prohibited under
ERISA or the Code. The acquisition or holding of the Notes by or on behalf of a
Plan could nevertheless give rise to a prohibited transaction, if such
acquisition and holding of Notes by or on behalf of a Plan were deemed to be a
prohibited loan to a party in interest with respect to such Plan. Certain
exemptions from such prohibited transaction rules could be applicable to the
purchase and holding of Notes by a Plan, depending on the type and circumstances
of the plan fiduciary making the decision to acquire such Notes. Included among
these exemptions are: PTCE 84-14, regarding certain transactions effected by
"qualified professional asset managers"; PTCE 90-1, regarding certain
transactions entered into by insurance company pooled separate accounts; PTCE
91-38, regarding certain transactions entered into by bank collective investment
funds; PTCE 95-60, regarding certain transactions entered into by insurance
company general accounts; and PTCE 96-23, regarding certain transactions
effected by "in-house asset managers". Each purchaser and each transferee of a
Note that is treated as debt for purposes of the Plan Assets Regulation may be
required to represent and warrant that its
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purchase and holding of such Note 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 Sponsor 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.
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.
PLAN OF DISTRIBUTION
The Depositor may offer each Series of Securities through First Union
Capital Markets Corp. ("First Union") or one or more other firms that may be
designated at the time of each offering of such Securities. The participation of
First Union in any offering will comply with Schedule E to the bylaws of the
National Association of Securities Dealers, Inc. The Prospectus Supplement
relating to each Series of Securities will set forth the specific terms of the
offering of such Series of Securities and of each Class within such Series, the
names of the underwriters, the purchase price of the Securities, the proceeds to
the Depositor from such 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 certain dealers. The place and time of delivery of each
Series of Securities will also be set forth in the Prospectus Supplement
relating to such Series. First Union is an affiliate of the Depositor.
LEGAL MATTERS
Certain legal matters in connection with the Securities will be passed
upon for the Depositor by Dewey Ballantine LLP, New York, New York or such other
counsel identified in the related Prospectus Supplement.
FINANCIAL INFORMATION
The Depositor 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 such 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 herein. Accordingly, no financial statements with respect
to such Trusts will be included in this Prospectus or any Prospectus Supplement.
A Prospectus Supplement and the related Form 8-K (which will be
incorporated by reference to the Registration Statement) may contain financial
statements of the related Credit Enhancer, if any.
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GLOSSARY OF TERMS
The following are abbreviated definitions of certain capitalized terms
used in this Prospectus. Unless otherwise provided in a "supplemental Glossary"
in the Prospectus Supplement for a Series, such definitions shall apply to
capitalized terms used in such Prospectus Supplement. The definitions may vary
from those in the related Agreement for a Series and the related Agreement for a
Series generally provides a more complete definition of certain of the terms.
Reference should be made to the related Agreement for a Series for a more
compete definition of such terms.
"Accrual Termination Date" means, with respect to a Class of Compound
Interest Securities, the Distribution Date specified in the related Prospectus
Supplement.
"Advance" means cash advanced by the Servicer in respect of delinquent
payments of principal of and interest on a Mortgage Loan and for any other
purposes specified in the related Prospectus Supplement.
"Agreement" means, with respect to a Series of Certificates, the
Pooling and Servicing Agreement or Trust Agreement, and, with respect to a
Series of Notes, the Indenture and the Servicing Agreement, as the context
requires.
"Appraised Value" means, with respect to property securing a Mortgage
Loan, the lesser of the appraised value determined in an appraisal obtained at
origination of the Mortgage Loan or sales price of such property at such time.
"Asset Group" means, with respect to the Primary Assets and other
assets comprising the Trust Fund of a Series, a group of such Primary Assets and
other assets having the characteristics described in the related Prospectus
Supplement.
"Assumed Reinvestment Rate" means, with respect to a Series, the per
annum rate or rates specified in the related Prospectus Supplement for a
particular period or periods as the "Assumed Reinvestment Rate" for funds held
in any fund or account for the Series.
"Available Distribution Amount" means the amount in the Distribution
Account (including amounts deposited therein from any reserve fund or other fund
or account) eligible for distribution to Holders on a Distribution Date.
"Bankruptcy Code" means the federal bankruptcy code, 11 United States
Code 101 et seq., and related rules and regulations promulgated thereunder.
"Business Day" means a day that, in the City of New York or in the city
or cities in which the corporate trust office of the Trustee are located, is
neither a legal holiday nor a day on which banking institutions are authorized
or obligated by law, regulations or executive order to be closed.
"Certificate" means the Asset-Backed Certificates.
"Class" means a Class of Securities of a Series.
"Closing Date" means, with respect to a Series, the date specified in
the related Prospectus Supplement as the date on which Securities of such Series
are first issued.
"Code" means the Internal Revenue Code of 1986, as amended, and
regulations (including proposed regulations) or other pronouncements of the
Internal Revenue Service promulgated thereunder.
"Collection Account" means, with respect to a Series, the account
established in the name of the Servicer for the deposit by the Servicer of
payments received from the Primary Assets.
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"Combined Loan-to-Value Ratio" means, with respect to a Mortgage Loan,
the ratio determined as set forth in the related Prospectus Supplement taking
into account the amounts of any related senior mortgage loans on the related
Mortgaged Property.
"Commission" means the Securities and Exchange Commission.
"Compound Interest Security" means any Security of a Series on which
all or a portion of the interest accrued thereon is added to the principal
balance of such Security on each Distribution Date, through the Accrual
Termination Date, and with respect to which no interest shall be payable until
such Accrual Termination Date, after which interest payments will be made on the
Compound Value thereof.
"Compound Value" means, with respect to a Class of Compound Interest
Securities, the original principal balance of such Class, plus all accrued and
unpaid interest, if any, previously added to the principal balance thereof and
reduced by any payments of principal previously made on such Class of Compound
Interest Securities.
"Condominium" means a form of ownership of real property wherein each
owner is entitled to the exclusive ownership and possession of his or her
individual Condominium Unit and also owns a proportionate undivided interest in
all parts of the Condominium Building (other than the individual Condominium
Units) and all areas or facilities, if any, for the common use of the
Condominium Units.
"Condominium Association" means the person(s) appointed or elected by
the Condominium Unit owners to govern the affairs of the Condominium.
"Condominium Building" means a multi-unit building or buildings, or a
group of buildings whether or not attached to each other, located on property
subject to Condominium ownership.
"Condominium Loan" means a Mortgage Loan secured by a Mortgage on a
Condominium Unit (together with its appurtenant interest in the common
elements).
"Condominium Unit" means an individual housing unit in a Condominium
Building.
"Cooperative" means a corporation owned by tenant-stockholders who,
through the ownership of stock, shares or membership securities in the
corporation, receive proprietary leases or occupancy agreements which confer
exclusive rights to occupy specific units and which is described in Section 216
of the Code.
"Cooperative Dwelling" means an individual housing unit in a building
owned by a Cooperative.
"Cooperative Loan" means a housing loan made with respect to a
Cooperative Dwelling and secured by an assignment by the borrower
(tenant-stockholder) or security interest in shares issued by the applicable
Cooperative.
"Credit Enhancement" means the credit enhancement for a Series, if any,
specified in the related Prospectus Supplement.
"Cut-off Date" means the date designated as such in the related
Prospectus Supplement for a Series.
"Debt Securities" means Securities characterized as indebtedness for
federal income tax purposes, and Regular Interest Securities.
"Deferred Interest" means the excess of the interest accrued on the
outstanding principal balance of a Mortgage Loan during a specified period over
the amount of interest required to be paid by an obligor on such Mortgage Loan
on the related Due Date.
"Deposit Agreement" means a guaranteed investment contract or
reinvestment agreement providing for the investment of funds held in a fund or
account, guaranteeing a minimum or a fixed rate of return on the investment of
moneys deposited therein.
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"Depositor" means Home Equity Securitization Corp.
"Disqualified Organization" means the United States, any State or
political subdivision thereof, any possession of the United States, any foreign
government, any international organization, or any agency or instrumentality of
any of the foregoing, a rural electric or telephone cooperative described in
section 1381(a)(2)(C) of the Code, or any entity exempt from the tax imposed by
sections 1-1399 of the Code, if such entity is not subject to tax on its
unrelated business income.
"Distribution Account" means, with respect to a Series, the account
established in the name of the Trustee for the deposit of remittances received
from the Servicer with respect to the Primary Assets.
"Distribution Date" means, with respect to a Series or Class of
Securities, each date specified as a distribution date for such Series or Class
in the related Prospectus Supplement.
"Due Date" means each date, as specified in the related Prospectus
Supplement for a Series, on which any payment of principal or interest is due
and payable by the obligor on any Primary Asset pursuant to the terms thereof.
"Eligible Investments" means any one or more of the obligations or
securities described as such in the related Agreement.
"Credit Enhancer" means the provider of the Credit Enhancement for a
Series specified in the related Prospectus Supplement.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"Escrow Account" means an account, established and maintained by the
Servicer for a Mortgage Loan, into which payments by borrowers to pay taxes,
assessments, mortgage and hazard insurance premiums and other comparable items
required to be paid to the mortgagee are deposited.
"FHLMC" means the Federal Home Loan Mortgage Corporation.
"Final Scheduled Distribution Date" means, with respect to a Class of
Notes of a Series, the date no later than which principal thereof will be fully
paid and with respect to a Class of Certificates of a Series, the date after
which no Certificates of such Class will remain outstanding, in each case based
on the assumptions set forth in the related Prospectus Supplement.
"FNMA" means the Federal National Mortgage Association.
"Holder" means the person or entity in whose name a Security is
registered.
"Home Improvements" means the home improvements financed by a Mortgage
Loan.
"HUD" means the United States Department of Housing and Urban
Development.
"Indenture" means the indenture relating to a Series of Notes between
the Trust Fund and the Trustee.
"Insurance Policies" means certain mortgage insurance, hazard insurance
and other insurance policies required to be maintained with respect to Mortgage
Loans.
"Insurance Proceeds" means amount paid by the insurer under any of the
Insurance Policies covering any Mortgage Loan or Mortgaged Property.
"Interest Only Securities" means a Class of Securities entitled solely
or primarily to distributions of interest and which is identified as such in the
related Prospectus Supplement.
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"IRS" means the Internal Revenue Service.
"Lifetime Rate Cap" means the lifetime limit if any, on the Loan Rate
during the life of each adjustable rate Mortgage Loan.
"Liquidation Proceeds" means amounts received by the Servicer in
connection with the liquidation of a Mortgage Loan, net of liquidation expenses.
"Loan Rate" means, unless otherwise indicated herein or in the
Prospectus Supplement, the interest rate borne by a Mortgage Loan.
"Loan-to-Value Ratio" means, with respect to a Mortgage Loan, the ratio
determined as set forth in the related Prospectus Supplement.
"Minimum Rate" means the lifetime minimum Loan Rate during the life of
each adjustable rate Loan.
"Minimum Principal Payment Agreement" means a minimum principal payment
agreement with an entity meeting the criteria of the Rating Agencies.
"Modification" means a change in any term of a Mortgage Loan.
"Mortgage" means the mortgage, deed of trust or other similar security
instrument securing a Mortgage Note.
"Mortgaged Property" means residential properties securing a Mortgage
Loan.
"Mortgage Loan" means a loan secured by a Mortgaged Property.
"Mortgage Note" means the note or other evidence of indebtedness of a
Mortgagor under the Mortgage Loan.
"Mortgagor" means the obligor on a Mortgage Note.
"1986 Act" means the Tax Reform Act of 1986.
"Notes" means the Asset-Backed Notes.
"Notional Amount" means the amount set forth in the related Prospectus
Supplement for a Class of Interest Only Securities.
"PAC" ("Planned Amortization Class Securities") means a Class of
Securities of a Series on which payments of principal are made in accordance
with a schedule specified in the related Prospectus Supplement, based on certain
assumptions stated therein.
"Participating Securities" means Securities entitled to receive
payments of principal and interest and an additional return on investment as
described in the related Prospectus Supplement.
"Pass-Through Security" means a security representing an undivided
beneficial interest in a pool of assets, including the right to receive a
portion of all principal and interest payments relating to those assets.
"Pay Through Security" means Regular Interest Securities and certain
Debt Securities that are subject to acceleration due to prepayment on the
underlying Primary Assets.
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"Person" means any individual, corporation, partnership, joint venture,
association, joint stock company, trust (including any beneficiary thereof),
unincorporated organization, or government or any agency or political
subdivision thereof.
"Pooling and Servicing Agreement" means the pooling and servicing
agreement relating to a Series of Certificates among the Depositor, the Servicer
(if such Series relates to Mortgage Loans) and the Trustee.
"Primary Assets" means the Private Securities, the Mortgage Loans, as
the case may be, which are included in the Trust Fund for such Series. A Primary
Asset refers to a specific Private Security or Mortgage Loan, as the case may
be.
"Principal Balance" means, with respect to a Primary Asset and as of a
Due Date, the original principal amount of the Primary Asset, plus the amount of
any Deferred Interest added to such principal amount, reduced by all payments,
both scheduled or otherwise, received on such Primary Asset prior to such Due
Date and applied to principal in accordance with the terms of the Primary Asset.
"Principal Only Securities" means a Class of Securities entitled solely
or primarily to distributions of principal and identified as such in the
Prospectus Supplement.
"Private Security" means a participation or pass-through certificate
representing a fractional, undivided interest in Underlying Loans or
collateralized obligations secured by Underlying Loans.
"PS Agreement" means the pooling and servicing agreement, indenture,
trust agreement or similar agreement pursuant to which a Private Security is
issued.
"PS Servicer" means the servicer of the Underlying Loans.
"PS Sponsor" means, with respect to Private Securities, the sponsor or
depositor under a PS Agreement.
"PS Trustee" means the trustee designated under a PS Agreement.
"Qualified Insurer" means a mortgage guarantee or insurance company
duly qualified as such under the laws of the states in which the Mortgaged
Properties are located duly authorized and licensed in such states to transact
the applicable insurance business and to write the insurance provided.
"Rating Agency" means the nationally recognized statistical rating
organization (or organizations) which was (or were) requested by the Depositor
to rate the Securities upon the original issuance thereof.
"Regular Interest" means a regular interest in a REMIC.
"REMIC" means a real estate mortgage investment conduit.
"REMIC Administrator" means the Person, if any, specified in the
related Prospectus Supplement for a Series for which a REMIC election is made,
to serve as administrator of the Series.
"REMIC Provisions" means the provisions of the federal income tax law
relating to real estate mortgage investment conduits, which appear at sections
860A through 860G of Subchapter M of Chapter 1 of the Code, and related
provisions, and regulations, including proposed regulations and rulings, and
administrative pronouncements promulgated thereunder, as the foregoing may be in
effect from time to time.
"REO Property" means real property which secured a defaulted Mortgage
Loan, beneficial ownership of which has been acquired upon foreclosure, deed in
lieu of foreclosure, repossession or otherwise.
"Reserve Fund" means, with respect to a Series, any Reserve Fund
established pursuant to the related Agreement.
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"Residual Interest" means a residual interest in a REMIC.
"Retained Interest" means, with respect to a Primary Asset, the amount
or percentage specified in the related Prospectus Supplement which is not
included in the Trust Fund for the related Series.
"Scheduled Payments" means the scheduled payments of principal and
interest to be made by the borrower on a Primary Asset.
"Securities" means the Notes or the Certificates.
"Originator" means the originator or acquiror of the Primary Assets to
the Depositor identified in the related Prospectus Supplement for a Series.
"Senior Securityholder" means a holder of a Senior Security.
"Senior Securities" means a Class of Securities as to which the
holders' rights to receive distributions of principal and interest are senior to
the rights of holders of Subordinate Securities, to the extent specified in the
related Prospectus Supplement.
"Series" means a separate series of Securities sold pursuant to this
Prospectus and the related Prospectus Supplement.
"Servicer" means, with respect to a Series relating to Mortgage Loans,
the Person if any, designated in the related Prospectus Supplement to service
Mortgage Loans for that Series, or the successors or assigns of such Person.
"Single Family Property" means property securing a Mortgage Loan
consisting of one-to four-family attached or detached residential housing,
including Cooperative Dwellings.
"Stripped Securities" means Pass-Through Securities representing
interests in Primary Assets with respect to which all or a portion of the
principal payments have been separated from all or a portion of the interest
payments.
"Subordinate Securityholder" means a Holder of a Subordinate Security.
"Subordinated Securities" means a Class of Securities as to which the
rights of holders to receive distributions of principal, interest or both is
subordinated to the rights of holders of Senior Securities, and may be allocated
losses and shortfalls prior to the allocation thereof to other Classes of
Securities, to the extent and under the circumstances specified in the related
Prospectus Supplement.
"Trustee" means the trustee under the applicable Agreement and its
successors.
"Trust Fund" means, with respect to any Series of Securities, the trust
holding all money, instruments, securities and other property, including all
proceeds thereof, which are, with respect to a Series of Certificates, held for
the benefit of the Holders by the Trustee under the Pooling and Servicing
Agreement or Trust Agreement or, with respect to a Series of Notes, pledged to
the Trustee under the Indenture as a security for such Notes, including, without
limitation, the Primary Assets (except any Retained Interests), all amounts in
the Distribution Account Collection Account or Reserve Funds, distributions on
the Primary Assets (net of servicing fees), and reinvestment earnings on such
net distributions and any Credit Enhancement and all other property and interest
held by or pledged to the Trustee pursuant to the related Agreement for such
Series.
"UCC" means the Uniform Commercial Code.
"Underlying Loans" means loans of the type eligible to be Mortgage
Loans underlying or securing Private Securities.
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"Variable Interest Security" means a Security on which interest accrues
at a rate that is adjusted, based upon a predetermined index, at fixed periodic
intervals, all as set forth in the related Prospectus Supplement.
"Zero Coupon Security" means a Security entitled to receive payments of
principal only.
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TABLE OF CONTENTS
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SUMMARY OF PROSPECTUS 5
RISK FACTORS
ASSET BACKED NOTES AND ASSET BACKED CERTIFICATES, ISSUABLE IN SERIES.............................................1
PROSPECTUS SUPPLEMENT.............................................................................................3
REPORTS TO HOLDERS................................................................................................3
AVAILABLE INFORMATION.............................................................................................3
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE...................................................................4
SUMMARY OF PROSPECTUS.............................................................................................5
RISK FACTORS.....................................................................................................17
AN INVESTMENT IN ANY SECURITY MAY BE AN ILLIQUID INVESTMENT, WHICH MAY RESULT
IN THE HOLDER HOLDING SUCH INVESTMENT TO MATURITY.............................................................17
THE ASSETS OF THE TRUST FUND, AS WELL AS ANY APPLICABLE CREDIT ENHANCEMENT,
WILL BE LIMITED AND, IF SUCH ASSETS AND/OR CREDIT ENHANCEMENT BECOME
INSUFFICIENT TO SERVICE THE RELATED SECURITIES, LOSSES MAY RESULT.............................................17
CREDIT ENHANCEMENT WILL BE LIMITED IN AMOUNT AND SCOPE OF COVERAGE AND MAY
NOT BE SUFFICIENT TO COVER LOSSES.............................................................................17
THE TIMING OF PRINCIPAL PAYMENTS MAY ADVERSELY AFFECT THE YIELD TO MATURITY OF THE SECURITIES.................18
PREPAYMENTS MAY ADVERSELY AFFECT THE YIELD TO MATURITY OF THE SECURITIES......................................18
AS A RESULT OF OPTIONAL REDEMPTION OR REPURCHASE OR AUCTION SALE, HOLDERS COULD BE FULLY PAID SIGNIFICANTLY
EARLIER THAN WOULD OTHERWISE BE THE CASE......................................................................19
MORTGAGE LOANS WITH BALLOON AND NON-TRADITIONAL PAYMENT METHODS MAY CREATE GREATER DEFAULT RISK...............19
JUNIOR LIENS MAY EXPERIENCE HIGHER RATES OF DELINQUENCIES AND LOSSES..........................................19
PROPERTY VALUES MAY DECLINE, LEADING TO HIGHER LOSSES.........................................................19
GEOGRAPHIC CONCENTRATION OF MORTGAGED PROPERTIES MAY RESULT IN HIGHER LOSSES, IF PARTICULAR REGIONS EXPERIENCE
DOWNTURNS.....................................................................................................20
PRE-FUNDING MAY ADVERSELY AFFECT INVESTMENT...................................................................20
ENVIRONMENTAL CONDITIONS ON THE PROPERTY MAY GIVE RISE TO LIABILITY...........................................20
STATE AND FEDERAL CREDIT PROTECTION LAWS MAY LIMIT COLLECTION OF PRINCIPAL AND INTEREST ON THE MORTGAGE LOANS.21
RATINGS ARE NOT RECOMMENDATIONS. A REDUCTION IN THE RATING OF ANY CREDIT ENHANCER WOULD LIKELY ADVERSELY
IMPACT THE RATING OF THE SECURITIES...........................................................................21
A REDUCTION IN THE RATING OF ANY CREDIT ENHANCER WOULD LIKELY ADVERSELY IMPACT THE RATING OF THE SECURITIES...21
ERISA MAY RESTRICT THE ACQUISITION, OWNERSHIP AND DISPOSITION OF SECURITIES...................................21
PURCHASE OF MORTGAGE LOANS OR UNDERLYING LOANS FROM AFFILIATES MAY LEAD TO CONFLICTS OF INTEREST..............21
DESCRIPTION OF THE SECURITIES....................................................................................22
GENERAL.......................................................................................................22
PAYMENTS OF INTEREST..........................................................................................22
PAYMENTS OF PRINCIPAL.........................................................................................23
FINAL SCHEDULED DISTRIBUTION DATE.............................................................................23
SPECIAL REDEMPTION............................................................................................23
OPTIONAL REDEMPTION, PURCHASE OR TERMINATION..................................................................24
WEIGHTED AVERAGE LIFE OF THE SECURITIES.......................................................................24
THE TRUST FUNDS..................................................................................................25
GENERAL.......................................................................................................25
THE MORTGAGE LOANS............................................................................................26
PRIVATE SECURITIES............................................................................................29
COLLECTION AND DISTRIBUTION ACCOUNTS..........................................................................30
PRE-FUNDING ACCOUNTS..........................................................................................30
CREDIT ENHANCEMENT...............................................................................................31
SUBORDINATE SECURITIES........................................................................................31
INSURANCE.....................................................................................................31
RESERVE FUNDS.................................................................................................33
MINIMUM PRINCIPAL PAYMENT AGREEMENT...........................................................................33
i
<PAGE>
DEPOSIT AGREEMENT.............................................................................................33
SERVICING OF MORTGAGE LOANS......................................................................................33
GENERAL.......................................................................................................33
COLLECTION PROCEDURES; ESCROW ACCOUNTS........................................................................33
DEPOSITS TO AND WITHDRAWALS FROM THE COLLECTION ACCOUNT.......................................................34
ADVANCES AND LIMITATIONS THEREON..............................................................................35
MAINTENANCE OF INSURANCE POLICIES AND OTHER SERVICING PROCEDURES..............................................36
REALIZATION UPON DEFAULTED MORTGAGE LOANS.....................................................................37
ENFORCEMENT OF DUE-ON-SALE CLAUSES............................................................................37
SERVICING COMPENSATION AND PAYMENT OF EXPENSES................................................................37
EVIDENCE AS TO COMPLIANCE.....................................................................................38
CERTAIN MATTERS REGARDING THE SERVICER........................................................................38
THE AGREEMENTS...................................................................................................39
ASSIGNMENT OF PRIMARY ASSETS..................................................................................39
REPORTS TO HOLDERS............................................................................................41
EVENTS OF DEFAULT; RIGHTS UPON EVENT OF DEFAULT...............................................................42
THE TRUSTEE...................................................................................................44
DUTIES OF THE TRUSTEE.........................................................................................44
RESIGNATION OF TRUSTEE........................................................................................45
AMENDMENT OF AGREEMENT........................................................................................45
VOTING RIGHTS.................................................................................................45
LIST OF HOLDERS...............................................................................................45
FORM OF SECURITIES............................................................................................46
REMIC ADMINISTRATOR...........................................................................................47
TERMINATION...................................................................................................47
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS..........................................................................48
GENERAL.......................................................................................................49
ENFORCEMENT OF THE NOTE.......................................................................................49
SECURITY INTERESTS............................................................................................50
FORECLOSURE ON MORTGAGES......................................................................................50
RIGHTS OF REDEMPTION..........................................................................................51
JUNIOR MORTGAGES; RIGHTS OF SENIOR MORTGAGES..................................................................52
DUE-ON-SALE CLAUSES IN MORTGAGE LOANS.........................................................................52
ENFORCEABILITY OF PREPAYMENT AND LATE PAYMENT FEES............................................................53
EQUITABLE LIMITATIONS ON REMEDIES.............................................................................53
APPLICABILITY OF USURY LAWS. TITLE V OF THE DEPOSITORY INSTITUTIONS DEREGULATION AND MONETARY CONTROL ACT OF
1980, ENACTED IN MARCH 1980 ("TITLE V"), PROVIDES THAT STATE USURY LIMITATIONS SHALL NOT APPLY TO CERTAIN
TYPES OF RESIDENTIAL FIRST MORTGAGE LOANS ORIGINATED BY CERTAIN LENDERS AFTER MARCH 31, 1980. SIMILAR FEDERAL
STATUTES WERE IN EFFECT WITH RESPECT TO MORTGAGE LOANS MADE DURING THE FIRST THREE MONTHS OF 1980. THE OTS,
AS SUCCESSOR TO THE FEDERAL HOME LOAN BANK BOARD, IS AUTHORIZED TO ISSUE RULES AND REGULATIONS AND TO PUBLISH
INTERPRETATIONS GOVERNING IMPLEMENTATION OF TIDE V. TIDE 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 SUCH 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 MORTGAGE LOANS COVERED BY TITLE V. .......................................................53
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT OF 1940...............................................................54
THE DEPOSITOR....................................................................................................55
GENERAL.......................................................................................................55
USE OF PROCEEDS..................................................................................................55
MATERIAL FEDERAL INCOME TAX CONSEQUENCES.........................................................................55
GENERAL.......................................................................................................55
GRANTOR TRUST SECURITIES......................................................................................56
REMIC SECURITIES..............................................................................................57
ii
<PAGE>
DEBT SECURITIES...............................................................................................63
DISCOUNT AND PREMIUM..........................................................................................68
BACKUP WITHHOLDING............................................................................................71
FOREIGN INVESTORS.............................................................................................71
STATE TAX CONSIDERATIONS.........................................................................................72
ERISA CONSIDERATIONS.............................................................................................72
LEGAL INVESTMENT.................................................................................................75
PLAN OF DISTRIBUTION.............................................................................................75
LEGAL MATTERS....................................................................................................75
FINANCIAL INFORMATION............................................................................................75
GLOSSARY OF TERMS................................................................................................76
</TABLE>
iii
<PAGE>
INDEX OF PRINCIPAL TERMS
Unless the context indicates otherwise, the following terms shall have
the meanings set forth on the page indicated below:
Actuarial Mortgage Loan..................................................... 27
Agreement.....................................................................5
ARM Loans................................................................... 18
Available Interest Amount................................................... 23
Balloon Loan................................................................. 9
bankruptcy bond............................................................. 32
Book-Entry Securities....................................................... 46
Business Day................................................................ 12
Capitalized Interest Account................................................ 12
Cede........................................................................ 46
CERCLA...................................................................... 20
Certificate Schedule........................................................ 40
Certificates...............................................................1, 5
Class.........................................................................2
Code........................................................................ 56
Collection Account...........................................................10
Combined Loan-to-Value Ratio..................................................9
Commission....................................................................3
Condominium Units........................................................... 26
Cooperative Dwellings....................................................... 26
Credit Enhancement...........................................................12
Credit Enhancer............................................................. 11
Current Interest Rates....................................................... 9
Custodian................................................................... 40
Cut-Off Date..................................................................8
D&P......................................................................... 73
Debt Securities..........................................................14, 56
Deleted Primary Asset....................................................... 41
Deposit Agreement............................................................13
Depositor.....................................................................1
Depositor Securities........................................................ 55
Distribution Account........................................................ 11
Distribution Date.............................................................2
DOL......................................................................... 73
Eligible Investments.....................................................12, 30
ERISA....................................................................... 15
Escrow Accounts............................................................. 34
Event of Default............................................................ 39
Exchange Act..................................................................4
FASIT....................................................................14, 56
FASIT High-Yield Securities..................................................14
FASIT OWNERSHIP SECURITY.....................................................14
FASIT Regular Securities.....................................................14
FASIT SECURITIES.............................................................56
FDIC........................................................................ 34
FHA......................................................................... 26
FHLMC....................................................................... 53
Final Scheduled Distribution Date.............................................6
First Union................................................................. 75
fully taxable bonds......................................................... 70
Garn-St. Germain Act........................................................ 53
Grantor Trust............................................................... 56
Grantor Trust Securities.................................................... 14
Holders.......................................................................3
Indenture................................................................... 22
i
<PAGE>
Indirect Participant........................................................ 46
IRS......................................................................... 58
Issuer........................................................................5
Lifetime Rate Caps............................................................9
Liquidation Proceeds........................................................ 34
Loan Rate.................................................................... 9
Loan Schedule............................................................... 40
Loan-to-Value Ratio...........................................................9
Minimum Principal Payment Agreement.........................................13
Modification................................................................ 37
Mortgage Loans........................................................ 1, 8, 26
MORTGAGED PROPERTY...........................................................35
Notes......................................................................1, 5
Notional Amount...............................................................6
Originator....................................................................1
OTS......................................................................... 53
Owner Trust...................................................................5
Owner Trustee.................................................................6
PAC...........................................................................5
Participants................................................................ 46
PARTNERSHIP..................................................................56
Partnership Interests....................................................14, 56
Physical Certificates....................................................... 46
Plan........................................................................ 73
Plan Assets Regulation...................................................... 73
Pool..........................................................................1
Pooling and Servicing Agreement............................................. 22
Pre-Funded Amount............................................................11
Pre-Funding Account......................................................... 11
Pre-Funding Period...........................................................11
Premium Security............................................................ 70
Prepayment Assumption....................................................... 69
Primary Assets................................................................1
Prospectus SUPPLEMENTS.......................................................1
PS Agreement................................................................ 29
PS Servicer..................................................................10
PS Sponsor...................................................................10
PS Trustee...................................................................10
PTCE........................................................................ 74
Qualifying Substitute Primary Asset......................................... 41
Rating Agency................................................................12
REMIC....................................................................14, 56
REMIC Regular Securities.................................................... 14
REMIC Regulations........................................................... 58
REMIC Residual Securities....................................................14
REMIC Securities............................................................ 56
Reserve Fund................................................................ 13
Restricted Group............................................................ 74
Retained Interests.......................................................... 40
Rule of 78s Mortgage Loan................................................... 27
Securities....................................................................1
Security Registrar.......................................................... 46
Series........................................................................1
Servicer......................................................................1
Servicing Agreement......................................................... 25
Servicing Fee............................................................... 14
Settlement Date............................................................. 59
Simple Interest Mortgage Loan............................................... 27
Single Family MORTGAGED Properties.......................................... 26
SMMEA....................................................................... 15
Special Redemption Date..................................................... 23
ii
<PAGE>
Title I Program............................................................. 28
TITLE V..................................................................... 54
Trust Agreement...............................................................5
Trust Fund....................................................................1
Trustee....................................................................5, 6
UCC......................................................................... 46
Underlying Loans..............................................................9
Underwriter Exemptions...................................................... 73
iii
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
<TABLE>
<CAPTION>
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The Registrant estimates that expenses in connection with the offering
described in this registration statement will be as follows:
<S> <C>
Securities and Exchange Commission registration fee.............................................. $295
Printing expenses................................................................................ 35,000
Accounting fees and expenses..................................................................... 30,000
Legal fees and expenses.......................................................................... 200,000
Fees and expenses (including legal fees) for qualifications under state securities laws.......... 10,000
Trustee's fees and expenses...................................................................... 5,000
Rating Agency fees and expenses.................................................................. 40,000
Miscellaneous.................................................................................... 200,000
-------
Total............................................................................................ $520,295
========
</TABLE>
All amounts except the Securities and Exchange Commission registration
fee are estimated.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Sections 55-8-50 through 55-8-58 of the revised North Carolina Business
Corporation Act (the "NCBCA") contain specific provisions relating to
indemnification of directors and officers of North Carolina corporations. In
general, the statute provides that (i) a corporation must indemnify a director
or officer who is wholly successful in his defense of a proceeding to which he
is a party because of his status as such, unless limited by the articles of
incorporation, and (ii) a corporation may indemnify a director or officer if he
is not wholly successful in such defense, if it is determined as provided in the
statute that the director or officer meets a certain standard of conduct,
provided when a director or officer is liable to the corporation, the
corporation may not indemnify him. The statute also permits a director or
officer of a corporation who is a party to a proceeding to apply to the courts
for indemnification, unless the articles of incorporation provide otherwise, and
the court may order indemnification under certain circumstances set forth in the
statute. The statute further provides that a corporation may in its articles of
incorporation, by contract or by resolution provide indemnification in addition
to that provided by the statute, subject to certain conditions set forth in the
statute.
The Articles of Incorporation of the Registrant provide that the
personal liability of each director of the corporation is eliminated to the
fullest extent permitted by the provisions of the NCBCA, as presently in effect
or as amended. No amendment, modification or repeal of this provision of the
Articles of Incorporation shall adversely affect any right or protection of a
director that exists at the time of such amendment, modification or repeal.
First Union Corporation maintains directors and officers liability
insurance for the benefit of its subsidiaries, which provides coverage of up to
$80,000,000, subject to certain deductible amounts. In general, the policy
insures (i) the Registrant's directors and, in certain cases, its officers
against loss by reason of any of their wrongful acts, and/or (ii) the Registrant
against loss arising from claims against the directors and officers by reason of
their wrongful acts, all subject to the terms and conditions contained in the
policy.
In connection with an agreement between the Registrant and Peter H.
Sorensen,
4
<PAGE>
an independent director of the Registrant, the Registrant has agreed to
indemnify and hold harmless Peter H. Sorensen from any and all loss, claim,
damage or cause of action, including reasonable attorneys' fees related thereto
(collectively, "Claims"), incurred by Peter H. Sorensen in the performance of
his duties as a director; provided, however, that Peter H. Sorensen shall not be
so indemnified for such Claims if they arise from his own negligence or willful
misconduct.
Under agreements which may be entered into by the Registrant, certain
controlling persons, directors and officers of the Registrant may be entitled to
indemnification by underwriters and agents who participate in the distribution
of Securities covered by the Registration Statement against certain liabilities,
including liabilities under the Securities Act.
ITEM 16. EXHIBIT SCHEDULE
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT
<S> <C>
(a) Any required financial statements of a provider of credit
enhancement will be included as an appendix to the related
Prospectus Supplement
1.1 Form of Underwriting Agreement between the Registrant and the
Underwriter named therein, relating to the distribution of the
Securities*
3.1 Certificate of Incorporation of Home Equity Securitization
Corp.*
3.2 By-laws of Home Equity Securitization Corp.*
4.1 Form of Pooling and Servicing Agreement*
4.2 Form of Indenture*
4.3 Form of Sale and Servicing Agreement*
4.4 Form of Mortgage Loan Purchase Agreement*
4.5 Form of Trust Agreement*
5.1 Opinion of Dewey Ballantine LLP as to legality of the
securities being issued
8.1 Opinion of Dewey Ballantine LLP with respect to tax matters
23.3 Consent of Dewey Ballantine LLP (contained in Exhibit 5.1 and
Exhibit 8.1)
24.1 Power of Attorney (included on signature page of this
Pre-Effective Amendment No. 1 to the Registration Statement)
99.1 Form of Prospectus Supplement
99.2 Form of Prospectus Supplement
</TABLE>
* Filed in previous filing
ITEM 17. UNDERTAKINGS
(a) The undersigned 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 the
registration statement (or the most recent
post-effective amendment thereof) which, individually
or in the aggregate, represent a fundamental change
in the information set forth in the registration
statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities
5
<PAGE>
offered (if the total dollar value of securities
offered would not exceed that which was registered)
and any deviation from the low or high and of the
estimated maximum offering range may be reflected in
the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than 20
percent change in the maximum aggregate offering
price set forth in the "Calculation of Registration
Fee" table in the effective registration statement;
(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 the
registration statement;
provided, however, that paragraphs (i) and (ii) do
not apply if the information required to be included
in the post-effective amendment is contained in
periodic reports filed by the registrant pursuant to
Section 13 or Section 15(d) of the Securities
Exchange Act of 1934 that are incorporated by
reference in the registration statement.
(2) That, for the purpose of determining any liability
under the Securities Act of 1933, each such
post-effective amendment shall be deemed to be a new
registration statement relating to the securities
offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a
post-effective amendment any of the securities being
registered which remain unsold at the termination of
the offering.
(b) The undersigned registrant hereby undertakes to provide to the
Underwriter at the closing specified in the Underwriting Agreement certificates
in such denominations and registered in such names as required by the
Underwriter to permit prompt delivery to each purchaser.
(c) 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.
6
<PAGE>
(d) The undersigned 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 ("Act") in
accordance with the rules and regulations prescribed by the Commission under
section 305(b)(2) of the Act.
7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
the registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form S-3 and has duly caused this
registration statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Charlotte, North Carolina on the 14th day of
May, 1998.
HOME EQUITY SECURITIZATION CORP.
By: /s/ Wallace Saunders
---------------------------------------
NAME: Wallace Saunders
TITLE Assistant Vice President
Pursuant to the requirements of the Securities Act of 1933, this
Pre-Effective Amendment No. 4 to the Registration Statement has been signed by
the following persons in the capacities indicated on May 14, 1998.
SIGNATURE TITLE
<TABLE>
<CAPTION>
<S> <C>
By: *
_________________________
NAME: Brian E. Simpson Chairman and President
By: *
__________________________
NAME:.Carolyn Eskridge Senior Vice President
By: *
___________________________
NAME: Peter H. Sorensen Independent Director
*by Wallace Saunders as his true and lawful attorney-in-fact and agent.
</TABLE>
8
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT
<S> <C>
(a) Any required financial statements of a provider of credit
enhancement will be included as an appendix to the related
Prospectus Supplement
1.1 Form of Underwriting Agreement between the Registrant and the
Underwriter named therein, relating to the distribution of the
Securities*
3.1 Certificate of Incorporation of Home Equity Securitization
Corp.*
3.2 By-laws of Home Equity Securitization Corp.*
4.1 Form of Pooling and Servicing Agreement*
4.2 Form of Indenture*
4.3 Form of Sale and Servicing Agreement*
5.1 Opinion of Dewey Ballantine LLP as to legality of the
securities being issued
8.1 Opinion of Dewey Ballantine LLP with respect to tax matters
23.3 Consent of Dewey Ballantine LLP (contained in Exhibit 5.1 and
Exhibit 8.1)
24.1 Power of Attorney *
99.1 Form of Prospectus Supplement
99.2 Form of Prospectus Supplement
</TABLE>
* Filed in a previous filing
9
EXHIBIT 5.1
May 14, 1998
Home Equity Securitization Corp.
301 South College Street
Charlotte, North Carolina 28202-6001
Ladies and Gentlemen:
We have acted as counsel to Home Equity Securitization Corp., a North
Carolina corporation (the "Company"), in connection with the preparation of the
registration statement on Form S-3 (the "Registration Statement") relating to
the proposed offering from time to time in one or more series (each, a "Series")
of up to $500,000,000.00 aggregate principal amount of asset backed notes (the
"Notes") and asset backed certificates (the "Certificates," and, together with
the Notes, the "Securities"). The Registration Statement will be filed with the
Securities and Exchange Commission (the "Commission") under the Securities Act
of 1933, as amended (the "Act"). As set forth in the Registration Statement,
each Series of Securities is to be issed under and pursuant to the terms of a
separate pooling and servicing agreement, sale and servicing agreement, pooling
agreement, trust agreement or indenture (each, an "Agreement") among the
Company, an independent trustee (the "Trustee") and where appropriate, a
servicer (the "Servicer"), each to be identified in the prospectus supplement
for such Series of Securities.
As such counsel, we have examined copies of the Articles of Incorporation
and Bylaws of the Company, the Registration Statement, the Prospectus and each
form of Prospectus Supplement included therein, the form of each Agreement, and
originals or copies of such other corporate minutes, records, agreements and
other instruments of the Company, certificates of public officials and other
documents and have made such examinations of law, as we have deemed necessary to
form the basis for the opinion hereinafter expressed. In our examination of such
materials, we have assumed the genuineness of all signatures, the authenticity
of all documents submitted to us as originals and the conformity to original
documents of all copies submitted to us. As to various questions of fact
material to such opinion, we have relied, to the extent we deemed appropriate,
upon representations, statements and certificates of officers and
representatives of the Company and others.
<PAGE>
Home Equity Securitization Corp.
Page 2
May 14, 1998
We are admitted to the Bar of the State of New York and we do not express
any opinion herein concerning any law other than the federal laws of the United
States of America and the laws of the State of New York.
Based upon and subject to the foregoing, we are of the opinion that:
1. When the Notes have been duly executed and delivered, authenticated by
the Trustee and sold as described in the Registration Statement, the Notes will
constitute valid and binding obligations of the issuer thereof in accordance
with their terms and the terms of such Agreement or Agreements, and will be
legally issued, fully paid and non-assessable. This opinion is subject to the
effect of bankruptcy, insolvency, moratorium, fraudulent conveyance and similar
laws relating to or affecting creditors' rights generally and court decisions
with respect thereto and we express no opinion with respect to the application
of equitable principles or remedies in any proceeding, whether at law or in
equity.
2. When the Certificates have been duly executed and delivered,
authenticated by the Trustee and sold as described in the Registration
Statement, the Certificates will be legally issued, fully paid and
non-assessable.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the references to this firm under the caption
"Legal Matters" in the Prospectus which forms a part of the Registration
Statement. In giving such consent, we do not admit hereby that we come within
the category of persons whose consent is required under Section 7 of the Act or
the Rules and Regulations of the Commission thereunder.
Very truly yours,
/s/ Dewey Ballantine LLP
EXHIBIT 8.1
May 14, 1998
Home Equity Securitization Corp.
301 South College Street
Charlotte, North Carolina 28202
Re: Registration Statement 333-44409
--------------------------------
Ladies and Gentlemen:
We have acted as special tax counsel to Home Equity
Securitization Corp., a North Carolina corporation (the "Company") in connection
with the Prospectus filed by the company.
The term "Prospectus" means the prospectus included in the
Registration Statement. The term "Registration Statement" means (i) the
Registration Statement on Form S-3 (No. 333-44409), including the exhibits
thereto and (ii) any post-effective amendment filed and declared effective prior
to the date of issuance of the Securities.
We have examined the question of whether the Securities will
have the tax treatment described in the Prospectus. Our analysis is based on the
provisions of the Internal Revenue Code of 1986, as amended, and the Treasury
Regulations promulgated thereunder as in effect on the date hereof and on
existing judicial and administrative interpretations thereof. These authorities
are subject to change and to differing interpretations, which could apply
retroactively. The opinion of special tax counsel is not binding on the courts
or the Internal Revenue Service (the "IRS").
In general, whether a transaction constitutes the issuance of
indebtedness or the sale of assets for federal income tax purposes is a question
of fact, the resolution of which is based primarily upon the economic substance
of the instruments and the transaction pursuant to which they are issued rather
than the form of the transaction or the manner in which the instruments are
labeled. The IRS and the courts have set forth various factors to be taken into
account in determining whether or not a transaction constitutes the issuance of
indebtedness or the sale of assets for federal income tax purposes, which we
have reviewed as they apply to the transactions described on the Prospectus.
<PAGE>
Home Equity Securitization Group
May 14, 1998
Page 2
Based on the foregoing, and such legal and factual
investigations as we have deemed appropriate, we are of the opinion that for
federal income tax purposes:
(1) The Securities, assuming they are issued in accordance
with the Prospectus, will have the federal income tax treatment described in the
Prospectus.
(2) The information appearing under the caption "Federal
Income Tax Consequences" in the Prospectus provide a fair and accurate summary
of all material federal income tax consequences of an investment in the
Securities.
This opinion is furnished by us as counsel to the Registrant.
We hereby consent to the filing of this opinion as an Exhibit to the
Registration Statement and to the reference to Dewey Ballantine LLP in the
Registration Statement and the related prospectus under the heading "Legal
Matters."
Very truly yours,
/s/ Dewey Ballantine LLP
<TABLE>
<S> <C>
Exhibit 99.1 Form of Prospectus Supplement
PROSPECTUS SUPPLEMENT
(To Prospectus Dated _________)
====================================================================================================================================
$--------
__________ MORTGAGE LOAN TRUST_____
MORTGAGE LOAN PASS-THROUGH CERTIFICATES, SERIES _____
- ------------------------------------------------------------------------------------------------------------------------------------
$__________ CLASS A-1 GROUP I CERTIFICATES, VARIABLE PASS-THROUGH RATE
$__________ CLASS A-2 GROUP I CERTIFICATES, _____% PASS-THROUGH RATE
$__________ CLASS A-3 GROUP I CERTIFICATES, _____% PASS-THROUGH RATE
$__________ CLASS A-4 GROUP I CERTIFICATES, _____% PASS-THROUGH RATE
$__________ CLASS A-5 GROUP I CERTIFICATES, _____% PASS-THROUGH RATE
$__________ CLASS A-6 GROUP II CERTIFICATES, VARIABLE PASS-THROUGH RATE
- ------------------------------------------------------------------------------------------------------------------------------------
LOGO HOME EQUITY SECURITIZATION CORP.
DEPOSITOR
====================================================================================================================================
The __________Mortgage Loan Asset Backed Certificates, Series _____ (the
"Certificates") will consist of six classes of offered certificates, the Class
A-1 Group I Certificates, the Class A-2 Group I Certificates, the Class A-3
Group I Certificates, the Class A-4 Group I Certificates, the Class A-5 Group I
Certificates, (collectively, the "Class A Group I Certificates" or the "Group I
Certificates"), and the Class A-6 Group II Certificates (the "Class A-6 Group II
Certificates" or the "Group II Certificates", together with the Group I
Certificates and the Group II Certificates, the "Class A Certificates") which
represent beneficial ownership interests in __________ Mortgage Loan Trust _____
(the "Trust"). The assets of the Trust consist of a pool (the "Pool") of fixed
and adjustable rate, amortizing mortgage loans which are secured by first or
second liens on residential properties (the "Mortgage Loans"), the Certificate
Insurance Policy (as defined below; see the Index of Principal Definitions on
page i hereof) covering the Class A Certificates and amounts held from time to
time in certain trust accounts.
The Company has obtained a financial guaranty insurance policy (the "Certificate
Insurance Policy") from ____________________ (the "Certificate Insurer") which
will unconditionally and irrevocably guarantee payment of certain amounts due to
the Owners of the Class A Certificates to the extent described herein; see "The
Certificate Insurance Policy and the Certificate Insurer -- The Certificate
Insurance Policy" in this Prospectus Supplement.
INSURER LOGO (Cover continued on next page)
- ------------------------------------------------------------------------------------------------------------------------------------
FOR A DISCUSSION OF CERTAIN RISK FACTORS REGARDING AN INVESTMENT IN THE CLASS A
CERTIFICATES, SEE "RISK FACTORS" ON PAGE HEREIN AND ON PAGE __ OF THE
ACCOMPANYING PROSPECTUS.
- ------------------------------------------------------------------------------------------------------------------------------------
__________ and ___________ (the "Underwriters") have agreed to purchase from the
Trust the Class A-1 Group I Certificates at an aggregate price of _____% of the
principal amount thereof, the Class A-2 Group I Certificates at an aggregate
price of _____% of the principal amount thereof, the Class A-3 Group I
Certificates at an aggregate price of _____% of the principal amount thereof,
the Class A-4 Group I Certificates at an aggregate price of _____% of the
principal amount thereof, the Class A-5 Group I Certificates at an aggregate
price of _____% of the principal amount thereof, and the Class A-6 Group II
Certificates at an aggregate price of _____% of the principal amount thereof,
(representing $__________ aggregate proceeds to the Company before deducting
expenses payable by the Company, estimated at $______) plus accrued interest, if
any, from __________ for the Class A-2, A-3, A-4 and A-5 Group I Certificates
(together, the "Class A Fixed Rate Certificates") subject to the terms and
conditions set forth in the Underwriting Agreement dated __________ among the
Underwriters and the Company. See "Underwriting" in this Prospectus Supplement.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION NOR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- ------------------------------------------------------------------------------------------------------------------------------------
The Class A Certificates are offered hereby by the Underwriters when, as and if
issued by the Trust, delivered and accepted by the Underwriters and subject to
their right to reject orders in whole or in part. It is expected that delivery
of the Class A Certificates will be made in book-entry form only through the
facilities of The Depository Trust Company, CEDEL, S.A. and Euroclear on or
about __________ against payment in immediately available funds.
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(COVER CONTINUED FROM PREVIOUS PAGE)
The Underwriters propose to offer the Class A Certificates from time to time for
sale in negotiated transactions or otherwise, at market prices prevailing at the
time of sale or at negotiated prices. For further information with respect to
the plan of distribution and any discounts, commissions or profits on resale
that may be deemed underwriting discounts or commissions, see "Underwriting" in
this Prospectus Supplement.
The Class A Group I Certificates will represent undivided ownership interests in
a group ("Group I") of Mortgage Loans in the Trust which bear fixed rates of
interest, and the Class A-6 Group II Certificates will represent undivided
ownership interests in a group ("Group II") of Mortgage Loans in the Trust which
bear adjustable rates of interest. Group I and Group II are collectively
referred to herein as the "Mortgage Loan Groups" and each singularly, a
"Mortgage Loan Group".
The Certificates will be issued pursuant to a Pooling and Servicing Agreement
(the "Pooling and Servicing Agreement") among Home Equity Securitization Corp.
as the Depositor (the "Depositor"), __________, as Master Servicer (the "Master
Servicer"), and __________ (the "Trustee"). On or prior to the Closing Date, the
Company will acquire the Mortgage Loans from the Originators, as described
herein. Pursuant to a Purchase and Sale Agreement dated as of __________ (the
"Sale Agreement"), the Company will sell the Mortgage Loans to the Depositor.
The Depositor will in turn sell the Mortgage Loans to the Trust pursuant to the
Pooling and Servicing Agreement. In addition to the Class A Certificates, the
Trust will also issue a subordinate Class of Certificates with respect to Group
I and Group II (the "Class B Certificates"), and one or more Classes of Residual
Certificates. Only the Class A Certificates are offered hereby. Distributions of
interest on the Class A Certificates are of an equal priority to the extent
described herein, and distributions on the Class B Certificates and on the
Residual Certificates are subordinate to distributions on the Class A
Certificates to the extent described herein. See "Description of the
Certificates" herein.
All of the Mortgage Loans were originated under the Company's Mortgage Loan
Program by unaffiliated originators (the "Originators"). Except for certain
representations and warranties relating to the Mortgage Loans and certain other
matters, Home Equity Securitization Corp., __________, ________________, the
Master Servicer, any Sub-Servicers and the Originators will have no obligations
with respect to the Certificates.
Distributions of principal and interest on the Class A Certificates will be made
to the extent funds are available therefor on the __ day of each month or if
such day is not a business day, on the next succeeding business day commencing
___________ (each, a "Payment Date") to holders of record as of the close of
business on the first business day of the current calendar month (with respect
to the Class A Fixed Rate Certificates) or as of the close of business on the
business day immediately preceding such Payment Date (with respect to the Class
A-1 Group I Certificates and the Class A-6 Group II Certificates), except in the
case of the first Payment Date, on which distributions will be made to holders
of record as of the Closing Date (each such date being the applicable "Record
Date").
An ERISA Plan purchasing the Class A Certificates should consult with its legal
advisors concerning the impact of ERISA and the Code with respect to such
purchase. See "Risk Factors" and "ERISA Considerations" herein.
There is currently no secondary market for any Class of the Class A
Certificates. There can be no assurance that a secondary market for any of the
Class A Certificates will develop, or if it does develop, that it will continue.
One or more elections will be made to treat certain assets of the Trust as "real
estate mortgage investment conduits" ("REMICs") for federal income tax purposes,
pursuant to the Internal Revenue Code of 1986, as amended (the "Code"). See
"Federal Tax Consequences" herein.
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THIS PROSPECTUS SUPPLEMENT DOES NOT CONTAIN COMPLETE INFORMATION ABOUT THE
OFFERING OF THE SECURITIES. ADDITIONAL INFORMATION IS CONTAINED IN THE
PROSPECTUS AND PROSPECTIVE INVESTORS ARE URGED TO READ BOTH THIS PROSPECTUS
SUPPLEMENT AND THE PROSPECTUS IN FULL. SALES OF THE SECURITIES MAY NOT BE
CONSUMMATED UNLESS THE PURCHASER HAS RECEIVED BOTH THIS PROSPECTUS SUPPLEMENT
AND THE PROSPECTUS.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE CLASS A
CERTIFICATES AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
THE CLASS A CERTIFICATES REPRESENT INTERESTS IN THE TRUST ONLY AND DO NOT
REPRESENT INTERESTS IN OR OBLIGATIONS OF HOME EQUITY SECURITIZATION CORP.,
__________, THE TRUSTEE, THE CERTIFICATE INSURER, ANY SUB-SERVICER OR ANY OF
THEIR RESPECTIVE AFFILIATES, EXCEPT TO THE EXTENT DESCRIBED HEREIN. THE CLASS A
CERTIFICATES AND THE MORTGAGE LOANS ARE NOT INSURED OR GUARANTEED BY ANY
GOVERNMENTAL AGENCY, NOR HAS ANY GOVERNMENTAL AGENCY PASSED UPON THE ACCURACY OF
THE INFORMATION CONTAINED IN THIS PROSPECTUS.
AVAILABLE INFORMATION
The Depositor has filed a Registration Statement under the Securities
Act of 1933, as amended, (the "1933 Act") with the Securities and Exchange
Commission (the "Commission") on behalf of the Trust with respect to the Class A
Certificates offered pursuant to this Prospectus Supplement and the related
Prospectus. For further information, reference is made to the Registration
Statement and amendments thereof and to the exhibits thereto, which are
available for inspection without charge at the public reference facilities
maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549;
7 World Trade Center, 13th Floor, New York, New York 10048; and 500 West Madison
Street, Chicago, Illinois 60661. Copies of the Registration Statement and
amendments thereof and exhibits thereto may be obtained from the Public
Reference Section of the Commission, 450 Fifth Street, N.W., Washington, D.C.
20549 at prescribed rates. In addition, the Commission maintains a site on the
World Wide Web at http://www.sec.gov containing reports, proxy and information
statements and other information regarding registrants that file electronically
with the Commission.
REPORTS TO THE HOLDERS
So long as the Class A Certificates are in book-entry form, monthly and
annual reports concerning such Certificates and the Trust will be sent by the
Trustee to Cede & Co. ("Cede"), as the nominee of The Depository Trust Company
("DTC") and as registered holder of the Class A Certificates pursuant to the
Pooling and Servicing Agreement. DTC will forward such reports to the
Participants and indirect participants by mail for forwarding to the Owner of
any Class A Certificates (the "Owner" or "Certificateholder"). See "Risk
Factors" and "Description of the Certificates -- Reports to Owners". The Trust
will not provide any financial information to the Owners which has been examined
and reported upon, with an opinion expressed by, an independent public
accountant. The Company and the Depositor have determined that their respective
financial statements are not material to the offering made hereby. The Trust
will have no assets or obligations prior to issuance of the Certificates and
will engage in no activities other than those described herein. Accordingly, no
financial statements with respect to the Trust are included in this Prospectus
Supplement and the related Prospectus.
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<PAGE>
SUMMARY
This summary is qualified in its entirety by reference to the detailed
information appearing elsewhere in this Prospectus Supplement and the
accompanying Prospectus. Reference is made to the Indices of Principal
Definitions for the location in either the Prospectus or this Prospectus
Supplement of the definitions of certain capitalized terms.
<TABLE>
<S> <C>
Issuer __________ Mortgage Loan Trust _____ (the "Trust").
Securities Offered $________ aggregate principal amount of Class A-1
Group I Certificates, Variable Pass-Through Rate; $________ aggregate
principal amount of Class A-2 Group I Certificates, _____% Pass-Through
Rate; $_________ aggregate principal amount of Class A-3 Group I
Certificates, _____% Pass-Through Rate; $________ aggregate principal
amount of Class A-4 Group I Certificates, _____% Pass-Through Rate;
$_________ aggregate principal amount of Class A-5 Group I
Certificates, _____% Pass-Through Rate; and $________ aggregate
principal amount of Class A-6 Group II Certificates.
Company ___________ (the "Company").
Depositor Home Equity Securitization Corp., a Delaware corporation (the
"Depositor").
Master Servicer __________, a __________ corporation (the "Master
Servicer").
Trustee __________ (the "Trustee").
Originators of the Mortgage Loans The Mortgage Loans to be acquired by
the Trust have been acquired by the Company from the Originators, in
accordance with the Company's underwriting criteria.
Original Pool Principal Balance $___________ as of the close of business on the Cut-Off Date.
Original Group I Pool Principal Balance $___________ as of the close of business on the Cut-Off Date.
Original Group II Pool Principal Balance $___________ as of the close of business on the Cut-Off Date.
Closing Date On or about __________.
Cut-Off Date ___________.
Description of the Certificates The Certificates will be issued by the Trust pursuant to a Pooling
and Servicing Agreement to be dated as of ___________ (the "Pooling
and Servicing Agreement") among the Master Servicer, the Depositor
and the Trustee. The $________ aggregate principal amount of Class A
Group I Certificates (collectively, the "Class A Group I
Certificates" or the "Group I Certificates"), and the $________
aggregate principal amount of Class A-6 Group II Certificates (the
"Class A-6 Group II Certificates" or the "Group II
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<PAGE>
Certificates"), are senior certificates as described herein.
The assets of the Trust initially will include two groups (each, a
"Mortgage Loan Group") of closed-end mortgage loans (the "Mortgage
Loans") secured by mortgages or deeds of trust (the "Mortgages") on
one-to-four family residential properties (the "Mortgaged Properties")
to be conveyed to the Trust on the Closing Date. The Group I
Certificates will represent undivided ownership interests in a group of
fixed-rate Mortgage Loans ("Group I"). The Group II Certificates will
represent undivided ownership interests in a group of adjustable-rate
Mortgage Loans ("Group II").
The Trust will issue a subordinate Class of Certificates with respect
to Group I and Group II (the "Class B Certificates"), which are
subordinated to the Class A Group I Certificates and the Class A-6
Group II Certificates. The Class B Certificates are not being offered
hereby. The Trust will also issue one residual class of Certificates
with respect to each REMIC election made by the Trust (the "Residual
Certificates") which are not being offered hereby and will initially be
retained by the Depositor or its affiliates. The Class A Group I
Certificates, the Class A-6 Group II Certificates, the Class B
Certificates and the Residual Certificates are collectively referred to
as the "Certificates". The Class A Group I Certificates and the Class
A-6 Group II Certificates are collectively referred to as the "Class A
Certificates"
A. Class A Group I The Class A Group I Certificates represent senior
beneficial ownership interests in Group I. One hundred percent (100%)
Certificates of the Group I Insured Distribution Amount (as described herein under
"Description of the Certificates") due to the Owners of the Class A
Group I Certificates on each Payment Date is guaranteed by the
Certificate Insurer. The final scheduled Payment Date for the Class A-1
Group I Certificates is ___________, for the Class A-2 Group I
Certificates is _______, for the Class A-3 Group I Certificates is
_______, for the Class A-4 Group I Certificates is _________ and for
the Class A-5 Group I Certificates is _______. Each Class of Class A
Group I Certificates is issuable in original principal amounts of
$1,000 and integral multiples thereof except that one certificate for
each Class of Class A Group I Certificates may be issued in a different
amount
B. Class A-6 Group The Class A-6
Group II Certificates represent
senior beneficial ownership
interests in Group II. One hundred
percent (100%) of the
II Certificates Group II Insured Distribution Amount (as described herein under
"Description of the Certificates") due to the Owners of the Class A-6
Group II Certificates on each Payment Date is guaranteed by the
Certificate Insurer. The final scheduled Payment Date for the Class
A-6 Group II Certificates is _______. The Class A-6 Group II
Certificates are issuable in original principal amounts of $1,000 and
integral multiples thereof except that one certificate may be issued
in a different amount.
