<PAGE>
PROSPECTUS SUPPLEMENT
(To prospectus dated November 10, 1998)
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Mortgage Lenders Network Home Equity Loan Trust 1998-3
Issuer
$114,925,000 6.38%
Asset-Backed Notes, Series 1998-3
[MLN LOGO]
Mortgage Lenders Network USA, Inc.
Seller and Servicer
Residential Asset Funding Corporation
Depositor
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Consider carefully the risk factors starting on page S-11 of this prospectus
supplement and page 17 of the prospectus before making a decision to invest in
the notes.
The notes represent asset-backed debt secured solely by the mortgage loans held
by the trust. The notes are not interests in or obligations of any other person.
No governmental agency or instrumentality has insured or guaranteed the notes or
the underlying mortgage loans.
This prospectus supplement may be used to offer and sell the notes only if
accompanied by the prospectus.
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Mortgage Lenders Network Home Equity Loan Trust 1998-3 will issue its asset
backed notes backed solely by a pledge of the assets of the trust.
The Notes--
The trust will issue one class of notes offered for sale by this prospectus
supplement.
Interest and principal on the notes is scheduled to be paid monthly on the 25th
day of the month or, if such day is not a business day, the immediately
following business day. The first scheduled payment date is January 25, 1999.
Credit enhancement--
The assets of the trust may exceed the principal balance of the notes and, if
so, will result in overcollateralization which will be available to absorb
losses.
The notes will be unconditionally and irrevocably guaranteed as to the timely
payment of scheduled interest and the ultimate payment of principal pursuant to
the terms of a financial guaranty insurance policy to be issued by MBIA
Insurance Corporation.
[MBIA Logo]
The notes will be purchased by the underwriters from the issuer and offered by
the underwriters from time to time to the public in negotiated transactions or
otherwise at varying prices to be determined at the time of sale. Proceeds to
the issuer from the sale of the notes are anticipated to be approximately
$114,937,961 before the deduction of expenses payable by the issuer, estimated
to be approximately $300,000.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF
THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS IS TRUTHFUL OF COMPLETE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
First Union Capital Markets, a division of Wheat First Securities, Inc., and
Prudential Securities Incorporated will offer the notes for sale after the
notes have been issued by the trust and purchased by the underwriters. The
underwriters have the right to reject any order. The underwriters expect to
deliver the notes on or about December 18, 1998 through The Depository Trust
Company, Cedelbank or the Euroclear system.
FIRST UNION CAPITAL MARKETS PRUDENTIAL SECURITIES INCORPORATED
The date of this prospectus supplement is December 11, 1998
<PAGE>
Important notice about the information presented in this prospectus supplement
and the accompanying prospectus
We provide information to you about the notes in two separate documents
that progressively provide more detail: (1) the accompanying prospectus, which
provides general information, some of which may not apply to your series of
notes, and (2) this prospectus supplement, which describes the specific terms of
your series of notes.
This prospectus supplement does not contain complete information about the
offering of the notes. Additional information is contained in the prospectus.
You are urged to read both this prospectus supplement and the prospectus in
full.
TO THE EXTENT THE PROSPECTUS CONTEMPLATES DIFFERENT TYPES OF SECURITIES,
YOU SHOULD RELY ON THE INFORMATION IN THIS PROSPECTUS SUPPLEMENT WITH RESPECT TO
THESE SECURITIES.
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 notes offered pursuant to this prospectus
supplement. This prospectus supplement and the prospectus, which form a part of
the registration statement, omit certain information contained in such
registration statement pursuant to the rules and regulations of the Commission.
You may inspect and copy the registration statement at the Public Reference Room
at the Commission at 450 Fifth Street, N.W., Washington, D.C. and the
Commission's regional offices at Seven World Trade Center, 13th Floor, New York,
New York, 10048 and Northwestern Atrium Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661. You can obtain copies of such materials at
prescribed rates from the Public Reference Section of the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549. In addition, the Commission
maintains a site on the World Wide Web containing reports, proxy materials,
information statements and other items. The address is http://www.sec.gov.
The Securities and Exchange Commission allows us to "incorporate by
reference" certain information already on file with it. This means that we can
disclose important information to you by referring you to those documents. Such
information is considered part of this prospectus supplement, and later
information that is filed will automatically update and supersede this
information. We incorporate by reference the financial statements of MBIA
Insurance Corporation included in, or as exhibits to, the Annual Report on Form
10-K for the year ended December 31, 1997 and Quarterly Report on Form 10-Q for
the quarter ended September 30, 1998, which have been filed by MBIA Insurance
Corporation.