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The Mortgage Loan Pool The statistical information concerning the Pool
of Mortgage Loans is based upon Pool information as of the close of
business on ___________ (the "Cut-Off Date").
The Pool of Mortgage Loans consists of Notes secured by mortgages,
deeds of trust or other instruments creating liens or estates in fee
simple interests ("Mortgages") on one- to four-family residential
properties, including investment properties. The Mortgage Loans will
not be insured by primary mortgage insurance policies, nor will any
pool insurance insure the Mortgage Loans. The Mortgage Loans are not
guaranteed by the Company, the Depositor, the Master Servicer, the
Sub-Servicers, the Trustee or any of their respective affiliates. The
Mortgage Loans will be serviced by the Master Servicer on a
"scheduled/actual" basis (i.e., "scheduled" interest and "actual"
principal receipts are required to be remitted by the Master Servicer
to the Trustee each month).
Each Mortgage Loan in the Trust will be assigned to one of two mortgage
loan groups ("Group I" or "Group II", each, a "Mortgage Loan Group")
comprised of Mortgage Loans which bear fixed-interest rates only in the
case of Group I, and Mortgage Loans which bear adjustable interest
rates only in the case of Group II. As of the Cut-Off Date, the
Mortgage Loans in Group I had an aggregate principal balance of
approximately $________ (the "Original Group I Pool Principal Balance")
and the Mortgage Loans in Group II had an aggregate principal balance
of approximately $________ (the "Original Group II Pool Principal
Balance"). The sum of the Original Group I Pool Principal Balance and
the Original Group II Pool Principal Balance is equal to the "Original
Pool Principal Balance".
The Pool of Mortgage Loans in Group I consists of approximately _____
Mortgages secured by Mortgaged Properties located in __ states and the
District of Columbia. The Pool of Mortgage Loans in Group I consists as
of the Cut-Off Date and as a percentage of the Original Group I Pool
Principal Balance, of approximately _____% of loans secured by first
liens on the related Mortgaged Properties and approximately ____% of
loans secured by second liens on the related Mortgaged Properties. The
Pool of Mortgage Loans in Group I consists of approximately _____% of
loans secured by primary residences. _____% of the Mortgage Loans in
Group I will be fully amortizing and _____% of the Mortgage Loans in
Group I are partially amortizing loans ("Balloon Loans"). The weighted
average Combined Loan-to-Value Ratio (with property values calculated
as of the time of origination of the related Mortgage Loan) of the Pool
of Mortgage Loans in Group I is approximately _____% with a range from
approximately ______% to approximately ______%; the weighted average
stated remaining term to maturity is approximately ___ months, with a
range from ___ months to ___ months; the weighted average number of
months since origination is approximately _ months; the average
principal balance of the Mortgage Loans in Group I is
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approximately $______, the highest principal balance is approximately
$______ and the lowest principal balance is approximately $________;
the coupon rates (the "Coupon Rates") of the Mortgage Loans in Group I
range from ___% per annum to ______% per annum, with a weighted average
Coupon Rate of approximately ____% per annum.
The Pool of Mortgage Loans in Group II consists of approximately _____
Mortgages secured by Mortgaged Properties located in __ states and the
District of Columbia. The Pool of Mortgage Loans in Group II consists
as of the Cut-Off Date and as a percentage of the Original Group II
Pool Principal Balance, of ___% of loans secured by first liens on the
related Mortgaged Properties. The Pool of Mortgage Loans in Group II
consists of approximately ____% of loans secured by primary residences.
_____% of the Mortgage Loans in Group II will be fully amortizing and
_____% of the Mortgage Loans in Group II are Balloon Loans. The
weighted average Loan-to-Value Ratio (with property values calculated
as of the time of origination of the related Mortgage Loan) of the Pool
of Mortgage Loans in Group II is approximately _____% with a range from
approximately _____% to approximately ______%; the weighted average
stated remaining term to maturity is approximately ____ months, with a
range from ___ months to ___ months; the weighted average number of
months since origination is approximately _ month; the average
principal balance of the Mortgage Loans in Group II is approximately
$_____, the highest principal balance is approximately $______ and the
lowest principal balance is approximately $______; the Coupon Rates of
the Mortgage Loans in Group II range from ____% per annum to ____% per
annum, with a weighted average Coupon Rate of approximately ____% per
annum; the margins of the Mortgage Loans in Group II range from ____%
to ____% with a weighted average margin of approximately ____% per
annum. The Coupon Rates of Mortgage Loans in Group II bear interest
rates that adjust semi-annually based on six-month LIBOR. In general
the interest rates on the Mortgage Loans in Group II are subject to
periodic interest rate caps and lifetime interest rate ceilings. ____%
of the aggregate principal balance of the Mortgage Loans in Group II
were fixed rate loans that, in 2 years from origination, will be
converted into variable rate loans and ____% of the aggregate principal
balance of the Mortgage Loans in Group II were fixed rate loans that,
in 3 years from origination, will be converted into variable rate
loans.
Class A-1 Pass- On each Payment Date, the "Class A-1 Pass-Through Rate" will be equal to
Through Rate the lesser of (i) the London interbank offered rate for one-month United
States dollar deposits ("LIBOR") (calculated as described under
"Description of the Certificates -- Calculation of LIBOR") as of the
second to last business day prior to the immediately preceding Payment
Date (or as of the second to the last business day prior to the Closing
Date in the case of the first Payment Date) plus ____% per annum and (ii)
the weighted average net coupon rate (i.e., the weighted average coupon
rate
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on the Mortgage Loans in Group I less the sum of the per annum rates at
which the Servicing Fees, Trustee fees and Certificate Insurer premiums
are calculated, which sum shall not exceed ___% for any Payment Date)
for Group I for such Payment Date (the "Group I Available Funds
Pass-Through Rate").
Class A-2 Pass-Through Rate _____% per annum.
Class A-3 Pass-Through Rate _____% per annum.
Class A-4 Pass-Through Rate _____% per annum; provided, that on no Payment Date will the Class
A-4 Pass-Through Rate be greater than the Group I Available Funds
Pass-Through Rate.
Class A-5 Pass-Through Rate ____% per annum.
Class A-6 Pass-Through Rate On each Payment Date, the "Class A-6 Pass-Through Rate" will be equal
to the lesser of (i) LIBOR as of the second to last business day
prior to the immediately preceding Payment Date (or as of the second
to the last business day prior to the Closing Date in the case of the
first Payment Date) plus ____% per annum, and (ii) the weighted
average net coupon rate (i.e., the weighted average coupon rate on
the Mortgage Loans in Group II less the sum of the per annum rates at
which the Servicing Fees, Trustee fees and Certificate Insurer
premiums are calculated, which sum shall not exceed ___% for any
Payment Date) for Group II for such Payment Date and less ___% on the
___ Payment Date and thereafter (the "Class A-6 Available Funds
Pass-Through Rate").
The "Class A-6 Formula Pass-Through Rate" for a Payment Date is the
rate described in clause (i) of the definition of "Class A-6 Group II
Pass-Through Rate" on such Payment Date. The excess, if any, of (x) the
interest due on the Class A-6 Certificates on any Payment Date
calculated at the Class A-6 Formula Pass-Through Rate over (y) the
interest due on the Class A-6 Certificates calculated at the Class A-6
Available Funds Pass-Through Rate is the "Group II Supplemental
Interest Amount" for such Payment Date.
If, on any Payment Date, there is a Group II Supplemental Interest
Amount calculated for any Payment Date, such amount shall be payable
from amounts that would otherwise be distributed to the Owners of the
Class B Certificates, and the Owners of certain of the Class R
Certificates have agreed to pay any remaining amounts. If the full
amount of the Group II Supplemental Interest Amount is not paid on a
Payment Date, then the amount not paid will accrue interest at the
Class A-6 Formula Pass-Through Rate until actual payment.
The Certificate Insurer does not guarantee the payment of, nor do the
ratings assigned to the Class A-6 Certificates address the likelihood
of the payment of, any Supplemental Interest Amount.
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Payment Dates, Record Dates On the __ day of each month, or, if such day is not a
and Accrual Periods business day, then the next succeeding business day, commencing
___________ (each such day being a "Payment Date"), the Trustee will be
required to distribute to the Owners of record of the Certificates as of
the close of business on the first business day of the current calendar
month (with respect to the Class A Fixed Rate Certificates) or as of the
close of business on the business day immediately preceding such Payment
Date (with respect to the Class A-1 Group I Certificates and the Class A-6
Group II Certificates), except in the case of the first Payment Date, on
which distributions will be made to holders of record as of the Closing
Date (each such date being the applicable "Record Date") such Owners'
Percentage Interests in the amounts required to be distributed to the
Owners of each Class of Certificates on such Payment Date.
Interest will accrue on each Class A-2, A-3, A-4 and A-5 Group I
Certificate during the period from and including the second day of the
month preceding the month in which a Payment Date occurs through and
including the first day of the month in which such Payment Date occurs
and on each Class A-1 Group I Certificate and Class A-6 Group II
Certificate from and including each Payment Date (or the Closing Date,
with respect to the initial Payment Date) to and including the day
preceding the current Payment Date. Each period referred to in the
immediately preceding sentence relating to the accrual of interest is
the "Accrual Period" for the related Class of Certificates. Interest
will be calculated on the basis of a 360-day year consisting of twelve
30-day months for the Class A-2, A-3, A-4 and A-5 Group I Certificates.
Interest for the Class A-1 Group I Certificates and the Class A-6 Group
II Certificates will be calculated based upon the actual number of days
in the related Accrual Period, divided by 360.
Distributions on the Certificates
A. Priority of Distributions As more fully described herein, each Class of Certificates has a
specified priority to the collections on the Pool of Mortgage Loans
which comprise the related Mortgage Loan Group, subject to the credit
enhancement and cross-collateralization provisions hereinafter
described. In addition, ________________, as Certificate Insurer, is
required pursuant to the Certificate Insurance Policy to make
available to the Trustee on each Payment Date 100% of the related
Class A Insured Distribution Amount for the related Mortgage Loan
Group to the extent that available funds remaining after payment of
the Trustee's fee are insufficient to cover such amount.
The Owners of the Class A Group I Certificates and the Class A-6 Group
II Certificates will receive certain monthly distributions of principal
on each Payment Date which generally reflect
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collections of principal during the prior Remittance Period with
respect to the related Mortgage Loan Group. The Certificate Insurance
Policy only guarantees the amount by which the sum of the related
Interest Distribution Amount and the related Subordination Deficit, if
any, exceeds Total Available Funds.
B. Distributions on the Class A
Certificates
1.Interest Distributions Interest will accrue on each Class of Class A Certificates at the related
Class A Pass-Through Rate during each Accrual Period for such Class of
Certificates, and will be distributed, to the extent of the Total
Available Funds for the related Mortgage Loan Group plus the proceeds of
any Insured Payments, on each Payment Date. Interest accruing during the
related Accrual Period at the related Class A Pass-Through Rate on the
related Class A Principal Balance immediately preceding such Payment Date
is referred to herein as the "Class A Interest Distribution Amount" for
the related Class of Class A Certificates. The "Class A Interest
Distribution Amount" does not include the amounts, if any, of the
Supplemental Interest Amount applicable to the Class A-6 Group II
Certificates. See "Description of the Certificates -- Flow of Funds and
Distributions on the Class A Certificates" herein.
2.Principal Distributions The Holders of the Class A Certificates
issued with respect to each Mortgage Loan Group will be entitled to
receive on each Payment Date a distribution allocable to principal (the
"Class A Principal Distribution Amount" for such Mortgage Loan Group
and Payment Date) which will be equal to the lesser of:
(a) the Total Available Funds for the related Mortgage Loan Group plus
any related Insured Payment minus the interest then due on account of
the related Class A Certificates; and
(b) (i) the sum, without duplication, of:
(x) for the Mortgage Loans in the related Mortgage Loan Group, the sum
of (i) the principal portion of all scheduled and unscheduled payments
received on the Mortgage Loans during the related Remittance Period,
including (a) any full or partial principal prepayments of any Mortgage
Loans ("Prepayments") received during the related Remittance Period,
(b) the proceeds received on any insurance policy relating to a
Mortgage Loan, a Mortgaged Property or a REO Property, net of proceeds
to be applied to the repair of the Mortgaged Property or released to
the Mortgagor (as defined herein) and net of expenses reimbursable
therefrom ("Insurance Proceeds"), (c) proceeds received in connection
with the liquidation of any defaulted Mortgage Loans, whether by
trustee's sale, foreclosure sale or otherwise ("Liquidation Proceeds"),
net of fees and advances reimbursable therefrom ("Net Liquidation
Proceeds") and (d) proceeds received in connection with a taking of a
Mortgaged Property by condemnation or the exercise of eminent domain or
in
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connection with a release of part of the Mortgaged Property from the
related lien ("Released Mortgaged Property Proceeds"), (ii) the
principal portion of all amounts deposited into the Principal and
Interest Account on the related Remittance Date in connection with the
repurchase of, or the substitution of a substantially similar mortgage
loan for, a Mortgage as to which there is defective documentation or a
breach of a representation or warranty contained in the Pooling and
Servicing Agreement, and (iii) the proceeds received by the Trustee in
connection with any termination of the Trust, to the extent that such
proceeds relate to principal.
(y) the amount of any Subordination Deficit with respect to the related
Mortgage Loan Group for such Payment Date; and
(z) the amount of any Subordination Increase Amount with respect to the
related Mortgage Loan Group for such Payment Date;
minus
(ii) the amount of any Subordination Reduction Amount with respect to
the related Mortgage Loan Group for such Payment Date.
The amount of any Subordination Deficit or Subordination Increase
Amount to be paid to the Holders of the Class A Certificates will be
paid to the Holders of the Class A Certificates then entitled to
receive distributions of principal. Similarly, the amount of any
Subordination Reduction Amount to be deducted from the Class A
Principal Distribution Amount for the Class A Certificates will be
deducted from such amounts otherwise due to the Holders of the Class A
Certificates then entitled to receive distributions of principal.
The amount of any loss on a Liquidated Mortgage Loan in the related
Mortgage Loan Group (i.e., a Realized Loss) may or may not be allocated
to the Owners of the Class A Certificates issued with respect to such
Mortgage Loan Group on the Payment Date which immediately follows the
event of loss. However, the Owners of each Class of the Class A
Certificates are entitled to receive ultimate recovery of 100% of the
original principal balance for such Class.
Principal distributions with respect to the Class A Group I
Certificates will generally be distributed in a sequential-pay fashion,
subject to the "lockout" provisions applicable to the Class A-5 Group I
Certificates.
The Owners of the Class A-5 Group I Certificates are entitled to
receive payments of the Class A-5 Lockout Distribution Amount specified
herein; provided, that if on any Payment Date the Class A-4 Certificate
Principal Balance is zero, the Owners of the Class
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A-5 Group I Certificates will be entitled to receive the entire Class A
Principal Distribution Amount for Group I for such Payment Date.
The "Class A-5 Lockout Distribution Amount" for any Payment Date will
be the product of (i) the applicable Class A-5 Lockout Percentage for
such Payment Date and (ii) the Class A-5 Lockout Pro Rata Distribution
Amount for such Payment Date.
The "Class A-5 Lockout Percentage" for each Payment Date shall be as
follows:
Payment Dates Lockout Percentage
The "Class A-5 Lockout Pro Rata Distribution Amount" for any Payment
Date will be an amount equal to the product of (x) a fraction, the
numerator of which is the Certificate Principal Balance of the Class
A-5 Group I Certificates immediately prior to such Payment Date and the
denominator of which is the aggregate Certificate Principal Balance of
all Classes of the Group I Certificates immediately prior to such
Payment Date and (y) the Class A Principal Distribution Amount for
Group I for such Payment Date.
After payment of the Class A-5 Lockout Distribution Amount, the
remaining Class A Principal Distribution Amount for Group I shall be
paid to the Owners of the other Classes of Class A Group I Certificates
sequentially, such that the Class A-4 Group I Certificates are entitled
to receive no principal distributions until the Class A-3 Certificate
Principal Balance has been reduced to zero, the Class A-3 Group I
Certificates are entitled to receive no principal distributions until
the Class A-2 Certificate Principal Balance has been reduced to zero,
the Class A-2 Group I Certificates are entitled to receive no principal
distributions until the Class A-1 Certificate Principal Balance has
been reduced to zero.
As of any Payment Date, the "Class A Certificate Principal Balance" for
a Class of Class A Certificates, prior to any distribution on such
Payment Date, will equal the original Class A Certificate Principal
Balance of such Class less the sum of all
S-13
<PAGE>
amounts previously distributed to the Owners of the related Class of
Class A Certificates on account of principal. "Class A Group I
Certificate Principal Balance" refers to the Class A Group I
Certificates and the "Class A Group II Certificate Principal Balance"
refers to the Class A-6 Group II Certificates.
C. Class A Distribution Amounts and The "Class A Distribution Amount" with respect to each Class of Class
Class A Insured Distribution Amounts Insured Distribution Amounts A Certificates and Payment Date is the
sum, without duplication, of (x) the Class A Interest Distribution Amount
with respect to such Class and Payment Date, (y) the Class A Principal
Distribution Amount, if any, with respect to such Class and Payment Date
and (z) the Class A Carry-Forward Amount, if any, with respect to such
Class and Payment Date.
The "Class A Carry-Forward Amount" means, with respect to each Class of
Class A Certificates and Payment Date, the sum, without duplication, of
(a) the amount, if any, by which (x) the Class A Distribution Amount
for the related Class of Class A Certificates as of the immediately
preceding Payment Date exceeded (y) the amount of the actual
distribution, exclusive of any portion thereof representing the
proceeds of an Insured Payment, to the Owners of the related Class of
Class A Certificates on such immediately preceding Payment Date and (b)
interest on the amount, if any, described in clause (a) at the related
Class A Pass-Through Rate from such immediately preceding Payment Date.
The "Class A Insured Distribution Amount" with respect to each Class of
Class A Certificates and Payment Date is the sum, without duplication,
of (x) the Class A Interest Distribution Amount with respect to such
Class and Payment Date, less interest shortfalls arising from
Prepayments of principal and from application of the Soldiers' and
Sailors' Civil Relief Act of 1940, as amended (the "Relief Act") and
(y) the amount of any Subordination Deficit with respect to such Class
and Payment Date.
To the extent that the Certificate Insurer pays Insured Payments the
Certificate Insurer, as subrogee, will be entitled to receive the Class
A Carry-Forward Amount.
The Pooling and Servicing Agreement provides that to the extent any
portion of a Class A Carry-Forward Amount relates to principal such
portion shall be treated as a distribution of principal, with any
portion which relates to interest being treated as a distribution of
interest.
Registration of the Class A Certificates The Class A Certificates will initially be issued in book-entry
form. Persons acquiring beneficial ownership interests in such Class
A Certificates ("Beneficial Certificate Owners") may elect to hold
their interests through The Depository Trust Company ("DTC"), in the
United States, or Centrale de Livraison de Valeurs Mobiliers, S.A.
("CEDEL") or the Euroclear System ("Euroclear"), in Europe.
Transfers within DTC, CEDEL or Euroclear, as the case may be, will be
in accordance with the usual rules and operating
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<PAGE>
procedures of the relevant system. So long as the Class A Certificates
are book-entry certificates, such Class A Certificates will be
evidenced by one or more Class A Certificates registered in the name of
Cede & Co. ("Cede"), as the nominee of DTC or one of the relevant
depositories (collectively, the "European Depositories"). Cross-market
transfers between persons holding directly or indirectly through DTC,
on the one hand, and counterparties holding directly or indirectly
through CEDEL or Euroclear, on the other, will be effected in DTC
through Citibank N.A. ("Citibank") or The Chase Manhattan Bank
("Chase"), the relevant depositories of CEDEL or Euroclear,
respectively, and each a participating member of DTC. The Class A
Certificates will initially be registered in the name of Cede. The
interests of the Owners of such Class A Certificates will be
represented by book-entries on the records of DTC and participating
members thereof. No Beneficial Certificate Owner will be entitled to
receive a definitive certificate representing such person's interest,
except in the event that Definitive Certificates (as defined herein)
are issued under the limited circumstances described herein. All
references herein to any Class A Certificates reflect the rights of
Beneficial Certificate Owners only as such rights may be exercised
through DTC and its participating organizations for so long as such
Class A Certificates are held by DTC. See "Risk Factors" and
"Description of the Certificates -- Book-Entry Registration of the
Class A Certificates" herein.
Servicing of the Mortgage Loans The Master Servicer has agreed to service the Mortgage Loans in accordance
with the Pooling and Servicing Agreement. In certain limited circumstances
and with the consent of the Certificate Insurer, the Master Servicer may
be removed as Master Servicer under the Pooling and Servicing Agreement.
In the event that Home Equity Securitization Corp. is removed as Master
Servicer under the Pooling and Servicing Agreement, a successor Master
Servicer will be appointed thereunder. See "Servicing" herein.
Monthly Servicing Fee The Master Servicer will retain fees not in excess of ___% per annum (the
"Servicing Fee"), payable monthly at one-twelfth the annual rate, of the
then outstanding principal amount of each Mortgage Loan serviced by it as
of the close of business on the first day of the preceding calendar month.
Subordination of Class B Certificates The Class B Certificates are subordinated to the Class A Certificates.
Such subordination is intended to enhance the likelihood that the Owners
of the Class A Certificates will receive full and timely receipt of all
amounts due to them. See "Description of the Certificates -- Subordination
of Class B Certificates" herein.
Certificate Insurer ________________, a ___________________.
Certificate Insurance Policy Pursuant to an Insurance and Indemnity Agreement dated as of
__________ (the "Insurance Agreement"), the Depositor will obtain the
Certificate Insurance Policy, which is non-cancelable,
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<PAGE>
in favor of the Trustee on behalf of the Owners of the Class A
Certificates. On each Payment Date, the Certificate Insurer is required to
make available to the Trustee the amount of any insufficiency in Total
Available Funds for the related Mortgage Loan Group as of such Payment
Date necessary, after the application of the cross-collateralization
provisions described herein, to distribute the Class A Insured
Distribution Amount with respect to the related Mortgage Loan Group. The
Certificate Insurance Policy does not guarantee any specified rate of
Prepayments. See "The Certificate Insurance Policy and the Certificate
Insurer" and "Description of the Certificates -- Subordination of Class B
Certificates" herein.
The Trustee or paying agent will (i) receive as attorney-in-fact of each
Owner of the Class A Certificates, any Insured Payment from the
Certificate Insurer and (ii) disburse the same to each Owner of the
related Class A Certificates in accordance with the Pooling and Servicing
Agreement. The Pooling and Servicing Agreement will provide that to the
extent the Certificate Insurer makes Insured Payments, either directly or
indirectly (as by paying through the Trustee or a paying agent), to the
Owners of any Class A Certificates, the Certificate Insurer will be
subrogated to the rights of such Owners of such Class A Certificates with
respect to such Insured Payments. The Certificate Insurer will receive
reimbursement for such Insured Payments, but only from the sources and in
the manner provided in the Pooling and Servicing Agreement. Such
subrogation and reimbursement will have no effect on the Certificate
Insurer's obligations under the Certificate Insurance Policy.
Optional Termination The Depositor will have the right to purchase all the Mortgage Loans
on any Payment Date when the aggregate principal balances of the
Mortgage Loans has declined to ten percent or less of the Original
Pool Principal Balance (the "Depositor Optional Termination Date"),
subject to the consent of the Certificate Insurer in certain
circumstances. See "Description of the Certificates -- Optional
Termination by the Depositor" herein.
Auction Sale The Pooling and Servicing Agreement requires that, within ninety days
following the Depositor Optional Termination Date, if the Depositor has
not exercised its optional termination right by such date, the Trustee
solicit bids for the purchase of all Mortgage Loans remaining in the
Trust. In the event that satisfactory bids are received as described in
the Pooling and Servicing Agreement, the net sale proceeds will be
distributed to Certificateholders, in the same order of priority as
collections received in respect of the Mortgage Loans. If satisfactory
bids are not received, the Trustee shall decline to sell the Mortgage
Loans and shall not be under any obligation to solicit any further bids or
otherwise negotiate any further sale of the Mortgage Loans. Such sale and
consequent termination of the Trust must constitute a "qualified
liquidation" of each REMIC established by the Trust under Section 860F of
the Internal Revenue Code of 1986, as
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<PAGE>
amended, including, without limitation, the requirement that the qualified
liquidation takes place over a period not to exceed 90 days. Such sale
shall be subject to the consent of the Certificate Insurer in certain
circumstances.
Ratings It is a condition of the original issuance of the Class A Certificates
that the Class A Certificates receive ratings of ___ or ___ by __________
("___") and __________ ("___"), respectively. A security rating is not a
recommendation to buy, sell or hold securities, and may be subject to
revision or withdrawal at any time by the assigning entity.
Such ratings address credit risk, but do not purport to address any
prepayment risk associated with the Class A Certificates, nor do such
ratings cover the payment of the Supplemental Interest Amounts.
Federal Income One or more elections will be made to treat certain assets of the Trust as
one or more REMICs for federal income tax purposes. Each
Tax Consequences Class of the Class A Certificates will be designated as a "regular
interest" in a REMIC and a separate class of certificates will be
designated as the "residual interest" with respect to each REMIC.
Certificateholders that would otherwise report income under a cash method
of accounting will be required to include in income interest on the Class
A Certificates (including original issue discount, if any) in accordance
with an accrual method of accounting. See "Federal Income Tax
Consequences" herein and in the Prospectus.
ERISA Considerations As described under "ERISA Considerations" herein, the Class A Certificates
may be purchased by a pension or other employee benefit plan subject to
the Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
or by individual retirement accounts or Keogh plans covering only a sole
proprietor or partner which are not subject to ERISA but are subject to
Section 4975 of the Code ("Plans"). See "ERISA Considerations" herein and
in the Prospectus.
Legal Investment Considerations The Class A Certificates will not constitute "mortgage related securities"
for purposes of the Secondary Mortgage Market Enhancement Act of 1984
("SMMEA"). Accordingly, many institutions may not be legally authorized to
invest in the Class A Certificates.
Risk Factors For a discussion of certain factors that should be considered by
prospective investors in the Class A Certificates, see "Risk Factors"
herein and in the accompanying Prospectus.
</TABLE>
S-17
<PAGE>
RISK FACTORS
For a discussion of all material risk factors in connection with an
investment in the Class A Certificates, prospective investors should consider,
among other things, the following factors (as well as the factors set forth
under "Risk Factors" in the accompanying Prospectus) in connection with the
purchase of the Class A Certificates.
PREPAYMENT MAY AFFECT THE YIELD TO MATURITY OF THE NOTES. All of the
Mortgage Loans are prepayable in full or in part at any time. The rate of
Prepayments on the Mortgage Loans may be influenced by a variety of economic,
social and other factors, including interest rates, the availability of
alternative financing and homeowner mobility. Although there is little
significant data available on the effects of interest rates on prepayment rates
for non-purchase money, non-conforming credit mortgage loans, a number of
factors suggest that the prepayment behavior of a pool of such mortgage loans
may be significantly different from that of a pool of purchase money,
conforming-credit mortgage loans. One such factor is the typically smaller
principal balance of the average non-purchase money mortgage loan than that of
the average purchase money mortgage conventional loan in the typical pool. A
smaller principal balance is easier for a borrower to prepay than a larger
balance and therefore a higher prepayment rate may result for a non-purchase
money mortgage loan pool than for a pool of purchase money mortgage loans,
irrespective of the relative average interest rates in the two pools and the
general interest rate environment. A small principal balance, however, also may
make refinancing a non-purchase money mortgage loan at a lower loan rate less
attractive to the borrower relative to refinancing a larger principal balance
non-purchase money mortgage loan, as the perceived impact to the borrower of
lower interest rates on the size of the monthly payment on a mortgage loan is
much less than for a larger principal balance non-purchase money mortgage loan.
Other factors that might be expected to affect the prepayment rate of a pool of
mortgage loans include the amounts of, and interest rates on, the related senior
mortgage loans, if one exists, and the use of the first mortgage loans as
long-term financing for home purchase and junior mortgage loans as shorter-term
financing for a variety of purposes, including debt consolidation, home
improvement, education expenses and purchases of consumer durables such as
automobiles. See "Risk Factors" in the accompanying Prospectus.
The weighted average life of a pool of loans is the average amount of
time for which each dollar of principal on such loans is outstanding. Because it
is expected that there will be payments of principal of Mortgage Loans in
advance of the scheduled due date for the payments of such principal (the
"Prepayments") and defaults on the Mortgage Loans, the actual weighted average
life of the Mortgage Loans is expected to vary substantially from the weighted
average life of the Mortgage Loans based upon their amortization schedules.
Prepayments may result from voluntary early payments by borrowers (including
payments in connection with refinancings of the related first mortgage loans or
the Mortgage Loan itself), the sale of Properties subject to due-on-sale
clauses, and liquidations due to default, as well as the receipt of proceeds
from physical damage insurance policies. In addition, repurchases of Mortgage
Loans from the Trust will have the same effect as Prepayments of the related
Mortgage Loans. Substantially all of the Mortgage Loans contain "due-on-sale"
provisions, and the Pooling and Servicing Agreement generally requires the
Master Servicer to enforce such provisions unless such enforcement is not
permitted by applicable law. See "Description of the Certificates --Flow of
Funds and Distributions on the Class A Certificates", " -- General Servicing
Procedures", " --Termination of the Trust", "Legal Investment Considerations",
and "Maturity, Prepayment and Yield Considerations" herein.
MORTGAGE LOANS WITH BALLOON PAYMENTS MAY CAUSE RISK OF HIGHER DEFAULT
RATES. _____% of the Original Group I Pool Principal Balance of the Mortgage
Loans in Group I, and ___% of the Original Group II Pool Principal Balance of
the Mortgage Loans in Group II are Balloon Loans. See "Risk Factors" in the
accompanying Prospectus.
GEOGRAPHIC CONCENTRATION OF MORTGAGE LOANS. Approximately ___% of the
Original Group I Pool Principal Balance represents Mortgage Loans relating to
Mortgaged Properties located in five states: Florida
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<PAGE>
_____%, Michigan _____%, Ohio _____%, Georgia _____% and North Carolina _____%.
Approximately _____% of the Original Group II Pool Principal Balance represents
Mortgage Loans relating to Mortgaged Properties located in five states: Michigan
_____%, Minnesota _____%, Wisconsin _____%, Illinois ____% and Texas _____%. See
"Risk Factors" in the Prospectus.
JUNIOR LIEN LOANS MAY CREATE A RISK OF HIGHER DEFAULT RATES. ____% of
the Original Group I Pool Principal Balance of the Mortgage Loans relates to
Mortgage Loans secured by liens which are in a second position. See "Risk
Factors" in the Prospectus.
OPTIONAL OR MANDATORY TERMINATION OF THE TRUST MAY ADVERSELY AFFECT AN
OWNER'S YIELD TO MATURITY. The Trust may be terminated subject to the consent of
the Certificate Insurer in certain circumstances, when the aggregate principal
balances of the Mortgage Loans has declined to ten percent or less of the
Original Pool Principal Balance, either by the Depositor, exercising its
optional termination right, or pursuant to the Auction Sale. See "Description of
Certificates -- Optional Termination by the Depositor" and "Description of the
Certificates -- Auction Sale". Such a termination would be the equivalent of a
prepayment of all the Mortgage Loans. The Owners of the Class A Certificates
would receive from the proceeds resulting from any such termination, any
interest accrued and unpaid, together with any distribution of principal owed
and unpaid, in the order of priority set forth under "Description of
Certificates -- Distributions on the Class A Certificates". Any such termination
of the Trust will reduce the yield to maturity on Class A Certificates purchased
at a premium. See "Description of the Certificates -- Termination of the Trust"
herein.
BASIS RISK ON THE CLASS A-1 AND CLASS A-6 CERTIFICATES MAY REDUCE
INTEREST RATE BORNE BY SUCH CERTIFICATES. The Class A-1 Pass-Through Rate is
based upon the value of an adjustable index (one-month LIBOR), while the Coupon
Rates on the Group I Mortgage Loans are fixed. Consequently, the interest which
becomes due on such Mortgage Loans in Group I (net of the Servicing Fees, the
Trustee fees and the Certificate Insurer premiums) during any Remittance Period
may be less than the amount of interest that would accrue at one-month LIBOR
plus the margin on the Class A-1 Group I Certificates, during the related
Accrual Period, and will be limited to such lower amount. The Class A-1 Group I
Certificates do not contain any "carry-forward" or "catch-up" feature if the
amount of interest paid is so limited.
The Class A-6 Group II Pass-Through Rate is based upon the value of an
index (one-month LIBOR) which is different from the value of the indices
applicable to the Mortgage Loans in Group II, as described under "The Mortgage
Pool -- Group II" (either as a result of the use of a different index, rate
determination date, rate adjustment date or rate cap or floor). The Mortgage
Loans in Group II primarily adjust semi-annually based upon a six-month LIBOR
index whereas the Class A-6 Group II Pass-Through Rate adjusts monthly based on
a one-month LIBOR index and is limited by the Class A-6 Available Funds
Pass-Through Rate, unless Supplemental Interest Amounts (the payment of which is
not insured by the Certificate Insurer and which is not rated) are funded in
full. Consequently the actual Class A-6 Pass-Through Rate for a Payment Date may
not equal the Class A-6 Formula Pass-Through Rate, for such Payment Date. In
particular, the interest rates on the Mortgage Loans in Group II adjust less
frequently, with the result that the actual Class A-6 Pass-Through Rate may be
lower than the Class A-6 Formula Pass-Through Rate, for extended periods in a
rising interest rate environment. In addition, one-month LIBOR and six-month
LIBOR may respond to different economic and market factors, and there is not
necessarily any correlation between them. Thus, it is possible, for example,
that one-month LIBOR may rise during periods in which one or more Indices are
falling or that, even if both one-month LIBOR and six-month LIBOR Indices rise
during the same period, one-month LIBOR may rise much more rapidly than
six-month LIBOR. See "Class A-6 Pass-Through Rate" in the Summary for this
Prospectus Supplement.
USE OF PROCEEDS
The Trust will acquire the Mortgage Loans from the Depositor (the
Depositor having obtained the Mortgage Loans from the Company) concurrently with
the sale of the Certificates and the net proceeds from
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<PAGE>
the sale of the Certificates will be paid to the Depositor. Such net proceeds
will, in effect, represent the purchase price paid by the Trust to the Depositor
for the Mortgage Loans. The net proceeds, after funding transaction costs, to be
received from the sale of the Mortgage Loans will be added to the Depositor's
general funds and will be available for general corporate purposes.
THE COMPANY
[description]
SERVICING
THE MASTER SERVICER
As Master Servicer, __________ will be obligated to service the
Mortgage Loans pursuant to the Pooling and Servicing Agreement. See "Description
of the Certificates -- General Servicing Procedures" herein.
<TABLE>
<CAPTION>
DELINQUENCY EXPERIENCE ON THE COMPANY'S PORTFOLIO OF MORTGAGE LOANS
AS OF
---------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------
<S> <C>
Number of Mortgage
Loans................
Dollar amount of
Mortgage Loans.......
DELINQUENCY
Period30-59 Days
% of number of
loans (1)........
% of dollar
amount of loans
(2)..............
60-89 days
% of number of
loans (1)........
% of dollar
amount of loans
(2)..............
90 days and over
% of number of
loans (1)........
% of dollar
amount of loans
(2)..............
Foreclosed
Properties
% of number of
loans (1)........
% of dollar
amount of loans
(2)..............
</TABLE>
(1) The number of delinquent Mortgage Loans or the number of foreclosed
properties as a percentage of the total "Number of Mortgage Loans" as of
the date indicated.
(2) The dollar amount of delinquent Mortgage Loans or the dollar amount of
foreclosed properties as a percentage of the total "Dollar amount of
Mortgage Loans" as of the date indicated.
S-20
<PAGE>
<TABLE>
<CAPTION>
LOAN LOSS EXPERIENCE ON THE COMPANY'SPORTFOLIO OF MORTGAGE LOANS
-------------------------------- -----------------------------------
<S> <C>
Average amount outstanding(1).............
Gross losses(2)...........................
Recoveries(3).............................
Net losses(4).............................
Net losses as a percentage of average amount
outstanding ..............................
</TABLE>
(1) "Average Amount Outstanding" during the period is the arithmetic average
of the principal balances of the mortgage loans outstanding on the last
business day of each month during the period.
(2) "Gross Losses" are the principal amounts of the mortgage loans for each
respective period which have been determined to be uncollectible.
(3) "Recoveries" represent the excess of (x) the sum of recoveries from
liquidation proceeds and deficiency judgments over (y) the sum of expenses
and accrued interest.
(4) "Net Losses" represents "Gross Losses" minus "Recoveries".
While the above delinquency and loan loss experience represents the
recent experience of the Company's portfolio of Mortgage Loans, there can be no
assurance that the future delinquency and loan loss experience on the Mortgage
Loans included in the Pool will be similar. The Company can neither quantify the
impact of any recent property value declines on the Mortgage Loans nor predict
whether, to what extent or how long such declines may continue. In a period of
such decline, the rates of delinquencies, foreclosures and losses on the
Mortgage Loans could be higher than those heretofore experienced in the mortgage
lending industry in general. In addition, adverse economic conditions (which may
or may not affect real property values) may affect the timely payment by
borrowers of scheduled payments of principal and interest on the Mortgage Loans
and, accordingly, the actual rates of delinquencies, foreclosures and losses.
THE MORTGAGE LOAN POOL
GENERAL
The statistical information concerning the Pool of Mortgage Loans is
based upon Pool information as of the close of business on ___________ (the
"Cut-Off Date").
The Mortgage Loans consist of _____ mortgage loans evidenced by
promissory notes (the "Notes") secured by deeds of trust, security deeds or
mortgages on the properties (the "Properties" or "Mortgaged Properties"), which
are located in __ states and the District of Columbia. The Properties securing
the Mortgage Loans consist of one- to four-family residences (which may be
detached, part of a one- to four-family dwelling, a manufactured home, modular
housing, a condominium unit, a townhouse, rowhouse or a unit in a planned unit
development). The Properties may be owner-occupied (which includes second and
vacation homes) and non-owner occupied investment properties.
Each Mortgage Loan in the Trust will be assigned to one of two mortgage
loan groups: "Group I" or "Group II", (each a "Mortgage Loan Group") comprised
of Mortgage Loans which bear fixed interest rates only, in the case of Group I,
and Mortgage Loans which bear adjustable interest rates only, in the case of
Group II. The Class A Group I Certificates will be issued in respect of Group I,
and the Class A-6 Group II Certificates will be issued in respect of Group II.
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<PAGE>
The Mortgage Loans in Group I consist of _____% of fully amortizing
mortgage loans and ______% of Balloon Loans; consist of approximately _____% of
loans secured by first liens on the related Properties, with the remainder
representing second liens; and consist of approximately _____% of loans secured
by primary residences. No Group I Mortgage Loan is more than 60 days
contractually delinquent as of the Cut-Off Date.
The Mortgage Loans in Group II consist of _____% of fully amortizing
mortgage loans and _____% of Balloon Loans; consist of _____% of loans secured
by first liens on the related Properties; and consist of approximately _____% of
Loans secured by primary residences. No Group II Mortgage Loan is more than 60
days contractually delinquent as of the Cut-Off Date.
GROUP I
The Mortgage Loans in Group I consist of approximately _____ loans
under which the related Mortgaged Properties are located in __ states and the
District of Columbia as set forth herein. As of the Cut-Off Date, the Mortgage
Loans in Group I had an aggregate principal balance of $______, the maximum
principal balance of any of the Mortgage Loans in Group I was $_______, the
minimum principal balance thereof was $______, and the principal balance of the
Mortgage Loans in Group I averaged $_______. As of the Cut-Off Date, Coupon
Rates on the Mortgage Loans in Group I ranged from _____% to ______% per annum,
and the weighted average Coupon Rate of the Mortgage Loans in Group I was _____%
per annum. As of the Cut-Off Date, the original term to stated maturity of the
Mortgage Loans in Group I ranged from __ months to ___ months, the remaining
term to stated maturity ranged from __ months to ___ months, the weighted
average original term to stated maturity was ___ months and the weighted average
remaining term to stated maturity was ___ months. No Mortgage Loan in Group I
had a stated maturity later than ________. ______% of the aggregate principal
balance of the Mortgage Loans in Group I require monthly payments of principal
that will fully amortize the Mortgage Loans by their respective maturity dates,
and _____% of the aggregate principal balance of the Mortgage Loans in Group I
are Balloon Loans.
The sum of the percentage columns set forth in the following tables may
not equal 100% due to rounding.
S-22
<PAGE>
<TABLE>
<CAPTION>
GEOGRAPHIC DISTRIBUTION
GROUP I
Aggregate Unpaid
Number Principal Balance % of
of as of the Aggregate
State Mortgage Loans Cut-Off Date Principal Balance
----- -------------- ------------ -----------------
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------
================================================================================================
</TABLE>
The Combined Loan-to-Value Ratios shown above were calculated based
upon the appraised values of the Properties at the time of origination of the
Mortgage Loans or in the case of a purchase money mortgage loan the lesser of
the purchase price or the appraised value at the time of origination (the
"Appraised Values"). No assurance can be given that values of the Properties
have remained or will remain at their levels on the dates of origination of the
related Mortgage Loans. If the residential real estate market should experience
an overall decline in property values such that the unpaid principal balances of
the Mortgage Loans, together with the unpaid principal balances of any senior
mortgage loans, become equal to or greater than the value of the Properties, the
actual rates of delinquencies, foreclosures and losses could be higher than
those now generally experienced in the mortgage lending industry.
S-23
<PAGE>
<TABLE>
<CAPTION>
COMBINED LOAN-TO-VALUE RATIO DISTRIBUTION
GROUP I
Aggregate Unpaid
Number of Principal Balance
Range of Combined Loan-to-Value Mortgage as of the % of Aggregate
Ratios Loans Cut-Off Date Principal Balance
------ ----- ------------ -----------------
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------
================================================================================================
</TABLE>
The Combined Loan-to-Value Ratios shown above were calculated based
upon the appraised values of the Properties at the time of origination of the
Mortgage Loans or in the case of a purchase money mortgage loan the lesser of
the purchase price or the appraised value at the time of origination (the
"Appraised Values"). No assurance can be given that values of the Properties
have remained or will remain at their levels on the dates of origination of the
related Mortgage Loans. If the residential real estate market should experience
an overall decline in property values such that the unpaid principal balances of
the Mortgage Loans, together with the unpaid principal balances of any senior
mortgage loans, become equal to or greater than the value of the Properties, the
actual rates of delinquencies, foreclosures and losses could be higher than
those now generally experienced in the mortgage lending industry.
S-24
<PAGE>
<TABLE>
<CAPTION>
COUPON RATE DISTRIBUTION
GROUP I
NUMBER AGGREGATE UNPAID
OF PRINCIPAL BALANCE % OF
RANGE OF MORTGAGE AS OF THE AGGREGATE
COUPON RATES (%) LOANS CUT-OFF DATE PRINCIPAL BALANCE
---------------- ----- ------------ -----------------
<S> <C> <C> <C>
</TABLE>
S-25
<PAGE>
<TABLE>
<CAPTION>
DISTRIBUTION OF UNPAID PRINCIPAL BALANCES AS OF THE CUT-OFF DATE
GROUP I
AGGREGATE UNPAID
NUMBER PRINCIPAL BALANCE % OF
RANGE OF UNPAID OF AS OF THE AGGREGATE
PRINCIPAL BALANCES ($) MORTGAGE LOANS CUT-OFF DATE PRINCIPAL BALANCE
- ---------------------------------------- ------------------------ -------------------------- -------------------
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------
====================================================================================================================
LIEN STATUS AND OCCUPANCY STATUS
GROUP I
NUMBER AGGREGATE UNPAID
OF PRINCIPAL BALANCE % OF
LIEN STATUS AND MORTGAGE AS OF THE AGGREGATE
OCCUPANCY STATUS LOANS CUT-OFF DATE PRINCIPAL BALANCE
- ------------------------------------- -------------------- ----------------------------- -----------------------
- --------------------------------------------------------------------------------------------------------------------
====================================================================================================================
DISTRIBUTION OF AGE (IN MONTHS) FROM ORIGINATION TO THE CUT-OFF DATE
GROUP I
NUMBER AGGREGATE UNPAID PRINCIPAL
OF BALANCE % OF
MONTHS ELAPSED MORTGAGE AS OF THE AGGREGATE
SINCE ORIGINATION LOANS CUT-OFF DATE PRINCIPAL BALANCE
----------------- ----- ------------ -----------------
- ---------------------------------------------------------------------------------------------------------------------
=====================================================================================================================
</TABLE>
S-26
<PAGE>
<TABLE>
<CAPTION>
PROPERTY TYPE
GROUP I
NUMBER AGGREGATE UNPAID
OF PRINCIPAL BALANCE % OF
MORTGAGE AS OF THE AGGREGATE
PROPERTY TYPE LOANS CUT-OFF DATE PRINCIPAL BALANCE
------------- ----- ------------ -----------------
DISTRIBUTION OF REMAINING TERM TO MATURITY(IN MONTHS) AS OF THE CUT-OFF DATE
GROUP I
NUMBER AGGREGATE UNPAID
OF PRINCIPAL BALANCE % OF
MONTHS REMAINING MORTGAGE AS OF THE AGGREGATE
TO MATURITY LOANS CUT-OFF DATE PRINCIPAL BALANCE
----------- ----- ------------ -----------------
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
</TABLE>
S-27
<PAGE>
GROUP I
The Mortgage Loans in Group II consist of approximately _____ loans
under which the related Mortgaged Properties are located in __ states and the
District of Columbia as set forth herein. As of the Cut-Off Date, the Mortgage
Loans in Group II had an aggregate principal balance of $_________, the maximum
principal balance of any of the Mortgage Loans in Group II was $__________, the
minimum principal balance thereof was $_________ and the principal balance of
the Mortgage Loans in Group II averaged $_________. As of the Cut-Off Date,
Coupon Rates of the Mortgage Loans in Group II ranged from _____% per annum to
_____% per annum. As of the Cut-Off Date, the weighted average Coupon Rate of
the Mortgage Loans in Group II was ______%. As of the Cut-Off Date, margins of
the Mortgage Loans in Group II ranged from _____% per annum to _____% per annum,
and the weighted average margin was _____%. As of the Cut-Off Date, the maximum
coupons of the Mortgage Loans in Group II ranged from _____% per annum to
______% per annum, and the weighted average maximum coupon was ______%. _____%
of the aggregate principal balance of the Mortgage Loans in Group II had a
periodic interest rate cap of ____% and ____% of the aggregate principal balance
of the Mortgage Loans in Group II had a periodic interest rate cap of ____%.
_____% of the aggregate principal balance of the Mortgage Loans in Group II were
fixed rate loans that, in 2 years from origination, will be converted into
variable rate loans with an interest rate cap of ____% on the date of such
conversion and with a periodic interest rate cap of ___% or ___% thereafter.
____% of the aggregate principal balance of the Mortgage Loans in Group II were
fixed rate loans that, in 3 years from origination, will be converted into
variable rate loans with an interest rate cap of ___% on the date of such
conversion and with a periodic interest rate cap of ____% thereafter.
As of the Cut-Off Date, the original term to stated maturity of the
Mortgage Loans in Group II ranged from ___ months to ___ months, the remaining
term to stated maturity ranged from ___ months to ___ months, the weighted
average original term to stated maturity was ___ months and the weighted average
remaining term to stated maturity was ___ months. No Mortgage Loan in Group II
had a stated maturity later than May _______. _____% of the aggregate principal
balance of the Mortgage Loans in Group II require monthly payments of principal
that will fully amortize the Mortgage Loans by their respective dates and 0.04%
of the aggregate principal balance of the Mortgage Loans in Group II are Balloon
Loans.
The Coupon Rates of the Mortgage Loans in Group II adjust semi-annually
based on six month LIBOR.
S-28
<PAGE>
The sum of the percentage columns set forth on the following tables may
not equal 100% due to rounding.
<TABLE>
<CAPTION>
GEOGRAPHIC DISTRIBUTION
GROUP II
NUMBER AGGREGATE UNPAID
OF PRINCIPAL BALANCE % OF
MORTGAGE AS OF THE AGGREGATE
STATE LOANS CUT-OFF DATE PRINCIPAL BALANCE
----- ----- ------------ -----------------
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------------------
TOTAL
- ---------------------------------------------------------------------------------------------
</TABLE>
S-29
<PAGE>
The combined loan-to-value ratio of a Mortgage Loan is equal to the ratio
(expressed as a percentage) of (x) the sum of the (i) original principal balance
of such Mortgage Loan and (ii) the outstanding principal balances of any senior
mortgage loans (computed at the date of origination of such Mortgage Loan) to
(y) the appraised value of the related Mortgaged Property at the time of
origination or in the case of a purchase money mortgage loan the lesser of the
purchase price or the appraised value at the time of origination (the "Combined
Loan-to-Value Ratio"). The Combined Loan-to-Value Ratios are distributed as
follows:
<TABLE>
<CAPTION>
COMBINED LOAN-TO-VALUE RATIO DISTRIBUTION
GROUP II
NUMBER AGGREGATE UNPAID
OF PRINCIPAL BALANCE % OF
RANGE OF COMBINED MORTGAGE AS OF THE AGGREGATE
LOAN-TO-VALUE RATIOS LOANS CUT-OFF DATE PRINCIPAL BALANCE
-------------------- ----- ------------ -----------------
<S> <C> <C> <C>
</TABLE>
The Combined Loan-to-Value Ratios shown above were calculated based
upon the appraised values of the Properties at the time of origination of the
Mortgage Loans or in the case of a purchase money mortgage loan the lesser of
the purchase price or the appraised value at the time of origination (the
"Appraised Values"). No assurance can be given that values of the Properties
have remained or will remain at their levels on the dates of origination of the
related Mortgage Loans. If the residential real estate market should experience
an overall decline in property values such that the unpaid principal balances of
the Mortgage Loans, together with the unpaid principal balances of any senior
mortgage loans, become equal to or greater than the value of the Properties, the
actual rates of delinquencies, foreclosures and losses could be higher than
those now generally experienced in the mortgage lending industry.
S-30
<PAGE>
<TABLE>
<CAPTION>
DISTRIBUTION OF UNPAID PRINCIPAL BALANCES AS OF THE CUT-OFF DATE
GROUP II
AGGREGATE UNPAID % OF
NUMBER OF PRINCIPAL BALANCE AGGREGATE
RANGE OF UNPAID MORTGAGE AS OF THE PRINCIPAL
PRINCIPAL BALANCES ($) LOANS CUT-OFF DATE BALANCE
---------------------- ----- ------------ -------
<S> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
LIEN STATUS AND OCCUPANCY STATUS
GROUP II
NUMBER AGGREGATE UNPAID
OF PRINCIPAL BALANCE % OF
LIEN STATUS AND MORTGAGE AS OF THE AGGREGATE
OCCUPANCY STATUS LOANS CUT-OFF DATE PRINCIPAL BALANCE
---------------- ----- ------------ -----------------
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
DISTRIBUTION OF AGE (IN MONTHS) FROM ORIGINATION TO THE CUT-OFF DATE
GROUP II
NUMBER AGGREGATE UNPAID
OF PRINCIPAL BALANCE % OF
MONTHS ELAPSED MORTGAGE AS OF THE AGGREGATE
SINCE ORIGINATION LOANS CUT-OFF DATE PRINCIPAL BALANCE
----------------- ----- ------------ -----------------
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
S-31
<PAGE>
<TABLE>
<CAPTION>
PROPERTY TYPE
GROUP II
NUMBER AGGREGATE UNPAID
OF PRINCIPAL BALANCE % OF
MORTGAGE AS OF THE AGGREGATE
PROPERTY TYPE LOANS CUT-OFF DATE PRINCIPAL BALANCE
------------- ----- ------------ -----------------
<S> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
DISTRIBUTION OF REMAINING TERM TO MATURITY
(IN MONTHS) AS OF THE CUT-OFF DATE
GROUP II
NUMBER AGGREGATE UNPAID
OF PRINCIPAL BALANCE % OF
MONTHS REMAINING MORTGAGE AS OF THE AGGREGATE
TO MATURITY LOANS CUT-OFF DATE PRINCIPAL BALANCE
----------- ----- ------------ -----------------
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
DISTRIBUTION OF CURRENT COUPON RATES
AS OF THE CUT OFF DATE
GROUP II
NUMBER AGGREGATE UNPAID
OF PRINCIPAL BALANCE
MORTGAGE AS OF THE % OF AGGREGATE
CURRENT COUPON RATES (%) LOANS CUT-OFF DATE PRINCIPAL BALANCE
------------------------ ----- ------------ -----------------
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
S-32
<PAGE>
<TABLE>
<CAPTION>
DISTRIBUTION OF MAXIMUM COUPON RATES
GROUP II
AGGREGATE UNPAID
NUMBER OF PRINCIPAL BALANCE % OF AGGREGATE
MORTGAGE AS OF THE PRINCIPAL
MAXIMUM COUPON RATES (%) LOANS CUT-OFF DATE BALANCE
------------------------ ----- ------------ -------
<S> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
DISTRIBUTION OF MARGINS
AS OF THE CUT OFF DATE
GROUP II
AGGREGATE UNPAID
NUMBER OF PRINCIPAL BALANCE
MORTGAGE AS OF THE % OF ORIGINAL POOL
MARGINS (%) LOANS CUT-OFF DATE PRINCIPAL BALANCE
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
S-33
<PAGE>
<TABLE>
<CAPTION>
NEXT INTEREST ADJUSTMENT DATE
GROUP II
NUMBER AGGREGATE UNPAID
OF PRINCIPAL BALANCE
NEXT INTEREST MORTGAGE AS OF THE % OF AGGREGATE
ADJUSTMENT DATE LOANS CUT-OFF DATE PRINCIPAL BALANCE
--------------- ----- ------------ -----------------
<S> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
DISTRIBUTION OF MINIMUM
COUPON RATES
GROUP II
AGGREGATE UNPAID
NUMBER OF PRINCIPAL BALANCE
MINIMUM MORTGAGE AS OF THE % OF AGGREGATE
COUPON RATES (%) LOANS CUT-OFF DATE PRINCIPAL BALANCE
---------------- ----- ------------ -----------------
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
S-34
<PAGE>
THE MORTGAGE LOAN PROGRAM -- UNDERWRITING STANDARDS; REPRESENTATIONS
[DESCRIBE]
MATURITY, PREPAYMENT AND YIELD CONSIDERATIONS
CLASS A CERTIFICATES
The weighted average life of, and, if purchased at other than par, the
yield to maturity on, a Class A Certificate will be directly related to the rate
of payment of principal of the Mortgage Loans in the related Mortgage Loan
Group, including for this purpose Prepayments, liquidations due to defaults,
casualties and condemnations, and repurchases of Mortgage Loans by the Company,
or purchases of Mortgage Loans by the Master Servicer or a Sub-Servicer. The
Mortgage Loans in the related Mortgage Loan Group may be prepaid by the related
obligors on the Notes ("Mortgagors") at any time. The actual rate of principal
prepayments on pools of mortgage loans is influenced by a variety of economic,
tax, geographic, demographic, social, legal and other factors and has fluctuated
considerably in recent years. In addition, the rate of principal prepayments may
differ among pools of mortgage loans at any time because of specific factors
relating to the mortgage loans in the particular pool, including, among other
things, the age of the mortgage loans, the geographic locations of the
properties securing the loans, the extent of the mortgagors' equity in such
properties, and changes in the mortgagors' housing needs, job transfers and
unemployment.
Generally, however, because the Mortgage Loans in Group I bear interest
at fixed rates, and the rate of prepayment on fixed rate mortgage loans is
sensitive to prevailing interest rates, if prevailing interest rates were to
fall, the Mortgage Loans in Group I may be subject to higher prepayment rates.
Conversely, if prevailing interest rates were to rise, the rate of prepayments
on Mortgage Loans in Group I would be likely to decrease.
If purchased at other than par, the yield to maturity on a Class A
Certificate will be affected by the rate of the payment of principal of the
Mortgage Loans in the related Mortgage Loan Group. If the actual rate of
payments on the Mortgage Loans in the related Mortgage Loan Group is slower than
the rate anticipated by an investor who purchases a Class A Certificate at a
discount, the actual yield to such investor will be lower than such investor's
anticipated yield. If the actual rate of payments on the Mortgage Loans in the
related Mortgage Loan Group is faster than the rate anticipated by an investor
who purchases a Class A Certificate at a premium, the actual yield to such
investor will be lower than such investor's anticipated yield.
All of the Mortgage Loans in Group II are adjustable rate mortgage
loans. As is the case with conventional fixed rate mortgage loans, adjustable
rate mortgage loans may be subject to a greater rate of principal prepayments in
a declining interest rate environment. For example, if prevailing interest rates
fall significantly, adjustable rate mortgage loans could be subject to higher
prepayment rates than if prevailing interest rates remain constant because the
availability of fixed rate mortgage loans at competitive interest rates may
encourage Mortgagors to refinance their adjustable rate mortgage loans to "lock
in" a lower fixed interest rate. However, no assurance can be given by the
Company as to the level of prepayments that the Mortgage Loans in Group II will
experience.
The final scheduled Payment Date for the A-1 Group I Certificates is
______________, for the Class A-2 Group I Certificates is _____________, for the
Class A-3 Group I Certificates is ________________, for the A-4 Group I
Certificates is _____________, for the A-5 Group I Certificates is
_____________, and for the Class A-6 Group II Certificates is ____________. Such
dates are the dates on which the related Class A Certificate Principal Balance
would be reduced to zero, assuming, among other things that with respect to the
Class A-1 Group I Certificates, the Class A-2 Group I Certificates and the Class
A-3 Group I Certificates (i) no Prepayments are received on any of the Mortgage
Loans, (ii) distributions of principal and interest on each of the Mortgage
Loans is timely received, (iii) Class B Interest will not be used to make
accelerated payments of principal (i.e. Subordination Increase Amounts) to the
Holders of the Class A Certificates and (iv) the
S-35
<PAGE>
Mortgage Loans in each Mortgage Loan Group have the applicable characteristics
set forth in the "Weighted Average Lives of Class A Certificates" section
herein. The final scheduled Payment Date for the Class A-4 Group I Certificates
and the Class A-5 Group I Certificates is the Payment Date in the calendar month
after the month in which the stated maturity of the Mortgage Loan in the related
Mortgage Loan Group having the latest stated maturity occurs. The final
scheduled Payment Date for the Class A-6 Group II Certificates is the Payment
Date in the calendar month in which the stated maturity of the Mortgage Loan in
Group II having the last stated maturity occurs. The weighted average life of
the Class A Certificates of each Class is likely to be shorter than would be the
case if payments actually made on the Mortgage Loans in the related Mortgage
Loan Group conformed to the foregoing assumptions, and the final Payment Dates
with respect to the Class A Certificates of each Class could occur significantly
earlier than such final scheduled Payment Dates because (i) Prepayments are
likely to occur, (ii) the Company may repurchase Mortgage Loans in the related
Mortgage Loan Group in the event of breaches of representations and warranties
and (iii) subject to the Certificate Insurer's consent in certain circumstances,
the Depositor may cause, and the Trustee may, pursuant to the Auction Sale,
cause a termination of the Trust when the Pool Principal Balance has declined to
ten percent or less of the Original Pool Principal Balance.
"Weighted average life" refers to the average amount of time from the
date of issuance of a security until each dollar of principal of such security
will be repaid to the investor. The weighted average lives of the Classes of
Class A Certificates will be influenced by the rate at which principal payments
(including scheduled payments and prepayments) on the Mortgage Loans in the
related Mortgage Loan Group are made. Principal payments on Mortgage Loans may
be in the form of scheduled amortization or prepayments (for this purpose, the
term "prepayment" includes prepayments and liquidations due to a default or
other dispositions of the Mortgage Loans). The weighted average lives of the
Class A Certificates will also be influenced by delays associated with realizing
on defaulted Mortgage Loans in the related Mortgage Loan Group. The model used
in this Prospectus Supplement assumes that, (i) with respect to Group I, the
pool of loans prepays in the first month at a constant prepayment rate of 2.4%
and increases by an additional 2.4% each month thereafter until the tenth month,
where it remains at a constant prepayment rate equal to 24% (the "Home Equity
Prepayment" Model or "HEP"), and (ii) with respect to Group II, the pool of
loans prepays a constant prepayment rate equal to 26% ("CPR") ((i) and (ii)
together, the "Prepayment Assumption"). HEP represents an assumed annualized
rate of prepayment relative to the then outstanding principal balance on a pool
of new mortgage loans.
WEIGHTED AVERAGE LIVES OF CLASS A CERTIFICATES
For the purpose of the tables below, it is assumed that: (i) the
Mortgage Loans of each Mortgage Loan Group consist of pools of loans with
level-pay and balloon amortization methodologies, Cut-Off Date principal
balances, gross coupon rates, net coupon rates, original and remaining terms to
maturity, and original amortization terms as applicable, as set forth below,
(ii) the Closing Date for the Certificates occurs on __________, (iii)
distributions on the Certificates are made on the __ day of each month
regardless of the day on which the Payment Date actually occurs, commencing in
__________ in accordance with the priorities described herein, (iv) the
difference between the gross coupon rate and the net coupon rate is sufficient
to pay Servicer Fees, Trustee fees and Certificate Insurer premiums (the sum of
which is assumed to be ___%), (v) the Mortgage Loans' prepayment rates are a
multiple of the Prepayment Assumption, (vi) prepayments include 30 days'
interest thereon, (vii) optional termination is not exercised, (viii) the
Specified Subordinated Amount for each Mortgage Loan Group is set initially as
specified in the Insurance Agreement and thereafter changes in accordance with
the provisions of the Insurance Agreement, (ix) no delinquencies in the payment
by Mortgagors of principal and interest on the Mortgage Loans are experienced,
(x) no Mortgage Loan is repurchased for breach of a representation and warranty
or otherwise, (xi) the Coupon Rate for each Mortgage Loan in Group II is
adjusted on its next rate adjustment date (and on subsequent rate adjustment
dates, if necessary) to equal the sum of (a) an assumed level of the applicable
index (_____%) and (b) the respective gross margin (such sum being subject to
the applicable periodic adjustment cap and maximum interest rate), (xii) the
Class A-1 Group I Pass-Through Rate remains constant at ____%, and (xiii) the
Class A-6 Group II Pass-Through Rate remains constant at ______%.
S-36
<PAGE>
<TABLE>
<CAPTION>
GROUP I CHARACTERISTICS
-----------------------
ORIGINAL REMAINING ORIGINAL
TERM TO TERM TO AMORTIZATION
POOL GROSS COUPON NET COUPON MATURITY MATURITY TERM AMORTIZATION
NUMBER PRINCIPAL BALANCE RATE (%) RATE (%) (IN MONTHS) (IN MONTHS) (IN MONTHS) METHOD
- ------------ ------------------ ------------------ -------------- ---------------- -------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
GROUP II CHARACTERISTICS
------------------------
NET ORIGINAL REMAINING
GROSS MONTHS TO MAXIMUM TERM TO TERM TO
PRINCIPAL COUPON NET COUPON RATE INTEREST MATURITY MATURITY
POOL NUMBER BALANCE (1) RATE (%) RATE (%) CHANGE MARGIN (%) RATE (%) (IN MONTHS) (IN MONTHS)
- ------------ -------------- ------------ ------------- ------------ ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
<CAPTION>
ORIGINAL
AMORTIZATION
TERM PERIODIC AMORTIZATION
(IN MONTHS) CAP (%) METHOD
- ------------- ------------- -------------
<C> <C> <C>
- -----------------------------------------------------
</TABLE>
S-37
<PAGE>
<TABLE>
<CAPTION>
PERCENTAGE OF CERTIFICATE PRINCIPAL BALANCE
-------------------------------------------
CLASS A-1 GROUP I CERTIFICATES CLASS A-2 GROUP I CERTIFICATES CLASS A-3 GROUP I CERTIFICATES
HEP HEP HEP
PAYMENT DATE
<S> <C> <C> <C>
</TABLE>
- -----------------------------------------------------
(1) For purposes of calculating the percentages and the weighted average lives
with respect to the Group I Certificates, the Mortgage Loans in Group II
are assumed to prepay at 26% CPR and for purposes of calculating the
percentages and the weighted average lives with respect to the Group II
Certificates, the Mortgage Loans in Group I are assumed to prepay at 24%
HEP.
(2) The weighted average life of the Class A Certificates is determined by (i)
multiplying the amount of each principal payment by the number of years
from the Closing Date to the related Payment Date, (ii) adding the results,
and (iii) dividing the sum by the initial respective Certificate Principal
Balance for such Class of Class A Certificates.
S-38
<PAGE>
<TABLE>
<CAPTION>
PERCENTAGE OF CERTIFICATE PRINCIPAL BALANCE (1)-
------------------------------------------------
CLASS A-4 GROUP I CERTIFICATES CLASS A-5 GROUP I CERTIFICATES CLASS A-6 GROUP I CERTIFICATES
HEP HEP HEP
PAYMENT DATE
<S> <C> <C> <C>
</TABLE>
- -----------------------------------------------------
(1) For purposes of calculating the percentages and the weighted average lives
with respect to the Group I Certificates, the Mortgage Loans in Group II
are assumed to prepay at 26% CPR and for purposes of calculating the
percentages and the weighted average lives with respect to the Group II
Certificates, the Mortgage Loans in Group I are assumed to prepay at 24%
HEP.
(2) The weighted average life of the Class A Certificates is determined by (i)
multiplying the amount of each principal payment by the number of years
from the Closing Date to the related Payment Date, (ii) adding the results,
and (iii) dividing the sum by the initial respective Certificate Principal
Balance for such Class of Class A Certificates.
S-39
<PAGE>
The Mortgage Loans will not have the characteristics assumed above, and
there can be no assurance that (i) the Mortgage Loans will prepay at any of the
rates shown in the table or at any other particular rate or will prepay
proportionately or (ii) the weighted average lives of each Class of the Class A
Group I Certificates, or the weighted average life of the Class A-6 Group II
Certificates will be as calculated above. Because the rate of distributions of
principal of the Class A Certificates will be a result of the actual
amortization (including prepayments) of the Mortgage Loans in the related
Mortgage Loan Group, which will include Mortgage Loans that have remaining terms
to stated maturity shorter or longer than those assumed and Coupon Rates higher
or lower than those assumed, the weighted average lives of the Class A Group I
Certificates and the Class A-6 Group II Certificates will differ from those set
forth above, even if all of the Mortgage Loans in the related Mortgage Loan
Group prepay at the indicated constant prepayment rates.
PAYMENT DELAY FEATURE OF CLASS A-2, A-3, A-4 AND A-5 GROUP I CERTIFICATES
The effective yield to the Owners of the Class A-2, A-3, A-4 and A-5
Group I Certificates will be lower than the yield which would otherwise apply
because distributions will not be payable to such Owners until at least the __
day of the month in which the related Accrual Period ends, without any
additional distribution of interest or earnings thereon in respect of such
delay.
DESCRIPTION OF THE CERTIFICATES
GENERAL
The Certificates will be issued in classes (each, a "Class") pursuant
to a Pooling and Servicing Agreement to be dated as of __________ (the "Pooling
and Servicing Agreement") among the Master Servicer, the Depositor and the
Trustee. The Trustee will make available for inspection a copy of the Pooling
and Servicing Agreement (without exhibits or schedules) to the Owners of the
Certificates on written request. The following describes certain terms of the
Pooling and Servicing Agreement, but does not purport to be complete and is
qualified in its entirety by reference to the Pooling and Servicing Agreement.
The Class A-1 Group I Certificates, the Class A-2 Group I Certificates,
the Class A-3 Group I Certificates, the Class A-4 Group I Certificates, the
Class A-5 Group I Certificates and the Class A-6 Group II Certificates are
senior certificates as described herein. The Class B Certificates are not being
offered hereby. Each Class of Class A Certificates will be issued in original
principal amounts of $1,000 and integral multiples thereof, except that one
certificate for each class of Class A Certificates may be issued in a different
amount. The Trust will also issue a residual class in each REMIC created by the
Trust (the "Residual Certificates") which are not being offered hereby and will
initially be retained by the Company or its affiliates. The Class A
Certificates, the Class B Certificates and the Residual Certificates are
collectively referred to as the "Certificates".
PAYMENT DATES AND DISTRIBUTIONS
On the __ day of each month, or, if such day is not a business day then
the next succeeding business day, commencing ___________ (each such day being a
"Payment Date"), the Trustee will be required to distribute to the Owners of
record of the Certificates as of the related Record Date, such Owners'
Percentage Interest in the amounts required to be distributed to the Owners of
each Class of Certificates on such Payment Date. For so long as any Class A
Certificate is in book-entry form with DTC, the only "Owner" of such Class A
Certificates will be Cede. See " -- Book-Entry Registration of the Class A
Certificates" herein.
S-40
<PAGE>
Each Owner of record of a Certificate as of each Record Date will be
entitled to receive such Owner's Percentage Interest in the amounts due on the
related Payment Date to the Owners of the related Class of Certificates. The
"Percentage Interest" of each Class A Certificate as of any date of
determination will be equal to the percentage obtained by dividing the principal
balance of such Class A Certificate as of the Cut-Off Date by the related Class
A Certificate Principal Balance as of the Cut-Off Date.
FLOW OF FUNDS AND DISTRIBUTIONS ON THE CLASS A CERTIFICATES
THE PRINCIPAL AND INTEREST ACCOUNT. The Pooling and Servicing Agreement
requires the Master Servicer to establish a custodial account (the "Principal
and Interest Account") on behalf of the Trustee at a depository institution
meeting the requirements set forth in the Pooling and Servicing Agreement. The
Pooling and Servicing Agreement requires the Master Servicer to deposit all
collections (other than amounts escrowed for taxes and insurance) related to the
Mortgage Loans to the Principal and Interest Account on a daily basis (but no
later than the first business day after receipt). All funds in the Principal and
Interest Account can only be invested in Eligible Investments. Investment
earnings on funds held in the Principal and Interest Account are for the account
of the Master Servicer, and the Master Servicer will be responsible for any
losses.
The Master Servicer is required pursuant to the Pooling and Servicing
Agreement on the thirteenth day or, if such day is not a business day, on the
next following business day (the "Remittance Date") of each month to remit to
the Trustee the following amounts with respect to the Mortgage Loans in each
Mortgage Loan Group: (i) an amount equal to the sum, without duplication, of (x)
the aggregate portions of the interest payments (whether or not collected)
becoming due on the Mortgage Loans during the immediately preceding Remittance
Period, and (y) any Compensating Interest calculated at the Coupon Rate on the
related Mortgage Loan, less the Servicing Fee with respect to the Mortgage Loans
serviced by the Master Servicer due with respect to such Mortgage Loans with
respect to the immediately preceding Remittance Period (the amount described in
this clause (i) for the Mortgage Loans in Group I being the "Group I Interest
Remittance Amount" and the amount in this clause (i) for the Mortgage Loans in
Group II being the "Group II Interest Remittance Amount"), (ii) an amount equal
to the sum, without duplication, of (x) the aggregate portions of the scheduled
principal payments, but only to the extent collected, on the Mortgage Loans
during the immediately preceding Remittance Period, (y) any Prepayments,
Insurance Proceeds and Net Liquidation Proceeds (but only to the extent that
such Net Liquidation Proceeds do not exceed the principal balance of the related
Mortgage Loan) and Released Mortgaged Property Proceeds, in each case only to
the extent collected on the Mortgage Loans during the preceding Remittance
Period and (z) all Loan Purchase Prices and Substitution Amounts with respect to
the related Mortgage Loans at such Remittance Date paid or received by the
Master Servicer for deposit to the Principal and Interest Account (the amount
described in this clause (ii) for the Mortgage Loans in Group I being the "Group
I Principal Remittance Amount", and the amount described in this clause (ii) for
the Mortgage Loans in Group II being the "Group II Principal Remittance Amount".
For any Remittance Date, the sum of the Group I Interest Remittance Amount and
the Group I Principal Remittance Amount is the "Group I Monthly Remittance" for
such Remittance Date and the sum of the Group II Interest Remittance Amount and
the Group II Principal Remittance Amount is the "Group II Monthly Remittance"
for such Remittance Date. The sum of the Group I Interest Remittance Amount and
the Group II Interest Remittance Amount is the "Interest Remittance Amount". The
sum of the Group I Principal Remittance Amount and the Group II Principal
Remittance Amount is equal to the "Principal Remittance Amount". For any
Remittance Date, the sum of the Interest Remittance Amount and the Principal
Remittance Amount is the "Monthly Remittance" for such Remittance Date.
A "Remittance Period" is the period commencing at the opening of
business on the second day of each month and ending at the close of business on
the first day of the following month.
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DELINQUENCY ADVANCES. The Pooling and Servicing Agreement requires that
if, on any Remittance Date, the amount then on deposit in the Principal and
Interest Account from Mortgage Loan collections and relating to interest is less
than the Interest Remittance Amount applicable to such Remittance Period, then
the Master Servicer is required to deposit into the Principal and Interest
Account a sufficient amount of its own funds ("Delinquency Advances") to make
such amount equal to such Interest Remittance Amount. The Master Servicer is not
required to make a Delinquency Advance if it believes that such Delinquency
Advance will not be recoverable from the related Mortgage Loan. The Trustee, as
successor Master Servicer, will not be required to make a Delinquency Advance if
it believes that such Delinquency Advance will not be recoverable from the
related Mortgage Loan.
THE CERTIFICATE ACCOUNT. The Pooling and Servicing Agreement provides
that the Trustee shall create and maintain one or more accounts for the purpose
of funding distributions to the Owners (collectively, the "Certificate
Account"). The Pooling and Servicing Agreement provides that the Trustee shall
deposit to the Certificate Account monthly, the Monthly Remittance received from
the Master Servicer on the related Remittance Date.
THE POLICY PAYMENTS ACCOUNT. The Pooling and Servicing Agreement
requires that the Trustee shall establish a separate special purpose trust
account for the benefit of Owners of the Class A Certificates and the
Certificate Insurer (the "Policy Payments Account"). On the second business day
prior to each Payment Date, in preparation of making distributions on such
Payment Date, if the Trustee determines with respect to either Mortgage Loan
Group that the Total Available Funds to be on deposit in the Certificate Account
with respect to such Mortgage Loan Group will be insufficient to pay the full
amount of the related Insured Distribution Amount and the fees of the Trustee
for such Payment Date, the Trustee will then be required to make a draw on the
Certificate Insurance Policy for the deficiency (the amount of any such
deficiency being the amount of the "Insured Payment" required to be made) and to
deposit the amount received with respect to such draw into the Policy Payments
Account. The Trustee will then distribute such amount only for purposes of
payment to Owners of Class A Certificates of the Insured Payments for which a
claim was made.
THE SUPPLEMENTAL INTEREST ACCOUNT. The Pooling and Servicing Agreement
also establishes the "Group II Supplemental Interest Account" (the "Supplemental
Interest Account") which is held in trust by the Trustee, but does not
constitute a part of the Trust. The Supplemental Interest Account will hold
certain amounts and other property relating to the funding of Supplemental
Interest Amounts, if any, to the Owners of the Class A-6 Group II Certificates.
"Group II Supplemental Interest Amounts" are payments due on any Payment Date
which result from any shortfall between Class A-6 Group II Certificate interest
calculated at the Class A-6 Formula Pass-Through Rate, and such interest
calculated at the Class A-6 Available Funds Pass-Through Rate.
DISTRIBUTIONS ON THE CLASS A CERTIFICATES. On each Payment Date, the
Trustee shall be required to make the following disbursements and transfers from
the Certificate Account in the following order of priority, and each such
transfer and disbursement shall be treated as having occurred only after all
preceding transfers and disbursements have occurred:
(i) first, the Trustee shall pay first, to itself the
Trustee's fees then due;
(ii) second, the Trustee shall pay to the Certificate Insurer
the premium amount then due and any other amounts then due the
Certificate Insurer under the Insurance Agreement;
(iii) third, the Trustee shall pay, pari passu, to the Owners
of each of the Class A Certificates, the related Class A Distribution
Amount for such Class and such Payment Date; and
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(iv) fourth, the Trustee shall distribute any remaining amount
in the Certificate Account to the Owners of the related Class B
Certificates and as otherwise required by the Pooling and Servicing
Agreement.
Principal distributions with respect to the Class A Group I
Certificates will generally be distributed in a sequential-pay fashion, subject
to the "lockout" provisions applicable to the Class A-5 Group I Certificates.
The Owners of the Class A-5 Group I Certificates are entitled to
receive payments of the Class A-5 Lockout Distribution Amount specified herein;
provided, that if on any Payment Date the Class A-4 Certificate Principal
Balance is zero, the Owners of the Class A-5 Group I Certificates will be
entitled to receive the entire Class A Principal Distribution Amount for Group I
for such Payment Date.
The "Class A-5 Lockout Distribution Amount" for any Payment Date will
be the product of (i) the applicable Class A-5 Lockout Percentage for such
Payment Date and (ii) the Class A-5 Lockout Pro Rata Distribution Amount for
such Payment Date.
The "Class A-5 Lockout Percentage" for each Payment Date shall be as
follows:
PAYMENT DATES LOCKOUT PERCENTAGE
------------- ------------------
The "Class A-5 Lockout Pro Rata Distribution Amount" for any Payment
Date will be an amount equal to the product of (x) a fraction, the numerator of
which is the Certificate Principal Balance of the Class A-5 Group I Certificates
immediately prior to such Payment Date and the denominator of which is the
aggregate Certificate Principal Balance of all Classes of the Group I
Certificates immediately prior to such Payment Date and (y) the Class A
Principal Distribution Amount for Group I for such Payment Date.
After payment of the Class A-5 Lockout Distribution Amount, the
remaining Class A Principal Distribution Amount for Group I shall be paid to the
Owners of the other Classes of Class A Group I Certificates sequentially, such
that the Class A-4 Group I Certificates are entitled to receive no principal
distributions until the Class A-3 Certificate Principal Balance has been reduced
to zero, the Class A-3 Group I Certificates are entitled to receive no principal
distributions until the Class A-2 Certificate Principal Balance has been reduced
to zero, and the Class A-2 Group I Certificates are entitled to receive no
principal distributions until the Class A-1 Certificate Principal Balance has
been reduced to zero.
The Pooling and Servicing Agreement provides that to the extent the
Certificate Insurer makes Insured Payments, the Certificate Insurer will be
subrogated to the rights of the Owners of the related Class A Certificates with
respect to such Insured Payments and shall be deemed, to the extent of the
payments so made, to be a registered Owner of Class A Certificates and shall be
entitled to reimbursement for such Insured Payments, as provided in the Pooling
and Servicing Agreement.
CALCULATION OF LIBOR
On the second business day preceding each Payment Date or, in the case
of the first Payment Date, on the second business day preceding the Closing Date
(each such date, an "Interest Determination Date"),
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the Trustee will determine the London interbank offered rate for one-month U.S.
dollar deposits ("LIBOR") for the next Accrual Period for the Class A-1 Group I
Certificates and the Class A-6 Group II Certificates on the basis of the offered
rates of the Reference Banks for one-month U.S. dollar deposits, as such rates
appear on the Reuters Screen LIBO Page, as of 11:00 a.m. (London time) on such
Interest Determination Date. As used in this section, "business day" means a day
on which banks are open for dealing in foreign currency and exchange in London
and New York City; "Reuters Screen LIBO Page" means the display designated as
page "LIBO" on the Reuter Monitor Money Rates Service (or such other page as may
replace the LIBO page on that service for the purpose of displaying London
interbank offered rates of major banks); and "Reference Banks" means leading
banks selected by the Trustee and engaged in transactions in Eurodollar deposits
in the international Eurocurrency market (i) with an established place of
business in London, (ii) whose quotations appear on the Reuters Screen LIBO Page
on the Interest Determination Date in question, (iii) which have been designated
as such by the Trustee and (iv) not controlling, controlled by, or under common
control with, the Company or the Trustee.
On each Interest Determination Date, LIBOR for the related Accrual
Period for the Class A-1 Group I Certificates and the Class A-6 Group II
Certificates will be established by the Trustee as follows:
(a) If on such Interest Determination Date two or more Reference Banks
provide such offered quotations, LIBOR for the related Accrual Period for the
Class A-1 Group I and the Class A-6 Group II Certificates shall be the
arithmetic mean of such offered quotations (rounded upwards if necessary to the
nearest whole multiple of 1/16%).
(b) If on such Interest Determination Date fewer than two Reference
Banks provide such offered quotations, LIBOR for the related Accrual Period for
the Class A-1 Group I and the Class A-6 Group II Certificates shall be the
higher of (x) LIBOR as determined on the previous Interest Determination Date
and (y) the Reserve Interest Rate. The "Reserve Interest Rate" shall be the rate
per annum that the Trustee determines to be either (i) the arithmetic mean
(rounded upwards if necessary to the nearest whole multiple of 1/16%) of the
one-month U.S. dollar lending rates which New York City banks selected by the
Trustee are quoting on the relevant Interest Determination Date to the principal
London offices of leading banks in the London interbank market or, in the event
that the Trustee can determine no such arithmetic mean, (ii) the lowest
one-month U.S. dollar lending rate which New York City banks selected by the
Trustee are quoting on such Interest Determination Date to leading European
banks.
The establishment of LIBOR on each Interest Determination Date by the
Trustee and the Trustee's calculation of the rate of interest applicable to the
Class A-1 Group I and the Class A-6 Group II Certificates for the related
Accrual Period shall (in the absence of manifest error) be final and binding.
Each such rate of interest may be obtained by telephoning the Trustee at
__________.
SUBORDINATION OF CLASS B CERTIFICATES
The Class B Certificates are subordinated to the Class A Certificates.
Such subordination is intended to enhance the likelihood that the Owners of the
Class A Certificates will receive full and timely receipt of all amounts due to
them.
The Pooling and Servicing Agreement requires that the excess of the
aggregate principal balance of the Mortgage Loans in Group I over the Class A
Certificate Principal Balance for all Classes of the Class A Group I
Certificates be maintained at a certain amount (which amount may vary over time)
over the life of the transaction, which amount is specified by the Certificate
Insurer. The actual amount of this excess is the "Subordinated Amount" for Group
I, and the specified target amount of the excess at a point in time is the
"Specified Subordinated Amount" for Group I.
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Similarly, the Pooling and Servicing Agreement requires that the excess
of the Group II Pool Principal Balance over the Class A Certificate Principal
Balance for the Class A-6 Group II Certificates be maintained at a certain
amount (which amount may vary over time) over the life of the transaction, which
amount is specified by the Certificate Insurer. The actual amount of this excess
is the "Subordinated Amount" for Group II, and the specified target amount of
the excess at a point in time is the "Specified Subordinated Amount" for Group
II.
The Certificate Insurer may permit the reduction of the Specified
Subordinated Amount without the consent of, or the giving of notice to, the
Owners of the related Class A Certificates; provided, that the Certificate
Insurer is not then in default; and provided, further, that such reduction would
not change materially the weighted average life of the related Class A
Certificates or the current rating thereof.
The Pooling and Servicing Agreement generally provides that the Owners
of the Class B Certificates will only receive distributions of principal to the
extent that the actual related Subordinated Amount exceeds the then related
Specified Subordinated Amount; i.e., to the extent that there is a level of
subordination greater than that required by the Certificate Insurer, as will be
the case when the Specified Subordinated Amount decreases or "steps down" in
accordance with its terms. Consequently, unless there exists on any particular
Payment Date such related excess subordination, the Owners of the related Class
A Certificates will be entitled to receive 100% of the principal to be
distributed on such Payment Date with respect to the related Mortgage Loan
Group.
Subject to the prior rights of the Owners of the Class A Certificates
to receive Class B Interest as discussed below, the Class B Certificates are
also entitled to receive all excess interest available on any Payment Date for
the related Mortgage Loan Group, i.e., the interest remitted by the Master
Servicer to the Trustee relating to the prior Remittance Period (which interest
remittance is itself net of the aggregate monthly Servicing Fees) less the
interest due and payable to the Owners of the related Class A Certificates,
together with the fees and premium due and payable to the Trustee and the
Certificate Insurer (such interest to which the related Class B Certificates are
entitled, the "Class B Interest" for the related Mortgage Loan Group).
On each Payment Date the Class B Interest will be used, to the extent
available and prior to any distribution thereof to the Class B Certificates, to
fund any shortfalls in amounts due to the Owners of the Class A Certificates on
such Payment Date. In addition, to the extent that the related Specified
Subordinated Amount increases or "steps up" due to the effect of the triggers
set forth in the definition thereof, or if, due to Realized Losses, the related
Subordinated Amount has been reduced below the related Specified Subordinated
Amount, the Pooling and Servicing Agreement requires that Class B Interest be
used to make payments of principal to the Owners of the Class A Group I
Certificates and the Class A-6 Group II Certificates for the purposes of
accelerating the amortization thereof relative to the amortization of the
Mortgage Loans in the related Mortgage Loan Group. Such accelerated payments of
principal will be made to the extent necessary to increase the related
Subordinated Amount to its then-applicable Specified Subordinated Amount. To the
extent that, on any Payment Date, the actual related Subordinated Amount is less
than the related Specified Subordinated Amount, a "Subordination Deficiency"
will exist. The Insurance Agreement defines a "Group I Subordination Deficit"
with respect to a Payment Date to be the amount, if any, by which (x) the
aggregate Certificate Principal Balance of the Class A Group I Certificates as
of such Payment Date, and following the making of all distributions to be made
on such Payment Date (except for any payment to be made as to principal from
proceeds of the Certificate Insurance Policy), exceeds (y) an amount equal to
the aggregate principal balances of the Mortgage Loans in Group I as of the
close of business on the last day of the preceding Remittance Period and a
"Group II Subordination Deficit" with respect to a Payment Date is the amount,
if any, by which (x) the aggregate Certificate Principal Balance of the Class
A-6 Group II Certificates as of such Payment Date, and following the making of
all distributions to be made on such Payment Date (except for any payment to be
made as to principal from proceeds of the Certificate
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Insurance Policy) exceeds (y) the aggregate principal balances of the Mortgage
Loans in Group II as of the close of business on the last day of the preceding
Remittance Period.
"Subordination Increase Amount" means, as of any Payment Date and with
respect to the related Mortgage Loan Group, the lesser of (i) the Subordination
Deficiency applicable to such Mortgage Loan Group as of such Payment Date and
(ii) the sum of (x) the actual amount available to pay the Class B Interest on
the related Mortgage Loan Group and (y) the actual amount allocable to the Class
A Certificates for such Mortgage Loan Group from the Class B Interest with
respect to the other Mortgage Loan Group, on such Payment Date.
"Subordination Reduction Amount" means, with respect to any Payment
Date and with respect to the related Mortgage Loan Group, an amount equal to the
lesser of (x) the excess of the actual Subordinated Amount applicable to such
Mortgage Loan Group over the Specified Subordinated Amount for such Payment Date
and (y) the amount described in clause (b)(i)(x) of the definition of Class A
Principal Distribution Amount for such Payment Date.
OVERCOLLATERALIZATION AND THE CERTIFICATE INSURANCE POLICY. The Pooling
and Servicing Agreement requires the Trustee to make a claim for an Insured
Payment under the Certificate Insurance Policy not later than 12:00 p.m., New
York City time on the second business day prior to any Payment Date as to which
the Trustee has determined that a Subordination Deficit will occur for the
purpose of applying the proceeds of such Insured Payment to the extent of such
Subordination Deficit as a payment of principal to the Owners of the Class A
Group I Certificates or the Class A-6 Group II Certificates, as the case may be,
on such Payment Date. Investors in the Class A Group I Certificates of each
Class and the Class A-6 Group II Certificates should realize that, under extreme
loss or delinquency scenarios applicable to the related Mortgage Loan Pool, they
may temporarily receive no distributions of principal.
CROSSCOLLATERALIZATION PROVISIONS
The Pooling and Servicing Agreement provides that the Class B Interest
generated by a Mortgage Loan Group may be used to fund certain shortfalls with
respect to the other Mortgage Loan Group, provided that such Class B Interest
must first be applied to fund certain required payments with respect to the
related Mortgage Loan Group. Specifically, the Class B Interest generated by one
Mortgage Loan Group is to be applied in the following order of priority: (i)
first, to fund a Subordination Increase Amount payment in response to a
Subordination Deficit in the related Mortgage Loan Group; (ii) second, to fund a
Subordination Increase Amount payment in response to a Subordination Deficit or
interest shortfall in the other Mortgage Loan Group; (iii) third, to fund a
Subordination Increase Amount payment in response to a Subordination Deficiency
in the related Mortgage Loan Group; and (iv) fourth, to fund a Subordination
Increase Amount payment in response to a Subordination Deficiency with respect
to the other Mortgage Loan Group.
CREDIT ENHANCEMENT DOES NOT APPLY TO PREPAYMENT RISK
In general, the protection afforded by the subordination provisions and
by the Certificate Insurance Policy is protection for credit risk and not for
prepayment risk. The subordination provisions may not be adjusted, nor may a
claim be made under the Certificate Insurance Policy to guarantee or insure that
any particular rate of prepayment is experienced by either of the two Mortgage
Loan Groups.
CLASS A CERTIFICATE DISTRIBUTIONS AND INSURED PAYMENTS
No later than the second business day prior to each Payment Date the
Trustee will be required to determine the amounts to be on deposit in the
Certificate Account on such Payment Date, following (i)
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payment of the applicable Trustee's fee and the premiums due the Certificate
Insurer and (ii) the application of the cross-collateralization provisions
described above with respect to each of the two Mortgage Loan Groups, such
amounts being the "Group I Total Available Funds" and the "Group II Total
Available Funds", respectively, or, collectively, the "Total Available Funds".
If the aggregate Class A Insured Distribution Amount related to the Class A
Group I Certificates for any Payment Date exceeds the Group I Total Available
Funds for such Payment Date and the amounts available by reason of the
application of the cross-collateralization provisions described above, the
Trustee will be required to draw the amount of such insufficiency from the
Certificate Insurer under the Certificate Insurance Policy. If on any Payment
Date the Class A Insured Distribution Amount related to the Class A-6 Group II
Certificates exceeds the Group II Total Available Funds for such Payment Date
and the amounts available by reason of the application of the
cross-collateralization provisions described above, the Trustee will be required
to draw the amount of such insufficiency from the Certificate Insurer under the
Certificate Insurance Policy. The Trustee will be required to deposit to the
Policy Payments Account the amount of any Insured Payment made by the
Certificate Insurer. The Pooling and Servicing Agreement provides that amounts
which cannot be distributed to the Owners of the Certificates as a result of
final, non-appealable proceedings under the United States Bankruptcy Code or
similar insolvency laws will not be considered in determining the amount of
Total Available Funds with respect to any Payment Date.
BOOK-ENTRY REGISTRATION OF THE CLASS A CERTIFICATES
The Class A Certificates will be book-entry certificates (the
"Book-Entry Certificates"). The Beneficial Certificate Owners may elect to hold
their Class A Certificates through DTC in the United States, or CEDEL or
Euroclear (in Europe) if they are participants of such systems ("Participants"),
or indirectly through organizations which are Participants in such systems. The
Book-Entry Certificates will be issued in one or more certificates per class of
Class A Certificates which in the aggregate equal the principal balance of such
Class A Certificates and will initially be registered in the name of Cede, the
nominee of DTC. CEDEL and Euroclear will hold omnibus positions on behalf of
their Participants through customers' securities accounts in CEDEL's and
Euroclear's names on the books of their respective depositories which in turn
will hold such positions in customers' securities accounts in the depositories'
names on the books of DTC. Citibank will act as depository for CEDEL and Chase
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 Certificates in minimum
denominations representing principal amounts of $1,000. Except as described
below, no Beneficial Certificate Owner will be entitled to receive a physical
certificate representing such Certificate (a "Definitive Certificate"). Unless
and until Definitive Certificates are issued, it is anticipated that the only
"Owner" of such Class A Certificates will be Cede, as nominee of DTC. Beneficial
Certificate Owners will not be Owners as that term is used in the Pooling and
Servicing Agreement. Beneficial Certificate Owners are only permitted to
exercise their rights indirectly through Participants and DTC.
The Beneficial 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 (each, a "Financial Intermediary")
that maintains the Beneficial Certificate Owner's account for such purpose. In
turn, the Financial Intermediary's Ownership of such Book-Entry Certificate will
be recorded on the records of DTC (or of a participating firm that acts as agent
for the Financial Intermediary, whose interest will in turn be recorded on the
records of DTC, or, if the Beneficial Certificate Owner's Financial Intermediary
is not a DTC Participant, then on the records of CEDEL or Euroclear, as
appropriate).
Beneficial Certificate Owners will receive all distributions of
principal of, and interest on, the Class A Certificates from the Trustee through
DTC and DTC Participants. While such Class A Certificates are outstanding
(except under the circumstances described below), under the rules, regulations
and procedures
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creating and affecting DTC and its operations (the "Rules"), DTC is required to
make book-entry transfers among Participants on whose behalf it acts with
respect to such Class A Certificates and is required to receive and transmit
distributions of principal of, and interest on, such Class A Certificates.
Participants and indirect participants with whom Beneficial Certificate Owners
have accounts with respect to Class A Certificates are similarly required to
make book-entry transfers and receive and transmit such distributions on behalf
of their respective Beneficial Certificate Owners. Accordingly, although
Beneficial Certificate Owners will not possess certificates, the Rules provide a
mechanism by which Beneficial Certificate Owners will receive distributions and
will be able to transfer their interest.
Beneficial Certificate Owners will not receive or be entitled to
receive certificates representing their respective interests in the Class A
Certificates, except under the limited circumstances described below. Unless and
until Definitive Certificates are issued, Beneficial Certificate Owners who are
not Participants may transfer ownership of Class A Certificates only through
Participants and indirect participants by instructing such Participants and
indirect participants to transfer such Class A Certificates, by book-entry
transfer, through DTC for the account of the purchasers of such Class A
Certificates, which account is maintained with their respective Participants.
Under the Rules and in accordance with DTC's normal procedures, transfers of
ownership of such Class A Certificates will be executed through DTC and the
accounts of the respective Participants at DTC will be debited and credited.
Similarly, the Participants and indirect participants will make debits or
credits, as the case may be, on their records on behalf of the selling and
purchasing Beneficial Certificate Owners.
Because of time zone differences, credits of securities received in
CEDEL or Euroclear as a result of a transaction with a Participant will be made
during subsequent securities settlement processing and dated the business day
following the DTC settlement date. Such credits or any transactions in such
securities settled during such processing will be reported to the relevant
Euroclear or CEDEL Participants on such business day. Cash received in CEDEL or
Euroclear as a result of sales of securities by or through a CEDEL Participant
(as defined below) or Euroclear Participant (as defined below) to a DTC
Participant will be received with value on the DTC settlement date but will be
available in the relevant CEDEL or Euroclear cash account only as of the
business day following settlements in DTC. For information with respect to tax
documentation procedures relating to the Certificates, see "Federal Income Tax
Consequences -- Foreign Investors" and " -- Backup Withholding" in the
Prospectus and "Global Clearance, Settlement and Tax Documentation Procedures
- --Certain U.S. Federal Income Tax Documentation Requirements" in Annex 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 funds settlement applicable to
DTC. CEDEL Participants and Euroclear Participants may not deliver instructions
directly to the European Depositories.
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DTC, which is a New York-chartered limited purpose trust company,
performs services for its Participants ("DTC Participants"), some of which
(and/or their representatives) own DTC. In accordance with its normal
procedures, DTC is expected to record the positions held by each DTC Participant
in the Book-Entry Certificates, whether held for its own account or as a nominee
for another person. In general, beneficial ownership of Book-Entry Certificates
will be subject to the rules, regulations and procedures governing DTC and DTC
Participants as in effect from time to time.
CEDEL is incorporated under the laws of Luxembourg as a professional
depository. CEDEL holds securities for its participant organizations ("CEDEL
Participants") and facilitates the clearance and settlement of securities
transactions between CEDEL Participants through electronic book-entry changes in
accounts of CEDEL Participants, thereby eliminating the need for physical
movement of certificates. Transactions may be settled in CEDEL in any of 28
currencies, including United States dollars. CEDEL provides to its CEDEL
Participants, among other things, services for safekeeping, administration,
clearance and settlement of internationally traded securities and securities
lending and borrowing. CEDEL interfaces with domestic markets in several
countries. As a professional depository, CEDEL is subject to regulation by the
Luxembourg Monetary Institute. CEDEL Participants are recognized financial
institutions around the world, including underwriters, securities brokers and
dealers, banks, trust companies, clearing corporations and certain other
organizations. Indirect access to CEDEL is also available to others, such as
banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a CEDEL Participant, either directly or indirectly.
Euroclear was created in 1968 to hold securities for participants of
Euroclear ("Euroclear Participants") and to clear and settle transactions
between Euroclear Participants through simultaneous electronic book-entry
delivery against payment, thereby eliminating the need for physical movement of
certificates and any risk from lack of simultaneous transfers of securities and
cash. Transactions may now be settled in any of 31 currencies, including United
States dollars. Euroclear includes various other services, including securities
lending and borrowing and interfaces with domestic markets in several countries
generally similar to the arrangements for cross-market transfers with DTC
described above. Euroclear is operated by the Brussels, Belgium office of Morgan
Guaranty Trust Company of New York (the "Euroclear Operator"), under contract
with Euroclear Clearance Systems S.C., a Belgian cooperative corporation (the
"Cooperative"). All operations are conducted by the Euroclear Operator, and all
Euroclear Securities clearance accounts and Euroclear cash accounts are accounts
with the Euroclear operator, not the Cooperative. The Cooperative establishes
policy for Euroclear on behalf of Euroclear Participants. Euroclear Participants
include banks (including central banks), securities brokers and dealers and
other professional financial intermediaries. Indirect access to Euroclear is
also available to other firms that clear through or maintain a custodial
relationship with a Euroclear Participant, either directly or indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. As such, it is
regulated and examined by the Board of Governors of the Federal Reserve System
and the New York State Banking Department, as well as the Belgian Banking
Commission.
Securities clearance accounts and cash accounts with the Euroclear
operator are governed by the Terms and Conditions Governing Use of Euroclear and
the related Operating Procedures of the Euroclear System and applicable Belgian
law (collectively, the "Terms and Conditions"). The Terms and Conditions govern
transfers of securities and cash within Euroclear, withdrawals of securities and
cash from Euroclear, and receipts of payments with respect to securities in
Euroclear. All securities in Euroclear are held on a fungible basis without
attribution of specific certificates to specific securities clearance accounts.
The Euroclear Operator acts under the Terms and Conditions only on behalf of
Euroclear Participants, and has no record of or relationship with persons
holding through Euroclear Participants.
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Distributions on the Book-Entry Certificates will be made on each
Payment Date by the Trustee to DTC. DTC will be responsible for crediting the
amount of such payments to the accounts of the applicable DTC Participants in
accordance with DTC's normal procedures. Each DTC Participant will be
responsible for disbursing such payment to the Beneficial Certificate 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 Certificate Owners of the
Book-Entry Certificates that it represents.
Under a book-entry format, Beneficial Certificate Owners of the
Book-Entry Certificates may experience some delay in their receipt of payments,
since such payments will be forwarded by the Trustee to Cede. Distributions with
respect to Class A Certificates held through CEDEL or Euroclear will be credited
to the cash accounts of CEDEL Participants or Euroclear Participants in
accordance with the relevant system's rules and procedures, to the extent
received by the Relevant Depository. Such distributions will be subject to tax
reporting in accordance with relevant United States tax laws and regulations.
Because DTC can only act on behalf of Financial Intermediaries, the ability of a
Beneficial Certificate Owner to pledge Book-Entry Certificates, to persons or
entities that do not participate in the Depository system, or otherwise take
actions in respect of such Book-Entry Certificates, may be limited due to the
lack of physical certificates for such Book-Entry Certificates. In addition,
issuance of the Book-Entry Certificates in book-entry form may reduce the
liquidity of such Certificates in the secondary market since certain potential
investors may be unwilling to purchase Certificates for which they cannot obtain
physical certificates.
Monthly and annual reports on the Trust provided by the Master Servicer
to Cede, as nominee of DTC, may be made available to Beneficial Certificate
Owners upon request, in accordance with the rules, regulations and procedures
creating and affecting the Depository, and to the Financial Intermediaries to
whose DTC accounts the Book-Entry Certificates of such Beneficial Certificate
Owners are credited.
DTC has advised the Trustee that, unless and until Definitive
Certificates are issued, DTC will take any action permitted to be taken by the
holders of the Book-Entry Certificates under the Pooling and Servicing Agreement
only at the direction of one or more Financial Intermediaries to whose DTC
accounts the Book-Entry Certificates are credited, to the extent that such
actions are taken on behalf of Financial Intermediaries whose holdings include
such Book-Entry Certificates. CEDEL or the Euroclear Operator, as the case may
be, will take any action permitted to be taken by an Owner under the Pooling and
Servicing Agreement on behalf of a CEDEL Participant or Euroclear Participant
only in accordance with its relevant rules and procedures and subject to the
ability of the Relevant 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 Class A Certificates which conflict with actions taken with
respect to other Class A Certificates.
Definitive Certificates will be issued to Beneficial Certificate Owners
of the Book-Entry Certificates, or their nominees, rather than to DTC, only if
(a) DTC or the Depositor advises the Trustee in writing that DTC is no longer
willing, qualified or able to discharge properly its responsibilities as a
nominee and depository with respect to the Book-Entry Certificates and the
Depositor or the Trustee is unable to locate a qualified successor, (b) the
Depositor, at its sole option, elects to terminate a book-entry system through
DTC or (c) DTC, at the direction of the Beneficial Certificate Owners
representing a majority of the outstanding Percentage Interests of the Class A
Certificates, advises the Trustee in writing that the continuation of a
book-entry system through DTC (or a successor thereto) is no longer in the best
interests of Beneficial Certificate Owners.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the Trustee will be required to notify all Beneficial
Certificate Owners of the occurrence of such event and the availability through
DTC of Definitive Certificates. Upon surrender by DTC of the global certificate
or
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certificates representing the Book-Entry Certificates and instructions for
re-registration, the Trustee will issue Definitive Certificates, and thereafter
the Trustee will recognize the holders of such Definitive Certificates as Owners
under the Pooling and Servicing Agreement.
Although DTC, CEDEL and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of Certificates among Participants
of DTC, CEDEL and Euroclear, they are under no obligation to perform or continue
to perform such procedures and such procedures may be discontinued at any time.
CERTAIN ACTIVITIES
The Trust has not and will not: (i) issue securities (except for the
Certificates); (ii) borrow money; (iii) make loans; (iv) invest in securities
for the purpose of exercising control; (v) underwrite securities; (vi) except as
provided in the Pooling and Servicing Agreement, engage in the purchase and sale
(or turnover) of investments; (vii) offer securities (except the Certificates)
in exchange for property; or (viii) repurchase or otherwise reacquire its
securities. See "Reports to the Holders" for information regarding reports to
the Certificateholders.
GENERAL SERVICING PROCEDURES
Acting directly or through one or more sub-servicers, __________ (the
"Master Servicer") is required to service and administer the Mortgage Loans in
accordance with the Pooling and Servicing Agreement.
The Master Servicer in its own name or in the name of a sub-servicer is
authorized and empowered pursuant to the Pooling and Servicing Agreement (i) to
execute and deliver any and all instruments of satisfaction or cancellation or
of partial or full release or discharge and all other comparable instruments
with respect to the Mortgage Loans and with respect to the Properties, (ii) to
institute foreclosure proceedings or obtain a deed in lieu of foreclosure so as
to effect ownership of any Property in its own name on behalf of the Trustee,
and (iii) to hold title in the name of the Trust to any Property upon such
foreclosure or deed in lieu of foreclosure on behalf of the Trustee; provided,
however, that to the extent any instrument described in clause (i) would be
delivered by the Master Servicer outside of its ordinary procedures for mortgage
loans held for its own account, the Master Servicer is required, prior to
executing and delivering such instrument, to obtain the prior written consent of
the Certificate Insurer.
The Master Servicer, in its own name or in the name of a Sub-Servicer,
has the right to approve requests of Mortgagors for consent to (i) partial
releases of Mortgages and (ii) alterations, removal, demolition or division of
Properties subject to Mortgages. The Pooling and Servicing Agreement provides
that no such request shall be approved by the Master Servicer unless: (i) (x)
the provisions of the related Note and Mortgage have been complied with, (y) the
Combined Loan-to-Value Ratio (which may, for this purpose, be determined at the
time of any such action in a manner reasonably acceptable to the Certificate
Insurer) after any release does not exceed the Combined Loan-to-Value Ratio set
forth for such Mortgage Loan in the Schedule of Mortgage Loans, and (z) the lien
priority of the related Mortgage is not affected; or (ii) the Certificate
Insurer shall have approved the granting of such request.
On the tenth day of each month (or the immediately following business
day if the tenth day does not fall on a business day), the Master Servicer or
Sub-Servicer shall send to the Trustee a report detailing the payments on the
Mortgage Loans serviced by it in each of the two Mortgage Loan Groups during the
prior Remittance Period.
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COLLECTION OF CERTAIN MORTGAGE LOAN PAYMENTS
The Master Servicer is required generally to service the Mortgage Loan
Pool in a prudent manner consistent with its general servicing standards for
similar mortgage loans and to make reasonable efforts to collect all payments
called for under the terms and provisions of the Mortgage Loans, and shall, to
the extent such procedures shall be consistent with the provisions of the
Pooling and Servicing Agreement, follow collection procedures for all Mortgage
Loans at least as rigorous as those the Master Servicer would take in servicing
loans and in collecting payments thereunder for its own account.
Consistent with the foregoing, the Master Servicer, in its own name or
in the name of a Sub-Servicer, may (i) in its discretion waive or permit to be
waived any late payment charge or assumption fee or any other fee or charge
which the Master Servicer would be entitled to retain as servicing compensation,
(ii) extend the due date for payments due on a Note for a period (with respect
to each payment as to which the due date is extended) not greater than 125 days
after the initially scheduled due date for such payment, and (iii) amend any
Note to extend the maturity thereof, provided that no maturity shall be extended
beyond the maturity date of the Mortgage Loan with the latest maturity date and
that no more than 1.0% of the Original Pool Balance of the Mortgage Loans shall
have a maturity date which has been extended beyond the maturity date thereof at
the Cut-Off Date; provided that such action does not violate applicable REMIC
provisions. In the event the Master Servicer, in its own name or in the name of
a Sub-Servicer, consents to the deferment of the due dates for payments due on a
Note, the Master Servicer or Sub-Servicer is nonetheless required to make
payment of any required Delinquency Advance with respect to the payments so
extended to the same extent as if such installment were due, owing and
delinquent and had not been deferred.
Generally the Class A Certificate Owners would prefer that
"due-on-sale" clauses be waived in the event of a sale of the underlying
Mortgaged Property, that extensions and accommodations be made with delinquent
Mortgagors, and that liquidations of Mortgage Loans be deferred, since upon
prepayment due to sale or upon liquidation such Owners will receive a payment of
principal in connection with such prepayment or liquidation. If attractive
re-investment opportunities are available at the time, Class A Certificate
Owners may prefer that "due-on-sale" clauses not be waived and that no such
extensions, accommodations or deferments be made, thus hastening the return of
principal to such Owners.
Owners do not have the right under the Pooling and Servicing Agreement
to make decisions with respect to Mortgagor accounts. Such decisions are in the
nature of mortgage servicing and the Master Servicer generally has the right to
make such decisions without the requirement of consent of the Owners, the
Trustee or the Certificate Insurer. The Master Servicer will generally be
required under the Pooling and Servicing Agreement to enforce "due-on-sale"
clauses, and will make decisions with respect to liquidations in accordance with
the Pooling and Servicing Agreement.
Under certain limited circumstances the Pooling and Servicing Agreement
may require the Master Servicer to obtain the consent of the Certificate Insurer
before taking certain actions with respect to defaulted Mortgage Loans and in
connection with the waiver of "due-on-sale" clauses. Since the Certificate
Insurer's exposure increases, to the extent of interest accrued, the longer the
liquidation process, it is likely to be the case that the Certificate Insurer
will favor quick liquidations in those situations in which its consent is
required. Similarly, the Certificate Insurer would favor the enforcement of a
"due-on-sale" clause, since a prepayment in the event of a sale also reduces its
exposure by limiting the accrual of interest.
PRINCIPAL AND INTEREST ACCOUNT
The Master Servicer, in its own name or in the name of a Sub-Servicer,
is required to deposit to the Principal and Interest Account all collections on
the Mortgage Loans, certain proceeds received by the Master
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Servicer in connection with the termination of the Trust, Loan Purchase Prices
and Substitution Amounts received or paid by the Master Servicer, insurance and
condemnation proceeds received by the Master Servicer, other amounts related to
the Mortgage Loans received by the Master Servicer, including any income from
REO Properties (net of Servicing Advances made with respect to such REO
Properties), and Delinquency Advances together with any amounts which are
reimbursable from the Principal and Interest Account, but net of the Servicing
Fee with respect to each Mortgage Loan serviced by the Master Servicer and other
servicing compensation to the Master Servicer as permitted by the Pooling and
Servicing Agreement.
The Master Servicer or Sub-Servicer may make withdrawals from the
Principal and Interest Account only for the following purposes: (a) to effect
the timely remittance to the Trustee of the Monthly Remittance due on the
Remittance Date; (b) to withdraw investment earnings on amounts on deposit in
the Principal and Interest Account; (c) to withdraw amounts that have been
deposited to the Principal and Interest Account in error; (d) to pay certain
miscellaneous amounts over to the Depositor and (e) to clear and terminate the
Principal and Interest Account.
On each Remittance Date the Master Servicer and any Sub-Servicer is
required to remit the Monthly Remittance amount inclusive of all Delinquency
Advances and Compensating Interest to the Trustee by wire transfer, or otherwise
make funds available in immediately available funds.
SERVICING ADVANCES
The Pooling and Servicing Agreement obligates the Master Servicer to
pay all reasonable and customary "out-of-pocket" costs and expenses (including
reasonable legal fees) incurred in the performance of its servicing obligations
including, but not limited to, the cost of (i) preservation expenses, (ii) any
enforcement or judicial proceedings, including foreclosures, (iii) the
management and liquidation of REO Property (including, without limitation,
realtors' commissions) and (iv) advances made for taxes, insurance and other
charges against a Property. Each such expenditure will constitute a "Servicing
Advance". The Master Servicer may recover Servicing Advances from the Mortgagors
to the extent permitted by the Mortgage Loans or, if not theretofore recovered
from the Mortgagor on whose behalf such Servicing Advance was made, from
Liquidation Proceeds realized upon the liquidation of the related Mortgage Loan.
In no case may the Master Servicer recover Servicing Advances from the principal
and interest payments on any Mortgage Loan or from any amounts relating to any
other Mortgage Loan. The Master Servicer is not required to make a Servicing
Advance if it believes that such Servicing Advance will not be recoverable from
the related Mortgage Loan.
COMPENSATING INTEREST
A full month's interest on each Mortgage Loan, calculated at a rate
equal to such Mortgage Loan's Coupon Rate less the Servicing Fee is due to the
Trustee on the outstanding principal balance of each Mortgage Loan as of the
beginning of each Remittance Period. If a Prepayment of a Mortgage Loan occurs
during any calendar month, any difference between the interest collected from
the Mortgagor during such calendar month and the full month's interest at such
rate ("Compensating Interest") that is due is required to be deposited by the
Master Servicer to the Principal and Interest Account (without any right of
reimbursement therefor) and shall be included in the Monthly Remittance and made
available to the Trustee on the next succeeding Remittance Date.
MAINTENANCE OF INSURANCE
The Master Servicer is required to cause to be maintained with respect
to each Mortgage Loan that it services and related Property a hazard insurance
policy with a carrier licensed in the state in which such
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Property is located that provides for fire and extended coverage, and which
provides for a recovery by the Trust of insurance proceeds relating to such
Mortgage Loan in an amount not less than the least of (i) the outstanding
principal balance of the Mortgage Loan (together in the case of a Junior
Mortgage, with the outstanding principal balance of the senior lien), or (ii)
the minimum amount required to compensate for loss or damage on a replacement
cost basis, or (iii) the full insurable value of the premises.
If a Mortgage Loan relates to a Mortgaged Property in an area
identified at the time of origination thereof in the Federal Register by the
Federal Emergency Management Agency as having special flood hazards, the Master
Servicer, in its own name or in the name of a Sub-Servicer, will be required to
maintain with respect thereto a flood insurance policy in a form meeting the
requirements of the then-current guidelines of the Federal Insurance
Administration with a generally acceptable carrier in an amount representing
coverage, and which provides for recovery by the Master Servicer or a
Sub-Servicer on behalf of the Trust of insurance proceeds relating to such
Mortgage Loan, of not less than the least of (i) the outstanding principal
balance of the Mortgage Loan, or (ii) the minimum amount required to compensate
for damage or loss on a replacement cost basis, or (iii) the maximum amount of
insurance that is available under the Flood Disaster Protection Act of 1973, as
amended.
In the event that the Master Servicer or a Sub-Servicer obtains and
maintains a blanket policy insuring against fire and other hazards with extended
coverage and against flood hazards on all of the Mortgage Loans that it
services, then, to the extent such policy names the Master Servicer or a
Sub-Servicer as loss payee and provides coverage in an amount equal to the
aggregate unpaid principal balance on the Mortgage Loans without co-insurance,
and otherwise complies with the requirements of the Pooling and Servicing
Agreement, the Master Servicer shall be deemed conclusively to have satisfied
its obligations with respect to fire and hazard insurance coverage under the
Pooling and Servicing Agreement. Such blanket policy may contain a deductible
clause, in which case the Master Servicer will be required, in the event that
there shall not have been maintained on the related Mortgaged Property a policy
complying with the Pooling and Servicing Agreement, and there shall have been a
loss that would have been covered by such policy, to deposit in the Principal
and Interest Account from the Master Servicer's own funds the difference, if
any, between the amount that would have been payable under a policy complying
with the Pooling and Servicing Agreement and the amount paid under such blanket
policy.
Pursuant to the Pooling and Servicing Agreement, the Master Servicer
will be required to indemnify the Trust out of its own funds for any loss to the
Trust resulting from the Master Servicer's failure to maintain any required
insurance.
DUE-ON-SALE CLAUSES
When a Property has been or is about to be conveyed by the Mortgagor,
the Master Servicer or a Sub-Servicer, to the extent it has knowledge of such
conveyance or prospective conveyance, is required to exercise its rights to
accelerate the maturity of the related Mortgage Loan under any "due on sale"
clause contained in the related Mortgage or Note; provided, however, that the
Master Servicer will not be required to exercise any such right if the
"due-on-sale" clause, in the reasonable belief of the Master Servicer, is not
enforceable under applicable law; and provided further, that the Master Servicer
may refrain from exercising any such right if the Certificate Insurer gives its
prior consent to such non-enforcement.
REALIZATION UPON DEFAULTED MORTGAGE LOANS
The Master Servicer, in its own name or in the name of a Sub-Servicer,
is required to foreclose upon or otherwise comparably effect the ownership in
the name of the Trust, on behalf of the Trustee, of Properties relating to
defaulted Mortgage Loans that it services as to which no satisfactory
arrangements can be made for
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collection of delinquent payments and which the Master Servicer has not
purchased pursuant to its purchase option described below, unless the Master
Servicer reasonably believes that Net Liquidation Proceeds with respect to such
Mortgage Loan would not be increased as a result of such foreclosure or other
action, in which case such Mortgage Loan will be charged off and will become a
Liquidated Mortgage Loan. In connection with such foreclosure or other
conversion, the Master Servicer is required to exercise or use foreclosure
procedures with the same degree of care and skill as it would exercise or use
under the circumstances in the conduct of its own affairs. Any amounts advanced
in connection with such foreclosure or other action shall constitute "Servicing
Advances".
The Master Servicer, in its own name or in the name of a Sub-Servicer,
is required to sell any REO Property within 23 months of its acquisition by the
Trustee, unless the Master Servicer obtains for the Trustee an opinion of
counsel experienced in federal income tax matters, addressed to the Trustee and
the Master Servicer, to the effect that the holding by the Trust of such REO
Property for a greater specified period will not result in the imposition of
taxes on "prohibited transactions" of the Trust as defined in Section 860F of
the Code or cause the Trust to fail to qualify as a REMIC.
In accordance with the Pooling and Servicing Agreement, if the Master
Servicer has actual knowledge that a Property which it is contemplating
acquiring in foreclosure or by deed in lieu of foreclosure contains
environmental or hazardous waste risks known to it, the Master Servicer shall
notify the Certificate Insurer and the Trustee prior to acquiring the Property.
The Master Servicer is not permitted to take any action with respect to such a
Property without the prior written approval of the Certificate Insurer.
The Master Servicer is required to determine, with respect to each
defaulted Mortgage Loan that it services, when it has recovered, whether through
trustee's sale, foreclosure sale or otherwise, all amounts, if any, it expects
to recover from or on account of such defaulted Mortgage Loan, whereupon such
Mortgage Loan shall become a "Liquidated Mortgage Loan".
SERVICING COMPENSATION
As compensation for its servicing activities under the Pooling and
Servicing Agreement, the Master Servicer shall be entitled to retain the amount
of the Servicing Fee with respect to each Mortgage Loan that it services.
Additional servicing compensation in the form of release fees, bad check
charges, assumption fees, late payment charges, and any other servicing-related
fees, and similar items may, to the extent collected from Mortgagors, be
retained by the Master Servicer.
ANNUAL STATEMENT AS TO COMPLIANCE
The Master Servicer is required to deliver, on its own behalf, to the
Trustee, the Depositor, the Company and the Certificate Insurer, annually,
commencing in 1998, an Officer's Certificate stating, as to each signer thereof,
that (i) a review of the activities of the Master Servicer during such preceding
calendar year and of performance under the Pooling and Servicing Agreement has
been made under such officer's supervision, and (ii) to the best of such
officer's knowledge, based on such review, the Master Servicer has fulfilled all
its obligations under the Pooling and Servicing Agreement for such year, or, if
there has been a default in the fulfillment of all such obligations, specifying
each such default known to such officer and the nature and status thereof
including the steps being taken by the Master Servicer to remedy such default.