You should rely only on the information incorporated by reference or provided in
this prospectus supplement and the accompanying prospectus. We have not
authorized anyone else to provide you with different information. You should not
assume that the information in this prospectus supplement or the accompanying
prospectus is accurate as of any date other than the date on the cover page of
this prospectus supplement or the accompanying prospectus. You can obtain from
Residential Asset Funding Corporation, Inc., free of charge, a copy of the
financial information incorporated by reference by making an oral or written
request to Residential Asset Funding Corporation, at its principal offices which
are located c/o First Union Capital Markets, 301 South College Street,
Charlotte, North Carolina 28288-0610, Attention: Legal Department, (704)
374-2703.
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<PAGE>
Mortgage Lenders Network USA, Inc.'s principal offices are located at
Middlesex Corporate Center, 213 Court Street, Middletown, Connecticut 06457 and
its telephone number is (860) 344-5700.
We include cross-references in this prospectus supplement and the
accompanying prospectus to captions in these materials where you can find
further related discussions. The following table of contents and the table of
contents included in the accompanying prospectus provide the pages on which
these captions are located.
S-3
<PAGE>
TABLE OF CONTENTS
SUMMARY.....................................................S-5
RISK FACTORS...............................................S-11
DESCRIPTION OF THE NOTES...................................S-17
General..................................................S-17
Book-Entry Registration and Definitive Notes.............S-18
Assignment of Mortgage Loans.............................S-22
Payments on the Notes....................................S-24
Note Account.............................................S-28
Overcollateralization Feature............................S-30
Reports to Noteholders...................................S-32
Redemption of the Notes..................................S-33
Payments to the Holder(s) of the Residual Interest.......S-35
The Indenture Trustee....................................S-35
Voting...................................................S-36
Note Events of Default...................................S-36
THE ISSUER.................................................S-36
MORTGAGE LENDERS NETWORK USA, INC........................S-36
DESCRIPTION OF THE MORTGAGE POOL...........................S-37
General..................................................S-37
Mortgage Loan Characteristics............................S-37
Underwriting Standards...................................S-47
CERTAIN PREPAYMENT AND YIELD CONSIDERATIONS................S-51
General..................................................S-51
Weighted Average Life....................................S-55
SERVICING OF THE MORTGAGE LOANS............................S-60
General..................................................S-60
Customary Servicing Procedures...........................S-61
The Servicing Agreement..................................S-62
Servicing and Other Compensation; Payment of Expenses....S-68
Historical Servicing Experience of the Servicer..........S-69
THE NOTE INSURANCE.........................................S-71
The Insurance Policy.....................................S-71
The Note Insurer.........................................S-73
Year 2000 Readiness Disclosure...........................S-76
Credit Enhancement Does Not Apply to Prepayment Risk.....S-76
ERISA CONSIDERATIONS.......................................S-76
USE OF PROCEEDS............................................S-78
LEGAL INVESTMENT CONSIDERATIONS............................S-78
UNDERWRITING...............................................S-78
REPORT OF EXPERTS..........................................S-79
CERTAIN FEDERAL INCOME TAX CONSEQUENCES....................S-79
STATE TAX CONSIDERATIONS...................................S-82
LEGAL MATTERS..............................................S-82
RATING OF THE NOTES........................................S-82
INDEX OF PRINCIPAL TERMS...................................S-84
Annex A
Global Clearance, Settlement and Tax Documentation
Procedures...............................................A-1
S-4
<PAGE>
SUMMARY
o This summary highlights selected information from this prospectus supplement
and does not contain all of the information that you need to consider in
making your investment decision. To understand all of the terms of the
offering of the notes, read carefully this entire prospectus supplement and
the accompanying prospectus.
o This summary provides an overview of certain calculations, cash flow
priorities and other information to aid your understanding and is qualified
by the full description of these calculations, cash flow priorities and other
information in this prospectus supplement and the accompanying prospectus.
o You can find a listing of the pages where capitalized terms used in this
prospectus supplement summary are defined under the caption "Index of
Principal Terms" beginning on page S-84 in this prospectus supplement and
under the caption "Index of Principal Terms" beginning on page (i) in the
accompanying prospectus.