ANNUAL INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS' REPORTS
Annually, commencing in 1998, the Master Servicer is required to cause
to be delivered, on its own behalf, to the Trustee and the Certificate Insurer a
letter or letters of a firm of independent, nationally
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recognized certified public accountants reasonably acceptable to the Certificate
Insurer stating that such firm has, with respect to the Master Servicer's
overall servicing operations (i) performed applicable tests in accordance with
the compliance testing procedures as set forth in Appendix 3 of the Audit Guide
for Audits of HUD Approved Nonsupervised Mortgagees or (ii) examined such
operations in accordance with the requirements of the Uniform Single Attestation
Program for Mortgage Bankers, and stating such firm's conclusions relating
thereto.
ASSIGNMENT OF AGREEMENT
The Master Servicer may not assign its obligations under the Pooling
and Servicing Agreement, in whole or in part, unless it shall have first
obtained the written consent of the Depositor, the Company, the Trustee and the
Certificate Insurer; provided, however, that any assignee must meet the
eligibility requirements set forth in the Pooling and Servicing Agreement for a
successor Master Servicer.
REMOVAL AND RESIGNATION OF THE MASTER SERVICER; EVENTS OF DEFAULT
The Certificate Insurer, or with the consent of the Certificate
Insurer, the Depositor or the Owners of Class A Certificates owning a majority
in Percentage Interest in the Class A Certificates may remove the Master
Servicer upon the occurrence of any of the following events (each, an "Event of
Default"):
(i) The Master Servicer shall (I) apply for or consent to the
appointment of a receiver, trustee, liquidator or custodian or similar
entity with respect to itself or its property, (II) admit in writing
its inability to pay its debts generally as they become due, (III) make
a general assignment for the benefit of creditors, (IV) be adjudicated
bankrupt or insolvent, (V) commence a voluntary case under the federal
bankruptcy laws of the United States of America or file a voluntary
petition or answer seeking reorganization, an arrangement with
creditors or an order for relief or seeking to take advantage of any
insolvency law or file an answer admitting the material allegations of
a petition filed against it in any bankruptcy, reorganization or
insolvency proceeding or (VI) cause corporate action to be taken by it
for the purpose of effecting any of the foregoing; or
(ii) If without the application, approval or consent of the
Master Servicer, a proceeding shall be instituted in any court of
competent jurisdiction, under any law relating to bankruptcy,
insolvency, reorganization or relief of debtors, seeking in respect of
the Master Servicer an order for relief or an adjudication in
bankruptcy, reorganization, dissolution, winding up, liquidation, a
composition or arrangement with creditors, a readjustment of debts, the
appointment of a trustee, receiver, liquidator or custodian or similar
entity with respect to the Master Servicer or of all or any substantial
part of its assets, or other like relief in respect thereof under any
bankruptcy or insolvency law, and, if such proceeding is being
contested by the Master Servicer in good faith, the same shall (A)
result in the entry of an order for relief or any such adjudication or
appointment or (B) continue undismissed or pending and unstayed for any
period of sixty (60) consecutive days; or
(iii) The Master Servicer shall fail to perform any one or
more of its obligations under the Pooling and Servicing Agreement
(other than its obligations referenced in clauses (vi) and (vii) below)
and shall continue in default thereof for a period of thirty (30) days
after the earlier to occur of (x) the date on which an authorized
officer of the Master Servicer knows or reasonably should know of such
failure or (y) receipt by the Master Servicer of a written notice by
the Trustee, any Owner, the Depositor or the Certificate Insurer of
said failure; or
(iv) The Master Servicer shall fail to cure any breach of any
of its representations and warranties set forth in the Pooling and
Servicing Agreement which materially and adversely affects
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the interests of the Owners or Certificate Insurer for a period of
thirty (30) days after the earlier of (x) the date on which an
authorized officer of the Master Servicer knows or reasonably should
know of such breach or (y) receipt by the Master Servicer of a written
notice from the Trustee, any Owner, the Depositor or the Certificate
Insurer of such breach;
(v) If the Certificate Insurer pays out any money under the
Certificate Insurance Policy, or if the Certificate Insurer otherwise
funds any shortfall with its own money, because the amounts available
to the Trustee (other than from the Certificate Insurer) are
insufficient to make required distributions on the Class A
Certificates;
(vi) The failure by the Master Servicer to make any required
Servicing Advance for a period of 30 days following the earlier of (x)
the date on which an authorized officer of the Master Servicer knows or
reasonably should know of such failure or (y) receipt by the Master
Servicer of a written notice from the Trustee, any Owner, the Depositor
or the Certificate Insurer of such failure;
(vii) The failure by the Master Servicer to make any required
Delinquency Advance or to pay any Compensating Interest or to pay over
the Monthly Remittance;
(viii) If the delinquency or loss levels applicable to the
Mortgage Loans serviced by the Master Servicer exceed certain "trigger"
levels set forth in the Insurance Agreement; or
(ix) An "Event of Default" exists and is continuing under the
Insurance Agreement;
provided, however, that (x) prior to any removal of the Master Servicer pursuant
to clauses (ii) through (iv) and (vi) above, any applicable grace period granted
by any such clause shall have expired prior to the time such occurrence shall
have been remedied and (y) in the event of the refusal or inability of the
Master Servicer to comply with its obligations described in clause (vii) above,
such removal shall be effective (without the requirement of any action on the
part of the Depositor, the Trustee or the Certificate Insurer) at 4 p.m. (New
York City time) on the second business day following the day on which the
Trustee notifies the Master Servicer that a required amount described in clause
(vii) above has not been received by the Trustee, unless the required amount
described in clause (vii) above is paid by the Master Servicer prior to such
time or the Certificate Insurer grants an additional grace period for such
payment. Upon the Trustee's determination that a required amount described in
clause (vii) above has not been made by the Master Servicer, the Trustee shall
so notify the Master Servicer, the Depositor and the Certificate Insurer as soon
as is reasonably practical.
The Master Servicer may not resign from the obligations and duties
imposed on it under the Pooling and Servicing Agreement, except upon
determination that its duties thereunder are no longer permissible under
applicable law or are in material conflict by reason of applicable law with any
other activities carried on by it, the other activities of the Master Servicer
so causing such a conflict being of a type and nature carried on by the Master
Servicer at the date of the Pooling and Servicing Agreement. Any such
determination permitting the resignation of the Master Servicer shall be
evidenced by an opinion of counsel to such effect which shall be delivered to
the Trustee, the Depositor and the Certificate Insurer.
No removal or resignation of the Master Servicer shall become effective
until the Trustee or a successor servicer shall have assumed the Master
Servicer's responsibilities and obligations in accordance with the Pooling and
Servicing Agreement.
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SUCCESSOR MASTER SERVICER
Upon removal or resignation of Home Equity Securitization Corp. as
Master Servicer under the Pooling and Servicing Agreement, the Trustee (x) may
solicit bids for a successor Master Servicer under the Pooling and Servicing
Agreement, which successor Master Servicer must be acceptable to the Certificate
Insurer, and (y) pending the appointment of a successor Master Servicer under
the Pooling and Servicing Agreement, as a result of soliciting such bids, is
required to serve as Master Servicer under the Pooling and Servicing Agreement,
unless Home Equity Securitization Corp. has been removed without cause, in which
event the Trustee prior to any such removal must designate a successor Master
Servicer under the Pooling and Servicing Agreement acceptable to the Certificate
Insurer. The Trustee, if it is unable to obtain a qualifying bid and is
prevented by law from acting as Master Servicer under the Pooling and Servicing
Agreement, may appoint, or petition a court of competent jurisdiction to
appoint, any housing and home finance institution, bank or mortgage servicing
institution which has been designated as an approved seller-servicer by FNMA or
FHLMC for first and second mortgage loans and having equity of not less than
$15,000,000, as determined in accordance with generally accepted accounting
principles, and acceptable to the Certificate Insurer.
The Trustee, or any other successor Master Servicer, upon assuming the
duties of the Master Servicer, is required immediately to make payment of all
Compensating Interest and all Delinquency Advances which the Master Servicer has
theretofore failed to remit with respect to the Mortgage Loans; provided,
however, that if the Trustee is acting as successor Master Servicer, the Trustee
is only required to make Delinquency Advances (including the Delinquency
Advances described in this sentence) if, in the Trustee's reasonable good faith
judgment, such Delinquency Advances will ultimately be recoverable from the
related Mortgage Loans.
INVESTMENT OF ACCOUNTS
All or a portion of the Principal and Interest Account, the Certificate
Account and any other account which may be created by the Trustee (each, an
"Account"), may be invested and reinvested in an Eligible Investment bearing
interest or sold at a discount. The bank serving as Trustee or any affiliate
thereof, may be the obligor on any investment in any Account which otherwise
qualifies as an Eligible Investment. No investment in any Account held by the
Trustee may mature later than the business day immediately preceding the next
succeeding Payment Date; provided, however, that if the investment is an
investment of the bank serving as Trustee, then it may mature on the Payment
Date.
The Trustee will not in any way be held liable by reason of any
insufficiency in any Account resulting from any loss on any Eligible Investment
included therein (except to the extent that the bank serving as Trustee is the
obligor thereon).
All income or other gain from investments in any Account will be
required to be deposited in such Account immediately upon receipt, and any loss
resulting from such investments will be required to be charged to such Account
(except with respect to the Principal and Interest Account, as to which the
Master Servicer is entitled to retain any gain from investments and is required
to deposit an amount equal to any loss into the Principal and Interest Account
from its own funds).
ELIGIBLE INVESTMENTS
The following are "Eligible Investments":
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(a) Direct general obligations of the United States or the obligations
of any agency or instrumentality of the United States, the timely payment or the
guarantee of which constitutes a full faith and credit obligation of the United
States;
(b) Federal Housing Administration debentures, but excluding any such
securities whose terms do not provide for payment of a fixed dollar amount upon
maturity or call for redemption;
(c) FHLMC senior debt obligations, but excluding any such securities
whose terms do not provide for payment of a fixed dollar amount upon maturity or
call for redemption;
(d) FNMA senior debt obligations, but excluding any such securities
whose terms do not provide for payment of a fixed dollar amount upon maturity or
call for redemption;
(e) Federal funds, certificates of deposit, time and demand deposits,
and bankers' acceptances (having original maturities of not more than 365 days)
of any domestic bank, the short-term debt obligations of which have been rated
___ or better by ___ and ___ by ___;
(f) Deposits of any bank or savings and loan association which has
combined capital, surplus and undivided profits of at least $50,000,000 which
deposits are not in excess of the applicable limits insured by the Bank
Insurance Fund or the Savings Association Insurance Fund of the FDIC, provided
that the long-term deposits of such bank or savings and loan association are
rated at least ___ by ___ and ___ by ___;
(g) Commercial paper (having original maturities of not more than 270
days) rated ___ or better by ___ and ___ by ___;
(h) Investments in money market funds rated ___ or ___ by ___ and ___
or ___ by ___; and
(i) Such other investments as have been approved in writing by ___, ___
and the Certificate Insurer;
provided that no instrument described above is permitted to evidence either the
right to receive (a) only interest with respect to obligations underlying such
instrument or (b) both principal and interest payments derived from obligations
underlying such instrument and the interest and principal payments with respect
to such instrument provided a yield to maturity at par greater than 120% of the
yield to maturity at par of the underlying obligations; and provided, further,
that no instrument described above may be purchased at a price greater than par
if such instrument may be prepaid or called at a price less than its purchase
price prior to stated maturity.
AMENDMENTS
The Trustee, the Master Servicer and the Depositor may at any time and
from time to time, with the prior written consent of the Certificate Insurer but
without the consent of the Owners, amend the Pooling and Servicing Agreement,
for the purposes of (a) curing any ambiguity, or correcting or supplementing any
provision of any such agreement which may be inconsistent with any other
provision of such agreement, (b) if accompanied by an approving opinion of
counsel experienced in federal income tax matters, removing the restriction
against the transfer of a Residual Certificate to a Disqualified Organization
(as such term is defined in the Code) or (c) complying with the requirements of
the Code; provided, however, that such action shall not, as evidenced by an
opinion of counsel delivered to the Trustee, materially and adversely affect the
interests of any Owner or materially and adversely affect (without its written
consent) the rights and interests of the Certificate Insurer.
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The Pooling and Servicing Agreement may also be amended by the Trustee,
the Master Servicer and the Depositor, as applicable, at any time and from time
to time, with the prior written approval of the Certificate Insurer and of not
less than 66 2/3% of the Percentage Interest represented by each affected Class
of Certificates then outstanding, for the purpose of adding any provisions or
changing in any manner or eliminating any of the provisions thereof or of
modifying in any manner the rights of the Owners thereunder; provided, however,
that no such amendment shall (a) change in any manner the amount of, or delay
the timing of, payments which are required to be distributed to any Owner
without the consent of the Owner of such Certificate or (b) change the aforesaid
percentages of Percentage Interest which are required to consent to any such
amendments, without the consent of the Owners of all Certificates of the Class
or Classes affected then outstanding. Any such amendment must be accompanied by
an opinion of tax counsel as to REMIC matters.
The Trustee will be required to furnish a copy of any such amendment to
each Owner in the manner set forth in the Pooling and Servicing Agreement.
TERMINATION OF THE TRUST
The Pooling and Servicing Agreement provides that the Trust will
terminate upon the payment to the Owners of all Certificates from amounts other
than those available under the Certificate Insurance Policy all amounts required
to be paid to such Owners upon the final payment and other liquidation (or any
advance made with respect thereto) of the last Mortgage Loan.
OPTIONAL TERMINATION BY THE DEPOSITOR
At its option, but subject to the consent of the Certificate Insurer in
certain circumstances, the Depositor may purchase from the Trust all (but not
fewer than all) remaining Mortgage Loans and other property, acquired by
foreclosure, deed in lieu of foreclosure, or otherwise, then constituting the
Trust Estate, and thereby effect early retirement of the Certificates, on any
Payment Date when the Pool Principal Balance has declined to ten percent or less
of the Original Pool Principal Balance.
The termination of the Trust by the preceding method is equivalent to a
prepayment of all the Mortgage Loans and a liquidation of the Trust. The Owners
of the Class A Certificates would receive from the proceeds of such purchase any
interest owed (including any accrued but unpaid Supplemental Interest Amounts)
and the Owners of the Class A Certificates would receive any principal not yet
paid, in the order of priority set forth under "Description of Certificates --
Distributions on Class A Certificates". Consequently, a termination of the Trust
pursuant to the preceding methods, if such Certificates were purchased at a
price in excess of par, reduces the yield to maturity on the Class A
Certificates.
AUCTION SALE
The Pooling and Servicing Agreement requires that, within ninety days
following the Depositor Optional Termination Date, if the Depositor has not
exercised its optional termination right by such date, the Trustee solicit bids
for the purchase of all Mortgage Loans remaining in the Trust. In the event that
satisfactory bids are received as described in the Pooling and Servicing
Agreement, the net sale proceeds will be distributed to Certificateholders, in
the same order of priority as collections received in respect of the Mortgage
Loans. If satisfactory bids are not received, the Trustee shall decline to sell
the Mortgage Loans and shall not be under any obligation to solicit any further
bids or otherwise negotiate any further sale of the Mortgage Loans. Such sale
and consequent termination of the Trust must constitute a "qualified
liquidation" of each REMIC established by the Trust under Section 860F of the
Internal Revenue Code of 1986, as amended, including, without limitation, the
requirement that the qualified liquidation takes place over a
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period not to exceed 90 days. Such Auction Sale shall be subject to the consent
of the Certificate Insurer in certain circumstances.
TRUSTEE
Pursuant to the Pooling and Servicing Agreement, The Chase Manhattan
Bank will serve as trustee of the Trust. The Pooling and Servicing Agreement
sets forth provisions regarding the Trustee, certain of which are described
below.
CERTAIN COVENANTS OF THE TRUSTEE
WITHHOLDING. The Trustee is required to comply with all requirements of
the Code or any applicable state or local law with respect to the withholding
from any distributions made by it to any Owner of any applicable withholding
taxes imposed thereon and with respect to any applicable reporting requirements
in connection therewith.
UNCLAIMED MONEYS. Any money held by the Trustee in trust for the
payment of any amount due with respect to any Class A Certificate and remaining
unclaimed for the period then specified in the escheat laws of the State of New
York after such amount has become due and payable will be discharged from such
trust and be paid to the Company, and the Owner of such Class A Certificate
shall thereafter, as an unsecured general creditor, look only to the Company for
payment thereof (but only to the extent of the amounts so paid to the Company),
and all liability of the Trustee with respect to such trust money will thereupon
cease; provided, however, that the Trustee, before being required to make any
such payment, may at the expense of the Company cause to be published once, in
the eastern edition of The Wall Street Journal, notice that such money remains
unclaimed and that, after a date specified therein, which shall be not less than
30 days from the date of such publication, any unclaimed balance of such money
then remaining will be paid to the Company. The Trustee may also adopt and
employ, at the expense of the Company, any other reasonable means of
notification of such payment (including but not limited to mailing notice of
such payment to Owners whose right to or interest in moneys due and payable but
not claimed is determinable from the Register at the last address of record for
each such Owner).
PROTECTION OF TRUST ESTATE. The trust estate (the "Trust Estate") of
the Trust primarily consists of (i) the Mortgage Loans, (ii) all moneys held in
the Accounts and (iii) the Certificate Insurance Policy. The Trustee is required
to hold the Trust Estate in Trust for the benefit of the Owners and, upon
request of and at the expense of the Company and at the expense of the
requesting party, will from time to time execute and deliver all such
supplements and amendments to the Pooling and Servicing Agreement, instruments
of further assurance and other instruments, and will take such other action upon
such request as it deems reasonably necessary or advisable, to more effectively
hold in trust all or any portion of the Trust Estate.
The Trustee has the power to enforce, and is required to enforce the
obligations of the other parties to the Pooling and Servicing Agreement by
action, suit or proceeding at law or equity, and also has the power to enjoin,
by action or suit, any acts or occurrences which may be unlawful or in violation
of the rights of the Owners; provided, however, that nothing in the Pooling and
Servicing Agreement requires any action by the Trustee unless the Trustee shall
first (i) have been furnished indemnity satisfactory to it and (ii) when
required by the Pooling and Servicing Agreement, have been requested to take
such action by the Owners and provided, further, that certain obligations may be
enforced by the Trustee only with the consent of the Certificate Insurer.
PERFORMANCE AND ENFORCEMENT OF OBLIGATIONS. The Pooling and Servicing
Agreement provides that the Trustee is under no obligation to exercise any of
the rights or powers vested in it by the Pooling and
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Servicing Agreement at the request or direction of any of the Owners, unless
such Owners shall have offered to the Trustee reasonable security or indemnity
against the costs, expenses and liabilities which might be incurred by it in
compliance with such request or direction.
The Trustee may execute any of the rights or powers granted by the
Pooling and Servicing Agreement or perform any duties thereunder either directly
or by or through agents or attorneys, and the Trustee is responsible for any
misconduct or negligence on the part of any agent or attorney appointed and
supervised with due care by it thereunder.
Pursuant to the Pooling and Servicing Agreement, the Trustee is not
liable for any action it takes or omits to take in good faith which it
reasonably believes to be authorized by an authorized officer of any person or
within its rights or powers under the Pooling and Servicing Agreement.
The Pooling and Servicing Agreement provides that no Owner has any
right to institute any proceeding, judicial or otherwise, with respect to the
Pooling and Servicing Agreement or the Certificate Insurance Policy, or for the
appointment of a receiver or trustee under the Pooling and Servicing Agreement,
unless:
(1) such Owner has previously given written notice to the
Depositor, the Certificate Insurer and the Trustee of such Owner's
intention to institute such proceeding, and the Certificate Insurer
consents thereto;
(2) the Owners of not less than 25% of the Percentage
Interests represented by any Class of Class A Certificates then
outstanding or, if there are no Class A Certificates then outstanding,
by such Percentage Interest represented by the Class B Certificates
then outstanding, shall have made written request to the Trustee to
institute such proceeding in its own name as representative of the
Owners;
(3) such Owner or Owners have offered to the Trustee
reasonable indemnity against the costs, expenses and liabilities to be
incurred in compliance with such request;
(4) the Trustee for 30 days after its receipt of such notice,
request and offer of indemnity, has failed to institute such
proceeding; and
(5) no direction inconsistent with such written request has
been given to the Trustee during such 60-day period by the Owners of a
majority of the Percentage Interests represented by each Class of Class
A Certificates then outstanding or, if there are no Class A
Certificates then outstanding, by a majority of the Percentage
Interests represented by the Class B Certificates then outstanding.
The Pooling and Servicing Agreement provides that no one or more Owners
shall have any right in any manner whatever by virtue of, or by availing
themselves of, any provision of the Pooling and Servicing Agreement to affect,
disturb or prejudice the rights of any other Owner of the same Class or to
obtain or to seek to obtain priority or preference over any other Owner of the
same Class or to enforce any right under the Pooling and Servicing Agreement,
except in the manner herein provided and for the equal and ratable benefit of
all the Owners of the same Class.
In the event the Trustee receives conflicting or inconsistent requests
and indemnity from two or more groups of Owners, each representing less than a
majority of the applicable Class of Certificates, the Trustee shall follow the
directions of the Certificate Insurer.
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The Certificate Insurer or, with the consent of the Certificate
Insurer, the Owners of a majority of the Percentage Interests represented by
each Class of Class A Certificates then outstanding or, if there are no Class A
Certificates then outstanding, by such majority of the Percentage Interests
represented by the Class B Certificates then outstanding, may direct the time,
method and place of conducting any proceeding for any remedy available to the
Trustee with respect to the Certificates or exercising any trust or power
conferred on the Trustee with respect to the Certificates or the Trust Estate
provided that: (1) such direction is not in conflict with any rule of law or
with the Pooling and Servicing Agreement; (2) the Trustee has been provided with
indemnity satisfactory to it; and (3) the Trustee may take any other action
deemed proper by the Trustee which is not inconsistent with such direction;
provided, however, that the Trustee need not take any action which it determines
might involve it in liability or may be unjustly prejudicial to the Owners not
so directing.
DISPOSITION OF TRUST ESTATE. The Trustee covenants not to permit the
Trust to sell, transfer, exchange or otherwise dispose of any of the Trust
Estate except as expressly permitted by the Pooling and Servicing Agreement.
REPORTING REQUIREMENTS. On each Payment Date the Trustee is required to
report in writing to each Owner and to the Certificate Insurer, among other
things: (i) the amount of the distribution with respect to the Class A
Certificates, the Class B Certificates and the Residual Certificates; (ii) the
amount of such distributions allocable to principal, separately identifying the
aggregate amount of any Prepayments or other recoveries of principal included
therein; (iii) the amount of such distributions allocable to interest; (iv) the
amount of such distributions allocable to the Class A Carry-Forward Amount or
the Class B Carry-Forward Amount; (v) the amount of any Insured Payment made
with respect to such Payment Date; (vi) the Class A Principal Balance as of such
Payment Date, together with the principal amount of each Class A Certificate
(based on a Certificate in the original principal amount of $1,000) then
outstanding, in each case after giving effect to any payment of principal on
such Payment Date; (vii) the Class B Principal Balance as of such Payment Date,
together with the principal amount of each Class B Certificate (based on a
Certificate in the original principal amount of $1,000) then outstanding, in
each case after giving effect to any payment of principal on such Payment Date;
(viii) the total of any Substitution Amounts and any Loan Purchase Prices
included in such distribution; (ix) the amount of the Servicing Fee paid with
respect to such Payment Date; and (x) the Subordinated Amount as of such Payment
Date.
REMOVAL OF TRUSTEE FOR CAUSE
The Trustee may be removed upon the occurrence of any of the following
events (whatever the reason for such event and whether it shall be voluntary or
involuntary or be effected by operation of law or pursuant to any judgment,
decree or order of any court or any order, rule or regulation of any
administrative or governmental body):
(1) the Trustee shall fail to distribute to the Owners
entitled thereto on any Payment Date amounts available for distribution
in accordance with the terms of the Pooling and Servicing Agreement; or
(2) the Trustee shall fail in the performance of, or breach,
any covenant or agreement of the Trustee in the Pooling and Servicing
Agreement, or if any representation or warranty of the Trustee made in
the Pooling and Servicing Agreement or in any certificate or other
writing delivered pursuant thereto or in connection therewith shall
prove to be incorrect in any material respect as of the time when the
same shall have been made, and such failure or breach shall continue or
not be cured for a period of 30 days after, there shall have been
given, by registered or certified mail, to the Trustee by the Depositor
or by the Certificate Insurer or by the Owners of at least 25% of the
aggregate Percentage Interest represented by any Class of Class A
Certificates then outstanding, or, if
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there are no Class A Certificates then outstanding, by such Percentage
Interest represented by the Class B Certificates then outstanding, a
written notice specifying such failure or breach and requiring it to be
remedied; or
(3) certain insolvency events related to the Trustee.
If any event described above occurs and is continuing, then and in
every such case (x) the Depositor or the Certificate Insurer or (y) with the
consent of the Certificate Insurer, the Owners of a majority Percentage Interest
represented by any Class of Class A Certificates or, if there are no Class A
Certificates then outstanding, by such Percentage Interest represented by the
Class B Certificates then outstanding, may immediately appoint a successor
trustee.
LIABILITY OF THE TRUSTEE
The Trustee, prior to the occurrence of an Event of Default and after
the curing of all Events of Default which may have occurred, undertakes to
perform such duties and only such duties as are specifically set forth in the
Pooling and Servicing Agreement. If an Event of Default has occurred and has not
been cured or waived, the Trustee shall exercise such of the rights and powers
vested in it by the Pooling and Servicing Agreement, and use the same degree of
care and skill in its exercise as a prudent person would exercise or use under
the circumstances in the conduct of such person's own affairs. Prior to the
occurrence of an Event of Default, and after the curing of all such Events of
Default which may have occurred, the Trustee (i) undertakes to perform such
duties and only such duties as are specifically set forth in the Pooling and
Servicing Agreement, and no implied covenants or obligations shall be read into
the Pooling and Servicing Agreement against the Trustee and (ii) in the absence
of bad faith on its part, may conclusively rely, as to the truth of the
statements and the correctness of the opinions expressed therein, upon
certificates or opinions furnished pursuant to and conforming to the
requirements of the Pooling and Servicing Agreement; provided, however, that
such provisions do not protect the Trustee or any such person against any
liability which would otherwise be imposed by reason of negligent action,
negligent failure to act or willful misconduct in the performance of duties or
by reason of reckless disregard of obligations and duties thereunder.
The Trustee and any director, officer, employee or agent of the Trustee
may rely and will be protected in acting or refraining from acting in good faith
in reliance on any certificate, notice or other document of any kind prima facie
properly executed and submitted by the authorized officer of any person
respecting any matters arising under the Pooling and Servicing Agreement.
THE CERTIFICATE INSURANCE POLICY AND THE CERTIFICATE INSURER
CERTIFICATE INSURER
[describe]
THE CERTIFICATE INSURANCE POLICY
The Depositor will obtain the Certificate Insurance Policy, issued by
the Certificate Insurer, in favor of the Owners of the Class A Certificates. The
Certificate Insurance Policy provides for 100% coverage of the related Insured
Distribution Amount.
The Certificate Insurance Policy unconditionally guarantees the payment
of Insured Payments on the Class A Certificates. The Certificate Insurer is
required to make Insured Payments to the Trustee for the benefit of the Class A
Certificateholders on the later of the Payment Date or on the second Business
Day next
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following the day on which the Certificate Insurer and its fiscal agent, if any,
shall have received an appropriate written notice of claim from the Trustee that
an Insured Payment is due.
If payment of any amount avoided as a preference under applicable
bankruptcy, insolvency, receivership or similar law is required to be made under
the Certificate Insurance Policy, the Certificate Insurer will cause such
payment to be made 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 Certificate Insurer from the Trustee of (A) a
certified copy of the order (the "Order") of the court or other governmental
body which exercised jurisdiction to the effect that the applicable Owner of the
Class A Certificates is required to return the amount of any Class A Insured
Distribution Amount distributed with respect to the Class A Certificates during
the term of the Certificate Insurance Policy because such distributions were
avoidable as preference payments under applicable bankruptcy law, (B) a
certificate of such Owner of the Class A Certificates that the Order has been
entered and is not subject to any stay and (C) an assignment duly executed and
delivered by such Owner of the Class A Certificates, in such form as is
reasonably required by the Certificate Insurer and provided to such Owner of the
Class A Certificates by the Certificate Insurer, irrevocably assigning to the
Certificate Insurer all rights and claims of such Owner of the Class A
Certificates relating to or arising under the Class A Certificates against the
debtor which made the preference payment or otherwise with respect to such
preference payment, or (ii) the date of Receipt by the Certificate Insurer from
the Trustee 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 Certificate Insurer
has Received written notice from the Trustee that such items were to be
delivered on such date and such date was specified in such notice. Such payment
will be disbursed to the receiver, conservator, debtor-in-possession or trustee
in bankruptcy named in the Order and not to the Trustee or any Owner of the
Class A Certificates directly (unless an Owner of the Class A Certificates 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 will be
disbursed to the Trustee for distribution to such Owner of the Class A
Certificates upon proof of such payment reasonably satisfactory to the
Certificate Insurer).
The terms "Receipt" and "Received," with respect to the Certificate
Insurance Policy, shall mean actual delivery to the Certificate Insurer and to
the fiscal agent, if any, prior to 12:00 noon, New York City time, on a Business
Day; delivery either on a day that is not a Business Day or after 12:00 noon,
New York City time, shall be deemed to be Received on the next Business Day. If
any notice or certificate given under the Certificate Insurance Policy by the
Trustee is not in proper form or is not properly completed, executed or
delivered, it shall be deemed not to have been Received, and the Certificate
Insurer or its fiscal agent will promptly so advise the Trustee and the Trustee
may submit an amended notice.
Under the Certificate Insurance Policy, "Business Day" means any day
other than a Saturday, Sunday or other day on which commercial banking
institutions or trust companies in New York, New York, or the principal place of
business of any successor Trustee is authorized or required to be closed.
The Certificate Insurance Policy is noncancelable.
THE CERTIFICATE INSURANCE POLICY IS NOT COVERED BY THE
PROPERTY/CASUALTY INSURANCE SECURITY FUND SPECIFIED IN ARTICLE 76 OF THE NEW
YORK INSURANCE LAW.
The Certificate Insurer's obligation under the Certificate Insurance
Policy will be discharged to the extent that funds are received by the Trustee
for distribution to the Class A Certificateholders, whether or not such funds
are properly distributed by the Trustee.
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The Certificate Insurance Policy does not guarantee to the Owners of
the Class A Certificates any specific rate of prepayments of principal of the
Mortgage Loans. Also, the Certificate Insurance Policy does not guarantee the
payment of any Group II Supplemental Interest Amount and does not cover interest
shortfalls arising from Prepayments or the application of the Relief Act.
Claims under the Certificate Insurance Policy will rank equally with
any other unsecured debt and unsubordinated obligations of the Certificate
Insurer except for certain obligations in respect of tax and other payments to
which preference is or may become afforded by statute. Claims against the
Certificate Insurer under the Certificate Insurance Policy constitute pari passu
claims against the general assets of the Certificate Insurer. The terms of the
Certificate Insurance Policy cannot be modified or altered by any other
agreement or instrument, or by the merger, consolidation or dissolution of the
Depositor. The Certificate Insurance Policy may not be cancelled or revoked
prior to payment in full of the Class A Certificates.
Pursuant to the terms of the Pooling and Servicing Agreement, unless a
Certificate Insurer default exists, the Certificate Insurer shall be deemed to
be the Certificateholders for all purposes (other than with respect to payment
on the Certificates), will be entitled to exercise all rights of the Class A
Certificateholders thereunder, without the consent of such Certificateholders,
and the Class A Certificateholders may exercise such rights only with the prior
written consent of the Certificate Insurer. In addition, the Certificate Insurer
will, as a third party beneficiary to the Pooling and Servicing Agreement, have
among others, the following rights: (i) the right to give notices of breach or
to terminate the rights and obligations of the Master Servicer under the Pooling
and Servicing Agreement in the event of an Event of Default by the Master
Servicer; (ii) the right to direct the actions of the Trustee during the
continuation of a Master Servicer default; (iii) the right to require the
Company to repurchase Mortgage Loans for breach of representation and warranty
or defect in documentation; and (iv) the right to direct foreclosures upon the
failure of the Master Servicer to do so in accordance with the Pooling and
Servicing Agreement. The Certificate Insurer's consent will be required prior
to, among other things, (i) the appointment of any successor Trustee or Master
Servicer or (ii) any amendment to the Pooling and Servicing Agreement (which
consent will not be unreasonably withheld).
Pursuant to the Pooling and Servicing Agreement, the Certificate
Insurer is subrogated to the rights of the Owners of the Class A Certificates to
the extent of any such payment under the Certificate Insurance Policy.
CREDIT ENHANCEMENT DOES NOT APPLY TO PREPAYMENT RISK
In general, the protection afforded by the Certificate Insurance Policy
is protection for credit risk and not for prepayment risk. A claim may not be
made under the Certificate Insurance Policy in an attempt to guarantee or insure
that any particular rate of prepayment is experienced by the Trust.
FEDERAL INCOME TAX CONSEQUENCES
The following discussion of the material federal income tax
consequences of the purchase, ownership and disposition of the Class A
Certificates is to be considered only in connection with "Federal Income Tax
Considerations" 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 Certificates.
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REMIC ELECTION
The Trustee will cause one or more elections to be made with respect to
certain specified assets of the Trust as real estate mortgage investment
conduits ("REMICs") within the meaning of Code Section 860D. Dewey Ballantine,
special tax counsel, will advise that, in its opinion, for federal income tax
purposes, assuming the REMIC elections are made and compliance with the Pooling
and Servicing Agreement, each Class of Class A Certificates will be treated as a
"regular 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 Class A Certificates that otherwise report income under a cash
method of accounting will be required to report income with respect to such
Certificates under an accrual method. The prepayment assumption that will be
used in determining the rate of accrual of original issue discount on the Class
A Certificates is the "Prepayment Assumption." See "Maturity, Prepayment and
Yield Considerations" herein and "Federal Income Tax Considerations -- Discount
and Premium" in the Prospectus.
The Owners of the Class A-6 Group II Certificates will be treated for
tax purposes as owning two separate investments: (i) Class A-6 Group II
Certificates, without the right to receive Supplemental Interest Amounts, and
(ii) the right to receive Supplemental Interest Amounts. The Owners of the Class
A-6 Group II Certificates must allocate the purchase price of their Certificates
between these two investments based on their relative fair market values. The
purchase price allocated to the first investment will be the issue price of the
Class A-6 Group II Certificates for calculating accruals of OID (if any). See
"Federal Income Tax Consequences--Discount and Premium" in the Prospectus.
An Owner of a Class A-6 Group II Certificate and the related rights to
receive Supplemental Interest Amounts will be treated for federal income tax
purposes as having entered into a notional principal contract on the date that
it purchases its Certificate. Treasury Regulations under Section 446 of the Code
relating to notional principal contracts (the "Notional Principal Contract
Regulations") provide that taxpayers must recognize periodic payments with
respect to a notional principal contract under the accrual method of accounting.
Any Supplemental Interest Amounts will be periodic payments. Income with respect
to periodic payments under a notional principal contract for a taxable year
should constitute ordinary income. The purchase price allocated to the right to
receive the related Supplemental Interest Amounts will be treated as a
nonperiodic payment under the Notional Principal Contract Regulations. Such a
nonperiodic payment may be amortized using several methods, including the level
payment method described in the Notional Principal Contract Regulations.
The right to receive the Supplemental Interest Amounts will not
constitute: (i) a "real estate asset" within the meaning of section 858(c)(5)(A)
of the Internal Revenue Code (the "Code") if held by a real estate investment
trust; (ii) a "qualified mortgage" within the meaning of section 860G(a)(3) of
the Code or a "permitted investment" within the meaning of section 860G(a)(5) of
the Code if held by a REMIC, or (iii) an asset described in section
7701(a)(19)(C)(xi) of the Code if held by a thrift. Moreover, other special
rules may apply to certain investors, including dealers in securities and
dealers in notional principal contracts.
TAXATION OF FOREIGN INVESTORS
In general, foreign investors will not be subject to U.S. withholding
on income from the Class A Certificates. See "Federal Income Tax Considerations
- -- Foreign Investors -- Grantor Trust Securities and REMIC Regular Securities"
in the Prospectus.
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<PAGE>
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended
("ERISA"), imposes certain requirements on those employee benefit plans to which
it applies ("ERISA Plan") and on those persons who are fiduciaries with respect
to such ERISA Plans. Certain employee benefit plans, such as governmental plans
(as defined in ERISA Section 3(32)) and certain church plans (as defined in
ERISA Section 3(33)), are not subject to ERISA. In accordance with ERISA's
general fiduciary standards, before investing in a Class A Certificate, an ERISA
Plan fiduciary should determine whether such an investment is permitted under
the governing ERISA Plan instruments and is appropriate for the ERISA Plan in
view of its overall investment policy and the composition and diversification of
its portfolio.
In addition, provisions of ERISA, and the corresponding provisions of
the Code, prohibit a broad range of transactions involving assets of ERISA
Plans, individual retirement accounts, and Keogh plans covering only a sole
proprietor or partners (collectively, the "Plans") and persons having certain
specified relationships to such a Plan ("parties in interest" and "disqualified
persons"). Such transactions are treated as "prohibited transactions" under
Sections 406 and 407 of ERISA and excise taxes are imposed upon such persons by
Section 4975 of the Code. Certain affiliates of the Originators, the Company,
the Master Servicer, the Depositor, any Sub-Servicer, and of the Trustee might
be considered "parties in interest" or "disqualified persons" with respect to a
Plan. If so, the acquisition or holding of Class A Certificates by or on behalf
of such Plan could be considered to give rise to a "prohibited transaction"
within the meaning of ERISA or the Code unless an exemption is available.
Furthermore, if an investing Plan's assets were deemed to include an interest in
the assets of the Mortgage Loans which constitute the Trust Estate and not
merely an interest in the Class A Certificates, transactions occurring in the
servicing of the Mortgage Loans might constitute prohibited transactions unless
an administrative exemption applies.
The DOL has issued to __________ an administrative exemption,
Prohibited Transaction Exemption ____ (the "Exemption"), which generally exempts
from the application of the prohibited transaction provisions of Section 406(a),
Section 406(b)(1) and Section 406(b)(2) of ERISA and the excise taxes imposed
pursuant to Sections 4975(a) and (b) of the Code, certain transactions relating
to the servicing and operation of asset pools, including pools of mortgage
loans, and the purchase, sale and holding of asset-backed pass-through
certificates, including pass-through certificates evidencing interests in
mortgage loans, such as the Class A Certificates underwritten by __________ and
certain of its affiliates, provided that certain conditions set forth in the
Exemption are satisfied.
If the general conditions of Section II of the Exemption are satisfied,
the Exemption may provide an exemption from the restrictions imposed by Sections
406(a) and 407(a) of ERISA (as well as the excise taxes imposed by Sections
4975(a) and (b) of the Code by reason of Section 4975(c)(1)(A) through (D) of
the Code) in connection with the direct or indirect sale, exchange or transfer
of Class A Certificates by Plans in the initial issue of Certificates, the
holding of Class A Certificates by Plans or the direct or indirect acquisition
or disposition in the secondary market of Class A Certificates by Plans.
However, no exemption is provided from the restrictions of Section 406(a)(1)(E),
406(a)(2) and 407 of ERISA for the acquisition or holding of a Class A
Certificate on behalf of an "Excluded Plan" (defined below) by any person who
has discretionary authority or renders investment advice with respect to the
assets of such Excluded Plan. For purposes of the Class A Certificates, an
Excluded Plan is a Plan sponsored by (1) the Underwriters, (2) the Master
Servicer and any Sub-Servicer, (3) the Certificate Insurer, (4) the Trustee, (5)
the Company, (6) the Depositor, (7) any Mortgagor with respect to Mortgage Loans
constituting more than 5 percent of the aggregate unamortized principal balance
of the Mortgage Loans as of the date of initial issuance and (8) any affiliate
or successor of a person described in (1) to (7) above (the "Restricted Group").
S-68
<PAGE>
If the specific conditions of paragraph I.B of Section I of the
Exemption are also satisfied, the Exemption may provide an exemption from the
restrictions imposed by Sections 406(b)(1) and (b)(2) of ERISA and the taxes
imposed by Sections 4975(a) and (b) of the Code by reason of Section
4975(c)(1)(E) of the Code in connection with (1) the direct or indirect sale,
exchange or transfer of Class A Certificates in the initial issuance of Class A
Certificates between the Depositor, the Underwriters and a Plan when the person
who has discretionary authority or renders investment advice with respect to the
investment of Plan assets in Class A Certificates is (a) a mortgagor with
respect to 5 percent or less of the fair market value of the Mortgage Loans or
(b) an affiliate of such a person, (2) the direct or indirect acquisition or
disposition in the secondary market of Class A Certificates by Plans and (3) the
holding of Class A Certificates by Plans.
If the specific conditions of paragraph I.C of Section I of the
Exemption are satisfied, the Exemptions may provide an exemption from the
restrictions imposed by Sections 406(a), 406(b) and 407(a) of ERISA, and the
taxes imposed by Sections 4975(a) and (b) of the Code by reason of Section
4975(c) of the Code for transactions in connection with the servicing,
management and operation of the Trust.
The Exemption may provide an exemption from the restrictions imposed by
Section 406(a) and 407(a) of ERISA, and the taxes imposed by Sections 4975(a)
and (b) of the Code by reason of Sections 4975(c)(1)(A) through (D) of the Code
if such restrictions are deemed to otherwise apply merely because a person is
deemed to be a "party in interest" or a "disqualified person" with respect to an
investing Plan by virtue of providing services to the Plan (or by virtue of
having certain specified relationships to such a person) solely as a result of
such Plan's ownership of Class A Certificates.
The Exemption sets forth the following seven general conditions which
must be satisfied for a transaction to be eligible for exemptive relief
thereunder.
(1) 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;
(2) 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;
(3) The certificates 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 Standard & Poor's, a division of
the McGraw-Hill Companies ("S&P"), Moody's Investors Service, Inc.
("Moody's"), Duff & Phelps Rating Co. ("D&P") or Fitch Investors
Service, Inc. ("Fitch");
(4) The trustee is not an affiliate of any other member of the
Restricted Group (as defined above);
(5) The sum of all payments made to and retained by the
Underwriters in connection with the distribution of certificates
represents not more than reasonable compensation for underwriting the
certificates. The sum of all payments made and retained by the seller
pursuant to the assignment of the loans to the trust fund 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 pooling
and servicing agreement and reimbursement of such person's reasonable
expenses in connection therewith; and
(6) The Plan investing in the certificates is an "accredited
investor" as defined in Rule 501(a)(1) of Regulation D of the
Commission under the Securities Act of 1933.
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<PAGE>
(7) The trust fund must also meet the following requirements:
(i) the corpus of the trust fund 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 generic rating
categories of S&P, Moody's, Fitch or D&P for at least one year
prior to the Plan's acquisition of certificates; 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 any Plan's
acquisition of certificates.
It is a condition of issuance of the Class A Certificates that they be
rated ___ or ___ by ___ and ___, respectively. Before purchasing a Class A
Certificate, based on the Exemption, a fiduciary of a Plan should itself confirm
(1) that such Certificate constitutes a "certificate" for purposes of the
Exemption and (2) that the specific conditions set forth in Section I of the
Exemption, the general conditions set forth in Section II of the Exemption and
the other requirements set forth in the Exemption would be satisfied.
Any person purchasing a Class A-6 Group II Certificate and the related
right to receive Supplemental Interest Amounts will have acquired for purposes
of ERISA and for federal income tax purposes, such Class A-6 Group II
Certificate without the right to receive the Supplemental Interest Amounts,
together with the right to receive the Supplemental Interest Amounts. The
Exemption does not apply to the acquisition, holding or resale of the right to
receive the Supplemental Interest Amounts. Accordingly, the acquisition of the
right to receive the Supplemental Interest Amounts by a Plan could result in a
prohibited transaction unless another administrative exemption to ERISA's
prohibited transaction rules is applicable. One or more alternative exemptions
may be available with respect to certain prohibited transaction rules of ERISA
that might apply in connection with the initial purchase, holding and resale of
the right to receive the Supplemental Interest Amounts, including, but not
limited to: (i) Prohibited Transaction Class Exemption ("PTCE") 91-38, regarding
investments by bank collective investment funds; (ii) PTCE 90-1, regarding
investments by insurance company pooled separate accounts; (iii) PTCE 84-14,
regarding transactions negotiated by qualified professional asset managers; or
(iv) PTCE 75-1, Part II, regarding principal transactions by broker-dealers (the
"Principal Transactions Exemption"). It is believed that the conditions of the
Principal Transactions Exemption will be met with respect to the acquisition of
a right to receive the Supplemental Interest Amounts by a Plan, so long as such
Underwriter is not a fiduciary with respect to the Plan (and is not a party in
interest with respect to the Plan by reason of being a participating employer or
affiliate thereof). Before purchasing Class A-6 Group II Certificates based on
an administrative exemption (or exemptions), a fiduciary of a Plan should
determine whether the conditions of such exemption (or exemptions) would be met
and whether the scope of the relief provided by such exemption (or exemptions)
would cover all acts that might be construed as prohibited transactions.
Prospective Plan investors in the Class A Certificates should consult
with their legal advisors concerning the impact of ERISA and the Code, the
applicability of the Exemption, and the potential consequences in their specific
circumstances, prior to making an investment in the Class A Certificates.
Moreover, each Plan fiduciary should determine whether under the general
fiduciary standards of investment prudence and diversification an investment in
the Class A 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.
In addition to the matters described above, purchasers of a Class A
Certificate that are insurance companies should consult with their counsel with
respect to the United States Supreme Court case
S-70
<PAGE>
interpreting the fiduciary responsibility rules of ERISA, John Hancock Mutual
Life Insurance Co. v. Harris Trust and Savings Bank, 114 S.CT. 517 (1993). In
John Hancock, the Supreme Court ruled that assets held in an insurance company's
general account may be deemed to be "plan assets" for ERISA purposes under
certain circumstances. Prospective purchasers using insurance company general
account assets should determine whether the decision affects their ability to
make purchases of the Class A Certificates.
NON-ERISA PLANS
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 requirements. Accordingly, assets of such plans
may be invested in the Class A Certificates without regard to the ERISA
restrictions described above, subject to applicable provisions of other federal
and state laws.
RATINGS
Ratings which are assigned to securities such as the Class A
Certificates generally evaluate the ability of the issuer (i.e., the Trust) and
any guarantor (i.e., the Certificate Insurer) to make timely payment when such
payments are due, as required by such securities. The amounts which are "due"
with respect to the Class A Certificates consist of principal and interest. In
general, ratings address credit risk and not prepayment risk. The ratings issued
with respect to the Class A-6 Group II Certificates do not cover the payment of
the Supplemental Interest Amounts.
It is a condition of the original issuance of the Class A Certificates
that they receive ratings of ___ or ___ by ___ and ___, respectively.
Explanations of the significance of such rating may be obtained from such rating
agency. The ratings will be the views only of such rating agencies. There is no
assurance that any such ratings will continue for any period of time or that
such ratings will not be revised or withdrawn. Any such revision or withdrawal
of such ratings may have an adverse effect on the market price of the Class A
Certificates. A security rating is not a recommendation to buy, sell or hold
securities.
LEGAL INVESTMENT CONSIDERATIONS
The Class A Certificates will not constitute "mortgage related
securities" for purposes of the Secondary Mortgage Market Enhancement Act of
1984 ("SMMEA"). Accordingly, many institutions may not be legally authorized to
invest in the Class A Certificates.
UNDERWRITING
Under the terms and subject to the conditions contained in an
Underwriting Agreement dated __________ (the "Underwriting Agreement"),
__________ and ___________ (together, the "Underwriters") have agreed to
purchase, and the Depositor has agreed to sell, the Class A Certificates offered
hereby.
In the Underwriting Agreement, each of the Underwriters has agreed,
subject to the terms and conditions set forth therein, to purchase, the
principal amount of the Class A Certificates set forth opposite its name below.
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT OF CLASS
UNDERWRITER A CERTIFICATES
----------- --------------
<S> <C>
- ----------..........................................
S-71
<PAGE>
- -----------.........................................
Total......................................
</TABLE>
The Underwriters have advised the Depositor that they propose to offer
the Class A Certificates for sale from time to time in one or more transactions
(which may include block transactions), in negotiated transactions or otherwise,
or a combination of such methods of sale, at market prices prevailing at the
time of sale or at negotiated prices. The Underwriters may effect such
transactions by selling the Class A Certificates to or through dealers, and such
dealers may receive compensation in the form of underwriting discounts,
concessions or commissions from the Underwriters and/or the purchasers of the
Class A Certificates for whom they may act as agents. In connection with the
sale of the Class A Certificates, the Underwriters may be deemed to have
received compensation from the Depositor in the form of underwriting discounts,
and the Underwriters may also receive commissions from purchasers of the Class A
Certificates for whom it may act as agent. The Underwriters and any dealers that
participate with the Underwriters in the distribution of the Class A
Certificates may be deemed to be underwriters, and any discounts or commissions
received by them and any profit on the resale of the Class A Certificates by
them may be deemed to be underwriting discounts or commissions.
The Underwriting Agreement provides that the obligations of the
Underwriters are subject to certain conditions precedent and that the
Underwriters will be obligated to purchase all the Class A Certificates offered
hereby if any are purchased.
The Class A Certificates are a new issue of securities with no
established trading market. The Underwriters have advised the Depositor that
they intend to act as market makers for the Class A Certificates. However, the
Underwriters are not obligated to do so and may discontinue any market making at
any time without notice. No assurance can be given as to the liquidity of the
trading market for the Class A Certificates.
The Depositor has agreed to indemnify each Underwriter against certain
liabilities, including civil liabilities under the Securities Act of 1933, or
contribute to payments which either Underwriter may be required to make in
respect thereof.
EXPERTS
The consolidated balance sheets of ________________ and Subsidiaries,
as of __________ and ____ and the related consolidated statements of income,
changes in shareholder's equity and cash flows for each of the three years in
the period ended __________, incorporated by reference in this Prospectus
Supplement, have been incorporated herein in reliance upon the report of
__________, independent accountants, given on the authority of that firm as
experts in accounting and auditing.
CERTAIN LEGAL MATTERS
Certain legal matters concerning the issuance of the Certificates will
be passed upon by __________.
S-72
<PAGE>
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered
__________ Mortgage Loan Trust _____ Class A Certificates (the "Global
Securities") will be available only in book-entry form. Investors in the Global
Securities may hold such Global Securities through any of DTC, CEDEL or
Euroclear. The Global Securities will be tradeable as home market instruments in
both the European and U.S. domestic markets. settlement and all secondary trades
will settle in same-day funds.
Secondary market trading between investors through CEDEL and Euroclear
will be conducted in the ordinary way in accordance with the normal rules and
operating procedures of CEDEL and Euroclear and in accordance with conventional
eurobond practice (i.e., seven calendar day settlement).
Secondary market trading between investors through DTC will be
conducted according to DTC's rules and procedures applicable to U.S. corporate
debt obligations.
Secondary cross-market trading between CEDEL or Euroclear and DTC
Participants holding Certificates will be effected on a delivery-against-payment
basis through the respective Depositories of CEDEL and Euroclear (in such
capacity) and as DTC Participants.
Non-U.S. holders (as described below) of Global Securities will be
subject to U.S. withholding taxes unless such holders meet certain requirements
and deliver appropriate U.S. tax documents to the securities clearing
organizations or their participants.
SETTLEMENT
All Global Securities will be held in book-entry form by DTC in the
name of Cede as nominee of DTC. Investors' interests in the Global Securities
will be represented through financial institutions acting on their behalf as
direct and indirect Participants in DTC. As a result, CEDEL and Euroclear will
hold positions on behalf of their participants through their Relevant Depository
which in turn will hold such positions in their accounts as DTC Participants.
Investors electing to hold their Global Securities through DTC will
follow DTC settlement practices. Investor securities custody accounts will be
credited with their holdings against payment in same-day funds on the settlement
date.
Investors electing to hold their Global Securities through CEDEL or
Euroclear accounts will follow the settlement procedures applicable to
conventional eurobonds, except that there will be no temporary global security
and no "lock-up" or restricted period. Global Securities will be credited to the
securities custody accounts on the settlement date against payment in same-day
funds.
SECONDARY MARKET TRADING
Since the purchaser determines the place of delivery, it is important
to establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired value
date.
i
<PAGE>
TRADING BETWEEN DTC PARTICIPANTS. Secondary market trading between DTC
Participants will be settled using the procedures applicable to prior home
equity loan asset-backed certificates issues in same-day funds.
TRADING BETWEEN CEDEL AND/OR EUROCLEAR PARTICIPANTS. Secondary market
trading between CEDEL Participants or Euroclear Participants will be settled
using the procedures applicable to conventional eurobonds in same-day funds.
TRADING BETWEEN DTC, COMPANY AND CEDEL OR EUROCLEAR PARTICIPANTS. When
Global Securities are to be transferred from the account of a DTC Participant to
the account of a CEDEL Participant or a Euroclear Participant, the purchaser
will send instructions to CEDEL or Euroclear through a CEDEL Participant or
Euroclear Participant at least one business day prior to settlement. CEDEL or
Euroclear will instruct the Relevant Depository, as the case may be, to receive
the Global Securities against payment. Payment will include interest accrued on
the Global Securities from and including the last coupon payment date to and
excluding the settlement date, on the basis of the actual number of days in such
accrual period and a year assumed to consist of 360 days. For transactions
settling on the 31st of the month, payment will include interest accrued to and
excluding the first day of the following month. Payment will then be made by the
Relevant Depository to the DTC Participant's account against delivery of the
Global Securities. After settlement has been completed, the Global Securities
will be credited to the respective clearing system and by the clearing system,
in accordance with its usual procedures, to the CEDEL Participant's or Euroclear
Participant's account. The securities credit will appear the next day (European
time) and the cash debt will be back-valued to, and the interest on the Global
Securities will accrue from, the value date (which would be the preceding day
when settlement occurred in New York). If settlement is not completed on the
intended value date (i.e., the trade fails), the CEDEL or Euroclear cash debt
will be valued instead as of the actual settlement date.
CEDEL Participants and Euroclear Participants will need to make
available to the respective clearing systems the funds necessary to process
same-day funds settlement. The most direct means of doing so is to preposition
funds for settlement, either from cash on hand or existing lines of credit, as
they would for any settlement occurring within CEDEL or Euroclear. Under this
approach, they may take on credit exposure to CEDEL or Euroclear until the
Global Securities are credited to their account one day later.
As an alternative, if CEDEL or Euroclear has extended a line of credit
to them, CEDEL Participants or Euroclear Participants can elect not to
preposition funds and allow that credit line to be drawn upon to finance
settlement. Under this procedure, CEDEL Participants or Euroclear Participants
purchasing Global Securities would incur overdraft charges for one day, assuming
they cleared the overdraft when the Global Securities were credited to their
accounts. However, interest on the Global Securities would accrue from the value
date. Therefore, in many cases the investment income on the Global Securities
earned during that one-day period may substantially reduce or offset the amount
of such overdraft charges, although the result will depend on each CEDEL
Participant's or Euroclear Participant's particular cost of funds.
Since the settlement is taking place during New York business hours,
DTC Participants can employ their usual procedures for crediting Global
Securities to the respective European 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 COMPANY AND DTC PURCHASER. Due to
time zone differences in their favor, CEDEL Participants and Euroclear
Participants may employ their customary procedures for transactions in which
Global Securities are to be transferred by the respective clearing system,
through the
ii
<PAGE>
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 credit the Global
Securities to the DTC Participant's account against payment. Payment will
include interest accrued on the Global Securities from and including the last
coupon payment to and excluding the settlement date on the basis of the actual
number of days in such accrual period and a year assumed to consist 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 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). In the event that the CEDEL Participant or Euroclear Participant have a
line of credit with its respective clearing system and elect to be in debt in
anticipation of receipt of the sale proceeds in its account, the back-valuation
will extinguish any overdraft incurred over that one-day period. If settlement
is not completed on the intended value date (i.e., the trade fails), receipt of
the cash proceeds in the CEDEL Participant's or Euroclear Participant's account
would instead be valued as of the actual settlement date.
Finally, day traders that use CEDEL or Euroclear and that purchase
Global Securities from DTC Participants for delivery to CEDEL Participants or
Euroclear Participants should note that these trades would automatically fail on
the sale side unless affirmative action is taken. At least three techniques
should be readily available to eliminate this potential problem:
(a) borrowing through CEDEL or Euroclear for one day (until the
purchase side of the trade is reflected in their CEDEL or Euroclear accounts) in
accordance with the clearing system's customary procedures;
(b) borrowing the Global Securities in the U.S. from a DTC Participant
no later than one day prior to settlement, which would give the Global
Securities sufficient time to be reflected in their CEDEL or Euroclear account
in order to settle the sale side of the trade; or
(c) staggering the value dates for the buy and sell sides of the trade
so that the value date for the purchase from the DTC Participant is at least one
day prior to the value date for the sale to the CEDEL Participant or Euroclear
Participant.
CERTAIN U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A beneficial owner of Global Securities holding securities through
CEDEL or Euroclear (or through DTC if the holder has an address outside the
U.S.) will be subject to the 30% U.S. withholding tax that generally applies to
payments of interest (including original issue discount) on registered debt
issued by U.S. Persons (as defined below), unless (i) each clearing system, bank
or other financial institution that holds customers' securities in the ordinary
course of its trade or business in the chain of intermediaries between such
beneficial owner and the U.S. entity required to withhold tax complies with
applicable certification requirements and (ii) such beneficial owner takes one
of the following steps to obtain an exemption or reduced tax rate:
EXEMPTION FOR NON-U.S. Persons (Form W-8). Beneficial 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). If the information shown on Form W-8 changes, a
new Form W-8 must be filed within 30 days of such change.
iii
<PAGE>
EXEMPTION FOR NON-U.S. Persons with effectively connected income (Form
4224). A Non-U.S. Person (as defined below), including a non-U.S. corporation or
bank with a U.S. branch, for which the interest income is effectively connected
with its conduct of a trade or business in the United States, can obtain an
exemption from the withholding tax by filing Form 4224 (Exemption from
Withholding of Tax on Income Effectively Connected with the Conduct of a Trade
or Business in the United States).
EXEMPTION OR REDUCED RATE FOR NON-U.S. Persons resident in treaty
countries (Form 1001). Non-U.S. Persons residing in a country that has a tax
treaty with the United States can obtain an exemption or reduced tax rate
(depending on the treaty terms) by filing Form 1001 (Ownership, Exemption or
Reduced Rate Certificate). If the treaty provides only for a reduced rate,
withholding tax will be imposed at that rate unless the filer alternatively
files Form W-8. Form 1001 may be filed by Certificate Owners or their agent.
EXEMPTION FOR U.S. Persons (Form W-9). U.S. Persons can obtain a
complete exemption from the withholding tax by filing Form W-9 (Payer's Request
for Taxpayer Identification Number and Certification).
U.S. Federal Income Tax Reporting Procedure. The Owner of a Global
Security or, in the case of a Form 1001 or a Form 4224 filer, his agent, files
for exemption 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 each are effective for three
calendar years and Form 4224 is effective for one calendar year.
On April 22, 1996 the IRS issued proposed regulations relating to (i)
withholding income tax on U.S.-source income paid to Non-U.S. Persons; (ii)
claiming Non-U.S. Person status to avoid backup withholding; and (iii) reporting
to the IRS of payments to Non-U.S. Persons. The proposed regulations would
substantially revise some aspects of the current system for withholding on and
reporting amounts paid to Non-U.S. Persons. The regulations unify current
certification procedures and forms and reliance standards are clarified. Most
forms are proposed to be combined into a single form: Form W-8. The regulations
are proposed to be effective for payments made after December 31, 1997.
Certificates issued, however, on or before the date that is 60 days after the
proposed regulations are made final will continue to be valid until they expire.
All proposed regulations are subject to change before adoption in their final
form. No reliable prediction can be made as to when, if ever, the proposed
regulations will be made final and if so, as to their final form.
The term "U.S. Person" means (i) a citizen or resident of the United
States, (ii) a corporation, partnership or other entity organized in or under
the laws of the United States or any political subdivision thereof, (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
fiduciary 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. This
discussion does not deal with all aspects of U.S. Federal income tax withholding
that may be relevant to foreign holders of the Global Securities. Investors are
advised to consult their own tax advisors for specific tax advice concerning
their holding and disposing of the Global Securities.
iv
<PAGE>
INDEX OF PRINCIPAL DEFINITIONS
------------------------------
Term Page
- ---- ----
1933 Act............................................4
Account............................................61
Appraised Values...........................25, 26, 32
Balloon Loans.......................................8
Beneficial Certificate Owners......................16
Book-Entry Certificates............................50
business day.......................................47
Cede............................................4, 16
CEDEL..............................................16
CEDEL Participants.................................52
Certificate Account................................45
Certificate Insurance Policy........................1
Certificate Insurer.................................1
Certificateholder...................................4
Certificates.....................................1, 6
Chase..............................................16
Citibank...........................................16
Class..............................................43
Class A Carry-Forward Amount.......................15
Class A Certificate Principal Balance..............14
Class A Certificates.............................1, 6
Class A Distribution Amount........................15
Class A Group I Certificate Principal Balance......14
Class A Group I Certificates.....................1, 6
Class A Group II Certificate Principal Balance.....14
Class A Insured Distribution Amount................15
Class A Principal Distribution Amount..............12
Class A-1 Pass-Through Rate........................10
Class A-2 Pass-Through Rate........................10
Class A-3 Pass-Through Rate........................10
Class A-4 Pass-Through Rate........................10
Class A-5 Lockout Distribution Amount..........12, 46
Class A-5 Lockout Percentage.......................12
Class A-5 Lockout Pro Rata
Distribution Amount.........................14, 46
Class A-5 Pass-Through Rate........................10
Class A-6 Available Funds Pass-Through Rate........10
Class A-6 Formula Pass-Through Rate................10
Class A-6 Group II Certificates..................1, 6
Class A-6 Pass-Through Rate........................10
Class B Certificates.............................3, 6
Code................................................3
Combined Loan-to-Value Ratio.......................32
Commission..........................................4
Company.............................................6
Term Page
- ---- ----
Cooperative........................................52
Coupon Rates........................................8
CPR................................................38
Cut-Off Date........................................8
D&P................................................73
Definitive Certificate.............................51
Delinquency Advances...............................45
Depositor........................................3, 6
Depositor Optional Termination Date................18
DTC.............................................4, 16
DTC Participants...................................52
Eligible Investments...............................62
ERISA..........................................19, 71
ERISA Plan.........................................71
Euroclear..........................................16
Euroclear Operator.................................52
Euroclear Participants.............................52
European Depositories..........................16, 50
Exchange Act........................................5
Exemption..........................................71
Financial Intermediary.............................51
Fitch..............................................73
Global Securities..................................76
Group I...................................3, 6, 8, 23
Group I Available Funds Pass-Through Rate..........10
Group I Certificates.............................1, 6
Group I Monthly Remittance.........................44
Group I Principal Remittance Amount................44
Group I Subordination Deficit......................49
Group I Total Available Funds......................50
Group II..................................3, 6, 8, 23
Group II Certificates............................1, 6
Group II Monthly Remittance........................44
Group II Principal Remittance Amount...............44
Group II Subordination Deficit.....................49
Group II Supplemental Interest Amount..............10
Group II Supplemental Interest Amounts.............45
Group II Total Available Funds.....................50
HEP................................................38
Home Equity Prepayment.............................38
Insurance Agreement................................17
Insurance Proceeds.................................12
Interest Determination Date........................47
i
<PAGE>
Interest Remittance Amount.........................44
LIBOR..............................................10
Liquidation Proceeds...............................12
Master Servicer..............................3, 6, 54
Monthly Remittance.................................44
Moody's............................................73
Mortgage Loan Group.......................3, 6, 8, 23
Mortgage Loan Groups................................3
Mortgage Loans...................................1, 6
Mortgaged Properties................................6
Mortgages........................................6, 8
Mortgagors.........................................37
Net Liquidation Proceeds...........................12
Notional Principal Contract Regulations............70
Original Group I Pool Principal Balance.............8
Original Group II Pool Principal Balance............8
Original Pool Principal Balance.....................8
Originators.........................................3
Owner...............................................4
Participants.......................................50
Payment Date................................3, 11, 43
Plans..........................................19, 71
Policy Payments Account............................45
Pool................................................1
Pooling and Servicing Agreement..............3, 6, 43
Prepayment Assumption..........................38, 70
Prepayments........................................12
Principal and Interest Account.....................44
Principal Remittance Amount........................44
Record Date.........................................3
Reference Banks....................................47
Released Mortgaged Property Proceeds...............12
Relief Act.........................................15
REMICs..............................................3
Remittance Period..................................45
Residual Certificates...........................6, 43
Restricted Group...................................72
Reuters Screen LIBO Page...........................47
Rules..............................................51
S&P................................................72
Sale Agreement......................................3
Servicing Fee......................................17
SMMEA..............................................19
Specified Subordinated Amount......................48
Subordinated Amount................................48
Subordination Deficiency...........................49
Subordination Increase Amount......................49
Subordination Reduction Amount.....................49
Supplemental Interest Account......................45
Terms and Conditions...............................53
Total Available Funds..............................50
Trust............................................1, 6
Trust Estate.......................................65
Trustee..........................................3, 6
U.S. Person.........................................v
Underwriters....................................1, 75
Underwriting Agreement.............................75
Weighted average life..............................38
ii
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
=========================================================== ===========================================================
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN
AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY __________
REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS Mortgage Loan Trust
SUPPLEMENT AND THE PROSPECTUS, IF GIVEN OR MADE, SUCH _____
INFORMATION OR REPRESENTATIONS MAY NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY, THE DEPOSITOR, OR
BY THE UNDERWRITERS. THIS PROSPECTUS SUPPLEMENT AND THE $
PROSPECTUS DO NOT CONSTITUTE AN OFFER TO SELL, OR A
SOLICITATION OF AN OFFER TO BUY, THE SECURITIES OFFERED
HEREBY IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS
UNLAWFUL TO MAKE SUCH OFFER IN SUCH JURISDICTION. MORTGAGE LOAN PASS-THROUGH
NEITHER THE DELIVERY OF THIS PROSPECTUS SUPPLEMENT OR CERTIFICATES,
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT INFORMATION
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE Series _____
HEREOF OR THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF
THE COMPANY, THE MASTER SERVICER, THE DEPOSITOR, OR THE
CERTIFICATE INSURER SINCE SUCH DATE.
$__________ Class A-1 Group I Certificates,
- ------------------------------------------ Variable Pass-Through Rate
TABLE OF CONTENTS --------------
PROSPECTUS SUPPLEMENT $__________ Class A-2 Group I Certificates,
PAGE _____% Pass-Through Rate
Available Information..........................4 --------------
Reports to the Holders.........................4 $__________ Class A-3 Group I Certificates,
Incorporation of Certain Documents by Reference5 _____% Pass-Through Rate
Summary........................................6 --------------
Risk Factors..................................20 $_________ Class A-4 Group I Certificates,
Use of Proceeds...............................21 _____% Pass-Through Rate
The Company...................................22 --------------
Servicing.....................................22 $__________ Class A-5 Group I Certificates,
Loan Loss Experience on the Company's _____% Pass-Through Rate
portfolio of Mortgage Loans................23 --------------
The Mortgage Loan Pool........................23 $__________ Class A-6 Group II Certificates,
Description of the Certificates...............43 Variable Pass-Through Rate
Trustee.......................................64
The Certificate Insurance Policy and --------------
the Certificate Insurer....................68
Federal Income Tax Consequences...............70 __________
Erisa Considerations..........................71 Company
Ratings.......................................74
Legal Investment Considerations...............75 -------------------------------------------------
Underwriting..................................75 PROSPECTUS SUPPLEMENT
Experts.......................................76 -------------------------------------------------
Certain Legal Matters.........................76
------------------------------------------ ----------
PROSPECTUS __________
Summary of Prospectus...........................
Risk Factors....................................
Prospectus Supplement........................... __________
Reports to Holders..............................
Available Information...........................
Incorporation of Certain Documents by Reference.
The Mortgage Loan Pool..........................
Summary of Prospectus...........................
Description of the Securities.................43
The Trust Funds...............................64
Credit Enhancement............................68
Servicing of Loans............................70
The Agreements................................71
Certain Legal Aspects.........................74
Legal Investment Considerations...............75
Underwriting..................................75
Experts.......................................76
Certain Legal Matters.........................76
- ------------------------------------------
UNTIL 90 DAYS AFTER THE DATE OF THIS PROSPECTUS
SUPPLEMENT, ALL DEALERS EFFECTING TRANSACTIONS IN THE
CLASS A CERTIFICATES, WHETHER OR NOT PARTICIPATING IN
THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A
PROSPECTUS SUPPLEMENT OR A PROSPECTUS. THIS IS IN
ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A
PROSPECTUS SUPPLEMENT AND PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS
OR SUBSCRIPTIONS.
=========================================================== ===========================================================
</TABLE>
<PAGE>
EXHIBIT 99.2
FORM OF PROSPECTUS SUPPLEMENT
PROSPECTUS SUPPLEMENT
(To Prospectus dated ___________)
_______________ TRUST ______
$__________ Class A-1 ____% Home Loan Asset Backed Notes
$__________ Class A-2 ____% Home Loan Asset Backed Notes
$__________ Class A-3 ____% Home Loan Asset Backed Notes
$__________ Class A-4 ____% Home Loan Asset Backed Notes
$__________ Class M-1 ____% Home Loan Asset Backed Notes
$__________ Class M-2 ____% Home Loan Asset Backed Notes
$__________ Class B ____% Home Loan Asset Backed Notes
Home Loan Asset Backed Notes
Distributions payable on the 25th day of each month, commencing in ___________
HOME EQUITY SECURITIZATION CORP.
as Depositor
[_______________]
as Servicer
The _______________ Trust _______ (the "Trust") will be formed pursuant to
a trust agreement to be dated as of _____________ (the "Trust Agreement") and
entered into by Home Equity Securitization Corp., as depositor (the
"Depositor"), __________________, as owner trustee (the "Owner Trustee"), and
__________________, as co-owner trustee (in such capacity, the "Co-Owner
Trustee"). The Trust will issue $____________ aggregate principal amount of Loan
Asset Backed Notes (the "Notes") pursuant to an indenture to be dated as of
______________ (the "Indenture"), between the Trust and ___________________, as
indenture trustee (in such capacity, the "Indenture Trustee"). The Trust will
also issue instruments evidencing in the aggregate the entire residual interest
in the Trust (each a "Residual Interest"). Only the Notes are offered hereby.
Distributions of interest on the Class B Notes will be subordinated in
priority to distributions of interest on the Class M-1 and Class M-2 Notes
(together, the "Mezzanine Notes") which, in turn, will be subordinated in
priority to distributions of interest on the Class A-1, Class A-2, Class A-3 and
Class A-4 Notes (the "Senior Notes") as described herein. Distributions of
principal on the Class B Notes will be subordinated in priority to distributions
of principal on the Mezzanine Notes which, in turn, will be subordinated in
priority to distributions of principal of the Senior Notes as described herein.
<TABLE>
<CAPTION>
=====================================================================================================
Price to Public Underwriting Discount Proceeds to Depositor (2)
<S> <C> <C> <C>
Class A-1 Notes (1) ...... % % %
Class A-2 Notes (1) ...... % % %
Class A-3 Notes (1) ...... % % %
Class A-4 Notes (1) ...... % % %
Class M-1 Notes (1) ...... % % %
Class M-2 Notes (1) ...... % % %
Class B Notes (1) ........ % % %
Total .................... $ $ $
=====================================================================================================
</TABLE>
(1) Plus accrued interest, if any, at the applicable rate from _______________
(2) Before deducting expenses, estimated to be $____________
FOR A DISCUSSION OF MATERIAL RISKS ASSOCIATED WITH AN INVESTMENT IN THE
NOTES, SEE THE INFORMATION HEREIN UNDER "RISK FACTORS" BEGINNING ON PAGE [___]
AND IN THE PROSPECTUS BEGINNING ON PAGE [__].
THE NOTES REPRESENT INTERESTS IN OR OBLIGATIONS OF THE TRUST ONLY AND DO
NOT REPRESENT INTERESTS IN OR OBLIGATIONS OF THE DEPOSITOR, SERVICER, OWNER
TRUSTEE, INDENTURE TRUSTEE OR ANY AFFILIATE THEREOF, EXCEPT TO THE EXTENT
PROVIDED HEREIN. NEITHER THE LOANS NOR THE NOTES ARE INSURED OR GUARANTEED BY
ANY GOVERNMENTAL AGENCY.
THE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL
<PAGE>
OFFENSE. THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR
ENDORSED THE MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS
UNLAWFUL.
The yield to maturity of any Notes may vary from the anticipated yields to
the extent such Notes are purchased at a discount or premium and to the extent
the rate and timing of payments thereof are sensitive to the rate and timing of
0principal payments (including prepayments) of the Loans. Noteholders should
consider, in the case of any Notes purchased at a discount, the risk that a
lower than anticipated rate of principal payments could result in an actual
yield that is lower than the anticipated yield and, in the case of any Notes
purchased at a premium, the risk that a faster than anticipated rate of
principal payments could result in an actual yield that is lower than the
anticipated yield.
The Trust will consist of a pool (the "Pool") of home loans (the "Loans")
secured by either mortgages, deeds of trust or other similar security
instruments (the "Mortgages") as described herein under "The Loans." Loans
expected to have an aggregate unpaid principal balance as of the close of
business on _______________ (the "Initial Cut-Off Date") of approximately
$_____________ (the "Initial Loans") will be designated for inclusion in the
Pool. On or prior to______________, the Trust may purchase additional loans (the
"Subsequent Loans") having an aggregate unpaid principal balance of up to
$______________ (as adjusted pursuant to the immediately following sentence, the
"Original Pre-Funded Amount") with amounts on deposit in an account (the
"Pre-Funding Account") established for such purpose on the Closing Date. To the
extent that the aggregate unpaid principal balance (as of the Initial Cut-Off
Date) of the Initial Loans actually delivered on the Closing Date is more or
less than the amount set forth in the second preceding sentence, the Original
Pre-Funded Amount will be decreased or increased by a corresponding amount
provided that the amount of any such adjustment shall not exceed
$_______________.
Distributions on the Notes will be made to the holders of the Notes (the
"Noteholders") on the 25th day of each month or, if such day is not a Business
Day (as defined below), the next succeeding Business Day (each, a "Distribution
Date"), beginning in _____________. The Notes are secured by the assets of the
Trust pursuant to the Indenture. On each Distribution Date, the Noteholders will
be entitled to receive, from and to the extent that funds are available therefor
in the Note Distribution Account, distributions with respect to interest and
principal calculated as described herein under "Description of the
Notes--Distributions on the Notes." "Business Day" means any day other than (i)
a Saturday or a Sunday or (ii) a day on which banking institutions in New York
City or in the city in which the corporate trust office of the Indenture Trustee
is located are authorized or obligated by law or executive order to be closed.
________________ (the "Underwriter") intends to make a secondary market in
the Notes but has no obligation to do so. There is currently no secondary market
for the Notes and there can be no assurance that such a market will develop or,
if it does develop, that it will continue.
The Notes are offered by the Underwriter, subject to prior sale, when, as
and if delivered to and accepted by the Underwriter and subject to approval of
certain legal matters by counsel. It is expected that delivery of the Notes will
be made in book-entry form only through the facilities of The Depository Trust
Company (the "Depository") on or about _________________.
Certain persons participating in this offering may engage in transactions
that stabilize, maintain, or otherwise affect the price of the Notes. Such
transactions may include stabilizing and the purchase of Notes to cover
syndicate short positions. For a description of these activities, see "Method of
Distribution" herein.
This Prospectus Supplement does not contain complete information about the
offering of the Notes. Additional information is contained in the Prospectus
dated _____________ (the "Prospectus") which accompanies this Prospectus
Supplement and purchasers are urged to read both this Prospectus Supplement and
the Prospectus in full. Sales of the Notes may not be consummated unless the
purchaser has received both this Prospectus Supplement and the Prospectus.
Upon written request, [ ]. will make available its most recent
audited financial statements. Requests should be directed to [ ].,
_____________________, Attention:
Until ninety days after the date of this Prospectus Supplement, all dealers
effecting transactions in the Notes, whether or not participating in this
distribution, may be required to deliver a Prospectus Supplement and the
Prospectus. This is in addition to the obligation of dealers to deliver a
Prospectus Supplement and the Prospectus when acting as underwriters and with
respect to their unsold allotments or subscriptions.
2
<PAGE>
To the extent statements contained herein do not relate to historical or
current information, this Prospectus Supplement may be deemed to consist of
forward looking statements that involve risks and uncertainties that may
adversely affect the distributions to be made on, or the yield of, the Notes,
which risks and uncertainties are discussed under "Risk Factors" and "Prepayment
and Yield Considerations." As a consequence, no assurance can be given as to the
actual distributions on, or the yield of, any Class of Notes.
3
<PAGE>
SUMMARY
The following summary of certain pertinent information is qualified in its
entirety by reference to the detailed information appearing elsewhere in this
Prospectus Supplement and in the accompanying Prospectus. Certain capitalized
terms used herein are defined elsewhere in the Prospectus Supplement or in the
Prospectus.
Issuer ........................ _______________ Trust ________ (the "Trust"
or the "Issuer"), a Delaware business trust,
will be established pursuant to a trust
agreement to be dated as of ______________
(the "Trust Agreement"), among the
Depositor, the Owner Trustee, and the
Co-Owner Trustee.
Depositor ..................... Home Equity Securitization Corp.. (the
"Depositor"), a North Carolina corporation.
The Depositor is a wholly owned, special
purpose subsidiary of First Union National
Bank, a national banking association with
its headquarters in Charlotte, North
Carolina. See "The Company" in the
Prospectus and "Method of Distribution"
herein. None of the Depositor, the Servicer,
the Indenture Trustee, or any of their
respective affiliates has guaranteed or is
otherwise obligated with respect to the
Notes.
Servicer ...................... _______________________, ("_____" or as
servicer, the "Servicer"), in its capacity
as servicer of the Loans.
Owner Trustee and Co-Owner
Trustee ....................... __________________, a _____________ banking
corporation, as owner trustee under the
Trust Agreement (the "Owner Trustee") and
_________________________, as co-owner
trustee under the Trust Agreement (in such
capacity, the "Co-Owner Trustee").
Indenture Trustee ............ ________________________, a national banking
association, as the indenture trustee (in
such capacity, the "Indenture Trustee")
under an indenture to be dated as of
__________________ (the "Indenture") between
the Trust and the Indenture Trustee.
Custodian ..................... ________________________, as the custodian
(the "Custodian") under the Custodial
Agreement to be dated as of _____________,
______ by and among the Trust, the
Depositor, the Servicer, the Indenture
Trustee and the Custodian.
Closing Date .................. On or about __________________.
Cut-Off Date .................. With respect to the Initial Loans, the close
of business on __________________ (the
"Initial Cut-Off Date"). With respect to the
Subsequent Loans, the close of business on
the date specified as such in the related
subsequent transfer agreement (as defined
herein).
Distribution Date ............. The 25th day of each month or, if such day
is not a Business Day, the next succeeding
Business Day, commencing in
_________________ (each, a "Distribution
Date").
Due Period .................... With respect to a Distribution Date the
calendar month immediately preceding such
Distribution Date (each, a "Due Period").
4
<PAGE>
Determination Date ............ The fourteenth calendar day of each month
or, if such day is not a Business Day, the
immediately preceding Business Day (each, a
"Determination Date").
Record Date ................... With respect to each Distribution Date
(other than the first Distribution Date),
the close of business on the last Business
Day of the month immediately preceding the
month in which each Distribution Date occurs
and, with respect to the first Distribution
Date, the Cut-off Date (each, a "Record
Date").
The Notes ..................... The Trust will issue the Classes of Notes
pursuant to the Indenture in the respective
aggregate initial principal amounts
specified on the cover hereof (each such
aggregate principal amount being the
"Original Class Principal Balance" for the
related Class). The Notes will be secured by
the assets of the Trust pursuant to the
Indenture and will be senior in right of
payment to the Residual Interests. In
addition, as described herein, the Class
A-1, Class A-2, Class A-3 and Class A-4
Notes (the "Senior Notes") will also be
senior in the right to receive certain
payments relative to the Class M-1 and Class
M-2 Notes (together, the "Mezzanine Notes"),
which will be senior in the right to receive
certain payments relative to the Class B
Notes. Payments in respect of interest on
the Notes will be made prior to payments of
principal of the Notes. Interest will accrue
on each Class of Notes at the following
applicable per annum rate (as to each such
Class, the "Note Interest Rate"):
Class A-1 Notes _____
Class A-2 Notes _____
Class A-3 Notes _____
Class A-4 Notes _____
Class M-1 Notes _____
Class M-2 Notes _____
Class B Notes _____
Interest on the Notes will accrue on the
basis of a 360-day year consisting of twelve
30-day months. See "Description of the
Notes/Distributions on the Notes" herein.
Investment Characteristics of
Notes....................... The Notes will be issued in three groups in
terms of seniority of payment. The Class
A-1, Class A-2, Class A-3 and Class A-4
Notes (the "Senior Notes") will be senior in
the right to receive certain payments
relative to the Class M-1 and Class M-2
Notes (together, the "Mezzanine Notes"),
which will be senior in the right to receive
certain payments relative to the Class B
Notes. See "--Subordination" in this
Summary. In addition, the Final Payment
Dates for the Senior Notes are expected to
occur prior to the Final Payment Dates for
the Mezzanine Notes, which are expected to
occur prior to the Final Payment Date for
the Class B Notes. See "Prepayment and Yield
Considerations" herein.
Priority of Distributions
Regular Distribution
Amount ........................ The Regular Distribution Amount (as defined
herein) will be distributed on each
Distribution Date in the following order of
priority: (i) to pay accrued and unpaid
interest on the Senior Notes (as defined
herein) pro rata, based on the amount of
interest distributable in respect of each
such Class calculated at the related Note
Interest Rate; (ii) to pay accrued and
unpaid interest, first, on the Class M-1
Notes and, second, on the Class M-2 Notes;
(iii) to pay accrued and unpaid interest on
the Class B Notes; (iv) to pay as principal
of the Class A-1, Class A-2, Class A-3 and
Class A-4 Notes, in that order, until the
respective Class Principal Balances thereof
are reduced to zero, the amount necessary to
reduce the aggregate Class Principal Balance
of the Senior Notes to the Senior Optimal
Principal Balance (as defined herein); (v)
to pay as principal of the Class M-1 and
Class M-2 Notes, in that order, the amount
necessary to reduce the Class Principal
Balances thereof to the Class M-1 and Class
M-2 Optimal Principal Balances,
respectively; (vi) to pay as principal of
the
5
<PAGE>
Class B Notes, the amount necessary to
reduce the Class Principal Balance thereof
to zero; (vii) to pay to the Class M-1,
Class M-2 and Class B Notes, in that order,
their respective Loss Reimbursement
Deficiencies (as defined herein), if any;
and (viii) to pay any remaining amount to
the holders of the Residual Interests.
Excess Spread ................ The Excess Spread (as defined below) will be
distributed on each Distribution Date in the
following order of priority (after giving
effect to all distributions specified above
under "--Regular Distribution Amount"): (i)
prior to the termination of the Spread
Deferral Period (as defined below), to be
deposited in the Certificate Distribution
Account for distribution to the holders of
the Residual Interests; (ii) upon the
termination of the Spread Deferral Period,
(A) in an amount equal to the
Overcollateralization Deficiency Amount (as
defined below), if any, as follows: (1) to
pay as principal of the Class A-1, Class
A-2, Class A-3 and Class A-4 Notes, in that
order, until the respective Class Principal
Balances thereof are reduced to zero, the
amount necessary to reduce the aggregate
Class Principal Balance of the Senior Notes
to the Senior Optimal Principal Balance; (2)
to pay as principal of the Class M-1 and
Class M-2 Notes, in that order, the amount
necessary to reduce the Class Principal
Balances thereof to the Class M-1 Optional
Principal Balance (as defined herein) and
Class M-2 Optimal Principal Balance (as
defined herein), respectively; and (3) to
pay as principal of the Class B Notes, the
amount necessary to reduce the Class
Principal Balance thereof to zero; (B) to
pay to the Class M-1, Class M-2 and Class B
Notes, in that order, their respective Loss
Reimbursement Deficiencies, if any; and (C)
to pay any remaining amount to the holders
of the Residual Interests. "Excess Spread."
means with respect to any Distribution Date,
the excess of (a) the Available Distribution
Amount over (b) the Regular Distribution
Amount. "Spread Deferral Period" means the
period beginning on the Closing Date and
ending as soon as Excess Spread in an amount
equal to _________ has been deposited in the
Certificate Distribution Account for
distribution to the holders of the Residual
Interests. "Overcollateralization Deficiency
Amount" means with respect to any date of
determination, the excess, if any, of the
Overcollateralization Amount (such
Overcollateralization Amount) to be
calculated after giving effect to all
payments of the Regular Distribution Amount
on the Notes and the Residual Interests on
such Distribution Date).
Final Maturity Dates The Class Principal Balance of each Class of
Notes, to the extent not previously paid,
will be payable in full on the Final
Maturity Dates set forth below (each a
"Final Maturity Date"), although it is
anticipated that the actual final
Distribution Date for each Class of Notes
will occur significantly earlier than its
respective Final Maturity Date.
Final
Maturity Date
Class A-1 Notes _____________
Class A-2 Notes _____________
Class A-3 Notes _____________
Class A-4 Notes _____________
Class M-1 Notes _____________
Class M-2 Notes _____________
6
<PAGE>
Class B Notes
========
Form and Registration of
the Notes ..................... The Notes will be available in book-entry
form. Persons acquiring beneficial ownership
interests in the Notes ("Note Owners") will
hold such Notes through the book-entry
facilities of The Depository Trust Company
("DTC"). Transfers within DTC will be in
accordance with the usual rules and
operating procedures of DTC. So long as each
Class of Notes is in book-entry form, each
such Class will be evidenced by one or more
certificates registered in the name of the
nominee of DTC. The interests of the Note
Owners will be represented by book-entries
on the records of DTC and participating
members thereof. No Note Owner will be
entitled to receive a definitive certificate
representing such person's interest, except
in the event that Definitive Securities are
issued under the limited circumstances
described herein. "Definitive Securities"
are Notes issued in fully registered,
certificated form, as set forth in the
Indenture. All references in this Prospectus
Supplement to any Class of Notes reflect the
rights of the Note Owners of such Class only
as such rights may be exercised through DTC
and its participating members so long as
such Class of Notes is held by DTC. See "The
Agreements Book-Entry Securities" in the
Prospectus and "Description of the
Notes--Book-Entry Registration" herein. The
Note Owners' interests in each Class of
Notes will be held only in minimum
denominations of $100,000 and integral
multiples of $1,000 on excess thereof.
Assets of the Trust ........... On the Closing Date, the Trust will purchase
from the Depositor a pool of home loans (the
"Initial Loans") expected to have an
aggregate unpaid principal balance of
approximately $_____________ as of the
Initial Cut-Off Date (the actual aggregate
unpaid principal balance (as of the Initial
Cut-off Date) of the Initial Loans, the
"Original Pool Principal Balance") pursuant
to a Sale and Servicing Agreement to be
dated as of _________________ (the "Sale and
Servicing Agreement") among the Trust, the
Depositor, the Servicer, the Indenture
Trustee and the Co-Owner Trustee. On or
prior to ______________, the Trust may
purchase additional loans (the "Subsequent
Loans," and together with the Initial Loans,
the "Loans") having an aggregate unpaid
principal balance of up to approximately
$_____________ (as adjusted pursuant to the
immediately following sentence, the
"Original Pre-Funded Amount"). To the extent
that the Original Pool Principal Balance is
more or less than the amount set forth in
the second preceding sentence, the Original
Pre-Funded Amount will be decreased or
increased by a corresponding amount provided
that the amount of any such adjustment shall
not exceed $_____________. The Loans will be
secured by mortgages, deeds of trust or
other similar security instruments (the
"Mortgages").
The Initial Loans are expected to consist
of approximately _______ loans, having an
Original Pool Principal Balance of
approximately $_________. See "The Loans"
herein. The statistical information
presented in this Prospectus Supplement
regarding the Loans is based only on the
Initial Loans identified as of the date of
this Prospectus Supplement, and does not
take into account any additional Initial
Mortgage Loans identified after the date of
this Prospectus Supplement or any
Subsequent Loans that may be sold to the
Trust during the Pre-Funding Period through
application of amounts in the Pre-Funding
Account. In addition, prior to the Closing
Date, ______ may remove any of the home
loans intended to be sold to the Trust,
substitute comparable loans therefor, or
add comparable loans thereto; however, the
aggregate principal balance of such loans
so replaced, added or removed may not
exceed ______% of the Original Pool
Principal Balance. If, prior to the Closing
Date, loans are removed (or added) as
described herein, an amount equal to the
aggregate principal balances of such loans
will be added to (or deducted from) the
Original Pre-Funded Amount on the Closing
Date. As a result of the foregoing, the
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statistical information presented herein
regarding the Loans expected to be sold to
the Trust as of the date of this Prospectus
Supplement (1) does not take into account
any (a) additional Initial Mortgage Loans
not identified as of the date of this
Prospectus Supplement and (b) Subsequent
Loans that may be sold to the Trust during
the Pre-Funding Period through the
application of amounts in the Pre-Funding
Account and (2) may vary in certain respects
from comparable information based on the
actual composition of Loans at the Closing
Date or any Subsequent Transfer Date. See
"Risk Factors--Acquisition of Subsequent
Loans" and "The Loans" herein.
The assets of the Trust will consist of the
Loans. The assets of the Trust will also
include (i) payments of interest and
principal received in respect of the Loans
after the related Cut-Off Date; (ii) amounts
on deposit in the Collection Account, Note
Distribution Account, Pre-Funding Account,
Capitalized Interest Account and Certificate
Distribution Account; and (iii) certain
other ancillary or incidental funds, rights
and properties related to the foregoing. See
"The Trust--General" herein. The Trust will
include the unpaid principal balance of each
Loan as of its applicable Cut-Off Date (the
"Cut-Off Date Principal Balance"). With
respect to any date, the "Pool Principal
Balance" will be equal to the aggregate of
the Principal Balances of all Loans as of
the last day of the immediately preceding
Due Period (as defined herein). The
Principal Balance of any Loan will be
calculated as described herein under "The
Trust--General."
The Trust will also issue instruments
evidencing in the aggregate the entire
residual interest in the assets of the Trust
(each a "Residual Interest"), which is not
being offered hereby. The Residual Interests
are subordinate in right of payment to the
Notes.
The Loans ..................... All of the Loans will be home loans that are
not insured or guaranteed by a governmental
agency the related proceeds of which were
used to finance (i) property improvements,
(ii) the acquisition of personal property
such as home appliances or furnishings,
(iii) debt consolidation, (iv) the partial
refinancing of one- to two-family
residential properties (which may include
cash-out to the borrower), (v) a combination
of property improvements, debt consolidation
and other consumer purposes or (vi) to
purchase the related mortgaged property.
Substantially all of the Mortgages for the
Loans will be junior (i.e., second) in
priority to a senior lien on the related
mortgaged properties (each a "Mortgaged
Property"), which will consist of
owner-occupied single-family residences.
Substantially all of the Loans will be
secured by liens on Mortgaged Properties in
which the borrowers have little or no equity
(i.e., the related Combined Loan-to-Value
Ratios exceed 100%) at the time of
origination. See "Risk Factors--Adequacy of
the Mortgaged Properties as Security for the
Loans" and "The Loans" herein and "The Trust
Funds--The Loans" in the Prospectus.
"Combined Loan-to-Value Ratio" means, with
respect to any Loan, the fraction, expressed
as a percentage, the numerator of which is
the principal balance of such Loan at
origination plus, in the case of a junior
lien Loan, the aggregate outstanding
principal balance of the related senior
liens on the date of origination of such
Loan, and the denominator of which is the
appraised value of the related Mortgaged
Property at the time of origination of such
Loan (determined as described herein under
"_______________--Underwriting Guidelines").
The Initial Loans are expected to consist of
approximately _______ loans having an
Original Pool Principal Balance expected to
be approximately $_____________. More or
fewer Initial Loans having an Original Pool
Principal Balance of greater or less than
such amount may actually constitute the
Initial Loans provided that the amount of
any such variance
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in the Original Pool Principal Balance
shall not exceed $__________. See "The
Loans" herein.
_______ and the Depositor will be obligated
either to repurchase any Loan as to which
(i) a representation or warranty has been
breached or (ii) a document deficiency
exists, which breach or deficiency remains
uncured for a period of 60 days and has a
materially adverse effect on the interests
of the Noteholders in such Loan (each, a
"Defective Loan") or to remove such
Defective Loan and substitute a Qualified
Substitute Loan. In addition, ______ may at
its option purchase or remove from the Trust
and, if not purchased, substitute for such
Loan a qualified Substitute Loan, any Loan
that is 90 days or more delinquent and which
_____ determines in good faith would
otherwise become subject to foreclosure
proceedings so long as the aggregate of such
purchases does not exceed 10% of the Maximum
Collateral Amount. As used herein, a
"Qualified Substitute Loan" will have
characteristics that are substantially
similar to the characteristics of the Loan
which it replaces. The repurchase of any
Loan (rather than the replacement thereof
through substitution) will result in
accelerated payments of principal
distributions on the Notes. See
"_________________--Repurchase or Substitut-
ution of Loans" herein.
With respect to any date, the "Maximum
Collateral Amount" shall equal the sum of
the (i) the Original Pool Principal Balance
and (ii) the aggregate Cut-Off Date
Principal Balances of all Subsequent Loans
transferred to the Trust on or prior to
such date.
Credit Enhancement ............ Credit enhancement with respect to the Notes
will be provided by (i) the subordination of
distributions in respect of the Residual
Interests (as well as the subordination of
certain Classes of Notes to other Classes of
Notes, as described herein), and (ii) the
Overcollateralization Amount which results
from (a) the excess of the sum of the
Original Pool Principal Balance and the
Original Pre-Funding Amount over the
aggregate of the Class Principal Balances of
all Classes of Notes and (b) following the
Spread Deferral Period, the limited
acceleration of the principal amortization
of the Notes relative to the amortization of
the Loans by the application of Excess
Spread, as described herein.
Subordination ............... The rights of the holders of the Class M-1
Notes to receive distributions of interest
on each Distribution Date will be
subordinated to such rights of the holders
of the Senior Notes, the rights of the
holders of the Class M-2 Notes to receive
distributions of interest on each
Distribution Date will be subordinated to
such rights of the holders of the Class M-1
Notes and the Senior Notes, and the rights
of the holders of the Class B Notes to
receive distributions of interest on each
Distribution Date will be subordinated to
such rights of the holders of all other
Classes of Notes. In addition, the rights of
the holders of the Class M-1 Notes to
receive distributions of principal on each
Distribution Date generally will be
subordinated to such rights of the holders
of the Senior Notes, and the rights of the
holders of the Class M-2 Notes to receive
distributions of principal on each
Distribution Date generally will be
subordinated to such rights of the holders
of the Senior Notes and the Class M-1 Notes.
The rights of the holders of the Class B
Notes to receive distributions of principal
on each Distribution Date generally will be
subordinated to such rights of the holders
of all other Classes of Notes. In addition,
the rights of the holders of the Residual
Interests to receive any distributions from
amounts available on each Distribution Date
will be subordinated to such rights of the
holders of all Classes of Notes. The
subordination described above is intended to
enhance the likelihood of regular receipt by
the holders of the Notes of the full amount
of interest and principal distributions due
to such holders and to afford such holders
protection against losses on the Loans.
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<PAGE>
See "Description of Credit Enhancement--
Subordination and Allocation of Losses"
herein.
Overcollateralization ......... As of any date of determination, the
"Overcollateralization Amount" will equal
the excess of (A) the sum of (i) the Pool
Principal Balance as of the end of the
immediately preceding Due Period and (ii)
the Pre-Funded Amount as of the end of the
immediately preceding Due Period over (B)
the aggregate of the Class Principal
Balances of the Notes. On the Closing Date,
the Overcollateralization Amount will be
$___________, which is equal to ______% of
the sum of the Original Pool Principal
Balance and the Original Pre-Funded Amount.
As a result of the application of Excess
Spread in reduction of the Class Principal
Balances of the Notes following the end of
the Spread Deferral Period, the
Overcollateralization Amount is expected to
increase over time until such amount is
equal to the Overcollateralization Target
Amount.
The "Spread Deferral Period" will begin on
the Closing Date and end as soon as Excess
Spread in an amount equal to $____________
has been deposited in the Certificate
Distribution Account for distribution to the
holders of the Residual Interests. The
"Overcollateralization Target Amount" will
equal (A) with respect to any Distribution
Date occurring prior to the Stepdown Date
(as defined below), the greater of (x)
____% of the Maximum Collateral Amount and
(y) the Net Delinquency Calculation Amount
(as defined below), and (B) with respect to
any other Distribution Date, the greater of
(x) ____% of the Pool Principal Balance as
of the end of the preceding Due Period and
(y) the Net Delinquency Calculation Amount;
provided, however, that the
Overcollateralization Target Amount will in
no event be less than ____% of the Maximum
Collateral Amount. "Net Delinquency
Calculation Amount" means with respect to
any Distribution Date, the excess, if any,
of (x) the product of 2.5 and the Six-Month
Rolling Delinquency Average over (y) the
aggregate of the amounts of Excess Spread
for the three preceding Distribution Dates.
While the distribution of Excess Spread
following the Spread Deferral Period to
holders of the Notes in reduction of their
respective Class Principal Balances has been
designed to produce and maintain a given
level of overcollateralization with respect
to the Notes, there can be no assurance that
Excess Spread will be generated in
sufficient amounts to ensure that such
overcollateralization level will be achieved
or maintained at all times. See "Description
of Credit Enhancement--Subordination and
Allocation of Losses" and "Risk
Factors--Adequacy of Credit Enhancement"
herein.
Application of Allocable Loss
Amounts ....................... In the event that (a) the aggregate of the
Class Principal Balances of all Classes of
Notes on any Distribution Date (after giving
effect to all distributions on such date)
exceeds (b) the sum of the Pool Principal
Balance and the Pre-Funded Amount, each as
of the end of the immediately preceding Due
Period (such excess, an "Allocable Loss
Amount"), such Allocable Loss Amount will be
applied, sequentially, in reduction of the
Class Principal Balances of the Class B,
Class M-2 and Class M-1 Notes, in that
order, until the respective Class Principal
Balances thereof have been reduced to zero.
Allocable Loss Amounts will not be applied
to the reduction of the Class Principal
Balance of any Class of Senior Notes.
Allocable Loss Amounts applied to any
applicable Class of Notes will entitle such
Class to reimbursement (such entitlement, a
"Loss Reimbursement Deficiency") under the
circumstances and to the extent provided
herein. See "Description of the
Notes--Application of Allocable Loss
Amounts" herein.
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<PAGE>
Fees and Expenses of
the Trust ..................... As compensation for its services pursuant to
the Sale and Servicing Agreement, the
Servicer will be entitled to receive a fee
(the "Servicing Fee") and the additional
compensation described under "Description of
Transfer and Servicing Agreements--
Servicing" (together, the "Servicing
Compensation"). As compensation for their
services pursuant to the Indenture, the Sale
and Servicing Agreement, the Administration
Agreement, the Custodial Agreement and the
Trust Agreement as applicable (the "Transfer
and Servicing Agreements") the Indenture
Trustee will be entitled to its accrued and
unpaid fee (the "Indenture Trustee Fee") and
the Owner Trustee will be entitled to its
accrued and unpaid fee (the "Owner Trustee
Fee"). The Servicing Compensation, the
Indenture Trustee Fee and the Owner Trustee
Fee are collectively referred to as the
"Trust Fees and Expenses."
Pre-Funding Account ........... On the Closing Date, the Original Pre-Funded
Amount will be deposited in the Pre-Funding
Account, which account will be in the name
of the Indenture Trustee, will form part of
the Trust and will be used to acquire
Subsequent Loans. The Original Pre-Funded
Amount is expected to equal $____________ on
the Closing Date but such account may be
increased or decreased to by an amount equal
to the amount by which the Original Pool
Principal Balance falls short of or exceeds
$___________; provided that the amount of
any such increase or decrease shall not
exceed $___________. During the Pre-Funding
Period (as defined below), the amount on
deposit in the Pre-Funding Account (net of
investment earnings thereon) (the
"Pre-Funded Amount") will be reduced by the
amount thereof used to purchase Subsequent
Loans in accordance with the Sale and
Servicing Agreement. The "Pre-Funding
Period" is the period commencing on the
Closing Date and ending generally on the
earlier to occur of (i) the date on which
the amount on deposit in the Pre-Funding
Account (net of any investment earnings
thereon) is less than $_________ and (ii)
______________. On the Distribution Date
following the Due Period in which the
termination of the Pre-Funding Period
occurs, if the Pre-Funded Amount at the end
of the Pre-Funding Period is less than
$___________, any such Pre-Funded Amount
will be distributed to holders of the
Classes of Notes then entitled to receive
principal on such Distribution Date in
reduction of the related Class Principal
Balances, thus resulting in a partial
redemption of the related Notes on such
date. On the Distribution Date following the
Due Period in which the termination of the
Pre-Funding Period occurs, if the Pre-Funded
Amount at the end of the Pre-Funding Period
is greater than or equal to $__________
(such event, a "Pre-Funding Pro Rata
Distribution Trigger"), such Pre-Funded
Amount will be distributed to the holders of
all Classes of Notes and the Residual
Interests (which initially are represented
by the Overcollateralization Amount on the
Closing Date), pro rata, based on the
Original Class Principal Balances thereof
and the Residual Interests in relation to
the sum of the Original Pool Principal
Balance and the Original Pre-Funded Amount.
Capitalized Interest Account .. On the Closing Date, a portion of the sales
proceeds of the Notes will be deposited in
an account (the "Capitalized Interest
Account") for application by the Indenture
Trustee on the Distribution Dates in
______________, _____________ and
_______________ to cover shortfalls in
interest on the Notes that may arise due to
the utilization of the Pre-Funding Account
as described herein. Any amounts remaining
in the Capitalized Interest Account at the
end of the Pre-Funding Period will be paid
to ______.
Optional Termination .......... The holders of Residual Interests exceeding
in the aggregate a 50% percentage interest
(the "Majority Residual Interestholders")
may, at their option, effect an early
termination of the Trust on or after any
Distribution Date on which the Pool
Principal Balance declines to ____% or less
of the Maximum Collateral Amount, by
purchasing all of the Loans at a price
11
<PAGE>
equal to or greater than the Termination
Price. The "Termination Price" shall be on
an amount equal to the sum of (i) the then
outstanding Principal Balances of the Loans
plus all accrued and unpaid interest
thereon, (ii) any Trust Fees Expenses due
and unpaid on such date and (iii) any
unreimbursed Servicing Advances including
such Servicing Advances deemed to be
nonrecoverable. "Servicing Advances" are
reasonable and customary expense advances
with respect to such loan. The proceeds from
such sale will be distributed in the order
and priority set forth above under
"Distribution Priorities." The proceeds from
any such sale will be distributed in the
amounts and subject to the priorities
described herein under "Description of the
Notes--Distributions on the Notes." See
"Description of the Notes--Optional
Termination of the Trust" herein.
Tax Status .................... In the opinion of (Dewey Ballantine LLP "Tax
Counsel" herein) for Federal income tax
purposes, the Notes will be characterized as
debt and the Trust will not be characterized
as an association (or a publicly traded
partnership) taxable as a corporation. Each
Noteholder, by the acceptance of a Note,
will agree to treat the Notes as
indebtedness for Federal income tax
purposes. Alternative characterizations of
the Trust are possible, but would not result
in materially adverse tax consequences to
Noteholders. See "Certain Federal Income Tax
Consequences" herein and "Certain Federal
Income Tax Consequences" in the Prospectus
for additional information concerning the
application of Federal income tax laws to
the Trust and the Notes.
ERISA ......................... Subject to the considerations discussed
under "ERISA Considerations" herein and in
the Prospectus, plans that are subject to
the requirements of the Employee Retirement
Income Security Act of 1974, as amended
("ERISA"), and the Internal Revenue Code of
1986, as amended (the "Code"), may purchase
the Notes. Any fiduciary considering whether
to purchase the Notes on behalf of such a
plan must determine that the purchase of a
Note is consistent with its fiduciary duties
under ERISA and does not result in a
nonexempt prohibited transaction as defined
in Section 406 of ERISA or Section 4975 of
the Code.
See "ERISA Considerations" herein and in the
Prospectus.
Servicing of the Loans ........ The Servicer will perform the loan servicing
functions with respect to the Loans pursuant
to the Sale and Servicing Agreement and will
be entitled to receive a fee (the "Servicing
Fee") and other servicing compensation
(collectively, the "Servicing
Compensation"), payable monthly, as
described herein (See "Description of the
Transfer and Servicing
Agreements--Servicing" herein). The Servicer
may subcontract its servicing obligations
and duties with respect to certain Loans to
certain qualified servicers pursuant to one
or more subservicing agreements (each such
servicer, in this capacity, a
"Subservicer"). However, the Servicer will
not be relieved of its servicing obligations
and duties with respect to any subserviced
Loans. In addition, the Servicer will be
responsible for paying the fees of any such
Subservicer.
Legal Investment .............. The Notes will not constitute "mortgage
related securities" for purposes of the
Secondary Mortgage Market Enhancement Act of
1984 "SMMEA"), because some of the Mortgages
securing the Loans are not first mortgages.
Accordingly, many institutions with legal
authority to invest in comparably rated
securities based solely on first mortgages
may not be legally authorized to invest in
the Notes. See "Legal Investment Matters"
herein and "Legal Investment" in the
Prospectus.
Ratings of the Notes .......... It is a condition to the issuance of the
Notes that each of the Senior Notes be rated
"[AAA]" by [Fitch Investors Service, L.P.
("Fitch")] and "[Aaa]"
12
<PAGE>
by [Moody's Investor Service] ["Moody's" and
together with Fitch,] the "Rating
Agencies"), and that the Class M-1 Notes be
rated "[AA]" by [Fitch] and "[A2]" by
[Moody's], the Class M-2 Notes be rated
"[A]" by Fitch] and "[A2]" by [Moody's] and
the Class [B] Notes be rated "[BBB]" by
[Fitch] and "[Baa3]" by [Moody's]. A
security rating does not address the
frequency of principal prepayments or the
corresponding effect on yield to holders of
the Notes. The security rating does not
address the ability of the Trust to acquire
Subsequent Loans, any potential redemption
with respect thereto or the effect on yield
resulting therefrom. None of the Depositor,
Servicer, Indenture Trustee, Owner Trustee,
Co-Owner Trustee or any other person is
obligated to maintain the rating on any
Class of Notes.
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<PAGE>
RISK FACTORS
For a discussion of all material risk factors in connection with the
purchase of the Notes, prospective investors in the Notes should consider the
following risk factors (as well as the factors set forth under "Risk Factors" in
the Prospectus). These factors are intended to identify the significant sources
of risk affecting an investment in the Notes. Unless the context indicates
otherwise, any numerical or statistical information presented in this Prospectus
Supplement is based upon the characteristics of the Initial Loans identified as
of ______________ (such date, the "Statistic Calculation Date").
The Statistical Distribution of Characteristics As Of The Initial Cut-Off Date
For The Initial Loans will Vary Somewhat From The Statiscal Distribution Of Such
Characteristics As Of The Statistic Calculation Date.
The statistical information presented in this Prospectus Supplement
concerning the Initial Loans is based on the characteristics of a portion of
such Initial Loans as of Statistic Calculation Date. Such portion aggregated $
_______________ as of the Statistic Calculation Date. _____ expects that the
actual aggregate principal balance of the Initial Loans as of the Initial
Cut-Off Date will be approximately $_____________. The additional Initial Loans
will represent Loans originated by or on behalf of ______ or purchased and
re-underwritten by ______ in accordance with ______'s program on or prior to the
Initial Cut-Off Date. Moreover, certain Initial Loans included as of the
Statistic Calculation Date may prepay in full, or may be determined not to meet
the eligibility requirements for the Loans, and thus not be included as Initial
Loans. As a result of the foregoing, the statistical distribution of
characteristics as of the Initial Cut-Off Date for the Initial Loans will vary
somewhat from the statistical distribution of such characteristics as of the
Statistic Calculation Date as presented in this Prospectus Supplement, although
such variance will not be material.
Variation in Credit Quality May Affect the Ability of _____________ to Acquire
or Originate Subsequent Loans
The ability of ______ to acquire or originate loans subsequent to the
Closing Date and on or prior to ___________________ that meet the requirements
for transfer during the Pre-Funding Period under the Sale and Servicing
Agreement is and will be affected by a variety of factors, including interest
rates, employment levels, the rate of inflation and consumer perception of
economic conditions generally. On the Distribution Date following the Due Period
in which the termination of the Pre-Funding Period occurs, if the Pre-Funded
Amount at the end of the Pre-Funding Period is less than $_________, any such
Pre-Funded Amount will be distributed to holders of the Classes of Notes then
entitled to receive principal on such Distribution Date in reduction of the
related Class Principal Balances, thus resulting in a partial redemption of the
related Notes on such date. On the Distribution Date following the Due Period in
which the termination of the Pre-Funding Period occurs, if the Pre-Funded Amount
at the end of the Pre-Funding Period is greater than or equal to $___________
(such event, a "Pre-Funding Pro Rata Distribution Trigger"), such Pre-Funded
Amount will be distributed to the holders of all Classes of Notes and the
Residual Interests (which initially represent the Overcollateralization Amount
on the Closing Date), pro rata, based on the Original Class Principal Balances
of the Notes and original balance of the Residual Interests in relation to the
sum of the Original Pool Principal Balance and the Original Pre-Funded Amount.
Any conveyance of Subsequent Loans is subject to the conditions set forth
in the Sale and Servicing Agreement, which conditions include among others: (i)
each Subsequent Loan must satisfy the representations and warranties specified
in the Sale and Servicing Agreement; (ii) ______ will not select Subsequent
Loans in a manner that it believes is adverse to the interests of the
Noteholders; and (iii) as of the related Cut-Off Date, all of the Loans,
including the Subsequent Loans to the conveyed to the Trust by the Depositor as
of such Cut-Off Date, must satisfy certain statistical criteria set forth in the
Sale and Servicing Agreement. Although each Subsequent Loan must satisfy the
eligibility criteria referred to above at the time of its transfer to the Trust,
the Subsequent Loans may have been originated or purchased by ______ using
credit criteria different from those which were applied to the Initial Loans and
may be of a different credit quality and have different loan characteristics
from the Initial Loans. After the transfer of the Subsequent Loans to the Trust,
the aggregate statistical characteristics of the Loan Pool may vary from those
of the Initial Loans that have been identified as of the Statistic Calculation
Date as described herein. See "The Loans Initial Loan Statistics", and
"Conveyance of Subsequent Loans" herein.
Prepayment May Affect the Yield to Maturity of the Notes
All of the Loans may be prepaid in whole or in part at any time; however,
with respect to certain Loans, a prepayment charge, as permitted by applicable
law, may apply to full and partial prepayments during the first three years
after origination as described below under "Prepayment and Yield
Considerations." Home loans, such as the Loans, have been originated in
significant volume only during the past few years and neither the Depositor nor
the Servicer is aware of any publicly available studies or statistics on the
rate of prepayment of such loans. The Trust's prepayment experience may be
affected by a wide variety of factors, including general economic conditions,
interest rates, the availability of alternative financing, homeowner mobility
and the Combined Loan-to-Value Ratios of the
14
<PAGE>
Loans. In addition, substantially all of the Loans contain due-on-sale
provisions and the Servicer intends to enforce such provisions unless (i) the
Servicer, in a manner consistent with accepted servicing practices, permits the
purchaser of the related Mortgaged Property to assume the Loan or (ii) such
enforcement is not permitted by applicable law. To the extent permitted by
applicable law, such assumption will not release the original borrower from its
obligation under any such Loan. See "Certain Legal Aspects of the
Loans--Due-on-Sale Clauses in Mortgage Loans" in the Prospectus.
In certain cases, the Servicer may, in a manner consistent with its
servicing practices, permit a borrower who is selling his principal residence
and purchasing a new one to substitute the new Mortgaged Property as collateral
for the related Loan. In such event, the Servicer will generally require the
borrower to make a partial prepayment in reduction of the principal balance of
the Loan to the extent that the borrower has received proceeds from the sale of
the prior residence that will not be applied to the purchase of the new
residence.
The extent to which the yield to maturity of a Note may vary from the
anticipated yield will depend upon (i) the degree to which it is purchased at a
premium or discount, (ii) the degree to which the timing of distributions to
holders thereof is sensitive to scheduled payments, prepayments, liquidations,
defaults, delinquencies, substitutions, modifications and repurchases of Loans
and to the distribution of Excess Spread and (iii) the application of Allocable
Loss Amounts to certain Classes of Notes as specified herein. In the case of any
Note purchased at a discount, an investor should consider the risk that a slower
than anticipated rate of principal distributions to the holder of such Note
(including without limitation principal prepayments on the Loans) could result
in an actual yield to such investor that is lower than the anticipated yield
and, in the case of any Note purchased at a premium, the risk that a faster than
anticipated rate of principal distributions to the holder of such Note
(including without limitation principal prepayments on the Loans) could result
in an actual yield to such investor that is lower than the anticipated yield. On
each Distribution Date following the Spread Deferral Period and until the
Overcollateralization Amount is at least equal to the Overcollateralization
Target Amount, the allocation of the Excess Spread for such Distribution Date as
an additional distribution of principal of the Notes will accelerate the
amortization of the Notes relative to the amortization of the Loans. Further, in
the event that significant distributions of principal are made to holders of the
Notes as a result of prepayments, liquidations, repurchases and purchases of the
Loans or distributions of Excess Spread, there can be no assurance that holders
of the Notes will be able to reinvest such distributions in a comparable
alternative investment having a comparable yield. See "Risk Factors--Prepayment
and Yield Considerations" herein.
In The Event Of Higher Rates Of Delinquencies, Defaults And Losses, The Amounts
Available From the Credit Enhancement May Not Be Adequate For Cover The Delays
Or Short Falls in Distributions To The Holders Of The Notes
Credit enhancement with respect to the Notes will be provided by (i) the
subordination of distributions in respect of the Residual Interests (as well as
the subordination of certain Classes of Notes to other Classes of Notes, as
described herein), and (ii) the Overcollateralization Amount which results from
(a) the excess of the sum of the Original Pool Principal Balance and the
Original Pre-Funded Amount over the aggregate of the Class Principal Balances
for all Classes as of Notes and (b) following the Spread Deferral Period, the
limited acceleration of the principal amortization of the Notes relative to the
amortization of the Loans by the application of Excess Spread, as described
herein. If the Loans experience higher rates of delinquencies, defaults and
losses than initially anticipated in connection with the ratings of the Notes,
or if the Loan Rates on those Initial Loans which have adjustable interest rates
("Adjustable Rate Loans") decrease, the amounts available from the credit
enhancement may not be adequate to cover the delays or shortfalls in
distributions to the holders of the Notes that result from such higher
delinquencies, defaults and losses. If the amounts available from the credit
enhancement are inadequate, the holders of the Notes will bear the risk of any
delays and losses resulting from the delinquencies, defaults and losses on the
Loans.
The rights of the holders of the Class M-1 Notes to receive distributions
of interest on each Distribution Date generally will be subordinated to such
rights of the holders of the Senior Notes, the rights of the holders of the
Class M-2 Notes to receive distributions of interest on each Distribution Date
generally will be subordinated to such rights of the holders of the Class M-1
Notes and the Senior Notes, and the rights of the holders of the Class B Notes
to receive distributions of interest on each Distribution Date generally will be
subordinated to such rights of the holders of all other Classes of Notes. In
addition, the rights of the holders of the Class M-1 Notes to receive
distributions of principal on each Distribution Date generally will be
subordinated to such rights of the holders of the Senior Notes, and the rights
of the holders of the Class M-2 Notes to receive distributions of principal on
each Distribution Date generally will be subordinated to such rights of the
holders of the Senior Notes and the Class M-1 Notes. Further, distributions of
principal of the Class B Notes generally will be subordinated in priority of
payment to all other Classes of Notes. See "Description of Credit
Enhancement--Subordination and Allocation of Losses" herein.
While the distribution of Excess Spread to the holders of the Notes in the
manner specified herein has been designed to produce and maintain a given level
of overcollateralization with respect to the Notes, there can be no assurance
that Excess Spread will be generated in sufficient amounts to ensure that such
overcollateralization level will be achieved or maintained at all times. In
particular, as a result of delinquencies on the Loans during any Due Period,
the amount of interest received on the Loans during such Due Period may be less
than the amount of interest distributable on the Notes on the related
Distribution Date. Such an occurrence will cause the Class Principal Balances of
the Classes of Notes to decrease at a slower rate relative to the
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Pool Principal Balance, resulting in a reduction of the Overcollateralization
Amount and, in some circumstances, an Allocable Loss Amount.
The holders of the Residual Interests will not be required to refund any
amounts previously distributed to them pursuant to the Transfer and Servicing
Agreements, including any distributions of Excess Spread, regardless of whether
there are sufficient funds on a subsequent Distribution Date to make a full
distribution to holders of the Notes.
The Mortgaged Properties May Not Provide Adequate Security For The Loans
As of the Statistic Calculation Date, the Combined Loan-to-Value Ratios for
the Initial Loans ranged from approximately ______% to _______%, with
approximately ______% of the Statistic Principal Balance consisting of Loans
having Combined-Loan-to-Value Ratios in excess of _______%. As of the Statistic
Calculation Date the weighted average Combined Loan-to-Value Ratio of the
Initial Loans was ________%. As a result of the foregoing, the Mortgaged
Properties may not provide adequate security for the Loans. Even assuming that a
Mortgaged Property provides adequate security for the related Loan, substantial
delays could be encountered in connection with the liquidation of a Loan that
would result in current shortfalls in distributions to the Noteholders to the
extent such shortfalls are not covered by the credit enhancement described
herein. In addition, liquidation expenses relating to any Liquidated Loan (such
as legal fees, real estate taxes, and maintenance and preservation expenses)
would reduce the liquidation proceeds otherwise payable to the Noteholders. In
the event that any Mortgaged Property fails to provide adequate security for the
related Loan, any losses in connection with such Loan will be borne by
Noteholders as described herein to the extent that the credit enhancement
described herein is insufficient to absorb all such losses.
Should The Loan Rates On The Adjustable Loans Decrease, The Amount Available For
Distribution May Be Lessened
While all of the Notes are fixed rate obligations, as of the Statistic
Calculation Date, Initial Loans representing approximately ______% of the
Statistic Principal Balance, are Adjustable Rate Loans. Should the Loan Rates on
the Adjustable Rate Loans decrease, the amount of Excess Spread available for
deposit to the Certificate Distribution Account to cause the termination of the
Spread Deferral Period and then to make payments to achieve the required
Overcollateralization Amount will be lessened. See "Prepayment and Yield
Considerations--Excess Spread and Reduction of Overcollateralization Amount."
Book-Entry Registration of Notes May Reduce The Liquidity Of Such Notes In The
Secondary Trading Market
Issuance of the Notes in book-entry form may reduce the liquidity of such
Notes in the secondary trading market because investors may be unwilling to
purchase Notes for which they cannot obtain physical certificates. Moreover,
because transactions in the Notes can be effected only through DTC,
participating organizations, indirect participants and certain banks, the
ability of a beneficial owner of a Note to pledge its interest in a Note to
persons or entities that do not participate in the DTC system, or otherwise to
take actions in respect of such Note, may be limited due to lack of a physical
certificate representing such Note.
Additional Factors Affecting Delinquencies, Defaults and Losses on Loans
Underwriting Guidelines May Not Consider The Adequacy Of The Value Of The
Related Mortgage Property
The evaluation of the adequacy of the value of the related Mortgaged
Property in relation to the Loan, together with the amount of all liens senior
to the Loan, is given less and in some cases no consideration in underwriting
the Loans. Although the creditworthiness of the related borrowers is the primary
consideration in the underwriting of the Loans, no assurance can be given that
such creditworthiness of the borrowers will not deteriorate as a result of
future economic and social factors, which deterioration may result in a
delinquency or default by such borrowers on the related Loans. In general, the
credit quality of the borrowers on the Loans as well as the Loans is lower than
that of borrowers and mortgage loans conforming to the Federal National Mortgage
Association ("FMNA") or Federal Home Loan Corporation ("FHLMC") underwriting
guidelines for first-lien, single-family mortgage loans. Accordingly, the Loans
are likely to experience higher rates of delinquencies, defaults and losses
(which rates could be substantially higher) than those rates that would be
experienced by similar types of loans underwritten in a manner which is more
similar to the FNMA or FHLMC underwriting guidelines.
In response to changes and developments in the consumer finance area as
well as the refinement of ______'s credit evaluation methodology, ______'s
underwriting requirements for certain types of home loans may change from time
to time, which in certain instances may result in more stringent and, in other
instances, less stringent underwriting requirements. Depending upon the date on
which the Loans were originated or purchased by ______, such Loans may have been
originated or purchased by ______ under different underwriting requirements, and
accordingly, certain Loans may be of a different credit
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quality and have different characteristics than other Loans. Furthermore, to the
extent that certain Loans were originated or purchased by ______ under less
stringent underwriting requirements, such Loans may be more likely to experience
higher rates of delinquencies, defaults and losses than those Loans originated
or purchased under more stringent underwriting requirements.
Geographic Concentration Of The Loans Within Certain States May Mean That
Delinquencies And Losses On The Loans May Be Higher
Approximately ______%, ______%, ______%, ______%, ______%,
______%,______% and ____% of the Statistic Principal Balance consisted of
Initial Loans that are secured by Mortgaged Properties located in the States of
__________, ____________, ___________, __________, ___________, ____________ and
__________, respectively. Because of the relative geographic concentration of
the Loans within these States, delinquencies and losses on the Loans may be
higher than would be the case if the Loans were more geographically diversified.
Adverse economic conditions in these States or geographic regions (which may or
may not affect real property values) may affect the ability of the related
borrowers to make timely payments of their scheduled monthly payments of
principal and interest and, accordingly, the actual rates of delinquencies,
defaults and losses on such Loans could be higher than those currently
experienced in the home lending industry for similar types of loans. In
addition, with respect to the Loans in these States, certain of the Mortgaged
Properties may be more susceptible to certain types of special hazards that are
not covered by any casualty insurance, such as earthquakes, floods and other
natural disasters and major civil disturbances, than residential properties
located in other parts of the country. In general, declines in one or more of
the related residential real estate markets may adversely affect the values of
the Mortgaged Properties securing such Loans such that the outstanding principal
balances of such Loans, together with the outstanding principal amount of any
senior lien mortgage loans on such Mortgaged Properties, will exceed the value
of such Mortgaged Properties to an increasing degree. Accordingly, the actual
rates of delinquencies, foreclosures and losses on such Loans could be higher
than those currently experienced in the home lending industry in general.
Reloading of Debt Could Impair The Ability Of Certain Borrowers To Service
Their Debts, which In Turn Could Result In Higher Rates Of Delinquencies,
Defaults And Losses On The Loans
With respect to Loans which in combination with superior liens have
loan-to-value ratios in excess of 100%, there is a risk that if the related
borrowers relocate, such borrowers will be unable to discharge the Loans in full
from the sale proceeds of the related Mortgaged Properties and any other funds
available to these borrowers, in which case the pool of Loans sold to the Trust
could experience higher rates of delinquencies, defaults and losses. With
respect to Loans, the proceeds of which were used in whole or in part for debt
consolidation, there can be no assurance that, following the debt consolidation,
the related borrower will not incur further consumer debt to third party
lenders. This reloading of debt could impair the ability of such borrowers to
service their debts, which in turn could result in higher rates of
delinquencies, defaults and losses on the Loans.
Loans Acquired From Third Parties May Be Subject To A Higher Incidence Of
Delinquency of Default
Substantially all of the Loans will have been either originated by or on
behalf of ______ or purchased and re-underwritten by ______ in accordance with
_________________________. A significant portion of the Loans will have been
acquired by ______ through purchases from a network of correspondent lenders or
through a portfolio acquisition program. See "The Loans General" herein. All of
such Loans will have been re-underwritten and reviewed for compliance with
______'s underwriting guidelines. ______ may have acquired certain Loans which
were originated by originators that, at the time of origination thereof, were
not approved Federal Housing Administration ("FHA") lenders or approved FNMA or
FHLMC seller/servicers, and therefore did not have an internal quality control
program substantially similar to the FNMA or FHLMC required quality control
programs with respect to the underwriting and origination of such Loans. Such
Loans may be subject to a higher incidence of delinquency or default. As
described herein, ______ will make certain representations and warranties
regarding each Loan and, in the event of a breach of any such representation or
warranty that materially and adversely affects the Noteholders, ______ will be
required either to cure such breach, repurchase the related Loan or Loans or
substitute one or more Qualified Substitute Loans therefor.
Because The Servicer Is under Not Obligation To Advance Scheduled
Monthly Payments Of Principal Or Interest with Respect to Delinquent Loans. The
Amount of Interest Received May Be Less Than The Amount Of Interest
Distributable On The Notes.
In the event of a delinquency or a default with respect to a Loan, the
Servicer will have no obligation to advance scheduled monthly payments of
principal or interest with respect to such Loan. As a result of the foregoing,
the amount of interest received on the Loans during any Due Period may be less
than the amount of interest distributable on the Notes on the related
Distribution Date. Such an occurrence will cause the Class Principal Balances of
the Classes of Notes to decrease at a slower rate relative to the Pool Principal
Balance, resulting in a reduction of the Overcollateralization Amount and, in
some circumstances, an Allocable Loss Amount. However, the Servicer will make
such reasonable and customary expense advances
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with respect to the Loans as generally would be required in accordance with its
servicing practices. See "Description of the Transfer and Servicing
Agreements--Servicing" herein.
The Manner In Which The Servicer Performs Its Servicing Obligations Will
Affect the Amount And Timing Of The Principal And Interest Payments Received On
The Loans
Pursuant to the Sale and Servicing Agreement, the Servicer will perform the
daily loan servicing functions for the Loans that include, without limitation,
the collection of payments from the Loans, the remittance of funds from such
collections for distribution to the holders of the Notes, the bookkeeping and
accounting for such collections, all other servicing activities relating to the
Loans, the preparation of the monthly servicing and remittance reports pursuant
to the Sale and Servicing Agreement and the maintenance of all records and files
pertaining to such servicing activities. Upon the Servicer's failure to remedy
an Event of Default under the Sale and Servicing Agreement, a majority of the
holders of the Notes or the Indenture Trustee or the Owner Trustee on behalf of
the Trust may remove the Servicer and appoint a successor servicer pursuant to
the terms of the Sale and Servicing Agreement. Absent such a replacement, the
holders of the Notes will be dependent upon the Servicer to adequately and
timely perform its servicing obligations and remit to the Indenture Trustee the
funds from the payments of principal and interest received on the Loans. The
manner in which the Servicer, and each Subservicer, as applicable, performs its
servicing obligations will affect the amount and timing of the principal and
interest payments received on the Loans. The principal and interest payments
received on the Loans are the sole source of funds for the distributions due to
the holders of the Notes under the Sale and Servicing Agreement. Accordingly,
the holders of the Notes will be dependent upon the Servicer to adequately and
timely perform its servicing obligations and such performance will affect the
amount and timing of distributions to the holders of the Notes. See "______
_____________, _____________________ The Servicer" and "_____________________
____________________ Delinquency and Loan Loss Experience" herein.
No Assurance Can Be Given That Any Proceeds Or A Significant Amount Of
Proceeds Will Be Recovered From The Liquidation Of Defaulted Loans
Substantially all of the Loans are secured by junior liens, and the related
loans secured by senior liens are not included in the Pool. The primary risk
with respect to any Loan secured by a junior lien is the possibility that
adequate funds will not be received in connection with a foreclosure of the
related Mortgaged Property to satisfy fully both any loan(s) secured by senior
lien(s) and the Loan. In accordance with the loan servicing practices of the
Servicer for home loans secured by junior liens, the Servicer may, in connection
with any Defaulted Loan, (i) pursue the foreclosure of a Defaulted Loan, (ii)
satisfy the senior mortgage(s) at or prior to the foreclosure sale of the
Mortgaged Property, or (iii) advance funds to keep the senior mortgage(s)
current. The Trust will have no source of funds to satisfy the senior
mortgage(s) or make payments due to the senior mortgagee(s), and, therefore,
holders of the Notes should not expect that any senior mortgage(s) will be
satisfied or kept current by the Trust for the purpose of protecting any junior
lien Loan. See "Certain Legal Aspects of the Loans--Junior Mortgages; Rights of
Senior Mortgages" in the Prospectus. Furthermore, it is unlikely that any of the
foregoing methods of realizing upon a defaulted junior lien Loan will be an
economically viable alternative with respect to any Loans having a Combined
Loan-to-Value Ratio that exceeds 100% at the time of default. As a result, the
Servicer may, in accordance with accepted servicing procedures, pursue
alternative methods of servicing Defaulted Loans to maximize proceeds therefrom,
including without limitation, the modification of Defaulted Loans, which, among
other things, may include the abatement of accrued interest or the reduction of
a portion of the outstanding Principal Balance of such Defaulted Loans. The
costs incurred in the collection and liquidation of Defaulted Loans in relation
to the smaller Principal Balances thereof are proportionately higher than with
respect to first-lien single-family mortgage loans, and because substantially
all of the Loans will have Combined Loan-to-Value Ratios at the time of
origination that exceed 100%, losses sustained from Defaulted Loans are likely
to be more severe (and could be total losses) in relation to the outstanding
Principal Balance of such Defaulted Loans. In fact, no assurance can be given
that any proceeds, or a significant amount of proceeds will be recovered from
the liquidation of Defaulted Loans.
There is Limited Historical Delinquency, Loss and Prepayment Information
Since January 1996, the Servicer has substantially increased the volume of
conventional home loans that it has originated, purchased, sold and/or serviced,
and thus, it has limited historical experience with respect to the performance,
including the delinquency and loss experience and the rate of prepayments, of
these conventional home loans, with respect to its entire portfolio of loans and
in particular with respect to such increased volume. Accordingly, it is possible
that neither the delinquency experience and loan loss and liquidation experience
set forth under " _________________ Delinquency and Loss Experience" herein nor
the prepayment scenarios set forth under "Prepayment and Yield Considerations
Weighted Average Lives of the Notes" herein will be indicative of the
performance of the Loans. Prospective investors should make their investment
determination based on the Loan underwriting criteria, the availability of the
credit enhancement described herein, the characteristics of the initial Loans
and other information provided here, and not based on any prior delinquency
experience and loan loss and liquidation experience information set forth herein
or any rate of prepayment assumed herein.
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A Deterioration In Economic Conditions May Affect The Ability Of Borrowers
To Repay Their Loans
For the limited period of time during which loans in the nature of the
Loans have been originated, economic conditions nationally and in most regions
of the country have been generally favorable. A deterioration in economic
conditions could be expected to adversely affect the ability and willingness of
borrowers to repay their Loans; however, because of lenders' limited experience
with loans similar to the Loans, no prediction can be made as to the severity of
the effect of a general economic downturn on the rate of delinquencies and
defaults on the Loans. Because borrowers under the Loans generally have little
or no equity in the related Mortgaged Properties, any significant increase in
the rate of delinquencies and defaults could result in substantial losses to
holders of Notes, in particular the Class B Notes, the Class M-2 Notes and the
Class M-1 Notes. See "Adequacy of the Mortgaged Properties as Security for the
Loans" and "Additional Factors Affecting Delinquencies, Defaults and Losses on
Loans" and "Prepayment and Yield Considerations" above.
Recharacterization Of The Sale Of The Loans As A Borrowing Secured By A
Pledge Could Result In Possible Reductions In The Amounts Available For
Distribution On The Notes.
The Initial Loans have been transferred from ______ to the Depositor, an
affiliate of ______. Each such transfer will be treated by ______ as a sale of
the Initial Loans. ______ has warranted that its transfer to the Depositor is a
sale of ______'s interest in the Loans. The Depositor has warranted that its
transfer to the Trust is a sale of the Depositor interest in the Initial Loans.
In the event of an insolvency of ______ or the Depositor, the receiver or
bankruptcy trustee of such entity may attempt to recharacterize the related sale
of the Initial Loans as a borrowing by such entity secured by a pledge of the
Initial Loans and possible reductions could occur in the amounts thereof
available for distribution on the Notes.
The Underwriting Origination, Servicing And Collection Of The Loans Are
Subject To A Variety Of State And Federal Laws, Public Policies And Principles
Of Equity And May Affect Distributions To The Holders Of The Notes
The underwriting, origination, servicing and collection of the Loans are
subject to a variety of State and Federal laws, public policies and principles
of equity. For example, the Federal District Court for the Eastern District of
Virginia recently announced a decision indicating that Federal law prohibited
lenders from paying independent mortgage brokers a premium for loans with
above-market interest rates. Depending on the provisions of applicable law and
the specific facts and circumstances involved, violations of these laws,
policies or principles may limit the ability of the Servicer to collect all or
part of the principal or interest on the Loans, may entitle the borrower to a
refund of amounts previously paid, and, in addition, could subject the Servicer
to damages and administrative sanctions. If the Servicer is unable to collect
all or part of the principal or interest on any Loans because of a violation of
the aforementioned laws, public policies or general principles of equity, then
the Trust may be delayed or unable to make all distributions owed to the holders
of the Notes to the extent any related losses are not otherwise covered by
amounts available from the credit enhancement provided for the Notes.
Furthermore, depending upon whether damages and sanctions are assessed against
the Servicer or the Depositor, such violations may materially impact (i) the
financial ability of the Servicer to continue to act in such capacity or (ii)
the ability of the Depositor or ______ to repurchase or replace Defective Loans.
See "Risk Factors Consumer Protection Laws" in the Prospectus. ______ will be
required to repurchase or replace any Loan which did not comply with applicable
State and Federal laws and regulations as of the Closing Date. See "Limitations
on Repurchase or Replacement of Defective Loans" below.
The National Bankruptcy Review Commission (the "Bankruptcy Commission"), an
independent commission established under the Bankruptcy Reform Act of 1994 to
study issues and make recommendations relating to the United States Bankruptcy
Code (the "Bankruptcy Code"), recently indicated that it may recommend that
debtors in proceedings under Chapter 13 of the Bankruptcy Code be permitted to
treat the portion of any mortgage debt that exceeds the value of the real
property securing such debt as an unsecured claim if such mortgage is not a
first lien mortgage. If such a change in the Bankruptcy Code were to be enacted,
and if such change were to apply to loans originated prior to enactment, a
substantial majority of the Loans would likely be treated as unsecured debt in a
case under Chapter 13 of the Bankruptcy Code. As a consequence, borrowers who
become Chapter 13 debtors would have substantially less incentive to make
arrangements for repayment of their Loans, and the likelihood that the Trust
Fund would recover any amounts in respect of the related Loans would be remote.
The Bankruptcy Commission is required to submit a report on its findings,
including recommendations for legislation to effect changes to the Bankruptcy
Code, to the President and Congress no later than October 20, 1997. The
Bankruptcy Commission's recommendations will be advisory only; any change in the
Bankruptcy Code must be effected through Congressional action.
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As A Result Of Non-Recordation Of Assignments In Some States, Some
Noteholders Could Lose The Right To Future Payments Of Principal And Interest
From Such Loans And Could Suffer A Loss Of Principal And Interest On The Notes
Subject to confirmation by the Rating Agencies, with respect to the Loans
secured by Mortgaged Properties located in certain states where ______ has been
advised by counsel that recordation of an assignment of mortgage is not
necessary in order to perfect an interest in a Loan, ______ will not be required
to record assignments to the Indenture Trustee of the Mortgages in the real
property records of these states for such Loans, but rather ______, in its
capacity as the Servicer, will retain record title to such Mortgages on behalf
of the Indenture Trustee, then the Noteholders could lose the right to future
payments of principal and interest from such Loans and could suffer a loss of
principal and interest to the extent that such loss is not otherwise covered by
amounts available from the credit enhancement provided for such Notes.
Although the recordation of the assignments of the Mortgages in favor of
the Indenture Trustee is not necessary to effect a transfer of the Loans to the
Indenture Trustee, If ______ or the Depositor were to sell, assign, satisfy or
discharge any Loan prior to recording the related assignments in favor of the
Indenture Trustee, the other parties to such sale, assignment, satisfaction or
discharge may have rights superior to those of the Indenture Trustee. In some
states, in the absence of such recordation of the assignments of the Mortgages,
the transfer to the Indenture Trustee of the Loans may not be effective against
certain creditors or purchasers from ______ or, a trustee in bankruptcy of
______ . In such other parties, creditors or purchasers have rights to the Loans
that are superior to those of the Indenture Trustee, then the Noteholders could
lose the right to future payments of principal and interest from such Loans and
could suffer a loss of principal and interest to the extent that such loss is
not otherwise covered by amounts available from the credit enhancement provided
for such Notes.
Limitations on Repurchase or Replacement of Defective Loans will Mean That
Resulting Losses Will Be Borne By The Holders Of The Notes
Pursuant to the Sale and Servicing Agreement, each of the Depositor and
______ has agreed to cure in all material respects any breach of its respective
representations and warranties set forth in the Sale and Servicing Agreement
with respect to Defective Loans. If the Depositor or ______ cannot cure such
breach within a specified period of time, it will be required to repurchase such
Defective Loans from the Trust or substitute other loans for such Defective
Loans. Although a significant portion of the Loans will have been acquired from
unaffiliated correspondent lenders, the Depositor and ______ will make the
representations and warranties with respect to each Loan. For a summary
description of the Depositor's or ______'s representations and warranties, See
"The Agreements Assignment of Primary Assets" in the Prospectus.
No assurance can be given that, at any particular time, the Depositor or
______ will be capable, financially or otherwise, of repurchasing or replacing
any Defective Loan(s) in the manner described above. If ______ repurchases, or
is obligated to repurchase, any defective home loan(s) from any other series of
asset backed securities, its financial ability to repurchase any Defective
Loan(s) from the Trust may be adversely affected. In addition, other events
relating to the Depositor or ______ and its home lending can occur that would
adversely affect its financial ability to repurchase Defective Loans from the
Trust, including, without limitation, the sale or other disposition of all or
any significant portion of its assets. If the Depositor or ______ is unable to
repurchase or replace a Defective Loan, then the Servicer, on behalf of the
Trust, will utilize customary servicing practices to recover the maximum amount
possible with respect to such Defective Loan, and any resulting loss will be
borne by the holders of the Notes to the extent that such loss is not otherwise
covered by amounts available from the credit enhancement provided for the Notes.
______, in its capacity as seller of the Loans to the Depositor, has agreed to
be bound by the same requirements as the Depositor with respect to Defective
Loans. See "______ Savings Bank, Federal Savings Bank" herein.
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THE TRUST
General
The Trust, _______________ Trust ________, will be a business trust formed
under the laws of the State of Delaware pursuant to the Trust Agreement for the
transactions described in this Prospectus Supplement. After its formation, the
Trust will not engage in any activity other than (i) acquiring, holding and
managing the Loans and the other assets of the Trust and proceeds therefrom,
(ii) issuing the Notes and any Residual Interest, (iii) making payments on the
Notes and any Residual Interest and (iv) engaging in other activities that are
necessary, suitable or convenient to accomplish the foregoing or are incidental
thereto or in connection therewith.
The Residual Interests in the aggregate represent the entire residual
interest in the assets of the Trust. The Residual Interests, together with the
Notes, will be delivered by the Trust to the Depositor as consideration for the
delivery of the Initial Loans and the deposit of the Original Pre-Funded Amount
pursuant to the Sale and Servicing Agreement.
On the Closing Date, the Trust will purchase Initial Loans expected to have
an aggregate principal balance of approximately $___________ as of the Initial
Cut-Off Date (the actual aggregate unpaid principal balance (as of the Initial
Cut-Off Date) of the Initial Loans, the "Original Pool Principal Balance") from
the Depositor pursuant to a sale and servicing agreement dated as of
______________ (the "Sale and Servicing Agreement"), among the Trust, the
Depositor, the Servicer, the Indenture Trustee and the Co-Owner Trustee. On or
prior to _______________, the Trust may purchase additional loans (the
"Subsequent Loans" and together with the Initial Loans, the "Loans") having an
aggregate unpaid principal balance of up to $_______________ (as adjusted
pursuant to the immediately following sentence, the "Original Pre-Funded
Amount"). To the extent that the Original Pool Principal Balance is more or less
than the amount set forth in the second preceding sentence, the Original
Pre-Funded Amount will be decreased or increased by a corresponding amount
provided that the amount of any such adjustment shall not exceed $____________.
The assets of the Trust will consist of the Loans secured by Mortgages. See
"The Loans" herein. The assets of the Trust will also include (i) payments of
interest and principal received after the applicable Cut-Off Date in respect of
the Loans; (ii) amounts on deposit in the Collection Account (excluding
investment earnings thereon), Note Distribution Account, Pre-Funding Account,
Capitalized Interest Account and Certificate Distribution Account; and (iii)
certain other ancillary or incidental funds, rights and properties related to
the foregoing.
The Trust will include the unpaid Principal Balance of each Loan as of its
applicable Cut-Off Date (the "Cut-Off Date Principal Balance"). With respect to
any date, the "Pool Principal Balance" will be equal to the aggregate of the
Principal Balances of all Loans as of the last day of the preceding Due Period.
The "Principal Balance" of a Loan on any day is equal to the outstanding unpaid
principal balance of the Loan as of the close of business on the last day of the
preceding Due Period (after giving effect to all payments received thereon and
the allocation of any Net Loan Losses thereto pursuant to clause (B) of the
definition thereof); provided, however, that any Loan that became a Liquidated
Loan during the preceding Due Period shall have a Principal Balance of zero.
With respect to any Distribution Date, any Loans repurchased in the month of
such Distribution Date prior to the related Determination Date in such month
shall be deemed (i) to have been repurchased during the related Due Period and
(ii) to have a Principal Balance of zero as of the end of such related Due
Period.
The Servicer will service the Loans pursuant to the Sale and Servicing
Agreement (collectively with the Indenture, the Administration Agreement and the
Trust Agreement, the "Transfer and Servicing Agreements") and will be
compensated for such services as described under "Description of the Transfer
and Servicing Agreements--Servicing" herein.
The Trust's principal offices are located in ___________, Delaware, in care
of ____________________, as Owner Trustee, at the address set forth below under
"--The Owner Trustee and Co-Owner Trustee."
The Owner Trustee and Co-Owner Trustee
______________________will act as the Owner Trustee under the Trust
Agreement. __________________ is a _______________ banking corporation and its
principal offices are located at _____________________.
Certain functions of the Owner Trustee under the Trust Agreement and the
Sale and Servicing Agreement will be performed by _________________________
___________, in its capacity as Co-Owner Trustee under the Trust Agreement and
the Sale and Servicing Agreement, including maintaining the Certificate
Distribution Account and making distributions therefrom. However, upon the
occurrence and continuation of an event of default under the Indenture, the
Co-Owner Trustee will resign and the Owner Trustee will assume the duties of the
Co-Owner Trustee under the Trust Agreement and the Sale and Servicing Agreement.
21
<PAGE>
THE LOANS
General
All of the Loans will be home loans (i.e., not insured or guaranteed by a
governmental agency) for which the related proceeds were used to finance (i)
property improvements, (ii) the acquisition of personal property such as home
appliances or furnishings, (iii) debt consolidation, (iv) the refinancing of
one- to four-family residential properties (which may include cash-out to the
borrower) or (v) a combination of property improvements, debt consolidation and
other consumer purposes. Substantially all of the Mortgages for the Loans will
be junior (i.e., second, third, etc.) in priority to one or more senior liens on
the related Mortgaged Properties, which will consist primarily of owner-occupied
single-family residences. As of the Statistic Calculation Date, approximately
_______% of the Loans will be secured by liens on Mortgaged Properties in which
the borrowers have little or no equity therein (i.e., the related Combined
Loan-to-Value Ratios equal or exceed ____%) at the time of origination of such
Loans. The characteristics of the Initial Loans actually delivered on the
Closing Date are not expected to vary materially from the characteristics of
those of such Loans that have been identified on the Statistic Calculation Date
and the characteristics of the Subsequent Loans are not expected to vary
materially from those of the Initial Loans.
______ originates and purchases loans principally through its nationwide
network of correspondents, other third party originators and independent
mortgage brokers.
For a description of the underwriting criteria applicable to the Loans, See
"_________________, ______________________ Underwriting Guidelines" herein. All
of the Initial Loans will be sold by ______ to the Depositor, whereupon the
Depositor will sell the Loans to the Trust pursuant to the Sale and Servicing
Agreement. All of the Subsequent Loans will be sold by ______ to the Depositor
for and by the Depositor to the Trust pursuant to a Subsequent Transfer
Agreement. Pursuant to the Indenture, the Trust will pledge and assign the Loans
to the Indenture Trustee for the benefit of the holders of the Notes. The Trust
will be entitled to all payments of interest and principal received in respect
of the Loans after the applicable Cut-Off Dates.
Payments on the Loans
The Loans generally provide for a schedule of payments which, if timely
paid, will be sufficient to amortize fully the principal balance of the related
Loan on or before its maturity date. The Loans have scheduled monthly payment
dates which occur throughout a month. Interest with respect to the Loans will
accrue on an "actuarial interest" method. No Loan provides for deferred interest
or negative amortization.
The actuarial interest method provides that interest is charged and
payments are due as of a scheduled day of each month which is fixed at the time
of origination, and payments received after a grace period following such
scheduled day are subject to late charges. For example, a scheduled payment on a
Loan received either earlier or later (other than delinquent) than the scheduled
due date thereof will not affect the amortization schedule or the relative
application of such payment to principal and interest in respect of such Loan.
Characteristics of Loans
The following is a brief description of certain terms of those of the
Initial Loans that have been identified as of the Statistic Calculation Date.
Neither the characteristics of the Initial Loans as of the Closing Date nor the
characteristics of the Subsequent Loans are expected to vary materially from the
characteristics of those of the Initial Loans that have been identified as of
the Statistic Calculation Date.
The Initial Loans will have the characteristics set forth below and in the
tables that follow.
This description does not take into account any (a) Initial Loans not
identified as of the date of this Prospectus Supplement and (b) Subsequent Loans
that may be sold to the Trust during the Pre-Funding Period through the
application of amounts on deposit in the Pre-Funding Account. In addition, prior
to the Closing Date, ______ may remove any of the Initial Loans intended to be
transferred to the Trust, substitute comparable loans therefor, or add
comparable loans thereto; provided, however, that the aggregate principal
balance of Initial Loans so replaced, added or removed will not exceed ____% of
the Original Pool Principal Balance. To the extent that, prior to the Closing
Date, Loans are removed from or sold to the Trust, an amount equal to the
aggregate principal balances of such Loans will be added to or deducted from,
respectively, the Original Pre-Funding Amount on the Closing Date; provided that
the amount of any such adjustment may not exceed $____________. As a result, the
statistical information presented below regarding the characteristics of the
Initial Loans expected to be sold to the Trust as of the date of this Prospectus
Supplement may vary in certain respects from comparable information based on the
actual Initial Loans sold to the Trust on the Closing Date. In addition, after
the _____________ Cut-Off Date, the characteristics of the actual Loans may vary
from the information below due to a number of factors, including prepayments
after the ____________ Cut-Off
22
<PAGE>
Date or the purchase of any Subsequent Loans after the Closing Date. See
"Conveyance of Subsequent Loans" below. A schedule of the Initial Loans sold to
the Trust as of the Closing Date will be attached to the Sale and Servicing
Agreement. A current report on Form 8-K containing a description of the Loans as
of the end of the Pre-Funding Period will be filed with the Commission.
Initial Loan Statistics
As of the Statistic Calculation Date, the Initial Loans consisted of
_______ Loans secured by mortgages or deeds of trust on Mortgaged Properties
located in ___ States and the District of Columbia. As of the Statistic
Calculation Date, the aggregate of the Principal Balances of the Initial Loans
was approximately $_______________ (the "Statistic Principal Balance"). As of
the Statistic Calculation Date, Initial Loans representing ________% of the
Statistic Principal Balance were secured by first liens, Initial Loans
representing approximately _______% of the Statistic Principal Balance were
secured by second liens. As of the Statistic Calculation Date, Adjustable Rate
Loans represented ______% of the Statistic Principal Balance and the remainder
of the Initial Loans have fixed Loan Rates ("Fixed Rate Loans"). The lowest
Statistic Calculation Date principal balance of any Initial Loan was $__________
and the highest was $___________. The average Statistic Calculation Date
principal balance of the Initial Loans was approximately $___________. The
weighted average remaining term to stated maturity of the Initial Loans as of
the Statistic Calculation Date was approximately ______ months. As of the
Statistic Calculation Date, the weighted average number of months that have
elapsed since origination of the Initial Loans was approximately 1 month. The
lowest and highest Combined Loan-to-Value Ratios of the Initial Loans at
origination were ______% and ____%, respectively. As of the Statistic
Calculation Date approximately ____ Loans representing approximately ______% of
the Statistic Principal Balance had a combined Loan-to-Value Ratio of less than
_____%. The weighted average Combined Loan-to-Value Ratio of the Initial Loans
as of the Statistic Calculation Date was approximately _______%.
Each Adjustable Rate Loan bears interest at an adjustable rate. The
interest rate borne by each Adjustable Rate Loan first adjusts on the date set
forth in the related Note for the Adjustable Rate Loans and then every six
months thereafter (each such date thereafter, a "Change Date"). The Loan Rate
with respect to each Adjustable Rate Loan will adjust on each applicable Change
Date to equal the sum of (i) the London Interbank Offered Rate for six-month
U.S. dollar deposits (the "LIBOR Index") either as announced by FNMA, and
available as of the date 45 days before each Change Date, or as published in The
Wall Street Journal generally on a day of the month preceding the month of the
Change Date and (ii) the gross margin (the "Gross Margin") set forth in the
related Note subject to rounding and to the effects of the Periodic Rate Cap (as
defined below), the applicable ______time Cap (as defined below) and the
applicable ______time Floor (as defined below).
The Initial Loans that are Fixed Rate Loans bear interest at fixed Loan
Rates that ranged from approximately ____% to approximately _______% per annum
as of the Statistic Calculation Date. The weighted average Loan Rate for the
Initial Loans that are Fixed Rate Loans was approximately _______% per annum as
of the Statistic Calculation Date.
As of the Statistic Calculation Date, the Loan Rates for the Adjustable
Rate Loans ranged from _______% to ______% and the Gross Margins for the
Adjustable Rate Loans ranged from ______% to ______%. As of the Statistic
Calculation Date, the weighted average Loan Rate of the Adjustable Rate Loans
was _______% and the weighted average Gross Margin of the Adjustable Rate Loans
was approximately _______%. The "Periodic Rate Cap" limits changes in the Rate
for each Adjustable Rate Loan on each Change Date to 100 to 150 basis points in
the case of Adjustable Rate Loans based on a LIBOR Index. The "______time Cap"
for each Adjustable Rate Loan is the rate which is generally 600 to 700 basis
points greater than the initial Loan Rate for such Adjustable Rate Loan, and the
______time Floor is the lowest rate to which the Loan Rate can adjust for such
Adjustable Rate Loan. As of the Statistic Calculation Date the ______time Caps
of the Adjustable Rate Loans ranged from ______% to ______% and the ______time
Floors of the Adjustable Rate Loans ranged from ______% to _______%. As of the
Statistic Calculation Date, the weighted average ______time Cap of the
Adjustable Rate Loans was approximately ______% and the weighted average
______time Floor was approximately ______%. As of the Statistic Calculation
Date, the number of months to the next Change Date of the Adjustable Rate Loans
ranged from two months to six months. As of the Statistic Calculation Date, the
weighted average months to next Change Date was approximately _____ months. The
Adjustable Rate Loans do not provide for negative amortization.
As of the Statistic Calculation Date, approximately _____% by principal
balance of the Initial Loans (each of which was a Fixed Rate Loan) had final
payments substantially in excess of the other monthly payments (the "Balloon
Loans") and the remainder of the Initial Loans were fully amortizing loans
having original stated maturities of not more than 30 years. As of the Statistic
Calculation Date, no Initial Loan was scheduled to mature later than September
_____.
As of the Closing Date, no Initial Loan will be 30 or more days past due.
As of the Statistic Calculation Date, _______% of the Mortgaged Properties
by principal balance of the related Loan were owner-occupied (based on
representations of the related borrowers at origination). As of the Statistic
Calculation Date, the obligors on Initial Loans representing approximately
89.08% of the Statistic Principal Balance had "A", "A+", "Ax" or "A-"
23
<PAGE>
credit ratings, under ______'s programs, the obligors on Initial Loans
representing approximately 10.82% of the Statistic Principal Balance had "B" or
"B+" credit ratings under ______'s programs and the obligors on Initial Loans
representing approximately _______% of the Statistic Principal Balance had "C"
or "Cx" credit ratings under ______'s programs.
The following tables are based on certain statistical characteristics with
respect to those of the Initial Loans that have been identified as of the
Statistic Calculation Date. The sum of the percentages in the following tables
may not equal the total due to rounding.
24
<PAGE>
FIXED RATE LOANS
Geographic Distribution of the Mortgaged Properties
% of Aggregate
Principal Balance
Number of Aggregate of Fixed Rate
State Initial Loans Principal Balance Loans
- ----------------- --------------- ----------------- -----------------
_________________ _____ $ _______ ______%
_________________ _____ _______ ______
_________________ _____ _______ ______
_________________ _____ _______ ______
_________________ _____ _______ ______
_________________ _____ _______ ______
_________________ _____ _______ ______
_________________ _____ _______ ______
_________________ _____ _______ ______
_________________ _____ _______ ______
_________________ _____ _______ ______
_________________ _____ _______ ______
_________________ _____ _______ ______
_________________ _____ _______ ______
_________________ _____ _______ ______
_________________ _____ _______ ______
_________________ _____ _______ ______
25
<PAGE>
% of Aggregate
Principal Balance
Number of Aggregate of Fixed Rate
State Initial Loans Principal Balance Loans
- - ----------------- -------------- ----------------- ---------------
____________ _____ _______ ______
____________ _____ _______ ______
____________ _____ _______ ______
____________ _____ _______ ______
____________ _____ _______ ______
____________ _____ _______ ______
____________ _____ _______ ______
____________ _____ _______ ______
____________ _____ _______ ______
____________ _____ _______ ______
____________ _____ _______ ______
____________ _____ _______ ______
____________ _____ _______ ______
____________ _____ _______ ______
____________ _____ _______ ______
____________ _____ _______ ______
-------------- ----------------- -----------------
Total ....... _____ $ _______ ______%
============== ================= =================
26
<PAGE>
Loan Rates
% of Aggregate
Principal Balance
Range of Number of Aggregate of Fixed Rate
Loan Rates Initial Loans Principal Balance Loans
- - ------------------------ -------------- ----------------- ---------------
8.000% to 8.999% ...... _____ $_______ ______%
9.000% to 9.999% ...... _____ _______ ______
10.000% to 10.999% ..... _____ _______ ______
11.000% to 11.999% ..... _____ _______ ______
12.000% to 12.999% ..... _____ _______ ______
13.000% to 13.999% ..... _____ _______ ______
14.000% to 14.999% ..... _____ _______ ______
15.000% to 15.999% ..... _____ _______ ______
16.000% to 16.999% ..... _____ _______ ______
17.000% to 17.999% ..... _____ _______ ______
-------------- ----------------- -----------------
Total ....... _____ $ _______ ______%
============== ================= =================
As of the Statistic Calculation Date, the weighted average Loan Rate of the
Initial Loans that are Fixed Rate Loans was approximately _________% per annum.
Mortgaged Property Types
% of Aggregate
Mortgaged Principal Balance
Property Number of Aggregate of Fixed Rate
Types Initial Loans Principal Balance Loans
- - ------------------------ -------------- ----------------- ---------------
One Family ............. _____ $_______ ______%
Two- to Four- Family ... _____ _______ ______
Condominium ............ _____ _______ ______
PUD .................... _____ _______ ______
-------------- ----------------- -----------------
Total ....... _____ $ _______ ______%
============== ================= =================
27
<PAGE>
Combined Loan-to-Value Ratios***
<TABLE>
<CAPTION>
Range of % of Aggregate
Combined Aggregate Average Principal Balance
Loan-to-Value Number of Principal Principal of Fixed Rate
Ratios Initial Loans Balance Balance Loans
- - -------------------------------- -------------- --------- --------- -----------------
<S> <C> <C> <C> <C>
less than or equal to 49.99% ... ________ $______ _______ _______%
50.00% to 59.99% ............... ________ ______ _______ _______
60.00% to 69.99% ............... ________ ______ _______ _______
70.00% to 79.99% ............... ________ ______ _______ _______
80.00% to 89.99% ............... ________ ______ _______ _______
90.00% to 99.99% ............... ________ ______ _______ _______
100.00% to 109.99% ............. ________ ______ _______ _______
110.00% to 119.99% ............. ________ ______ _______ _______
120.00% to 125.00% ............. ________ ______ _______ _______
-------------- --------- --------- -----------------
Total ................ $______ _______ 100.00%
============== ========= ========= =================
</TABLE>
As of the Statistic Calculation Date, the weighted average combined
loan-to-value ratio of the Initial Loans that are Fixed Rate Loans was ________.
FICO Scores
<TABLE>
<CAPTION>
Weighted % of Aggregate
Aggregate Average Principal Balance
Number of Principal FICO of Fixed Rate
Range of FICO Scores Initial Loans Balance Scores Loans
- - -------------------------------- -------------- --------- --------- -----------------
<S> <C> <C> <C> <C>
600 to 619 ..................... ________ $______ _______ _______%
620 to 639 ..................... ________ ______ _______ _______
640 to 659 ..................... ________ ______ _______ _______
660 to 679 ..................... ________ ______ _______ _______
680 to 699 ..................... ________ ______ _______ _______
700 to 719 ..................... ________ ______ _______ _______
</TABLE>
28
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
720 to 739 ..................... ________ ______ _______ _______
740 to 759 ..................... ________ ______ _______ _______
760 to 779 ..................... ________ ______ _______ _______
780 to 799 ..................... ________ ______ _______ _______
800 to 819 ..................... ________ ______ _______ _______
-------------- --------- --------- -----------------
Total .................... ________ $______ _______ 100.00%
============== ========= ========= =================
</TABLE>
As of the Statistic Calculation Date, the weighted average FICO scores of
the Initial Loans that are Fixed Rate Loans was _______.
29
<PAGE>
Occupancy
% of Aggregate
Principal Balance
Number of Aggregate of Fixed Rate
Initial Loans Principal Balance Loans
- - ---------------------- -------------- ----------------- ---------------
Non-Owner-Occupied ... _____ $_______ ______%
Owner-Occupied ....... _____ _______ ______
-------------- ----------------- -----------------
Total _____ $_______ 100.00%
============== ================= =================
Purpose of Loan
% of Aggregate
Principal Balance
Number of Aggregate of Fixed Rate
Purpose of Loan Initial Loans Principal Balance Loans
- - ---------------------- -------------- ----------------- ---------------
Cash Out ............. _____ $_______ ______%
Purchase ............. _____ _______ ______
Refinance ............ _____ _______ ______
-------------- ----------------- -----------------
Total ................ _____ $_______ 100.00%
============== ================= =================
30
<PAGE>
FIXED RATE TABLE Principal Balances
% of Aggregate
Aggregate
Number of Principal Balance
Range of Initial Principal of Fixed Rate
Principal Balances Loans Balance Loans
- - ------------------------------------ --------- --------- ---------------
Less than or equal to $15,000.00 ... _______ $______ __________%
$15,000.01 to $20,000.00 ........... _______ ______ __________
$20,000.01 to $25,000.00 ........... _______ ______ __________
$25,000.01 to $30,000.00 ........... _______ ______ __________
$30,000.01 to $35,000.00 ........... _______ ______ __________
$35,000.01 to $40,000.00 ........... _______ ______ __________
$40,000.01 to $45,000.00 ........... _______ ______ __________
$45,000.01 to $50,000.00 ........... _______ ______ __________
$50,000.01 to $55,000.00 ........... _______ ______ __________
$55,000.01 to $60,000.00 ........... _______ ______ __________
$60,000.01 to $65,000.00 ........... _______ ______ __________
$65,000.01 to $70,000.00 ........... _______ ______ __________
$70,000.01 to $75,000.00 ........... _______ ______ __________
$75,000.01 to $80,000.00 ........... _______ ______ __________
$80,000.01 to $85,000.00 ........... _______ ______ __________
Greater than or equal to $85,000.01 _______ ______ __________
--------- --------- -----------------
Total _______ $______ 100.00%
========= ========= =================
31
<PAGE>
Remaining Terms to Maturity
% of Aggregate
Number of Aggregate
Initial Principle Balance
Range of Remaining Principal of Fixed Rate
Terms to Maturity Loans Balance Loans
- - ------------------------------------ --------- --------- ---------------
Less than or equal to 149 Months ... _______ $______ __________%
150 to 179 Months .................. _______ ______ __________
180 to 209 Months .................. _______ ______ __________
210 to 239 Months .................. _______ ______ __________
240 to 269 Months .................. _______ ______ __________
270 to 299 Months .................. _______ ______ __________
300 to 329 Months .................. _______ ______ __________
--------- --------- -----------------
Total .................. _______ $______ 100.00%
========= ========= =================
As of the Statistic Calculation Date, the weighted average original term to
maturity of the Initial Loans that are Fixed Rate Loans was _______ months.
As of the Statistic Calculation Date, the weighted average remaining term
to maturity of the Initial Loans that are Fixed Rate Loans was _______ months.
32
<PAGE>
ADJUSTABLE RATE SECTION ADJUSTABLE RATE LOANS
Geographic Distribution of the Mortgaged Properties
% of Aggregate
Number of
Initial Principal Balance
Aggregate of Fixed Rate
State Loans Principal Balance Loans
- - ----------------- --------------- ----------------- ---------------
____________ _____ $ _______ ______%
____________ _____ _______ ______
____________ _____ _______ ______
____________ _____ _______ ______
____________ _____ _______ ______
____________ _____ _______ ______
____________ _____ _______ ______
____________ _____ _______ ______
____________ _____ _______ ______
____________ _____ _______ ______
____________ _____ _______ ______
____________ _____ _______ ______
____________ _____ _______ ______
____________ _____ _______ ______
____________ _____ _______ ______
____________ _____ _______ ______
____________ _____ _______ ______
33
<PAGE>
% of Aggregate
Number of
Initial Principal Balance
Aggregate of Adjustable Rate
State Loans Principal Balance Loans
- - ----------------- --------------- ----------------- ---------------
____________ _____ _______ ______
____________ _____ _______ ______
____________ _____ _______ ______
____________ _____ _______ ______
-------------- ----------------- -----------------
Total ....... _____ $ _______ 100.00%
============== ================= =================
34
<PAGE>
Loan Rates (as of the Statistic Calculation Date)
% of Aggregate
Number of Aggregate
Initial Principal Principal Balance
Range of of Adjustable Rate
Loan Rates Loans Balance Loans
- - ------------------------ -------------- ----------------- ---------------
9.000% to 9.999% ...... _____ $_______ ______%
10.000% to 10.999% ..... _____ _______ ______
11.000% to 11.999% ..... _____ _______ ______
12.000% to 12.999% ..... _____ _______ ______
13.000% to 13.999% ..... _____ _______ ______
14.000% to 14.999% ..... _____ _______ ______
-------------- ----------------- -----------------
TOTAL ....... _____ $_______ ______%
============== ================= =================
As of the Statistic Calculation Date, the weighted average Loan Rate of the
Initial Loans that are Adjustable Rate Loans was _______%.
Gross Margins
% of Aggregate
Principal Balance
Number of Aggregate of Adjustable Rate
Margin Initial Loans Principal Balance Loans
- - --------------------- --------------- ----------------- ---------------
4.000% to 4.999% .... _____ $_______ ______%
5.000% to 5.999% .... _____ _______ ______
6.000% to 6.999% .... _____ _______ ______
7.000% to 7.999% .... _____ _______ ______
8.000% to 8.999% .... _____ _______ ______
--------------- ----------------- -----------------
TOTAL ..... _____ $_______ 100.00%
=============== ================= =================
As of the Statistic Calculation Date, the weighted average Gross Margin for
the Initial Loans that are Adjustable Rate Loans was _____%.
35
<PAGE>
______time Caps
% of Aggregate
Aggregate Principal Balance
Number of Principal of Adjustable Rate
Lifetime Cap Initial Loans Balance Loans
- - -------------------------- ------------- ---------- --------------
15.001% to 16.000% ....... _____ $_______ ______%
16.001% to 17.000% ....... _____ _______ ______
17.001% to 18.000% ....... _____ _______ ______
18.001% to 19.000% ....... _____ _______ ______
19.001% to 20.000% ....... _____ _______ ______
Greater than 20.00% ...... _____ _______ ______
------------- ---------- ----------------
TOTAL .................... _____ $_______ 100.00%
============= ========== ================
As of the Statistic Calculation Date, the weighted average Lifetime Cap for
the Initial Loans that are Adjustable Rate Loans was ______%.
Lifetime Floors
% of Aggregate
Aggregate Principal Balance
Number of Principal of Adjustable Rate
Lifetime Floor Initial Loans Balance Loans
- - --------------------------------- ------------- ---------- --------------
less than or equal to 11.000% ... _____ $_______ ______%
11.001% to 12.000% .............. _____ _______ ______
12.001% to 13.000% .............. _____ _______ ______
13.001% to 14.000% .............. _____ _______ ______
Greater than 14.000% ............ _____ _______ ______
------------- ---------- ----------------
TOTAL ........................... _____ $_______ 100.00%
============= ========== ================
As of the Statistic Calculation Date, the weighted average Lifetime Floor
for the Initial Loans that are Adjustable Rate Loans was _____%
36
<PAGE>
Mortgaged Property Types
Number of % of Aggregate
Initial
Mortgaged Aggregate Principal Balance
Property of Adjustable Rate
Types Loans Principal Balance Loans
- - ------------------------ -------------- ----------------- --------------
One Family ............. _____ $_______ ______%
Two- to Four- Family ... _____ _______ ______
Condominium ............ _____ _______ ______
-------------- ----------------- -----------------
Total ....... _____ $ _______ 100.00%
============== ================= =================
Combined Loan-to-Value Ratios
<TABLE>
<CAPTION>
% of Aggregate
Range of
combined Aggregate Average Principal Balance
Loan-to-Value Number of Principal Principal of Adjustable Rate
Ratios Initial Loans Balance Balance Loans
- - -------------------------------- -------------- --------- --------- -----------------
<S> <C> <C> <C> <C>
70.00% to 79.99% ............... ________ $______ $_______ _______%
80.00% to 89.99% ............... ________ ______ _______ _______
90.00% to 99.99% ............... ________ ______ _______ _______
100.00% to 109.99% ............. ________ ______ _______ _______
110.00% to 119.99% ............. ________ ______ _______ _______
120.00% to 125.00% ............. ________ ______ _______ _______
-------------- --------- --------- -----------------
Total ................ $______ $_______
============== ========= ========= =================
</TABLE>
As of the Statistic Calculation Date, the weighted average Combined
Loan-to-Value Ratio of the Initial Loans that are Adjustable Rate Loans was
_______%.
37
<PAGE>
FICO Scores
<TABLE>
<CAPTION>
% of Aggregate
Weighted
Aggregate Average Principal Balance
Number of Principal FICO of Adjustable Rate
Range of FICO Scores Initial Loans Balance Scores Loans
- - -------------------------------- -------------- --------- --------- -----------------
<S> <C> <C> <C> <C>
600 to 619 ..................... ________ $______ _______ _______%
620 to 639 ..................... ________ ______ _______ _______
640 to 659 ..................... ________ ______ _______ _______
660 to 679 ..................... ________ ______ _______ _______
680 to 699 ..................... ________ ______ _______ _______
700 to 719 ..................... ________ ______ _______ _______
720 to 739 ..................... ________ ______ _______ _______
740 to 759 ..................... ________ ______ _______ _______
760 to 779 ..................... ________ ______ _______ _______
780 to 799 ..................... ________ ______ _______ _______
800 to 819 ..................... ________ ______ _______ _______
-------------- --------- --------- -----------------
Total .................... ________ $______ _______ _______%
============== ========= ========= =================
</TABLE>
As of the Statistic Calculation Date, the weighted average FICO scores of
the Initial Loans that are Adjustable Rate Loans was ________.
38
<PAGE>
Occupancy
The Mortgaged Property relating to each of the Adjustable Rate Loans was,
based on representations made by the borrower at the closing of the Loan, owner
occupied.
% of Aggregate
Principal Balance
Number of Aggregate of Adjustable Rate
Purpose of Loan Initial Loans Principal Balance Loans
- - ---------------------- -------------- ----------------- ---------------
Cash Out ............. _____ $_______ ______%
Purchase ............. _____ _______ ______
Refinance ............ _____ _______ ______
-------------- ----------------- -----------------
Total ................ _____ $_______ 100.00%
============== ================= =================
Principal Balances
% of Aggregate
Aggregate
Number of Principal Balance
Range of Initial Principal of Adjustable Rate
Principal Balances Loans Balance Loans
- - ------------------------------------ --------- --------- ---------------
Less than or equal to $20,000.00 ... _______ $______ __________%
$20,000.01 to $25,000.00 ........... _______ ______ __________
$25,000.01 to $30,000.00 ........... _______ ______ __________
$30,000.01 to $35,000.00 ........... _______ ______ __________
$35,000.01 to $40,000.00 ........... _______ ______ __________
$40,000.01 to $45,000.00 ........... _______ ______ __________
greater than $50,000.00 ........... _______ ______ __________
--------- --------- -----------------
Total _______ $______ 100.00%
========= ========= =================
39
<PAGE>
Remaining Terms to Maturity
% of Aggregate
Aggregate
Number of Principal Balance
Range of Remaining Initial Principal of Adjustable Rate
Terms to Maturity Loans Balance Loans
- - ------------------------------------ --------- --------- ----------------
___________ ........................ _______ $______ __________%
___________ ........................ _______ ______ __________
___________ ........................ _______ ______ __________
___________ ........................ _______ ______ __________
___________ ........................ _______ ______ __________
___________ ........................ _______ ______ __________
--------- --------- -----------------
_______ $______ 100.00%
========= ========= =================
As of the Statistic Calculation Date, the weighted average original term to
maturity for the Initial Loans that are Adjustable Rate Loans was ______ months.
As of the Statistic Calculation Date, the weighted average remaining term
for the Initial Loans that are Adjustable Rate Loans was _______ months.
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Conveyance of Subsequent Loans
The Sale and Servicing Agreement permits the Trust to purchase from ______,
subsequent to the Closing Date and prior to _______________, Subsequent Loans in
an amount not to exceed the Original Pre-Funded Amount in aggregate principal
balance for inclusion in the Trust. Accordingly, the statistical characteristics
of the Loans after giving effect to the acquisition of any Subsequent Loans will
likely differ from the information specified above (which is based exclusively
on the Initial Loans as of the Statistic Calculation Date). The date or dates on
which the Trust acquires the Subsequent Loans are referred to herein as
"Subsequent Transfer Dates." Any Subsequent Loans conveyed to the Trust Fund
will be subject to the approval of and must satisfy criteria established by the
Rating Agencies and are not expected to cause the characteristics of the Loans
to vary materially in the aggregate from the characteristics of the Initial
Loans.
[Description of the Servicer]
Delinquency and Loan Loss Experience
The following tables set forth information relating to the delinquency and
loan loss experience on the mortgage loans included in the Servicer's servicing
portfolio for the periods shown. The delinquency and loan loss experience
represents the historical experience of the Servicer, and there can be no
assurance that the future experience on the Loans in the Trust will be the same
as, or more favorable than, that of the total mortgage loans in the Servicer's
servicing portfolio. See "Risk Factors--Additional Factors Affecting
Delinquencies, Defaults and Losses on Loans -- Limited Historical Delinquency,
Loss and Prepayment Information."
Delinquency and Foreclosure Experience
(Dollars in Thousands)
<TABLE>
<CAPTION>
At _______________ At ________________ At ________________
---------------------------------------------------------------------------------------------------------------------
Number % of % of Number % of % of Number % of
Delinquency of Loans Loans Amount Amount of Loans Loans Amount Amount of Loans Loans
Status (1) Serviced Serviced Serviced Serviced Serviced Serviced Serviced Serviced Serviced Serviced
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
30 to 59 _____ _____% $_____ _____% _____ _____% _____ _____% _____ _____%
60 to 89 _____ _____ _____ _____ _____ _____ _____ _____ _____ _____
90 + (2) _____ _____ _____ _____ _____ _____ _____ _____ _____ _____
Bankruptcy _____ _____ _____ _____ _____ _____ _____ _____ _____ _____
Foreclosure _____ _____ _____ _____ _____ _____ _____ _____ _____ _____
REO (3) _____ _____ _____ _____ _____ _____ _____ _____ _____ _____
====================================================================================================================================
Total _____ _____% $_____ _____% _____ _____% $_____ _____% _____ _____%
</TABLE>
- - ----------
(1) The past due period is based on the actual number of days that a
payment is contractually past due. A loan as to which a monthly
payment was due 60-89 days prior to the reporting period is considered
60-89 days past due, etc.
(2) Statistic for 90+ delinquencies does not include loans in bankruptcy
or foreclosure.
(3) An "REO Property" is a property acquired and held as a result of
foreclosure or deed in lieu of foreclosure.
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<PAGE>
Total Servicing Portfolio
(Dollars in Thousands)
At Or For The
At Or For The At Or For The Six Months
Year Ended Year Ended
__________ __________ __________
_____________ _____________ _____________
Servicing portfolio at period end $__________ $__________ $__________
Average outstanding (1) $__________ $__________ $__________
Number of loans outstanding __________ __________ __________
Owned Portfolio and
Loan Charge-Off Experience
(Dollars in Thousands)
At Or For The
At Or For The At Or For The Six Months
Year Ended Year Ended Ended
__________ __________ __________
_____________ _____________ _____________
Owned portfolio at period end $__________ $__________ $__________
Average outstanding owned
portfolio $__________ $__________ $__________
Loan charge-offs __________ __________ __________
Loan recoveries __________ __________ __________
Net loan charge-offs __________ __________ __________
Net loan charge-offs as a
percentage of the average
outstanding (2) __________% __________% __________%
Net loan charge-offs as a
percentage of the portfolio
at period end (2) __________% __________% __________%
- - ----------
(1) "Average outstanding" presented is the arithmetic average of the end of
month principal balances of the loans in __________'s servicing portfolio
outstanding at the close of business for each period.
(2) Percentages presented are for the Servicer's owned portfolio only. The loss
percentages for loans serviced for others is not available because in many
instances the servicing client handles the disposition of foreclosed
property.
While the above delinquency and foreclosure and loan charge-off experience
reflect the Servicer's historical experiences at the dates and for the periods
indicated, there can be no assurance that the delinquency and foreclosure and
loan charge-off experience of the Loans will be similar. See "Risk
Factors--Additional Factors Affecting Delinquencies, Defaults and Losses on
Loans -- Limited Historical Delinquency, Loss and Prepayment Information."
Accordingly, the information should not be considered to reflect the credit
quality of the Loans included in the Trust or
used as a basis of assessing the likelihood, amount or severity of losses on the
Loans. The statistical data in the tables are based on all of the loans in the
Servicer's servicing
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<PAGE>
portfolio. The Loans are likely to have characteristics which distinguish them
from the majority of the loans in the Servicer's servicing portfolio.
The Servicer may resign its obligations to service the Loans only in
accordance with the terms of the Sale and Servicing Agreement. No removal or
resignation will become effective until the Indenture Trustee or a successor
servicer has assumed the Servicer's responsibilities and obligations in
accordance therewith.
The Servicer may not assign its obligations under the Sale and Servicing
Agreement unless it first obtains the written consent of the Indenture Trustee;
provided, however, that any assignee must meet the eligibility requirements for
a successor servicer set forth in the Sale and Servicing Agreement.
Notwithstanding anything in the preceding sentence to the contrary, the Servicer
may delegate certain of its obligations to a sub-servicer pursuant to one or
more sub-servicing agreements. A sub-servicer must meet certain eligibility
requirements, as set forth in the Sale and Servicing Agreement, and each
sub-servicing agreement shall require servicing of the Loans consistent with the
terms of the Sale and Servicing Agreement.
Repurchase or Substitution of Loans
Each of __________ and the Depositor is required (i) within 60 days after
discovery or notice thereof to cure in all material respects any breach of the
representations or warranties made with respect to any Loan or any document
deficiency with respect to any Loan (each, a "Defective Loan") or (ii) on or
before the Determination Date next succeeding the end of such 60-day period, to
repurchase such Defective Loan at a price (the "Purchase Price") equal to the
Principal Balance of such Defective Loan as of the date of repurchase, plus all
accrued and unpaid interest on such Defective Loan to but not including the due
date in the Due Period relating to the Distribution Date on which such Purchase
Price is to be distributed, computed at the Loan Rate. In addition, __________
may at its option purchase from the Trust any Loan that is 90 days or more
delinquent and which __________ determines in good faith would otherwise become
subject to foreclosure proceedings so long as the aggregate of such purchases
does not exceed 10% of the Maximum Collateral Amount. In lieu of repurchasing a
Defective Loan, each of __________ and the Depositor may replace such Defective
Loan with one or more Qualified Substitute Loans. If the aggregate outstanding
principal balance of the Qualified Substitute Loan(s) is less than the
outstanding Principal Balance of the Defective Loan(s), either __________ or the
Depositor will also remit for distribution to the holders of the Notes an amount
(a "Substitution Adjustment") equal to such shortfall, which will result in a
prepayment of principal on the Notes for the amount of such shortfall. As used
herein, a "Qualified Substitute Loan" is a home loan that (i) has an interest
rate which differs by no more than two percentage points from the Loan Rate for
the Defective Loan which it replaces (each, a "Deleted Loan"), (ii) has a
principal balance (after application of all payments received on or prior to the
date of such substitution) equal to or less than the Principal Balance of the
Deleted Loan as of such date, (iii) has a lien priority no lower than that of
the Deleted Loan, (iv) complies as of the date of substitution with each
representation and warranty set forth in the Sale and Servicing Agreement with
respect to the Loans, and (v) has a borrower with a credit grade classification
comparable to that of the borrower with respect to the Deleted Loan.
No assurance can be given that, at any particular time, __________ will be
capable, financially or otherwise, of repurchasing Defective Loans or
substituting Qualified Substitute Loans for Defective Loans in the manner
described above. If __________ or the Depositor repurchases, or is obligated to
repurchase, Defective Loans from any additional series of asset backed
securities, its financial ability to repurchase Defective Loans from the Trust
may be adversely affected. In addition, other events relating to the Depositor,
__________ and __________'s mortgage lending and consumer finance operations can
occur that would adversely affect the financial ability of __________ or the
Depositor to repurchase Defective Loans from the Trust, including without
limitation the sale or other disposition of all or any significant portion of
its assets. If __________ or the Depositor is unable to repurchase or replace a
Defective Loan, the Servicer, on behalf of the Trust, will make other customary
and reasonable efforts to recover the maximum amount possible with respect to
such Defective Loan. If the Servicer is unable to collect all amounts due to the
Trust with respect to such Defective Loan, the resulting loss will be borne by
the holders of the Notes to the extent that such loss is not otherwise covered
by amounts available from the credit enhancement provided for the Notes. See
"Risk Factors --Adequacy of Credit Enhancement" and "Risk Factors--Additional
Factors Affecting Delinquencies, Defaults and Losses on Loans "Limitations on
Repurchase or Replacement of Defective Loans" herein.
DESCRIPTION OF CREDIT ENHANCEMENT
Credit enhancement with respect to the Notes will be provided by (i) the
subordination of distributions in respect of the Residual Interests (as well as
the subordination of certain Classes of Notes to other Classes of Notes, as
described herein), and (ii) the Overcollateralization Amount which results from
(a) the excess of the sum of the Original Pool Principal Balance and the
Original Pre-Funded Amount over the aggregate of the Class Principal
Balances for all Classes as of Notes and (b) following the Spread Deferral
Period, the limited acceleration of the principal amortization of the Notes
relative to the amortization of the Loans by the application of Excess Spread,
as described herein.
43
<PAGE>
Subordination and Allocation of Losses
Distributions of interest on the Notes will be made first to the Senior
Notes and then to the Class M-1, Class M-2 and Class B Notes, in that order,
such that no interest will be paid on the Class B Notes until all required
interest payments have been made on the Mezzanine and Senior Notes and no
interest will be paid on the Mezzanine Notes until all required interest
payments have been made on the Senior Notes. In addition, distributions of
principal of the Notes will be made first to the Senior Notes, then to the Class
M-1, Class M-2 Notes and Class B Notes, in that order. Any distributions of
principal to the Classes of Senior Notes will be made sequentially in the order
of increasing numerical Class designations. All Allocable Loss Amounts applied
in reduction of the Class Principal Balances of the Mezzanine Notes will be
applied first to the Class M-2 Notes and then to the Class M-1 Notes, until
their respective Class Principal Balances have been reduced to zero. In
addition, no Allocable Loss Amounts will be applied in reduction of the Class
Principal Balance of any Class of Mezzanine Notes until the Class Principal
Balance of the Class B Notes has been reduced to zero. Further, no Allocable
Loss Amounts will be applied in reduction of the Class Principal Balance of the
Class B Notes until the Overcollateralization Amount has been reduced to zero.
No Allocable Loss Amounts will be applied to the Classes of Senior Notes. The
rights of the holders of the Residual Interests to receive any distributions on
any Distribution Date generally will be subordinated to the rights of the
holders of the Notes. The subordination described above is intended to enhance
the likelihood of the regular receipt of interest and principal due to the
holders of the Classes of Notes and to afford such holders protection against
losses on the Loans, with the greatest amount of such enhancement and protection
being provided to the Classes of Senior Notes, a lesser amount of such
enhancement and protection being provided to the Class M-1 and, in particular,
the Class M-2 Notes, and the least amount of such enhancement and protection
being provided to the Class B Notes. See "Risk Factors--Adequacy of Credit
Enhancement" herein.
On each Distribution Date, the "Allocable Loss Amount" will be equal to the
excess, if any, of (a) the aggregate of the Class Principal Balances of all
Classes of Notes (after giving effect to all distributions on such Distribution
Date) over (b) the sum of the Pool Principal Balance and the Pre-Funded Amount
as of the end of the immediately preceding Due Period.
On each Distribution Date, the "Net Loan Losses" will be equal to the sum
of (A) with respect to the Loans that will have become Liquidated Loans during
the immediately preceding Due Period, an amount (but not less than zero)
determined as of the related Determination Date equal to: (i) the aggregate
uncollected Principal Balances of such Liquidated Loans as of the last day of
such Due Period, minus (ii) the aggregate amount of any recoveries attributable
to principal from whatever source received during any Due Period, with respect
to such Liquidated Loans, including any Due Period subsequent to the Due Period
wherein such Loan became a Liquidated Loan, and including without limitation any
Net Liquidation Proceeds, any Insurance Proceeds, any Released Mortgaged
Property Proceeds, any post-liquidation proceeds, any payments from the related
Obligor and any payments made in connection with the repurchase of or
substitution for a Defective Loan, less the amount of any expenses incurred in
connection with such recoveries; and (B) any reduction to the Principal Balances
of any Loans resulting from an order issued by a court of appropriate
jurisdiction in an insolvency proceeding.
Overcollateralization
As of any Distribution Date, the "Overcollateralization Amount" will equal
the excess of the sum of the Pool Principal Balance as of the end of the
immediately preceding Due Period and the Pre-Funded Amount as of the end of the
immediately preceding Due Period over the aggregate of the Class Principal
Balances of all Classes of Notes (after giving effect to all distributions of
the Regular Distribution Amount on such Distribution Date). On the Closing Date,
the Overcollateralization Amount is expected to equal $__________. Following the
termination of the Spread Deferral Period, limited acceleration of the principal
amortization of the Notes relative to the principal amortization of the Loans
has been designed to increase the Overcollateralization Amount over time by
making additional distributions of principal to the holders of the Notes from
the distribution of Excess Spread until the Overcollateralization Amount is at
least equal to the Overcollateralization Target Amount.
The "Spread Deferral Period" will begin on the Closing Date and end as soon
as Excess Spread in an amount equal to $____________ has been deposited in the
Certificate Distribution Account for distribution to the holders of the Residual
Interests. The "Overcollateralization Target Amount" will equal (A) with respect
to any Distribution Date occurring prior to the Stepdown Date, the greater of
(x) ___% of the Maximum Collateral Amount and (y) the Net Delinquency
Calculation Amount, and (B) with respect to any other Distribution Date, the
greater of (x) ______% of the Pool Principal Balance as of the end of the
related Due Period and (y) the Net Delinquency Calculation Amount; provided,
however, that the Overcollateralization Target Amount will in no event be less
than _____% of the Maximum Collateral Amount.
If on any Distribution Date an Overcollateralization Deficiency (as defined
herein) exists, distributions of Excess Spread, if any, will be made as an
additional distribution of principal to the holders of the Notes, to be
allocated among the Classes of Notes in the order of priority set forth under
"Description of the Notes--Distributions on the Notes" herein. Such
distributions of Excess Spread are intended to accelerate the amortization of
the Class Principal Balances of all Classes of Notes relative to the
amortization of the Loans, thereby increasing the Overcollateralization Amount.
The relative percentage of the
44
<PAGE>
aggregate of the Class Principal Balances of the Classes of Notes to the sum of
the Pool Principal Balance and Pre-Funded Amount will decrease as a result of
the application of Excess Spread to reduce such Class Principal Balances.
On any Distribution Date (i) prior to the termination of the Spread
Deferral Period or (ii) with respect to which the Overcollateralization
Deficiency Amount is equal to zero, all or a portion of the Excess Spread may be
distributed to the holders of the Residual Interests rather than as principal to
the holders of the Notes, thereby ceasing the acceleration of principal
amortization of the Notes in relation to the principal amortization of the
Loans, until such time as the Overcollateralization Deficiency Amount is greater
than zero (i.e., due to a reduction in the Overcollateralization Amount as a
result of Net Loan Losses or delinquencies or due to an increase in the
Overcollateralization Target Amount as a result of the failure to satisfy
certain delinquency criteria).
While the application of Excess Spread in the manner specified above has
been designed to produce and maintain a given level of overcollateralization,
there can be no assurance that Excess Spread will be generated in sufficient
amounts to ensure that such overcollateralization level will be achieved or
maintained at all times. In particular, a high rate of delinquencies on the
Loans during any Due Period could cause the amount of interest received on the
Loans during such Due Period to be less than the amount of interest
distributable on the Notes on the related Distribution Date. In such a case, the
Class Principal Balances of the Classes of Notes would decrease at a slower rate
relative to the Pool Principal Balance, resulting in a reduction of the
Overcollateralization Amount and, in some circumstances, an Allocable Loss
Amount. In addition, Net Loan Losses will reduce the Overcollateralization
Amount to zero before Allocable Loss Amounts are applied in reduction of the
Class Principal Balances of certain Classes of Notes. See "Risk
Factors--Adequacy of Credit Enhancement" herein.
DESCRIPTION OF THE NOTES
General
The _______________ Trust ________ (the "Trust") will issue ________
Classes of Asset Backed Notes (collectively, the "Notes") having the
designations and aggregate initial principal amounts specified on the cover
hereof pursuant to an Indenture to be dated as of _______________ (the
"Indenture"), between the Trust and the Indenture Trustee. The Trust will also
issue instruments representing the residual interest (each a "Residual
Interest") in the Trust pursuant to the terms of a Trust Agreement dated as of
_____________ (the "Trust Agreement"), among the Depositor, the Co-Owner Trustee
and the Owner Trustee. The Notes are secured by the assets of the Trust pursuant
to the Indenture.
The Notes offered hereby will be issued pursuant to the terms of the
Indenture. The following summary describes certain terms of the Notes and the
Indenture. It does not purport to be complete and is subject to, and is
qualified in its entirety by reference to, all the provisions of the Notes and
the Indenture.
Beneficial ownership interests in each Class of Notes will be held in
minimum denominations of $_________ and integral multiples of $1,000 in excess
thereof in book-entry form only. Persons acquiring beneficial interests in the
Notes will hold their interests through DTC.
Book-Entry Registration
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 New York Uniform Commercial Code, and a
"clearing agency" registered pursuant to Section 17A of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"). DTC accepts securities for deposit
from its participating organizations Participants") and facilitates the
clearance and settlement of transactions in such securities between Participants
through electronic book-entry changes in accounts of its Participants, thereby
eliminating the need for physical movement of certificates. Participants include
securities brokers and dealers, banks and trust companies and clearing
corporations and may include certain other organizations. Indirect access to the
DTC system is also available to others such as banks, brokers, dealers and trust
companies that clear through or maintain a custodial relationship with a
Participant, either directly or indirectly ("Indirect Participants").
Noteholders which are not Participants or Indirect Participants but desire
to purchase, sell or otherwise transfer ownership of Notes may do so only
through Participants or Indirect Participants (unless and until Definitive
Securities (as defined herein) are issued). In addition, Noteholders will
receive all distributions of principal and interest on the Notes through DTC and
its Participants. Under a book-entry format, Noteholders may experience some
delay in their receipt of payments, since such payments will be forwarded by the
Indenture Trustee to Cede & Co. ("Cede"), as nominee for DTC. DTC will forward
such payments to its Participants which thereafter will forward them to Indirect
Participants or Noteholders. Noteholders will not be recognized by the Indenture
Trustee as Noteholders, as such term will be used in the Indenture, and
Noteholders will only be permitted to exercise the rights of Noteholders
indirectly through DTC and its Participants. Noteholders will not receive or be
45
<PAGE>
entitled to receive Definitive Securities representing their respective
interests in the Notes, except under the limited circumstances described below.
While the Notes are outstanding (except under the circumstances described
below), under the rules, regulations and procedures creating and affecting DTC
and its operations (the "Rules"), DTC will be required to make book-entry
transfers among Participants on whose behalf it acts with respect to the Notes
and will be required to receive and transmit distributions of principal and
interest on the Notes. Participants and Indirect Participants with which
Noteholders have accounts with respect to the Notes will similarly be required
to make book-entry transfers and receive and transmit such payments on behalf of
their respective Noteholders.
Because DTC can only act on behalf of Participants, which in turn act on
behalf of Indirect Participants, the ability of a Noteholder to pledge Notes to
persons or entities that do not participate in the DTC system, or otherwise take
actions in respect of such Notes, may be limited due to the lack of physical
certificates for such Notes.
Unless and until Definitive Securities are issued, Noteholders which are
not Participants may transfer ownership of Notes only through Participants by
instructing such Participants to transfer such Notes, by book-entry transfer,
through DTC for the account of the purchasers of such Notes, which account is
maintained with their respective Participants. Under the Rules and in accordance
with DTC's normal procedures, transfer of ownership of Notes 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 Noteholders.
DTC has advised the Issuer and the Indenture Trustee that, unless and until
Definitive Securities are issued, DTC will take any action permitted to be taken
by a Noteholder under the Indenture only at the direction of one or more
Participants to whose DTC accounts the Notes are credited. DTC may take
conflicting actions with respect to different undivided interests as a result of
different directions from Participants whose holdings include such undivided
interests.
Neither the Issuer nor the Indenture Trustee will have any liability for
any aspect of the records relating to or payments made on account of beneficial
ownership interests of the Notes held by Cede, as nominee for DTC, or for
maintaining, supervising or reviewing any records relating to such beneficial
ownership interests.
Definitive Securities
Under certain circumstances set forth in the Indenture, the Notes will be
issued in fully registered, certificated form ("Definitive Securities") to the
Noteholders of a given series or their nominees, rather than to DTC or its
nominee, only if (i) the Servicer, in respect of the Notes, advises the
Indenture Trustee in writing that DTC is no longer willing or able to discharge
properly its responsibilities as depository with respect to such Notes, and the
Servicer is unable to locate a qualified successor, (ii) the Servicer, at its
option advises the Indenture Trustee in writing that it elects to terminate the
book-entry system through DTC or (iii) after the occurrence of an Event of
Default under the Indenture Noteholders representing beneficial interests
aggregating at least a majority of the outstanding amount of the Notes advise
the DTC in writing that the continuation of the book-entry system through DTC
(or a successor thereto) is no longer in the best interests of the Noteholders.
Upon the occurrence of any event described in the immediately preceding
paragraph, DTC will be required to notify all Noteholders and the Indenture
Trustee of the availability of Definitive Notes. Upon surrender to the Indenture
Trustee of the typewritten Notes representing book-entry Notes and receipt of
instructions for registration, the Issuer shall execute and the Indenture
Trustee shall authenticate the Definitive Notes in accordance with the
instructions of DTC.
Distributions of principal of, and interest on, such Notes will thereafter
be made by the Indenture Trustee in accordance with the procedures set forth in
the Indenture directly to Noteholders in whose names the Definitive Notes were
registered at the close of business on the applicable Record Date specified for
such Notes.
Distributions on the Notes
For the definitions of certain of the defined terms used in the following
subsections, See "--Related Definitions" below.
On the 25th day of each month or, if such day is not a Business Day, the
first Business Day immediately following, commencing in ______________ (each
such date, a "Distribution Date"), the Indenture Trustee or its designee will
distribute to the persons in whose names the Notes are registered on the related
Record Date the portion of the aggregate distribution to be made to each
Noteholder as described below. The "Record Date" with respect to any
Distribution Date shall be the close of business on the last Business Day of the
month preceding the month in which such Distribution Date occurs. Prior to any
46
<PAGE>
termination of the book-entry provisions, distributions on the book-entry Notes
will be made to beneficial owners of interests therein only through DTC and its
Participants. See "Description of the Notes--Book-Entry Registration" herein.
Available Collection Amount. Distributions on the Notes on each
Distribution Date will be made from the Available Collection Amount. The
Servicer will calculate the Available Collection Amount on the fourteenth
calendar day of each month or, if such day is not a Business Day, then the
immediately preceding Business Day (each such day, a "Determination Date"). With
respect to each Distribution Date, the "Available Collection Amount" is the sum
of (i) all amounts received on the Loans or required to be paid by __________ or
the Depositor during the related Due Period (exclusive of such amounts not
required to be deposited by the Servicer in the Collection Account and amounts
permitted to be withdrawn by the Indenture Trustee from the Collection Account)
as reduced by any portion thereof that may not be withdrawn therefrom pursuant
to an order of a United States bankruptcy court of competent jurisdiction
imposing a stay pursuant to Section 362 of the United States Bankruptcy Code;
(ii) with respect to the final Distribution Date for the Class B Notes or an
early redemption or termination of the Notes pursuant to the Sale and Servicing
Agreement, the Termination Price; (iii) the Purchase Price paid for any Loans
required to be purchased and the Substitution Adjustment to be deposited to the
Collection Account in connection with any substitution, in each case prior to
the related Determination Date; and (iv) the Capitalized Interest Requirement
(as defined herein), if any, with respect to such Distribution Date.
Distributions of Interest. Interest on the Class Principal Balance of each
Class of Notes will accrue thereon at the applicable Note Interest Rate, and
will be payable to the holders of such Class of Notes monthly on each
Distribution Date, commencing in ___________. Interest on each Class of Notes
will be calculated on the basis of a 360-day year of twelve 30-day months.
With respect to any Distribution Date, interest distributions on the Notes
will be made from the Available Collection Amount (plus, if applicable, the
amount, if any, of Pre-Funding Earnings and, on the Distribution Date relating
to the Due Period in which the termination of the Pre-Funding Period occurred,
the amount on deposit in the Pre-Funding Account at such time) net of the Trust
Fees and Expenses (the "Available Distribution Amount"). Interest payments will
be made, first, to the Classes of Senior Notes, pro rata, based on the amount of
interest distributable in respect of each such Class calculated at the related
Note Interest Rate, second, to the Classes of Mezzanine Notes, sequentially, in
the order of their numerical Class designation, and then to the Class B Notes.
Under certain circumstances, the amount available for interest payments could be
less than the amount of interest payable on all Classes of Notes on any
Distribution Date. In such event, each affected Class will receive its ratable
share (based upon the aggregate amount of interest due to such Class) of the
remaining amount available to be distributed as interest after the payment of
all interest due on each Class having a higher interest payment priority. In
addition, any such interest deficiency will be carried forward as a Noteholders'
Interest Carry-Forward Amount (as defined herein) for such Class and will be
distributed to holders of each such Class of Notes on subsequent Distribution
Dates to the extent that sufficient funds are available. Any such interest
deficiency could occur, for example, if delinquencies or losses realized on the
Loans were exceptionally high or were concentrated in a particular month. No
interest will accrue on any Noteholders' Interest Carry-Forward Amount for any
Class.
Distributions of Principal. Principal distributions will be made to the
holders of the Notes on each Distribution Date in an amount generally equal to
the sum of (i) the Regular Principal Distribution Amount (less, in certain
circumstances, the excess of the Overcollateralization Amount over the
Overcollateralization Target Amount) and (ii) to the extent of the
Overcollateralization Deficiency Amount, any Excess Spread for such Distribution
Date.
A. On each Distribution Date, the Regular Distribution Amount will be
distributed in the following order of priority:
Distribution Priorities.
(i) to the holders of the Senior Notes, the Senior Noteholders'
Interest Distributable Amount for such Distribution Date allocated to each Class
of Senior Notes, pro rata, based on the amount of interest distributable in
respect of each such Class calculated at the related Note Interest Rate;
(ii) sequentially, to the holders of the Class M-1 and Class M-2
Notes, in that order, the Class M-1 Noteholders' Interest Distributable Amount
and the Class M-2 Noteholders' Interest Distributable Amount, respectively, for
such Distribution Date;
(iii) to the holders of the Class B Notes, the Class B Noteholders'
Interest Distributable Amount for such Distribution Date;
(iv) if with respect to such Distribution Date the Pre-Funding Pro
Rata Distribution Trigger has occurred, the amount on deposit in the Pre-Funding
Account at the end of the Pre-Funding Period will be distributed as principal
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to all Classes of Notes and the Residual Interests (which initially represent
the Overcollateralization Amount on the Closing Date), pro rata, based on the
Original Class Principal Balances thereof and the Residual Interests in relation
to the sum of the Original Pool Principal Balance and the Original Pre-Funded
Amount;
(v) to the holders of the Class A-1, Class A-2, Class A-3 and Class
A-4 Notes, in that order, until the respective Class Principal Balances thereof
are reduced to zero, in an amount necessary to reduce the aggregate Class
Principal Balance of the Senior Notes to the Senior Optimal Principal Balance
for such Distribution Date,
(vi) sequentially, to the holders of the Class M-1 and Class M-2
Notes, in that order, in an amount necessary to reduce the Class Principal
Balances thereof to the Class M-1 Optimal Principal Balance and the Class M-2
Optimal Principal Balance, respectively, for such Distribution Date;
(vii) to the holders of the Class B Notes, in an amount necessary to
reduce the Class Principal Balance thereof to zero;
(viii) sequentially, to the Class M-1, Class M-2 and Class B Notes, in
that order, until their respective Loss Reimbursement Deficiencies have been
paid in full; and
(ix) any remaining amount to the holders of the Residual Interests.
B. On each Distribution Date, the Indenture Trustee shall distribute the
Excess Spread, if any, in the following order of priority (in each
case after giving effect to all payments specified in paragraph A.
above):
(i) prior to the termination of the Spread Deferral Period, to the
Certificate Distribution Account for distribution to the holders of the Residual
Interests;
(ii) upon the termination of the Spread Deferred Period, (A) in an
amount equal to the Overcollateralization Deficiency Amount, if any, as follows:
(1) to the holders of the Class A-1, Class A-2, Class A-3 and Class
A-4 Notes, in that order, until the respective Class Principal Balances thereof
are reduced to zero, in an amount necessary to reduce the aggregate Class
Principal Balance of the Senior Notes to the Senior Optimal Principal Balance
for such Distribution Date;
(2) sequentially, to the holders of the Class M-1 and Class M-2 Notes,
in that order, until the respective Class Principal Balances thereof have been
reduced to the Class M-1 Optimal Principal Balance and Class M-2 Optimal
Principal Balance, respectively, for such Distribution Date; and
(3) to the holders of the Class B Notes until the Class Principal Balance
thereof has been reduced to zero; and
C. sequentially, to the Class M-1, Class M-2 and Class B Notes, in that
order, until their respective Loss Reimbursement Deficiencies, if any,
have been paid in full; and
D. any remaining amount to the holders of the Residual Interests.
Notwithstanding the priorities specified above, on any Distribution Date as
to which the Class Principal Balances of each of the Class M-1, Class M-2 and
Class B Notes and the Overcollateralization Amount have been reduced to zero,
distributions of principal on the Classes of Senior Notes on such Distribution
Date will be applied to such Classes pro rata based on their respective Class
Principal Balances.
Related Definitions
For purposes hereof, the following terms shall have the following meanings:
Business Day: Any day other than (i) a Saturday or a Sunday or (ii) a day
on which banking institutions in New York City or in the city in which the
corporate trust office of the Indenture Trustee is located are authorized or
obligated by law or executive order to be closed.
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Class A Excess Spread Distribution Amount: With respect to any Distribution
Date, the least of (i) the excess of (x) the Class Principal Balance of all
Senior Notes (after giving effect to all distributions of the Regular
Distribution Amount) over (y) the Senior Optimal Principal Balance for such
Distribution Date, (ii) the Overcollateralization Deficiency Amount for such
Distribution Date, and (iii) the Excess Spread for such Distribution Date.
Class A Principal Distribution Amount: With respect to any Distribution
Date, the lesser of (i) the Regular Principal Distribution Amount and (ii) the
excess of (x) the aggregate Class Principal Balance of all Senior Notes (prior
to giving effect to distributions on such Distribution Date, other than any
distributions in respect of the Pre-Funded Amount on the Distribution Date on
which a Pre-Funding Pro Rata Distribution Trigger has occurred) over (y) the
Senior Optimal Principal Balance for such Distribution Date.
Class B Noteholders' Interest Carry-Forward Amount: With respect to any
Distribution Date and the Class B Notes, the excess of (A) the Class B
Noteholders' Monthly Interest Distributable Amount for the preceding
Distribution Date and any outstanding Class B Noteholders' Interest
Carry-Forward Amount for such preceding Distribution Date over (B) the amount in
respect of interest that is actually distributed to such Notes on such preceding
Distribution Date.
Class B Noteholders' Interest Distributable Amount: With respect to any
Distribution Date and the Class B Notes, the sum of the Class B Noteholders'
Monthly Interest Distributable Amount for such Distribution Date and the Class B
Noteholders' Interest Carry-Forward Amount for such Distribution Date.
Class B Noteholders' Monthly Interest Distributable Amount: With respect to
each Distribution Date and the Class B Notes, the aggregate amount of interest
accrued during the related Interest Period at the Class B Note Interest Rate on
the sum of (i) the Class Principal Balance of the Class B Notes immediately
preceding such Distribution Date and (ii) any Class B Noteholders' Interest
Carry-Forward Amount remaining outstanding for such Distribution Date.
Class M-1 Noteholders' Interest Carry-Forward Amount: With respect to any
Distribution Date and the Class M-1 Notes, the excess of (A) the Class M-1
Noteholders' Monthly interest Distributable Amount for the preceding
Distribution Date and any outstanding Class M-1 Noteholders' Interest
Carry-Forward Amount for such preceding Distribution Date over (B) the amount in
respect of interest that is actually distributed to such Notes on such preceding
Distribution Date.
Class M-1 Noteholders' Interest Distributable Amount: With respect to any
Distribution Date and the Class M-1 Notes, the sum of the Class M-1 Noteholders'
Monthly Interest Distributable Amount for such Distribution Date and the Class
M-1 Noteholders' Interest Carry-Forward Amount for such Distribution Date.
Class M-1 Noteholders' Monthly Interest Distributable Amount: With respect
to each Distribution Date and the Class M-1 Notes, the aggregate amount of
interest accrued during the related Interest Period at the Class M-1 Note
Interest Rate on the sum of (i) the Class Principal Balance of the Class M-1
Notes immediately preceding such Distribution Date and (ii) any Class M-1
Noteholders' Interest Carry-Forward Amount remaining outstanding for such
Distribution Date.
Class M-1 Optimal Principal Balance: With respect to any Distribution Date
prior to the Stepdown Date, zero; and with respect to any other Distribution
Date, the Pool Principal Balance as of the preceding Determination Date minus
the sum of (i) the aggregate Class Principal Balance of the Senior Notes (after
taking into account distributions made on such Distribution Date in reduction of
the Class Principal Balances of the Classes of Senior Notes made prior to such
determination) and (ii) the greater of (x) the sum of (1) ___% of the Pool
Principal Balance as of the preceding Determination Date and (2) the
Overcollateralization Target Amount for such Distribution Date (calculated
without giving effect to the proviso in the definition thereof) and (y) ____% of
the Maximum Collateral Amount; provided, however, that the Class M-1 Optimal
Principal Balance shall never be less than zero or greater than the Original
Class Principal Balance of the Class M-1 Notes.
Class M-2 Noteholders' Interest Carry-Forward Amount: With respect to any
Distribution Date and the Class M-2 Notes, the excess of (A) the Class M-2
Noteholders' Monthly Interest Distributable Amount for the preceding
Distribution Date and any outstanding Class M-2 Noteholders' Interest
Carry-Forward Amount for such preceding Distribution Date over (B) the amount in
respect of interest that is actually distributed to such Notes on such preceding
Distribution Date.
Class M-2 Noteholders' Interest Distributable Amount: With respect to any
Distribution Date and the Class M-2 Notes, the sum of the Class M-2 Noteholders'
Monthly Interest Distributable Amount for such Distribution Date and the Class
M-2 Noteholders' Interest Carry-Forward Amount for such Distribution Date.
Class M-2 Noteholders' Monthly Interest Distributable Amount: With respect
to each Distribution Date (other than the first Distribution Date) and the Class
M-2 Notes, the aggregate amount of interest accrued during the related Interest
Period at the Class M-2 Note Interest Rate on the sum of (i) the Class Principal
Balance of the Class M-2 Notes immediately preceding such
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Distribution Date and (ii) any Class M-2 Noteholders' Interest Carry-Forward
Amount remaining outstanding for such Distribution Date.
Class M-2 Optimal Principal Balance: With respect to any Distribution Date
prior to the Stepdown Date, zero; and with respect to any other Distribution
Date, the Pool Principal Balance as of the preceding Determination Date minus
the sum of (i) the aggregate Class Principal Balance of the Senior Notes (after
taking into account any distributions made on such Distribution Date in
reduction of the Class Principal Balances of the Classes of Senior Notes made
prior to such determination) plus the Class Principal Balance of the Class M-1
Notes (after taking into account any distributions made on such Distribution
Date in reduction of the Class Principal Balance of the Class M-1 Notes prior to
such determination) and (ii) the greater of (x) the sum of (1) ___% of the Pool
Principal Balance as of the preceding Determination Date and (2) the
Overcollateralization Target Amount for such Distribution Date (without giving
effect to the proviso in the definition thereof) and (y) ______% of the Maximum
Collateral Amount; provided, however, that the Class M-2 Optimal Principal
Balance shall never be less than zero or greater than the Original Class
Principal Balance of the Class M-2 Notes.
Excess Spread: With respect to any Distribution Date, the excess of (a) the
Available Distribution Amount over (b) the Regular Distribution Amount.
Insurance Proceeds: With respect to any Loan, the proceeds paid to the
Servicer by any insurer pursuant to any insurance policy covering a Loan,
Mortgaged Property or REO Property or any other insurance policy that relates to
a Loan, net of any expenses which are incurred by the Servicer in connection
with the collection of such proceeds and not otherwise reimbursed to the
Servicer, but excluding the proceeds of any insurance policy that are to be
applied to the restoration or repair of the Mortgaged Property or released to
the borrower in accordance with accepted loan servicing procedures.
Interest Period: With respect to any Distribution Date and each Class of
Notes, the calendar month preceding the month of such Distribution Date based on
a 360-day year consisting of twelve 30-day months.
Liquidated Loan: With respect to any date of determination and any Loan as
to which the Servicer has determined that all recoverable liquidation and
insurance proceeds have been received, which will be deemed to occur upon the
earliest of: (a) the liquidation of the related Mortgaged Property acquired
through foreclosure or similar proceedings, (b) the Servicer's determination in
accordance with customary accepted practices that no further amounts are
collectible from the Loan and (c) any portion of a scheduled monthly payment of
principal and interest is past due in excess of 180 days.
Loss Reimbursement Deficiency: As of any date of determination and as to
the Class M-1 Notes, Class M-2 Notes or Class B Notes, the amount of Allocable
Loss Amounts, together with interest thereon, applied to the reduction of the
Class Principal Balance of such Class and not reimbursed pursuant to the Sale
and Servicing Agreement.
Net Delinquency Calculation Amount: With respect to any Distribution Date,
the excess, if any, of (x) the product of 2.5 and the Six-Month Rolling
Delinquency Average over (y) the aggregate of the amounts of Excess Spread for
the three preceding Distribution Dates.
Net Liquidation Proceeds: With respect to any Distribution Date, any cash
amounts received from Liquidated Loans during the related Due Period, whether
through trustee's sale, foreclosure sale, disposition of Mortgaged Properties or
otherwise (other than Insurance Proceeds and Released Mortgaged Property
Proceeds), and any other cash amounts received in connection with the management
of the Mortgaged Properties related to Defaulted Loans, in each case, net of any
reimbursements made to the Servicer from such amounts for any unreimbursed
Servicing Compensation and Servicing Advances (including nonrecoverable
Servicing Advances) made and any other fees and expenses paid by the Servicer in
connection with the foreclosure, conservation and liquidation of the related
Liquidated Loans or Mortgaged Properties pursuant to the Sale and Servicing
Agreement.
Note Interest Rate: With respect to each Class of Notes, the interest rate
per annum set forth or described below:
Class A-1: ________%
Class A-2: ________%
Class A-3: ________%
Class A-4: ________%
Class M-1: ________%
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Class M-2: ________%
Class B: ________%
Noteholders' Interest Carry-Forward Amount: With respect to any
Distribution Date, any of the Senior Noteholders' Interest Carry-Forward Amount,
the Class M-1 Interest Carry-Forward Amount, the Class M-2 Interest
Carry-Forward Amount or the Class B Interest Carry-Forward Amount.
Noteholders' Interest Distributable Amount: With respect to any
Distribution Date, the sum of the Senior Noteholders' Interest Distributable
Amount, the Class M-1 Interest Distributable Amount, the Class M-2 Interest
Distributable Amount and the Class B Interest Distributable Amount.
Overcollateralization Amount: With respect to any Distribution Date, the
amount equal to the excess of (a) the sum of the Pool Principal Balance as of
the end of the immediately preceding Due Period and the Pre-Funded Amount as of
such Distribution Date over (b) the aggregate of the Class Principal Balances of
the Classes of Notes (after giving effect to distributions on the Notes and the
Residual Interests on such Distribution Date).
Overcollateralization Deficiency Amount: With respect to any date of
determination, the excess, if any, of the Overcollateralization Target Amount
over the Overcollateralization Amount (such Overcollateralization Amount to be
calculated after giving effect to all payments of the Regular Distribution
Amount on the Notes and the Residual Interests on such Distribution Date).
Overcollateralization Target Amount: (A) With respect to any Distribution
Date occurring prior to the Stepdown Date, an amount equal to the greater of (x)
______% of the Maximum Collateral Amount and (y) the Net Delinquency
Calculation; and (B) with respect to any other Distribution Date, an amount
equal to the greater of (x) 14% of the Pool Principal Balance as of the end of
the related Due Period and (y) the Net Delinquency Calculation Amount; provided,
however, that the Overcollateralization Target Amount shall in no event be less
than _____% of the Maximum Collateral Amount.
Regular Distribution Amount: With respect to any Distribution Date, the
lesser of (a) the Available Distribution Amount and (b) the sum of (i) the
aggregate of the Noteholders' Interest Distributable Amounts, (ii) the Regular
Principal Distribution Amount and (iii) if such Distribution Date relates to the
Due Period in which the Pre-Funding Period ended and at the termination of such
Pre-Funding Period a Pre-Funding Pro Rata Distribution Trigger had occurred, the
amount on deposit in the Pre-Funding Account on such date.
Regular Principal Distribution Amount: On each Distribution Date, an amount
equal to the lesser of:
A. the sum of (i) each payment of principal collected by the Servicer
during the related Due Period, (ii) all partial and full principal prepayments
applied by the Servicer during such related Due Period, (iii) the principal
portion of all Net Liquidation Proceeds, Insurance Proceeds and Released
Mortgaged Property Proceeds received during the related Due Period, (iv) that
portion of the purchase price of any repurchased Loan which represents
principal, (v) the principal portion of any Substitution Adjustments required to
be deposited in the Collection Account as of the related Determination Date,
(vi) on the Distribution Date in which the Trust is to be terminated pursuant to
the Sale and Servicing Agreement, that portion of the Termination Price to be
applied to the payment of principal of the Notes and (v) if such Distribution
Date relates to the Due Period in which the Pre-Funding Period ended and at the
termination of such Pre-Funding Period a Pre-Funding Pro Rata Distribution
Trigger had not occurred, the amount on deposit in the Pre-Funding Account on
such date; and
B. the aggregate of the Class Principal Balances of the Classes of Notes
immediately prior to such Distribution Date.
Released Mortgaged Property Proceeds: With respect to any Distribution
Date, the proceeds received by the Servicer in connection with (i) a taking of
an entire Mortgaged Property by exercise of the power of eminent domain or
condemnation or (ii) any release of part of the Mortgaged Property from the lien
of the related Mortgage, whether by partial condemnation, sale or otherwise,
which in either case are not released to the related borrower in accordance with
applicable law, accepted mortgage servicing procedures and the Sale and
Servicing Agreement.
Senior Noteholders' Interest Carry-Forward Amount: With respect to any
Distribution Date and the Senior Notes, the excess of (A) the Senior
Noteholders' Monthly Interest Distributable Amount for the preceding
Distribution Date and any outstanding Senior Noteholders' Interest Carry-Forward
Amount for such preceding Distribution Date over (B) the amount in respect of
interest that is actually distributed to such Notes on such preceding
Distribution Date.
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Senior Noteholders' Interest Distributable Amount: With respect to any
Distribution Date and the Senior Notes, the sum of the Senior Noteholders'
Monthly Interest Distributable Amount for such Distribution Date and the Senior
Noteholders' Interest Carry-Forward Amount for such Distribution Date.
Senior Noteholders' Monthly Interest Distributable Amount: With respect to
each Distribution Date and the Classes of Senior Notes, the aggregate amount of
interest accrued during the related Interest Period at the respective Note
Interest Rates on the sum of (i) the Class Principal Balance of the Classes of
Senior Notes immediately preceding such Distribution Date and (ii) any Senior
Noteholders' Interest Carry-Forward Amount remaining outstanding for such
Distribution Date.
Senior Optimal Principal Balance: With respect to any Distribution Date
prior to the Stepdown Date, zero; with respect to any other Distribution Date,
an amount equal to the Pool Principal Balance as of the preceding Determination
Date minus the greater of (a) the sum of (1) _____% of the Pool Principal
Balance as of the preceding Determination Date and (2) the Overcollateralization
Target Amount for such Distribution Date (without giving effect to the proviso
in the definition thereof) and (b) ______% of the Maximum Collateral Amount;
provided, however, that the Senior Optimal Principal Balance shall never be less
than zero or greater than aggregate Class Principal Balance of the Senior Notes
as of the Closing Date.
Six-Month Rolling Delinquency Average: With respect to any Distribution
Date, the average of the applicable 60-Day Delinquency Amounts for each of the
six immediately preceding Due Periods, where the 60-Day Delinquency Amount for
any Due Period is the aggregate of the Principal Balances of all Loans that are
60 or more days delinquent, in foreclosure or REO Property as of the end of such
Due Period.
Spread Deferral Period: The period beginning on the Closing Date and ending
as soon as Excess Spread in an amount equal to $______ has been deposited in the
Certificate Distribution Account for distribution to the holders of the Residual
Interests.
Stepdown Date: The first Distribution Date occurring after __________ as to
which all of the following conditions exist:
(1) the Pool Principal Balance has been reduced to an amount less than or
equal to ____% of the Maximum Collateral Amount;
(2) the Net Delinquency Calculation Amount is less than ____% of the
Maximum Collateral Amount; and
(3) the aggregate Class Principal Balance of the Senior Notes (after giving
effect to distributions of principal on such Distribution Date) will be able to
be reduced on such Distribution Date (such determination to be made by the
Indenture Trustee prior to making actual distributions on such Distribution
Date) to an amount equal to the excess of (i) the Pool Principal Balance as of
the preceding Determination Date over (ii) the greater of (a) the sum of (1)
_____% of the Pool Principal Balance as of the preceding Determination Date and
(2) the Overcollateralization Target Amount for such Distribution Date (such
Overcollateralization Target Amount calculated without giving effect to the
proviso in the definition thereof and calculated pursuant only to clause (B) in
the definition thereof) and (b) _____% of the Maximum Collateral Amount.
Application of Allocable Loss Amounts
Following any reduction of the Overcollateralization Amount to zero, any
Allocable Loss Amounts will be applied, sequentially, in reduction of the Class
Principal Balances of the Class B, Class M-2 and Class M-1 Notes, in that order,
until their respective Class Principal Balances have been reduced to zero. The
Class Principal Balances of the Classes of Senior Notes will not be reduced by
any application of Allocable Loss Amounts. The reduction of the Class Principal
Balance of any applicable Class of Notes by the application of Allocable Loss
Amounts entitles such Class to reimbursement in an amount equal to the Loss
Reimbursement Deficiency. Each such Class of Notes will be entitled to receive
its Loss Reimbursement Deficiency, or any portion thereof, in accordance with
the payment priorities specified herein. Payment in respect of Loss
Reimbursement Deficiencies will not reduce the Class Principal Balance of each
related Class. The Loss Reimbursement Deficiency with respect to any Class will
remain outstanding until the earlier of (x) the payment in full of such amount
to the holders of such Class and (y) the occurrence of the applicable Final
Maturity Date (although there is no guarantee that such amounts will be paid on
such date).
Pre-Funding Account
On the Closing Date, $_________ (as adjusted pursuant to the immediately
following sentence, the "Original Pre-Funded Amount") will be deposited in an
account (the "Pre-Funding Account"), which account will be in the name of the
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Indenture Trustee and shall be part of the Trust and be used to acquire
Subsequent Loans. To the extent that the Original Pool Principal Balance is more
or less than $_________, the Original Pre-Funded Amount will be decreased or
increased by a corresponding amount provided that the amount of any such
adjustment shall not exceed $_________. During the Pre-Funding Period, the
amount on deposit in the Pre-Funding Account (net of investment earnings
thereon) (the "Pre-Funded Amount") will be reduced by the amount thereof used to
purchase Subsequent Loans in accordance with the Sale and Servicing Agreement.
The "Pre-Funding Period" is the period commencing on the Closing Date and ending
generally on the earlier to occur of (i) the date on which the amount on deposit
in the Pre-Funding Account (net of any investment earnings thereon) is less than
$________ and (ii) _________. On the Distribution Date following the Due Period
in which the termination of the Pre-Funding Period occurs, if the Pre-Funded
Amount at the end of the Pre-Funding Period is less than $__________, any such
Pre-Funded Amount will be distributed to holders of the Classes of Notes then
entitled to receive principal on such Distribution Date in reduction of the
related Class Principal Balances, thus resulting in a partial redemption of the
related Notes on such date. On the Distribution Date following the Due Period in
which the termination of the Pre-Funding Period occurs, if the Pre-Funded Amount
at the end of the Pre-Funding Period is greater than or equal to $__________
(such event, a "Pre-Funding Pro Rata Distribution Trigger"), such Pre-Funded
Amount will be distributed to the holders of all Classes of Notes and the
Residual Interests (which initially represent the Overcollateralization Amount
on the Closing Date), pro rata, based on the Original Class Principal Balances
thereof and the Residual Interests in relation to the sum of the Original Pool
Principal Balance and the Original Pre-Funded Amount.
Amounts on deposit in the Pre-Funding Account will be invested in eligible
investments. All interest and any other investment earnings on amounts on
deposit in the Pre-Funding Account will be deposited in the Note Distribution
Account.
Capitalized Interest Account
On the Closing Date, a portion of the sales proceeds of the Notes will be
deposited in an account (the "Capitalized Interest Account") for application by
the Indenture Trustee on the Distribution Dates in ___________, _____________
and __________________1997 to cover shortfalls in interest on the Notes that may
arise due to the utilization of the Pre-Funding Account as described herein. Any
amounts remaining in the Capitalized Interest Account at the end of the
Pre-Funding Period will be paid to ______.
Optional Termination of the Trust
The holders of an aggregate percentage interest in the Residual Interests
in excess of ___% (the "Majority Residual Interestholders") may, at their
option, effect an early termination of the Trust on or after any Distribution
Date on which the Pool Principal Balance declines to ____% or less of the
Maximum Collateral Amount, by purchasing all of the Loans at a price equal to or
greater than the Termination Price. The "Termination Price" shall be an amount
equal to the sum of (i) the then outstanding Principal Balances of the Loans
plus all accrued and unpaid interest thereon, (ii) any Trust Fees and Expenses
due and unpaid on such date and (iii) any unreimbursed Servicing Advances
including such Servicing Advances deemed to be nonrecoverable. The proceeds from
such sale will be distributed in the order and priority set forth above under
"Distribution Priorities".
DESCRIPTION OF THE TRANSFER AND SERVICING AGREEMENTS
The following summary describes certain terms of the Indenture, the Sale
and Servicing Agreement, the Administration Agreement, the Custodial Agreement
and the Trust Agreement (collectively, the "Transfer and Servicing Agreements").
Forms of certain of the Transfer and Servicing Agreements have been filed as
exhibits to the Registration Statement. Copies of the Transfer and Servicing
Agreements will be filed with the Commission following the issuance of the
Notes. The summary does not purport to be complete and is subject to, and
qualified in its entirety by reference to, all the provisions of the Transfer
and Servicing Agreements. The following summary supplements, and to the extent
inconsistent therewith replaces, the description of the general terms and
provisions of the Transfer and Servicing Agreements set forth under the headings
"The Agreements" in the Prospectus, to which description reference is hereby
made.
Sale and Assignment of the Loans
On the Closing Date, the Depositor will sell, convey, transfer and assign
the Initial Loans to the Trust. The Trust, concurrently with the sale,
conveyance, transfer and assignment of the Initial Loans, will deliver (or cause
to be delivered) to the Depositor the Notes in exchange for the Loans. The Trust
will pledge and assign the Loans (including any rights it may acquire from time
to time in the Subsequent Loans) to the Indenture Trustee in exchange for the
Notes. Each Loan will be identified in a schedule appearing as an exhibit to the
Sale and Servicing Agreement delivered to the Indenture Trustee as such Schedule
may from time to time be amended (the "Loan Schedule").
In addition, the Depositor will deliver (or cause to be delivered), as to
each Loan, to the Indenture Trustee or to the Custodian, the related Note
endorsed in blank or to the order of the Indenture Trustee, without recourse,
any assumption and modification agreements and the Mortgage with evidence of
recording indicated thereon (except for any Mortgage not returned
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from the public recording office), an assignment of the Mortgage in blank or in
the name of the Indenture Trustee, in recordable form, and any intervening
assignments of the Mortgage (collectively, as to each Loan, an "Indenture
Trustee's Loan File"). Subject to confirmation by the Rating Agencies, with
respect to Loan secured by Mortgaged Properties located in certain states where
______ has been advised by counsel that recordation of an assignment of mortgage
is not necessary in order to perfect an interest in a Loan, assignments of
Mortgage will not be filed to reflect the transfer of the Loans to the Trust and
the pledge of the Loans to Indenture Trustee. Rather, ______ in its capacity as
the Servicer will retain record title to such mortgages on behalf of the
Indenture Trustee and the Noteholders. See "Risk Factors--Additional Factors
Affecting Delinquencies, Defaults and Losses on Loans--Non-recordation of
Assignments". In all other cases, assignments to the Indenture Trustee of the
Mortgages will be recorded in order to protect the Trust and the Indenture
Trustee's interest in the Loans against the claims of certain creditors of
______ or subsequent purchasers. ______ will deliver or cause to be delivered to
the Indenture Trustee after recordation the assignments of the Mortgages and the
Mortgages. In the event that ______ cannot deliver the Mortgage or any
assignment with evidence of recording thereon concurrently with the conveyance
thereof under the Sale and Servicing Agreement because it has or they have not
yet been returned by the public recording office or because such office retains
the original thereof, then ______ will deliver or cause to be delivered to the
Indenture Trustee or the Custodian a certified true photocopy of such Mortgage
or assignment. ______ will deliver or cause to be delivered to the Indenture
Trustee or the Custodian any such Mortgage or assignment with evidence of
recording indicated thereon upon receipt thereof from the public recording
office. The Indenture Trustee or the Custodian will agree, for the benefit of
the holders of the Notes, to review (or cause to be reviewed) each Indenture
Trustee's Loan File within 30 days after the conveyance of the related Loan to
the Trust to ascertain that all required documents have been executed and
received, subject to the applicable cure period in the Transfer and Servicing
Agreements.
Trust Fees and Expenses
As compensation for its services pursuant to the Sale and Servicing
Agreement, the Servicer is entitled to the Servicing Fee and additional
servicing compensation and reimbursement as described under "Servicing" below.
As compensation for their services pursuant to the applicable Transfer and
Servicing Agreements, the Indenture Trustee is entitled to the Indenture Trustee
Fee and the Owner Trustee is entitled to the Owner Trustee Fee.
Servicing
In consideration for the performance of the daily loan servicing functions
for the Loans, the Servicer is entitled to a monthly fee (the "Servicing Fee")
equal to 1.00% (100 basis points) per annum (the "Servicing Fee Rate") of the
Pool Principal Balance as of the first day of the immediately preceding Due
Period. See "Risk Factors-- Additional Factors Affecting Delinquencies, Defaults
and Losses on Loans - Dependence on Servicer for Servicing Loans" herein. The
Servicer will pay the fees of any Subservicer out of the amounts it receives as
the Servicing Fee. In addition to the Servicing Fee, the Servicer is entitled to
retain additional servicing compensation in the form of assumption and other
administrative fees, release fees, insufficient funds charges, late payment
charges and any other servicing-related penalties and fees (such additional
compensation and Servicing Fee, collectively the "Servicing Compensation").
In the event of a delinquency or a default with respect to a Loan, the
Servicer will have no obligation to advance scheduled monthly payments of
principal or interest with respect to such Loan. However, the Servicer will make
reasonable and customary expense advances with respect to the Loans (each, a
"Servicing Advance") in accordance with their servicing obligations under the
Sale and Servicing Agreement and will be entitled to receive reimbursement for
such Servicing Advances as described herein. For example, with respect to a
Loan, such Servicing Advances may include costs and expenses advanced for the
preservation, restoration and protection of any Mortgaged Property, including
advances to pay delinquent real estate taxes and assessments. Any Servicing
Advances previously made and determined by the Servicer to be nonrecoverable, in
accordance with accepted servicing procedures will be reimbursable from amounts
in the Collection Account prior to distributions to Noteholders.
Collection Account, Note Distribution Account and Certificate Distribution
Account
The Servicer is required to use its best efforts to deposit in a segregated
account (the "Collection Account"), within two Business Days of receipt, all
payments received after the Cut-Off Date on account of principal and interest,
all Net Liquidation Proceeds, Insurance Proceeds, Released Mortgaged Property
Proceeds, post-liquidation proceeds, any amounts payable in connection with the
repurchase or substitution of any Loan and any amount required to be deposited
in the Collection Account in connection with the termination of the Notes. The
foregoing requirements for deposit in the Collection Account will be exclusive
of payments on account of principal and interest collected on the Loans on or
before the applicable Cut-Off Date. Withdrawals will be made from the Collection
Account only for the purposes specified in the Sale and Servicing Agreement
(including the payment of Servicing Compensation). The Collection Account may be
maintained at any depository institution which satisfies the requirements set
forth in the definition of "Eligible Account" in the Sale and Servicing
Agreement.
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The Servicer will establish and maintain with the Indenture Trustee an
account, in the name of the Indenture Trustee on behalf of the Noteholders, into
which amounts released from the Collection Account for distribution to the
Noteholders will be deposited and from which all distributions to the
Noteholders will be made (the "Note Distribution Account").
On the Business Day prior to each Distribution Date, the Indenture Trustee
will deposit the Available Collection Amount into the Note Distribution Account
by making the appropriate withdrawals from the Collection Account. On each
Distribution Date, the Indenture Trustee will make withdrawals from the Note
Distribution Account for application of the amounts specified below in the
following order of priority:
(i) to provide for the payment of certain fees of the Trust in the
following order: (a) to the Indenture Trustee, an amount equal to the
Indenture Trustee Fee and all unpaid Indenture Trustee Fees from prior Due
Periods and (b) to the Servicer on behalf of the Owner Trustee, an amount
equal to the Owner Trustee Fee and all unpaid Owner Trustee Fees from prior
Due Periods; and
(ii) to provide for the payments to the holders of the Notes, the
holders of the Residual Interests and the Servicer of the amounts specified
herein under "Description of the Notes--Distributions on the Notes."
Income from Accounts
So long as no Event of Default shall have occurred and be continuing,
amounts on deposit in the Note Distribution Account (together with the
Collection Account, the "Accounts") will be invested by the Indenture Trustee,
as directed by the Servicer, in one or more Permitted Investments (as defined in
the Sale and Servicing Agreement) bearing interest or sold at a discount. No
such investment in any Account will mature later than the Business Day
immediately preceding the next Distribution Date. All income or other gain from
investments in any Account will be deposited in such Account immediately on
receipt, unless otherwise specified herein. Income from investments of amounts
on deposit in the Note Distribution Account will be for the benefit of and
withheld by the Indenture Trustee.
Withdrawals from the Collection Account
The Indenture Trustee, at the direction of the Servicer, shall make the
following withdrawals from the Collection Account, in no particular order of
priority: (i) to withdraw any amount not required to be deposited in the
Collection Account or deposited therein in error; (ii) on each Distribution
Date, to pay to the Servicer any accrued and unpaid Servicing Compensation not
otherwise withheld as permitted by the Sale and Servicing Agreement; (iii) on
each Distribution Date, to pay to the Servicer any unreimbursed Servicing
Advances; provided, however, that, except as set forth in clause (iv) below, the
Servicer's right to reimbursement for unreimbursed Servicing Advances shall be
limited to late collections on the related Loans, including, without limitation,
late collections constituting Liquidation Proceeds, Released Mortgaged Property
Proceeds, Insurance Proceeds, post-liquidation proceeds and such other amounts
as may be collected by the Servicer from the related Obligor or otherwise
relating to the Loan in respect of which such unreimbursed amounts are owed;
(iv) on each Distribution Date, to reimburse the Servicer for any Servicing
Advances determined by the Servicer in good faith to have become nonrecoverable
Servicing Advances; and (v) make payments as set forth in the Sale and Servicing
Agreement.
The Owner Trustee and the Indenture Trustee
The Owner Trustee, the Indenture Trustee and any of their respective
affiliates may hold Notes in their own names or as pledgees. For the purpose of
meeting the legal requirements of certain jurisdictions, the Servicer, the
Owner Trustee and the Indenture Trustee acting jointly (or in some instances,
the Owner Trustee or the Indenture Trustee acting alone) will have the power to
appoint co-trustees or separate trustees of all or any part of the Trust. In the
event of such an appointment, all rights, powers, duties and obligations
conferred or imposed upon the Owner Trustee by the Trust Agreement and upon the
Indenture Trustee by the Sale and Servicing Agreement and the Indenture will be
conferred or imposed upon the Owner Trustee and the Indenture Trustee,
respectively, and in each such case such separate trustee or co-trustee jointly,
or, in any jurisdiction in which the Owner Trustee or the Indenture Trustee will
be incompetent or unqualified to perform certain acts, singly upon such separate
trustee or co-trustee who will exercise and perform such rights, powers, duties
and obligations solely at the direction of the Owner Trustee or the Indenture
Trustee, respectively.
The Owner Trustee and the Indenture Trustee may resign at any time, in
which event the Servicer will be obligated to appoint a successor thereto. The
Servicer may remove the Owner Trustee or the Indenture Trustee if either ceases
to be eligible to continue as such under the Trust Agreement, the Sale and
Servicing Agreement or the Indenture, as the case may be, or becomes legally
unable to act or becomes insolvent. In such circumstances, the Servicer will be
obligated to appoint a successor Owner Trustee or a successor Indenture Trustee,
as applicable. Any resignation or removal of the Owner Trustee or the Indenture
Trustee and appointment of a successor thereto will not become effective until
acceptance of the appointment by such successor. Upon the occurrence and
continuation of an event of default under the Indenture, the Co-Owner Trustee
will resign
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and the Owner Trustee will assume the duties of the Co-Owner Trustee under the
Trust Agreement and the Sale and Servicing Agreement.
The Trust Agreement and Indenture will provide that the Owner Trustee and
the Indenture Trustee will be entitled to indemnification by the Depositor or
______, and will be held harmless against, any loss, liability or expense
incurred by the Owner Trustee or the Indenture Trustee not resulting from its
own willful misfeasance, bad faith or negligence (other than by reason of a
breach of any of its representations or warranties to be set forth in the Trust
Agreement, the Indenture or the Sale and Servicing Agreement, as the case may
be).
Duties of the Owner Trustee and the Indenture Trustee
The Owner Trustee will make no representations as to the validity or
sufficiency of the Trust Agreement, the Notes or of any Loans or related
documents, and will not be accountable for the use or application by the
Depositor or the Servicer of any funds paid to the Depositor or the Servicer in
respect of the Notes, the Loans, or the investment of any monies by the Servicer
before such monies are deposited into the Accounts. So long as no Event of
Default has occurred and is continuing, the Owner Trustee will be required to
perform only those duties specifically required of it under the Trust Agreement.
Generally, those duties will be limited to the receipt of the various
certificates, reports or other instruments required to be furnished to the Owner
Trustee under the Trust Agreement, in which case it will only be required to
examine them to determine whether they conform to the requirements of the Trust
Agreement. The Owner Trustee will not be charged with knowledge of a failure by
the Servicer to perform its duties under the Trust Agreement or the Sale and
Servicing Agreement which failure constitutes an Event of Default unless the
Owner Trustee obtains actual knowledge of such failure as will be specified in
the Trust Agreement or the Sale and Servicing Agreement.
The Indenture Trustee will make no representations as to the validity or
sufficiency of the Indenture, the Sale and Servicing Agreement, the Notes (other
than the execution and authentication thereof) or of any Loans or related
documents, and will not be accountable for the use or application by the
Depositor or the Servicer of any funds paid to the Depositor or the Servicer in
respect of the Notes or the Loans, or the investment of any monies by the
Servicer before such monies are deposited into any of the Accounts. So long as
no Event of Default under the Indenture or the Sale and Servicing Agreement has
occurred and is continuing, the Indenture Trustee will be required to perform
only those duties specifically required of it under the Indenture or the Sale
and Servicing Agreement. Generally, those duties will be limited to the receipt
of the various certificates, reports or other instruments required to be
furnished to the Indenture Trustee under the Indenture, in which case it will
only be required to examine them to determine whether they conform to the
requirements of the Indenture. The Indenture Trustee will not be charged with
knowledge of a failure by the Servicer to perform its duties under the Trust
Agreement, Sale and Servicing Agreement or Administration Agreement which
failure constitutes an Event of Default under the Indenture or the Sale and
Servicing Agreement unless the Indenture Trustee obtains actual knowledge of
such failure as will be specified in the Indenture or the Sale and Servicing
Agreement.
The Indenture Trustee will be under no obligation to exercise any of the
rights or powers vested in it by the Indenture or the Sale and Servicing
Agreement or to make any investigation of matters arising thereunder or to
institute, conduct or defend any litigation thereunder or in relation thereto at
the request, order or direction of any of the Noteholders, unless such
Noteholders have offered to the Indenture Trustee reasonable security or
indemnity against the costs, expenses and liabilities that may be incurred
therein or thereby. No Noteholder will have any right under the Indenture or the
Sale and Servicing Agreement to institute any proceeding with respect to the
Indenture or the Sale and Servicing Agreement, unless such holder previously
shall have given to the Indenture Trustee written notice of the occurrence of an
Event of Default and (i) the Event of Default arises from the Servicer's failure
to remit payments when due or (ii) Noteholders evidencing not less than 25% of
the voting interests of each Class of Notes, acting together as a single class,
shall have made written request upon the Indenture Trustee to institute such
proceeding in its own name as the Indenture Trustee thereunder and offered to
the Indenture Trustee reasonable indemnity and the Indenture Trustee for 30 days
shall have neglected or refused to institute any such proceedings.
PREPAYMENT AND YIELD CONSIDERATIONS
Except as otherwise provided herein, no principal distributions will be
made on any Class of Senior Notes until the Class Principal Balance of each
Class of Senior Notes having a lower numerical designation has been reduced to
zero, and no principal distributions will be made on the Mezzanine Notes until
all required principal distributions have been made in respect of the Senior
Notes. In addition, except as otherwise provided, no distributions of principal
with respect to the Class B Notes will be made until the required principal
distributions have been made in respect of all Classes of Senior Notes and
Mezzanine Notes. See "Description of the Notes--Distributions on the Notes"
herein. As the rate of payment of principal of each Class of Notes depends
primarily on the rate of payment (including prepayments) of the Loans, final
payment of any Class of Notes could occur significantly earlier than its Final
Maturity Date. Holders of the Notes will bear the risk of being able to reinvest
principal payments on the Notes at yields at least equal to the yields on their
respective Notes. No prediction can be made as to the rate of prepayments on the
Loans in either stable or changing interest rate environments. Any reinvestment
risk resulting from the rate
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of prepayment of the Loans and the distribution of such payments to the holders
of the Notes will be borne entirely by the holders of the Notes.
The subordination of the Class B Notes to the Senior Notes and Mezzanine
Notes will provide limited protection to the holders of the Senior and Mezzanine
Notes against losses on the Loans. Accordingly, the yield on the Class B Notes
(and to a lesser extent, the Mezzanine Notes and Senior Notes) will be extremely
sensitive to the delinquency and loss experience of the Loans, the timing of any
such delinquencies and losses, the weighted average coupon of the Loans
(including the Adjustable Rate Loans) as well as the amount of Excess Spread
from time to time. If the actual rate and amount of delinquencies and losses
experienced by the Loans exceed the rate and amount of such delinquencies and
losses assumed by an investor or the actual weighted average coupon of the Loans
(including the Adjustable Rate Loans) is less than the weighted average coupon
assumed by an investor, the yield to maturity on the Notes may be lower than
anticipated.
The effective yield to the holders of any Class of Notes will be lower than
the yield otherwise produced by the applicable Note Interest Rate, because the
distribution of the interest accrued during each Interest Period (a calendar
month consisting of thirty days) will not be made until the Distribution Date
occurring in the month following such Due Period. See "Description of the
Notes--Distributions on the Notes" herein. This delay will result in funds being
passed through to the holders of the Notes approximately 25 days after the end
of the monthly accrual period, during which 25-day period no interest will
accrue on such funds. As discussed in greater detail below, greater than
anticipated distributions of principal can also affect the yield on Notes
purchased at a price greater or less than par.
The rate of principal payments on the Notes, the aggregate amount of each
interest payment on the Notes and the yield to maturity on the Notes will be
directly related to and affected by the rate and timing of principal reductions
on the Loans, the application of Excess Spread to reduce the Class Principal
Balances of the Notes to the extent described herein under "Description of
Credit Enhancement--Overcollateralization," and, under certain circumstances,
the delinquency rate experienced by and the weighted average coupon of the
Loans. The reductions in principal of such Loans may be in the form of scheduled
amortization payments or unscheduled payments or reductions, which may include
prepayments, repurchases and liquidations or write-offs due to default,
casualty, insurance or other dispositions. On or after any Distribution Date on
which the Pool Principal Balance declines to ____% or less of the Maximum
Collateral Amount, the Majority Residual Interestholders may effect an early
termination of the Trust, resulting in a redemption of the Notes. See
"Description of the Notes--Optional Termination of the Trust" herein.
The "weighted average life" of a Note refers to the average amount of time
that will elapse from ______________ (the "Closing Date") to the date on which
each dollar in respect of principal of such Note will have repaid. The weighted
average lives of the Notes will be influenced by the rate at which principal
reductions occur on the Loans, the extent to which high rates of delinquencies
on the Loans during any Due Period result in interest collections on the Loans
in amounts less than the amount of interest distributable on the Notes, the rate
at which Excess Spread is distributed to holders of the Notes as described
herein, and the extent to which any reduction of the Overcollateralization
Amount is paid to the holders of the Residual Interests as described herein. If
substantial principal prepayments on the Loans are received from unscheduled
prepayments, liquidations or repurchases, then the distributions to the holders
of the Notes resulting from such prepayments may significantly shorten the
actual average lives of the Notes. If the Loans experience delinquencies and
certain defaults in the payment of principal, then the holders of the Notes will
similarly experience a delay in the receipt of principal distributions
attributable to such delinquencies and default, which in certain instances may
result in longer actual average lives of the Notes than would otherwise be the
case. However, to the extent that the Principal Balances of Liquidated Loans are
included in the principal distributions on the Notes, then the holders of the
Notes will experience an acceleration in the receipt of principal distributions
which in certain instances may result in shorter actual average lives of the
Notes than would otherwise be the case. Interest shortfalls on the Loans due to
principal prepayments in full and in part and any resulting shortfall in amounts
distributable on the Notes will be covered to the extent of amounts available
from the credit enhancement provided for the Notes. See "Risk Factors--Adequacy
of Credit Enhancement" herein.
The rate and timing of principal reductions on the Loans will be influenced
by a variety of economic, geographic, social and other factors. These factors
may include changes in borrowers' housing needs, job transfers, unemployment,
borrowers' net equity, if any, in the Mortgaged Properties, servicing decisions,
homeowner mobility, the existence and enforceability of "due-on-sale" clauses,
seasoning of Loans, market interest rates for similar types of loans and the
availability of funds for such loans. Each of the Loans may be assumed, with the
Servicer's consent, upon the sale of the related Mortgaged Property. Certain of
the Loans are subject to prepayment penalties, which may reduce the amount or
the likelihood of prepayments on such Loans. The remaining Loans may be prepaid
in full or in part at any time without penalty. As with fixed rate obligations,
generally, the rate of prepayment on a pool of loans is likely to be affected by
prevailing market interest rates for similar types of loans of a comparable term
and risk level. If prevailing interest rates were to fall significantly below
the respective Loan Rates on the Loans, the rate of prepayment (and refinancing)
would be expected to increase. Conversely, if prevailing interest rates were to
rise significantly above the respective Loan Rates on the Loans, the rate of
prepayment on the Loans would be expected to decrease. In addition, depending on
prevailing market interest rates, the future outlook for market interest rates
and economic
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conditions generally, some borrowers may sell or refinance mortgaged properties
in order to realize their equity in the mortgaged properties, if any, to meet
cash flow needs or to make other investments. In addition, any future
limitations on the rights of borrowers to deduct interest payments on mortgage
loans for Federal income tax purposes may result in a higher rate of prepayment
on the Loans. ______ makes no representations as to the particular factors that
will affect the prepayment of the Loans, as to the relative importance of such
factors, or as to the percentage of the Principal Balances of the Loans that
will be paid as of any date.
Distributions of principal to holders of the Notes at a faster rate than
anticipated will increase the yields on Notes purchased at discounts but will
decrease the yields on Notes purchased at premiums, which distributions of
principal may be attributable to scheduled payments and prepayments of principal
as a result of repurchases and liquidations or write-offs due to default,
casualty or insurance on the Loans and to the application of Excess Spread. The
effect on an investor's yield due to distributions of principal to the holders
of the Notes (including, without limitation, prepayments on the Loans) occurring
at a rate that is faster (or slower) than the rate anticipated, by the investor
during any period following the issuance of the Notes will not be offset
entirely by a subsequent like reduction (or increase) in the rate of such
distributions of principal during any subsequent period.
The rate of delinquencies and defaults on the Loans and the recoveries, if
any, on Defaulted Loans and foreclosed properties will also affect the rate and
timing of principal payments on the Loans, and accordingly, the weighted average
lives of the Notes, and could cause a delay in the payment of principal or a
slower rate of principal amortization to the holders of Notes. Certain factors
may influence such delinquencies and defaults, including origination and
underwriting standards, Combined Loan-to-Value Ratios and delinquency history.
In general, defaults on home loans are expected to occur with greater frequency
in their early years, although few data are available with respect to the rate
of default on home loans similar to the Loans. The rate of default on Loans with
high Combined Loan-to-Value Ratios, secured by junior liens may be higher than
that on home loans with lower Combined Loan-to-Value Ratios or secured by first
liens on comparable properties. Furthermore, the rate and timing of prepayments,
defaults and liquidations on the Loans will be affected by the general economic
conditions of the regions of the country in which the related Mortgaged
Properties are located or the related borrower is residing. See "The Loans"
herein. The risk of delinquencies and loss is greater and voluntary principal
prepayments are less likely in regions where a weak or deteriorating economy
exists, as may be evidenced by increasing unemployment or falling property
values.
Because principal distributions generally are paid to certain Classes of
Notes before other Classes, holders of the Class B Notes and, to a lesser
extent, the Classes of Mezzanine Notes bear a greater risk of losses from
delinquencies and defaults on the Loans than holders of the Classes of Notes
having higher priorities for payment of principal. See "Description of Credit
Enhancement--Subordination and Allocation of Losses" herein.
Although some data have been published with respect to the historical
prepayment experience of certain residential mortgage loans, such mortgage loans
may differ in material respects from the Loans and such data may not be
reflective of conditions applicable to the Loans. No prepayment history is
generally available with respect to the types of Loans included in the Pool or
similar types of loans, and there can be no assurance that the Loans will
achieve or fail to achieve any particular rate of principal prepayment. A number
of factors suggest that the prepayment experience of the Pool may be
significantly different from that of a pool of conventional first-lien, single
family mortgage loans with equivalent interest rates and maturities. One such
factor is that the Principal Balance of the average Loan is smaller than that of
the average conventional first-lien mortgage loan. A smaller principal balance
may be easier for a borrower to prepay than a larger balance and, therefore, a
higher prepayment rate may result for the Pool than for a pool of first-lien
mortgage loans, irrespective of the relative average interest rates and the
general interest rate environment. In addition, in order to refinance a
first-lien mortgage loan, the borrower must generally repay any junior liens.
However, a small Principal Balance may make refinancing a Loan at a lower
interest rate less attractive to the borrower as the perceived impact to the
borrower of lower interest rates on the size of the monthly payment may not be
significant. Other factors that might be expected to affect the prepayment rate
of the Pool include general economic conditions, the amounts of and interest
rates on the underlying senior mortgage loans, and the tendency of borrowers to
use real property mortgage loans as long-term financing for home purchase and
junior liens as shorter-term financing for a variety of purposes, which may
include the direct or indirect financing of home improvement, education
expenses, debt consolidation, purchases of consumer durables such as
automobiles, appliances and furnishings and other consumer purposes.
Furthermore, because at origination a substantial majority of the Loans had
combined loan-to-value ratios that exceeded 100%, the related borrowers for
these Loans will generally have significantly less opportunity to refinance the
indebtedness secured by the related Mortgaged Properties and, therefore, a lower
prepayment rate may be experienced by the Pool than for a pool of mortgage
(including first or junior lien) loans that have combined loan-to-value ratios
less than 100%. Given these characteristics, the Loans may experience a higher
or lower rate of prepayment than first-lien mortgage loans.
Excess Spread and Reduction of Overcollateralization Amount
An overcollateralization feature has been designed to accelerate the
principal amortization of the Notes relative to the principal amortization of
the Loans. If on any Distribution Date following the termination of the Spread
Deferral Period, the
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Overcollateralization Target Amount exceeds the Overcollateralization Amount,
any Excess Spread will be distributed to the holders of the Classes of Notes in
the order and amounts specified herein under "Description of the
Notes--Distributions on the Notes--Distribution Priorities." Prior to the
termination of the Spread Deferral Period or if the Overcollateralization Amount
equals the Overcollateralization Target Amount for such Distribution Date,
Excess Spread otherwise distributable to the holders of the Notes as described
above will instead be distributed in respect of Loss Reimbursement Deficiencies,
if any, and thereafter to the holders of the Residual Interests. On the Stepdown
Date and on each Distribution Date thereafter as to which the
Overcollateralization Amount is or, after taking into account all other
distributions to be made on such Distribution Date, would be at least equal to
the Overcollateralization Target Amount, amounts otherwise distributable as
principal to the holders of the Notes on such Distribution Date in reduction of
their Class Principal Balances may, under certain circumstances, instead be
distributed in respect of the applicable Classes in payment of their respective
Loss Reimbursement Deficiencies and thereafter to the holders of the Residual
Interests, thereby reducing the rate of and under certain circumstances delaying
the principal amortization with respect to the Notes, until the
Overcollateralization Amount is reduced to the Overcollateralization Target
Amount.
While all of the Notes are fixed rate obligations, ______% of the Original
Pool Principal Balance consists of Adjustable Rate Loans. If the Loan Rates on
the Adjustable Rate Loans decrease, the amount of the Excess Spread available
(i) to cause the termination of the Spread Deferral Period and then (ii) to
achieve the required Overcollateralization Amount will be lessened.
In addition, high rates of delinquencies on the Loans during any Due Period
may cause the amount of interest received on the Loans during such Due Period to
be less than the amount of interest distributable on the Notes on the related
Distribution Date. Such an occurrence will cause the Class Principal Balances of
the Notes to decrease at a slower rate relative to the Pool Principal Balance,
resulting in a reduction of the Overcollateralization Amount and, in some
circumstances, an Allocable Loss Amount. As described herein, the yield to
maturity on a Note purchased at a premium or a discount will be affected by the
extent to which any amounts are paid to the holders of the Residual Interests in
lieu of payment to the holders of the Classes of Notes in reduction of their
Class Principal Balances. If the actual distributions of any such amounts to the
holders of the Residual Interests occur sooner than anticipated by an investor
who purchases a Note at a discount, the actual yield to such investor may be
lower than such investor's anticipated yield. If the actual distributions of any
such amounts to the holders of the Residual Interests occur later than
anticipated by an investor who purchases a Note at a premium, the actual yield
to such investor may be lower than such investor's anticipated yield. The amount
payable to the holders of the Residual Interests in reduction of the
Overcollateralization Amount, if any, on any Distribution Date will be affected
by the Overcollateralization Target Amount and by the actual default and
delinquency experience of the Pool and the principal amortization of the Pool.
Reinvestment Risk
The reinvestment risk with respect to an investment in the Notes will be
affected by the rate and timing of principal payments (including prepayments) in
relation to the prevailing interest rates at the time of receipt of such
principal payments. For example, during periods of falling interest rates,
holders of the Notes are likely to receive an increased amount of principal
payments from the Loans at a time when such holders may be unable to reinvest
such payments in investments having a yield and rating comparable to those of
the Notes. Conversely, during periods of rising interest rates, holders of the
Notes are likely to receive a decreased amount of principal prepayments from the
Loans at a time when such holders may have an opportunity to reinvest such
payments in investments having a higher yield than, and a comparable rating to,
those of the Notes.
Final Maturity Dates
The "Final Maturity Date" for each Class of Notes as set forth in the
"Summary of Terms" herein has been calculated as the thirteenth Distribution
Date following the Due Period in which the Class Principal Balance of such Class
of Notes would be reduced to zero assuming no losses or prepayments and that no
Excess Spread is applied to reduce the principal balance of such Class of Notes.
The actual maturity of any Class of Notes may be substantially earlier than its
Final Maturity Date set forth herein.
Weighted Average Lives of the Notes
The following information is given solely to illustrate the effect of
prepayments of the Loans on the weighted average lives of the Notes under
certain stated assumptions and is not a prediction of the prepayment rate that
might actually be experienced by the Loans. Weighted average life refers to the
average amount of time that will elapse from the date of delivery of a security
until each dollar of principal of such security will be repaid to the investor.
The weighted average lives of the Notes will be influenced by the rate at which
principal of the Loans is paid, which may be in the form of scheduled
amortization or prepayments (for this purpose, the term "prepayment" includes
reductions of principal, including without limitation those resulting from
unscheduled full or partial prepayments, refinancings, liquidations and
write-offs due to defaults, casualties, insurance or other dispositions,
substitutions and repurchases by or on behalf of the Depositor or ______), the
rate at which
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Excess Spread is distributed to holders of the Notes as described herein, the
delinquency rate of the Loans from time to time and the extent to which any
amounts are distributed to the holders of the Residual Interests as described
herein.
Prepayments on loans such as the Loans are commonly measured relative to a
prepayment standard or model. The model used in this Prospectus Supplement is
the prepayment assumption (the "Prepayment Assumption"), which represents an
assumed rate of prepayment each month relative to the then outstanding principal
balance of the pool of loans for the life of such loans. A 100% Prepayment
Assumption assumes a constant prepayment rate ("CPR") of _____% per annum of the
outstanding principal balance of such loans in the first month of the life of
the loans and an additional approximate ______% (expressed as a percentage per
annum) in each month thereafter until the twelfth month; beginning in the
twelfth month and in each month thereafter during the life of the loans, a CPR
of _______% each month is assumed. As used in the table below, 0% Prepayment
Assumption assumes prepayment rates equal to 0% of the Prepayment Assumption
(i.e., no prepayments). Correspondingly, ____% Prepayment Assumption assumes
prepayment rates equal to ____% of the Prepayment Assumption, and so forth. The
Prepayment Assumption does not purport to be a historical description of
prepayment experience or a prediction of the anticipated rate of prepayment of
any pool of loans, including the Loans. None of ______ or the Depositor makes
any representations about the appropriateness of the Prepayment Assumption or
the CPR model.
Modeling Assumptions. For purposes of preparing the tables below, the
following assumptions (the "Modeling Assumptions") have been made:
(i) all scheduled principal and interest payments on the Loans are
timely received on the first day of a Due Period, which will begin on the first
day of each month and end on the last day of the month (with the first Due
Period commencing on __________________), no delinquencies or losses occur on
the Loans and all Loans have a first payment date that occurs thirty (30) days
after the origination thereof; it is assumed that the scheduled payments of
interest include 30 days' accrued interest;
(ii) the scheduled payments on the Loans have been calculated on the
outstanding Principal Balance (prior to giving effect to prepayments), the Loan
Rate and the remaining term to stated maturity such that the Loans (other than
the Balloon Loans) will fully amortize by their remaining term to stated
maturity and the Balloon Loans will amortize according to their terms and the
balloon payment will be made on the final payment date;
(iii) all scheduled payments of interest and principal in respect of
the Loans have been made through the applicable Cut-Off Date for purposes of
calculating remaining term to stated maturity;
(iv) all Loans prepay monthly at the specified percentages of the
Prepayment Assumption, no optional or other early termination of the Notes
occurs (except with respect to the calculation of the Weighted Average Life - To
Call (Years) figures in the following tables) and no substitutions or
repurchases of the Loans occur;
(v) all prepayments in respect of the Loans are received on the last
day of each month commencing in the month of the Closing Date and include 30
days of interest thereon;
(vi) the Closing Date for the Notes is ______________ and each year
will consist of 360 days;
(vii) cash distributions are received by the holders of the Notes on
the 25th day of each month, commencing in _____________;
(viii) the Overcollateralization Target Amount will be as defined
herein;
(ix) the Pre-Funding Pro Rata Distribution Trigger does not occur;
(x) the Note Interest Rate for each Class of Notes is as set forth
herein;
(xi) the additional fees deducted from the interest collections in
respect of the Loans include the Indenture Trustee Fee, the Custodian Fee, the
Owner Trustee Fee and the Servicing Fee;
(xii) no reinvestment income from any Account is earned and available
for distribution;
(xiii) Sub-Pools 11, 12 and 13 (specified in the table below) are
transferred to the Trust in ____________ with principal payments on such Loans
being received by the Servicer in ____________ and passed through to holders of
the Notes on the Distribution Date in _________________;
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<PAGE>
(xiv) sufficient funds will be available in the Capitalized Interest
Account to cover any shortfalls in interest due to the Pre-Funding Account and
the transfer of Loans described in clause (xiii);
(xv) interest will accrue on the Notes for each related Distribution
Date at the related Note Interest Rate and based on the related Interest Period;
(xvi) all of the Original Pre-Funded Amount is used to acquire
Subsequent Loans as set forth in clause (xiii); and
(xvii) each Adjustable Rate Loan adjusts every six months following
its initial adjustment date and the Pool consists of thirteen Loans having the
following additional characteristics:
61
<PAGE>
Assumed Loan Characteristics
<TABLE>
<CAPTION>
Number of
Remaining Months to
Cut-Off Date Original Term to Final
Principal Term Maturity Balloon Gross Lifetime Lifetime
Sub-Pool Loan Rate Balance (Months) (Months) Payment Margin Cap Floor
- --------- ---------- ------------ --------- --------- ------- ------ --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 ________% $________ ________ _________ ________ ______ ________ ________
2 ________ ________ ________ _________ ________ ______ ________ ________
3 ________ ________ ________ _________ ________ ______ ________ ________
4 ________ ________ ________ _________ ________ ______ ________ ________
5 ________ ________ ________ _________ ________ ______ ________ ________
6 ________ ________ ________ _________ ________ ______ ________ ________
7 ________ ________ ________ _________ ________ ______ ________ ________
8 ________ ________ ________ _________ ________ ______ ________ ________
9 ________ ________ ________ _________ ________ ______ ________ ________
10 ________ ________ ________ _________ ________ ______ ________ ________
11 ________ ________ ________ _________ ________ ______ ________ ________
12 ________ ________ ________ _________ ________ ______ ________ ________
13 ________ ________ ________ _________ ________ ______ ________ ________
14 ________ ________ ________ _________ ________ ______ ________ ________
<CAPTION>
Months to
Next
Sub-Pool Periodic Cap Adjustment
- --------- ------------ ----------
<S> <C> <C>
1 ____________ __________
2 ____________ __________
3 ____________ __________
4 ____________ __________
5 ____________ __________
6 ____________ __________
7 ____________ __________
8 ____________ __________
9 ____________ __________
10 ____________ __________
11 ____________ __________
12 ____________ __________
13 ____________ __________
14 ____________ __________
</TABLE>
The tables on the following pages indicate the weighted average lives of
each Class of Notes corresponding to the specified percentages of the Prepayment
Assumption.
These tables have been prepared based on the Modeling Assumptions
(including the assumptions regarding the characteristics and performance of the
Loans which may differ from the actual characteristics and performance thereof)
and should be read in conjunction therewith.
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<PAGE>
Percent of Original Class Principal Balance Outstanding
at the Following Percentages of Prepayment Assumption(1)
Class A-1 Notes: $________________
-----------------------------------------------------------
Date 0% 50% 75% 100% 125% 150%
---- ----- ----- ----- ----- ----- -----
Initial Percent ... _____ _____ _____ _____ _____ _____
______ ............ _____ _____ _____ _____ _____ _____
______ ............ _____ _____ _____ _____ _____ _____
______ ............ _____ _____ _____ _____ _____ _____
______ ............ _____ _____ _____ _____ _____ _____
______ ............ _____ _____ _____ _____ _____ _____
______ ............ _____ _____ _____ _____ _____ _____
______ ............ _____ _____ _____ _____ _____ _____
Weighted Average Life
_____ _____ _____ _____ _____ _____
To Maturity (Years)
_____ _____ _____ _____ _____ _____
- -----------
(1) The percentages in this table have been rounded to the nearest whole
number.
(2) The weighted average life of a Class is determined by (a) multiplying the
amount of each distribution of principal thereof by the number of years
from the date of issuance to the related Distribution Date, (b) summing the
results and (c) dividing the sum by the aggregate distributions of
principal referred to in clause (a) and rounding to one decimal place.
63
<PAGE>
Percent of Original Class Principal Balance Outstanding
at the Following Percentages of Prepayment Assumption(1)
Class A-2 Notes: $________________
-----------------------------------------------------------
Date 0% 50% 75% 100% 125% 150%
---- ----- ----- ----- ----- ----- -----
Initial Percent _____ _____ _____ _____ _____ _____
______ _____ _____ _____ _____ _____ _____
______ _____ _____ _____ _____ _____ _____
______ _____ _____ _____ _____ _____ _____
______ _____ _____ _____ _____ _____ _____
______ _____ _____ _____ _____ _____ _____
______ _____ _____ _____ _____ _____ _____
______ _____ _____ _____ _____ _____ _____
Weighted Average Life
To Maturity (Years)_____ _____ _____ _____ _____ _____
- ------------
(1) The percentages in this table have been rounded to the nearest whole
number.
(2) The weighted average life of a Class is determined by (a) multiplying the
amount of each distribution of principal thereof by the number of years
from the date of issuance to the related Distribution Date, (b) summing the
results and (c) dividing the sum by the aggregate distributions of
principal referred to in clause (a) and rounding to one decimal place.
64
<PAGE>
Percent of Original Class Principal Balance Outstanding
at the Following Percentages of Prepayment Assumption(1)
Class A-3 Notes: $________________
-----------------------------------------------------------
Date 0% 50% 75% 100% 125% 150%
---- ----- ----- ----- ----- ----- -----
Initial Percent _____ _____ _____ _____ _____ _____
______ _____ _____ _____ _____ _____ _____
______ _____ _____ _____ _____ _____ _____
______ _____ _____ _____ _____ _____ _____
______ _____ _____ _____ _____ _____ _____
______ _____ _____ _____ _____ _____ _____
______ _____ _____ _____ _____ _____ _____
______ _____ _____ _____ _____ _____ _____
Weighted Average Life
To Maturity (Years)_____ _____ _____ _____ _____ _____
- - ----------
(1) The percentages in this table have been rounded to the nearest whole
number.
(2) The weighted average life of a Class is determined by (a) multiplying the
amount of each distribution of principal thereof by the number of years
from the date of issuance to the related Distribution Date, (b) summing the
results and (c) dividing the sum by the aggregate distributions of
principal referred to in clause (a) and rounding to one decimal place.
65
<PAGE>
Percent of Original Class Principal Balance Outstanding
at the Following Percentages of Prepayment Assumption(1)
Class A-4 Notes: $________________
-----------------------------------------------------------
Date 0% 50% 75% 100% 125% 150%
---- ----- ----- ----- ----- ----- -----
Initial Percent _____ _____ _____ _____ _____ _____
______ _____ _____ _____ _____ _____ _____
______ _____ _____ _____ _____ _____ _____
______ _____ _____ _____ _____ _____ _____
______ _____ _____ _____ _____ _____ _____
______ _____ _____ _____ _____ _____ _____
______ _____ _____ _____ _____ _____ _____
______ _____ _____ _____ _____ _____ _____
______ _____ _____ _____ _____ _____ _____
______ _____ _____ _____ _____ _____ _____
______ _____ _____ _____ _____ _____ _____
______ _____ _____ _____ _____ _____ _____
______ _____ _____ _____ _____ _____ _____
______ _____ _____ _____ _____ _____ _____
______ _____ _____ _____ _____ _____ _____
66
<PAGE>
Class A-4 Notes: $________________
-----------------------------------------------------------
______ _____ _____ _____ _____ _____ _____
______ _____ _____ _____ _____ _____ _____
______ _____ _____ _____ _____ _____ _____
______ _____ _____ _____ _____ _____ _____
______ _____ _____ _____ _____ _____ _____
______ _____ _____ _____ _____ _____ _____
______ _____ _____ _____ _____ _____ _____
Weighted Average Life
To Maturity (Years)_____ _____ _____ _____ _____ _____
- - ----------
(1) The percentages in this table have been rounded to the nearest whole
number.
(2) The weighted average life of a Class is determined by (a) multiplying the
amount of each distribution of principal thereof by the number of years
from the date of issuance to the related Distribution Date, (b) summing the
results and (c) dividing the sum by the aggregate distributions of
principal referred to in clause (a) and rounding to one decimal place.
67
<PAGE>
Percent of Original Class Principal Balance Outstanding
at the Following Percentages of Prepayment Assumption(1)
Class M-1 Notes: $________________
-----------------------------------------------------------
Date 0% 50% 75% 100% 125% 150%
---- ----- ----- ----- ----- ----- -----
Initial Percent _____ _____ _____ _____ _____ _____
______ _____ _____ _____ _____ _____ _____
______ _____ _____ _____ _____ _____ _____
______ _____ _____ _____ _____ _____ _____
______ _____ _____ _____ _____ _____ _____
______ _____ _____ _____ _____ _____ _____
______ _____ _____ _____ _____ _____ _____
______ _____ _____ _____ _____ _____ _____
______ _____ _____ _____ _____ _____ _____
______ _____ _____ _____ _____ _____ _____
______ _____ _____ _____ _____ _____ _____
______ _____ _____ _____ _____ _____ _____
______ _____ _____ _____ _____ _____ _____
______ _____ _____ _____ _____ _____ _____
______ _____ _____ _____ _____ _____ _____
68
<PAGE>
Class M-1 Notes: $________________
-----------------------------------------------------------
______ _____ _____ _____ _____ _____ _____
______ _____ _____ _____ _____ _____ _____
______ _____ _____ _____ _____ _____ _____
______ _____ _____ _____ _____ _____ _____
______ _____ _____ _____ _____ _____ _____
______ _____ _____ _____ _____ _____ _____
______ _____ _____ _____ _____ _____ _____
Weighted Average Life
To Maturity (Years)_____ _____ _____ _____ _____ _____
- - ----------
(1) The percentages in this table have been rounded to the nearest whole
number.
(2) The weighted average life of a Class is determined by (a) multiplying the
amount of each distribution of principal thereof by the number of years
from the date of issuance to the related Distribution Date, (b) summing the
results and (c) dividing the sum by the aggregate distributions of
principal referred to in clause (a) and rounding to one decimal place.
69
<PAGE>
Percent of Original Class Principal Balance Outstanding
at the Following Percentages of Prepayment Assumption(1)
Class M-2 Notes: $________________
-----------------------------------------------------------
Date 0% 50% 75% 100% 125% 150%
---- ----- ----- ----- ----- ----- -----
Initial Percent ... _____ _____ _____ _____ _____ _____
______ _____ _____ _____ _____ _____ _____
______ _____ _____ _____ _____ _____ _____
______ _____ _____ _____ _____ _____ _____
______ _____ _____ _____ _____ _____ _____
______ _____ _____ _____ _____ _____ _____
______ _____ _____ _____ _____ _____ _____
______ _____ _____ _____ _____ _____ _____
______ _____ _____ _____ _____ _____ _____
______ _____ _____ _____ _____ _____ _____
______ _____ _____ _____ _____ _____ _____
______ _____ _____ _____ _____ _____ _____
______ _____ _____ _____ _____ _____ _____
______ _____ _____ _____ _____ _____ _____
______ _____ _____ _____ _____ _____ _____
70
<PAGE>
Class M-2 Notes: $________________
-----------------------------------------------------------
______ _____ _____ _____ _____ _____ _____
______ _____ _____ _____ _____ _____ _____
______ _____ _____ _____ _____ _____ _____
______ _____ _____ _____ _____ _____ _____
______ _____ _____ _____ _____ _____ _____
______ _____ _____ _____ _____ _____ _____
______ _____ _____ _____ _____ _____ _____
Weighted Average Life
To Maturity (Years)_____ _____ _____ _____ _____ _____
- - ----------
(1) The percentages in this table have been rounded to the nearest whole
number.
(2) The weighted average life of a Class is determined by (a) multiplying the
amount of each distribution of principal thereof by the number of years
from the date of issuance to the related Distribution Date, (b) summing the
results and (c) dividing the sum by the aggregate distributions of
principal referred to in clause (a) and rounding to one decimal place.
71
<PAGE>
Percent of Original Class Principal Balance Outstanding
at the Following Percentages of Prepayment Assumption(1)
Class B Notes: $________________
-----------------------------------------------------------
Date 0% 50% 75% 100% 125% 150%
---- ----- ----- ----- ----- ----- -----
Initial Percent _____ _____ _____ _____ _____ _____
______ _____ _____ _____ _____ _____ _____
______ _____ _____ _____ _____ _____ _____
______ _____ _____ _____ _____ _____ _____
______ _____ _____ _____ _____ _____ _____
______ _____ _____ _____ _____ _____ _____
______ _____ _____ _____ _____ _____ _____
______ _____ _____ _____ _____ _____ _____
______ _____ _____ _____ _____ _____ _____
______ _____ _____ _____ _____ _____ _____
______ _____ _____ _____ _____ _____ _____
______ _____ _____ _____ _____ _____ _____
______ _____ _____ _____ _____ _____ _____
______ _____ _____ _____ _____ _____ _____
______ _____ _____ _____ _____ _____ _____
72
<PAGE>
Class B Notes: $________________
-----------------------------------------------------------
______ _____ _____ _____ _____ _____ _____
______ _____ _____ _____ _____ _____ _____
______ _____ _____ _____ _____ _____ _____
______ _____ _____ _____ _____ _____ _____
______ _____ _____ _____ _____ _____ _____
______ _____ _____ _____ _____ _____ _____
______ _____ _____ _____ _____ _____ _____
Weighted Average Life
To Maturity (Years)_____ _____ _____ _____ _____ _____
- -----------
(1) The percentages in this table have been rounded to the nearest whole
number.
(2) The weighted average life of a Class is determined by (a) multiplying the
amount of each distribution of principal thereof by the number of years
from the date of issuance to the related Distribution Date, (b) summing the
results and (c) dividing the sum by the aggregate distributions of
principal referred to in clause (a) and rounding to one decimal place.
73
<PAGE>
The amortization scenarios for the Notes set forth in the foregoing tables
are subject to significant uncertainties and contingencies (including those
discussed above under "Prepayment and Yield Considerations"). As a result, there
can be no assurance that any of the foregoing amortization scenarios and the
Modeling Assumptions on which they were made will prove to be accurate or that
the actual weighted average lives of the Notes will not vary from those set
forth in the foregoing tables, which variations may be shorter or longer, and
which variations may be greater with respect to later years. Furthermore, it is
unlikely that the Loans will prepay at a constant rate or that all of the Loans
will prepay at the same rate. Moreover, the Loans actually included in the Pool,
the payment experience of such Loans and certain other factors affecting the
distributions on the Notes will not conform to the Modeling Assumptions made in
preparing the above tables. In fact, the characteristics and payment experience
of the Loans will differ in many respects from such Modeling Assumptions. See
"The Loans" herein. To the extent that the Loans actually included in the Pool
have characteristics and a payment experience that differ from those assumed in
preparing the foregoing tables, the Notes are likely to have weighted average
lives that are shorter or longer than those set forth in the foregoing tables.
See "Risk Factors--Prepayment and Yield Considerations" herein.
In light of the uncertainties inherent in the foregoing paydown scenarios,
the inclusion of the weighted average lives of the Notes in the foregoing tables
should not be regarded as a representation by the Servicer, the Depositor, the
Underwriter, or any other person that such weighted average lives will be
achieved or that any of the foregoing paydown scenarios will be experienced.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
The following is a general discussion of the material anticipated federal
income tax considerations 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
considerations 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 federal, state, local and any other tax consequences to them
of the purchase, ownership and disposition of the Notes.
Treatment of the Notes as Indebtedness. The Depositor agrees, and the
Noteholders will agree by their purchase of Notes, to treat the Notes as debt
for all federal, state and local income tax purposes. There are no regulations,
published rulings or judicial decisions involving the characterization for
federal income tax purposes of securities with terms substantially the same as
the Notes. In general, whether instruments such as the Notes constitute
indebtedness for federal income tax purposes is a question of fact, the
resolution of which is based primarily upon the economic substance of the
instruments and the transaction pursuant to which they are issued rather than
merely upon the form of the transaction or the manner in which the instruments
are labeled. The Internal Revenue Service (the "IRS") and the courts have set
forth various factors to be taken into account in determining, for federal
income tax purposes, whether or not an instrument constitutes indebtedness and
whether a transfer of property is a sale because the transferor has relinquished
substantial incidents of ownership in the property or whether such transfer is a
borrowing secured by the property. On the basis of its analysis of such factors
as applied to the facts and its analysis of the economic substance of the
contemplated transaction, Dewey Ballantine LLP, tax counsel to ______ ("Tax
Counsel") will conclude that, for federal income tax purposes, the Notes will be
treated as indebtedness of the Trust, and not as an ownership interest in the
Loans, or an equity interest in the Trust or in a separate association taxable
as a corporation or other taxable entity.
If the Notes are characterized as indebtedness, interest paid or accrued on
a Note will be treated as ordinary income to the Noteholders and principal
payments on a Note will be treated as a return of capital to the extent of the
Noteholder's basis in the Note allocable thereto. An accrual method taxpayer
will be required to include in income interest on the Notes when earned, even if
not paid, unless it is determined to be uncollectible. The Trust will report to
Noteholders of record and the Internal Revenue Service (the "IRS") in respect of
the interest paid and original issue discount, if any, accrued on the Notes to
the extent required by law.
Although, as described above, it is the opinion of Tax Counsel that, for
federal income tax purposes, the Notes will be characterized as debt, such
opinion is not binding on the IRS and thus no assurance can be given that such a
characterization will prevail. If the IRS successfully asserted that one or more
Classes of the Notes did not represent debt for federal income tax purposes,
holders of the Notes would likely be treated as owning an interest in a
partnership and not an interest in an association (or publicly traded
partnership) taxable as a corporation. If the Noteholders were treated as owning
an equitable interest in a partnership, the partnership itself would not be
subject to federal income tax; rather each partner would be taxed individually
on their respective distributive share of the partnership's income, gain, loss,
deductions and credits. The amount, timing and characterization of items of
income and deductions for a Noteholder would differ if the Notes were held to
constitute partnership interests, rather than indebtedness and would cause a
tax-exempt entity subject to tax on unrelated business taxable income ("UBTI")
(including an individual retirement account) to recognize UBTI under the Code.
Since the parties will treat the Notes as indebtedness for federal income tax
purposes, none of the Servicer, the Indenture Trustee or the Owner Trustee will
attempt to satisfy the tax reporting requirements that would apply under this
alternative characterization of the Notes. Investors that are
74
<PAGE>
foreign persons are strongly urged to consult their own tax advisors in
determining the federal, state, local and other tax consequences to them of the
purchase, ownership and disposition of the Notes.
Original Issue Discount. It is anticipated that the Notes will not have any
original issue discount ("OID") other than possibly OID within a de minimis
exception and that accordingly the provisions of sections 1271 through 1273 and
1275 of the Internal Revenue Code of 1986, as amended (the "Code"), generally
will not apply to the Notes. OID will be considered de minimis if it is less
than 0.25% of the principal amount of a Note multiplied by its expected weighted
average life. The prepayment assumption that will be used for purpose of
computing original issue discount, if any, for federal income tax purposes is
100% of the Prepayment Assumption.
Market Discount. A subsequent purchaser who buys a Note for less than its
principal amount may be subject to the "market discount" rules of Section 1276
through 1278 of the Code. If a subsequent purchaser of a Note disposes of such
Note (including certain nontaxable dispositions such as a gift), or receives a
principal payment, any gain upon such sale or other disposition will be
recognized, or the amount of such principal payment will be treated, as ordinary
income to the extent of any "market discount" accrued for the period that such
purchaser holds the Note. Such holder may instead elect to include market
discount in income as it accrues with respect to all debt instruments acquired
in the year of acquisition of the Notes and thereafter. Market discount
generally will equal the excess, if any, of the then current unpaid principal
balance of the Note over the purchaser's basis in the Note immediately after
such purchaser acquired the Note. In general, market discount on a Note will be
treated as accruing over the term of such Note in the ratio of interest for the
current period over the sum of such current interest and the expected amount of
all remaining interest payments, or at the election of the holder, under a
constant yield method (taking into account the Prepayment Assumption). At the
request of a holder of a Note, information will be made available that will
allow the holder to compute the accrual of market discount under the first
method described in the preceding sentence.
The market discount rules also provide that a holder who incurs or
continues indebtedness to acquire a Note at a market discount may be required to
defer the deduction of all or a portion of the interest on such indebtedness
until the corresponding amount of market discount is included in income.
Notwithstanding the above rules, market discount on a Note will be
considered to be zero if it is less than a de minimis amount, which is 0.25% of
the remaining principal balance of the Note multiplied by its expected weighted
average remaining life. If OID or market discount is de minimis, the actual
amount of discount must be allocated to the remaining principal distributions on
the Notes and, when each such distribution is received, capital gain equal to
the discount allocated to such distribution will be recognized.
Market Premium. A subsequent purchaser who buys a Note for more than its
principal amount generally will be considered to have purchased the Note at a
premium. Such holder may amortize such premium, using a constant yield method,
over the remaining term of the Note and, except as future regulations may
otherwise provide, may apply such amortized amounts to reduce the amount of
interest reportable with respect to such Note over the period from the purchase
date to the date of maturity of the Note. Legislative history to the Tax Reform
Act of 1986 indicates that the amortization of such premium on an obligation
that provides for partial principal payments prior to maturity should be
governed by the methods for accrual of market discount on such an obligation
(described above). Proposed regulations implementing the provisions of the Tax
Reform Act of 1986 provide for the use of the constant yield method to determine
the amortization of premiums. Such proposed regulations will apply to bonds
acquired on or after 60 days after the final regulations are published. A holder
that elects to amortize premium must reduce the tax basis in the related
obligation by the amount of the aggregate deductions (or interest offsets)
allowable for amortizable premium. If a debt instrument purchased at a premium
is redeemed in full prior to its maturity, a purchaser who has elected to
amortize premium should be entitled to a deduction for any remaining unamortized
premium in the taxable year of redemption.
Sale or Redemption of Notes. If a Note 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 Note. Such adjusted basis
generally will equal the cost of the Note to the seller, increased by any
original issue discount included in the seller's gross income in respect of the
Note (and by any market discount which the taxpayer elected to include in income
or was required to include in income), and reduced by payments other than
payments of qualified stated interest in respect of the Note received by the
seller and by any amortized premium. Similarly, a holder who receives a payment
other than a payment of qualified stated interest in respect of a Note, either
on the date on which such payment is scheduled to be made or as a prepayment,
will recognize gain equal to the excess, if any, of the amount of the payment
over his adjusted basis in the Note allocable thereto. A Noteholder who receives
a final payment which is less than his adjusted basis in the Note will generally
recognize a loss in the amount of the shortfall on the last day of his taxable
year. Generally, any such gain or loss realized by an investor who holds a Note
as a "capital asset" within the meaning of Code Section 1221 should be capital
gain or loss, except as described above in respect of market discount and except
that a loss attributable to accrued but unpaid interest may be an ordinary loss.
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<PAGE>
Taxation of Certain Foreign Investors. Interest payments (including OID) on
the Notes made to a Noteholder who is a nonresident alien individual, foreign
corporation or other non-United States person (a "foreign person") generally
will be "portfolio interest" which is not subject to United States tax if such
payments are not effectively connected with the conduct of a trade or business
in the United States by such foreign person and if the Trust (or other person
who would otherwise be required to withhold tax from such payments) is provided
with an appropriate statement that the beneficial owner of the Note identified
on the statement is a foreign person.
Backup Withholding. Distributions of interest and principal as well as
distributions of proceeds from the sale of the Notes, may be subject to the
"backup withholding tax" under Section 3406 of the Code at rate of 31% if
recipients of such distributions fail to furnish to the payor certain
information, including their taxpayer identification numbers, or otherwise fail
to establish an exemption from such tax. Any amounts deducted and withheld from
a distribution to a recipient would be allowed as a credit against such
recipient's federal income tax. Furthermore, certain penalties may be imposed by
the IRS on a recipient of distributions that is required to supply information
but does not do so in the proper manner.
STATE AND LOCAL TAX CONSIDERATIONS
Potential Noteholders should consider the state and local income tax
consequences of the purchase, ownership and disposition of the Notes. State and
local income tax laws 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 Noteholders are urged to
consult their own tax advisors with respect to the various state and local tax
consequences of an investment in the Notes.
STATE TAX CONSEQUENCES
In addition to the Federal income tax consequences described in "Material
Federal Income Tax Consequences" herein, potential investors should consider the
state income tax consequences of the acquisition, ownership, and disposition of
the Notes. State income tax law may differ substantially from the corresponding
Federal tax law, and this discussion does not purport to describe any aspect of
the income tax laws of any state. Therefore, potential investors are urged to
consult their own tax advisors with respect to the various tax consequences of
investments in the Notes.
ERISA CONSIDERATIONS
Section 406 of ERISA and/or Section 4975 of the Code prohibit a pension,
profit sharing, or other employee benefit plan, as well as individual retirement
accounts and certain types of Keogh Plans, and entities deemed to hold assets of
such plans (each, a "Benefit Plan") 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. A violation
of these "prohibited transaction" rules may generate excise tax and other
liabilities under ERISA and the Code for such persons. ERISA also imposes
certain duties on persons who are fiduciaries of plans subject to ERISA Under
ERISA, any person who exercises any authority or control respecting the
management or disposition of the assets of a plan is considered to be a
fiduciary of such plan (subject to certain exceptions not here relevant).
In addition to the matters described below, purchasers of Notes that are
insurance companies are urged to 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. Prospective purchasers should
determine whether the decision affects their ability to make purchases of the
Class A Notes.
Certain transactions involving the Issuer might be deemed to constitute
prohibited transactions under ERISA and the Code if assets of the Issuer were
deemed to be "plan assets" of a Benefit Plan. Under a regulation issued by the
United States Department of Labor (the "Plan Assets Regulation"), the assets of
the Issuer would be treated as plan assets of a Benefit Plan for the purposes of
ERISA and the Code only if the Benefit Plan acquired an "equity interest" in the
Issuer and none of the exceptions contained in the Plan Assets Regulation is
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. Although
there is little guidance on the subject, the Issuer believes that the Notes
should be treated as indebtedness without substantial equity features for
purposes of the Plan Assets Regulation. This determination is based in part upon
the traditional debt features of the Notes, including the reasonable expectation
of purchasers of Notes that the Notes will be repaid when due, as well as the
absence of conversion rights, warrants and other typical equity features. The
debt treatment of the Notes for ERISA purposes could change if the Issuer
incurred losses. However, without regard to whether the Notes are
76
<PAGE>
treated as an equity interest for such purposes, the acquisition or holding of
Notes by or on behalf of a Benefit Plan could be considered to give rise to a
prohibited transaction if the Issuer or any affiliate thereof, is or becomes a
party in interest or a disqualified person with respect to such Benefit Plan. In
such case, certain exemptions from the prohibited transaction rules could be
applicable depending on the type and circumstances of the Benefit Plan fiduciary
making the decision to acquire a Note. Included among these exemptions are:
Prohibited Transaction Class Exemption ("PTCE") 90-1, regarding investments by
insurance company pooled separate accounts; PTCE 95-60, regarding investments by
insurance company general accounts; PTCE 91-38, regarding investments by bank
collective investment funds; PTCE 96-23, regarding transactions effected by
"in-house asset managers"; and PTCE 84-14, regarding transactions effected by
"qualified professional asset managers" Each investor using the assets of a
Benefit Plan that acquires notes, or to whom the Notes are transferred, will be
deemed to have represented that the acquisition and continued holding of the
Notes will be covered by one of the exemptions listed above or by another
Department of Labor Class Exemption.
Employee plans that are government 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; however, such plans may be subject to comparable restrictions
under applicable law.
Any Benefit Plan fiduciary considering the purchase of a Note is urged to
consult with its counsel with respect to the potential applicability of ERISA
and the Code to such investment, including the need for and availability of
exemptive relief from the prohibited transaction rules. Moreover, each fiduciary
of a Benefit Plan subject to ERISA should determine whether, under the general
fiduciary standards of investment prudence and diversification, an investment in
the Notes is appropriate for the Benefit Plan, taking into account the overall
investment policy of the Benefit Plan and the composition of the Benefit Plan's
investment portfolio.
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in the Underwriting Agreement
between the Depositor and _______________________ (an affiliate of the
Depositor), the Depositor has agreed to sell to the Underwriter, and the
Underwriter has agreed to purchase from the Depositor, the principal amount of
the Notes set forth on the cover hereof. Distribution of the Notes will be made
by the Underwriter from time to time in negotiated transactions or otherwise at
varying prices to be determined at the time of sale. In connection with the sale
of the Notes, the Underwriter may be deemed to have received compensation from
the Depositor in the form of underwriting discounts.
The Depositor has been advised by the Underwriter that it intends to make a
market in the Notes; however, the Underwriter has no obligation to do so.
Accordingly, there can be no assurance that a secondary market for the Notes
will develop or, if it does develop, that it will continue.
The Underwriter proposes to offer the Notes in part directly to purchasers
at the initial public offering prices set forth on the cover page of this
Prospectus Supplement and in part to certain securities dealers at such prices
less concessions not to exceed _______%, ________%, ______%, ______%, ______%,
_____% and _______% of the respective Class Principal Balances of the Class A-1,
Class A-2, Class A-3, Class A-4, Class M-1, Class M-2 and Class B Notes. The
Underwriter may allow, and such dealers may reallow, concessions not to exceed
_______%, ______%, _______%, ______%, ______%, ______% and ______% of the
respective Class Principal Balances of the Class A-1, Class A-2, Class A-3,
Class A-4, Class M-1, Class M-2 and Class B Notes to certain brokers and
dealers. After the Notes are released for sale to the public, the offering price
and other selling terms may be varied by the Underwriter.
Until the distribution of the Notes, is completed, rules of the Commission
may limit the ability of the Underwriter and certain selling group members to
bid for and purchase the Notes. As an exception to these rules, the Underwriter
is permitted to engage in certain transactions that stabilize the price of the
Notes. Such transactions consist of bids or purchases for the purpose of
pegging, fixing or maintaining the price of the Notes.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases.
Neither the Depositor nor the Underwriter makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the prices of the Notes. In addition, neither the
Depositor nor the Underwriter makes any representation that the Underwriter will
engage in such transactions or that such transactions, once commenced, will not
be discontinued without notice.
After the initial public offering of the Notes, the public offering price
and such concessions may be changed.
77
<PAGE>
The Depositor has agreed to indemnify the Underwriter against, or make
contributions to the Underwriter with respect to, certain liabilities, including
liabilities under the Securities Act of 1933, as amended.
An affiliate of the Underwriter and the Depositor has significant
contractual relations with ______ and provides periodic funding of its
origination of mortgage loans, including the Loans. Accordingly, a portion of
the proceeds payable to ______ will be paid to such affiliate in connection with
the sale of the Loans.
LEGAL INVESTMENT MATTERS
The Notes will not constitute "mortgage related securities" under the
Secondary Mortgage Market Enhancement Act of 1984 ("SMMEA") because a
substantial number of the Loans are secured by liens on real estate that are not
first liens. Accordingly, many institutions with legal authority to invest in
"mortgage related securities" may not be legally authorized to invest in the
Notes.
There may be restrictions on the ability of certain investors, including
depository institutions, either to purchase the Notes or to purchase Notes
representing more than a specified percentage of the investor's assets.
Investors are urged to consult their own legal advisors in determining whether
and to what extent the Notes constitute legal investments for such investors.
LEGAL MATTERS
Certain legal matters will be passed upon for the Underwriter by
_______________________. Certain legal matters will be passed upon for the
Depositor and for ______ by ____________________________________.
RATINGS
It is a condition to the issuance of the Notes that each of the Class A-1,
Class A-2, Class A-3, and Class A-4 Notes be rated "[AAA]" by [Fitch] and
"[Aaa]" by [Moody's]; and that the Class M-1 Notes be rated "[AA]" by [Fitch]
and "[A2]" by [Moody's], the Class M-2 Notes be rated "[A]" by [Fitch] and
"[A2]" by [Moody's] and the Class B Notes be rated "[BBB]" by [Fitch] and
"[Baa3]" by [Moody's].
The ratings on the Notes address the likelihood of the receipt by the
holders of the Notes of all distributions on the Loans to which they are
entitled. The ratings on the Notes also address the structural, legal and
issuer-related aspects associated with the Notes, including the nature of the
Loans. In general, the ratings on the Notes address credit risk and not
prepayment risk. The ratings on the Notes do not represent any assessment of the
likelihood that principal prepayments of the Loans will be made by borrowers or
the degree to which the rate of such prepayments might differ from that
originally anticipated. As a result, the initial ratings assigned to the Notes
do not address the possibility that holders of the Notes might suffer a lower
than anticipated yield in the event of principal payments on the Notes resulting
from rapid prepayments of the Loans or the application of Excess Spread as
described herein, or in the event that the Trust is terminated prior to the
Final Maturity Date of the Classes of Notes. The ratings on the Notes do not
address the ability of the Trust to acquire Subsequent Loans, any potential
redemption with respect thereto or the effect on yield resulting therefrom.
The Depositor has not solicited ratings on the Notes with any rating agency
other than the Rating Agencies. However, there can be no assurance as to whether
any other rating agency will rate the Notes, or, if it does, what rating would
be assigned by any such other rating agency. Any rating on the Notes by another
rating agency, if assigned at all, may be lower than the ratings assigned to the
Notes by the Rating Agencies.
A security rating is not a recommendation to buy, sell or hold securities
and may be subject to revision or withdrawal at any time by the assigning rating
organization. Each security rating should be evaluated independently of any
other security rating. In the event that the ratings initially assigned to any
of the Notes by the Rating Agencies are subsequently lowered for any reason, no
person or entity is obligated to provide any additional support or credit
enhancement with respect to such Notes.
78
<PAGE>
INDEX
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Page
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- --
______ time cap...............................................................23
A
Adjustable Rate Loans.........................................................15
Allocable Loss Amount.........................................................10
B
Bankruptcy Code...............................................................19
Bankruptcy Commission.........................................................19
Benefit Plan..................................................................76
Business Day...................................................................2
C
Capitalized Interest Account..................................................11
Cede..........................................................................45
Change Date...................................................................23
Class M-1 Optimal Principal Balance............................................6
Class M-2 Optimal Principal Balance............................................6
Closing Date..................................................................57
Code..........................................................................12
Combined Loan-to-Value Ratio...................................................8
Co-Owner Trustee...............................................................1
Custodian......................................................................4
Cut-Off Date Principal Balance.................................................8
D
Defective Loan.................................................................9
Definitive Notes..............................................................46
Definitive Securities..........................................................7
Deleted Loan..................................................................43
Depositor......................................................................1
Depository.....................................................................2
Determination Date.............................................................5
Distribution Date..............................................................2
DTC............................................................................7
Due Period.....................................................................4
E
ERISA.........................................................................12
Excess Spread..................................................................6
Exchange Act..................................................................45
F
FHA...........................................................................17
FHLMC.........................................................................16
Final Maturity Date............................................................6
Fitch.........................................................................12
FNMA..........................................................................16
G
Gross Margin..................................................................23
I
Indenture......................................................................1
Indenture Trustee..............................................................1
Indenture Trustee Fee.........................................................11
Indenture Trustee's Loan File.................................................54
Page
----
Indirect Participants.........................................................45
Initial Cut-Off Date...........................................................2
Initial Loans..................................................................2
Interest Carry-Forward Amount.................................................47
Issuer.........................................................................4
L
LIBOR Index...................................................................23
Loan Schedule.................................................................53
Loans..........................................................................2
Loss Reimbursement Deficiency.................................................10
M
Majority Residual Interestholders.............................................11
Maximum Collateral Amount......................................................9
Mezzanine Notes................................................................2
Modeling Assumptions..........................................................60
Moody's.......................................................................12
Mortgaged Property.............................................................8
Mortgages......................................................................2
N
Net Delinquency Calculation Amount............................................10
Net Loan Losses...............................................................44
Note Interest Rate.............................................................5
Noteholders....................................................................2
Notes..........................................................................1
O
OID...........................................................................75
Original Class Principal Balance...............................................5
Original Pool Principal Balance................................................7
Original Pre-Funded Amount.....................................................2
Overcollateralization Amount..................................................10
Overcollateralization Deficiency Amount........................................6
Overcollateralization Target Amount...........................................10
Owner Trustee..................................................................1
Owner Trustee Fee.............................................................11
P
Participants..................................................................45
Periodic Rate Cap.............................................................23
Plan Assets Regulation........................................................76
Pool...........................................................................2
Pool Principal Balance.........................................................8
Pre-Funded Amount.............................................................11
Prefunding Account.............................................................2
Pre-Funding Period............................................................11
Pre-Funding Pro Rata Distribution Trigger.....................................11
Prepayment Assumption.........................................................60
Prospectus.....................................................................2
PTCE..........................................................................77
Q
Qualified Substitute Loan......................................................9
R
Record Date....................................................................5
Regular Distribution Amount....................................................5
Residual Interest..............................................................1
i
<PAGE>
INDEX
-----
Page
----
Rules.........................................................................46
S
Sale and Servicing Agreement...................................................7
Senior Notes...................................................................2
Senior Optimal Principal Balance...............................................5
Servicer.......................................................................4
Servicing Advances............................................................12
Servicing Compensation........................................................11
Servicing Fee.................................................................11
Servicing Fee Rate............................................................54
SMMEA.........................................................................12
Spread Deferral Period.........................................................6
Statistic Calculation Period..................................................14
Page
----
Statistic Principal Balance...................................................23
Subsequent Loans...............................................................2
Subservicer...................................................................12
T
Tax Counsel...................................................................12
Termination Price.............................................................12
Transfer and Servicing Agreements.............................................11
Trust..........................................................................1
Trust Agreement................................................................1
U
Underwriter....................................................................2
<PAGE>
================================================================================
No dealer , salesman or other person has been authorized to give any information
or to make any representations other than those contained in or incorporated by
reference in this Prospectus Supplement or the Prospectus and, if given or made,
such information or representations must not be relied upon. This Prospectus
Supplement and the Prospectus do not constitute an offer to sell or a
solicitation of an offer to buy any securities other than the securities in any
state or jurisdiction in which, or to any person to whom, such offer would be
unlawful. The delivery of this Prospectus Supplement or the Prospectus at any
time does not imply that information herein or therein is correct as of any time
subsequent to its date.
--------------------
TABLE OF CONTENTS
Page
----
Prospectus Supplement
Incorporation of Certain Documents by Reference ..........................
Summary ..................................................................
Risk Factors .............................................................
The Trust ................................................................
The Pool .................................................................
- - -------------------.......................................................
- - ---------- ...............................................................
Description of Credit Enhancement ........................................
Description of the Notes .................................................
Description of Transfer and Servicing Agreement ..........................
Prepayment and Yield Considerations ......................................
Material Federal Income Tax Consequences .................................
State Tax Consequences ...................................................
ERISA Considerations .....................................................
Method of Distribution ...................................................
Legal Investment Matters .................................................
Legal Investment Matter ..................................................
Legal Matters ............................................................
Ratings ..................................................................
Prospectus
Summary of Prospectus .................................................... 5
Risk Factors .............................................................
Prospectus Supplement .................................................... 3
Reports to Holders ....................................................... 3
Available Information .................................................... 3
Incorporation of Certain Documents by Reference .......................... 4
Summary of Prospectus .................................................... 5
Risk Factors ............................................................. 15
Description of the Securities ............................................ 18
The Trust Funds .......................................................... 22
Credit Enhancement ....................................................... 27
Servicing of Loans ....................................................... 30
The Agreements ........................................................... 36
Certain Legal Aspects of the Loans ....................................... 43
The Depositor ............................................................ 51
Use of Proceeds .......................................................... 51
Material Federal Income Tax Consequences ................................. 51
State Tax Considerations ................................................. 63
ERISA Considerations ..................................................... 63
Legal Investment ......................................................... 66
Plan of Distribution ..................................................... 66
Legal Matters ............................................................ 66
Glossary of Terms ........................................................ 67
================================================================================
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_______________ TRUST ________
$________ Class A-1,
________% Home Loan Asset Backed Notes
$________ Class A-2,
________% Home Loan Asset Backed Notes
$________ Class A-3,
________% Home Loan Asset Backed Notes
$________ Class A-4,
________% Home Loan Asset Backed Notes
$________ Class M-1,
________% Home Loan Asset Backed Notes
$________ Class M-2,
________% Home Loan Asset Backed Notes
$________ Class B,
________% Home Loan Asset Backed Notes
________% Home Loan Asset Backed Notes
HOME EQUITY SECURITIZATION CORP.
(DEPOSITOR)
---------------
PROSPECTUS SUPPLEMENT
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