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Parties
The Trust or Issuer
Mortgage Lenders Network Home Equity Loan Trust 1998-3 is a Delaware trust,
formed pursuant to an agreement among Residential Asset Funding Corporation and
Wilmington Trust Company.
The Seller
Mortgage Lenders Network USA, Inc., a Delaware corporation, has originated or
acquired the mortgage loans. It will convey its interest in the mortgage loans
to the depositor.
The Servicer
Mortgage Lenders Network USA, Inc. will act as servicer of the mortgage loans
held by the trust.
The Depositor
Residential Asset Funding Corporation, a North Carolina corporation, will convey
the mortgage loans to the trust after acquiring them from Mortgage Lenders
Network USA, Inc.
The Note Insurer
MBIA Insurance Corporation is a New York financial guaranty insurance company.
The Indenture Trustee
Norwest Bank Minnesota, National Association is a national banking association.
If Mortgage Lenders Network USA, Inc. is terminated as servicer, Norwest Bank
will take over the servicer's obligations or appoint a successor servicer.
The Owner Trustee
Wilmington Trust Company, a Delaware banking corporation, will act as owner
trustee.
Description of the notes
The Notes
The trust will issue its asset-backed notes, designated as the "Mortgage Lenders
Network Home Equity Loan Trust 1998-3 Asset-Backed Notes, Series 1998-3." The
initial principal amount of the notes is indicated on the front cover of this
prospectus supplement.
S-5
<PAGE>
The Assets of the Trust
The notes will be backed solely by a pledge of the assets of the trust. The
assets of the trust will consist of (i) a pool of primarily fixed rate,
residential one- to four-family, first and second lien mortgage loans; (ii) a
security interest in the related underlying property; (iii) principal and
interest payments on the mortgage loans; (iv) the trust's rights under a
mortgage loan sale agreement and a servicing agreement; and (v) certain other
property.
The Stated Maturity of the Notes
The stated maturity date for the notes, on which the final payment of principal
must ultimately be made, is January 25, 2030, which is the payment date that
occurs in the thirteenth month following the month in which the last maturity
date of any mortgage loan conveyed to the trust is scheduled to occur. The
depositor anticipates, however, that actual final payment of principal on the
notes will occur significantly earlier.
Book-Entry Format
The notes will initially be issued in book-entry form only, through the
facilities of The Depository Trust Company. The notes will be issued in minimum
denominations of $1,000 and multiples of $1,000 in excess thereof.
Payments on the Notes
Payment Dates
Principal and interest is scheduled to be paid to the noteholders on the 25th
day of each month, or, if such day is not a business day, on the following
business day, commencing on January 25, 1999.
Record Dates
The indenture trustee will make payments to the noteholders of record determined
as of the last business day before the payment date or in the event that the
notes are issued in definitive form, the last day of the calendar month
immediately prior to the payment date.
Due Periods and Collection Periods
Generally, payments made to noteholders on each payment date will relate to the
collections of principal and interest on the mortgage loans in the due period,
with respect to all scheduled collections of principal and interest, or the
collection period, with respect to all unscheduled collections. The due period
commences on the second day of the calendar month immediately before the month
in which the related payment date occurs and ends on the first day of the
calendar month in which the related payment date occurs. The collection period
is the calendar month before the calendar month in which the related payment
date occurs.
Funds Available for Payment of Interest and Principal
The following funds will generally be available for the payment of interest and
principal on the notes:
o collections on the mortgage loans, net of fees and expenses;
o any advances made by the servicer in respect of delinquent payments of
principal and interest on mortgage loans;
o proceeds from any insurance policy covering a mortgaged property;
o any other proceeds, net of expenses, the servicer receives from the sale,
foreclosure, condemnation or other disposition of a mortgaged property;
o interest payments made by the servicer to compensate in part for any
shortfall in interest payments on the notes caused by a mortgagor
prepaying all or part of a mortgage loan;
o any amounts resulting from the repurchase, release, removal or
substitution of a mortgage loan; and
S-6
<PAGE>
o in the event the notes are redeemed in the manner described herein,
amounts deposited in connection with such redemption.
Interest
Interest on the notes will accrue at the note interest rate during each interest
period. The note interest rate will initially be 6.38% per annum and will
increase to 6.88% per annum after the first payment date upon which the
aggregate principal balance of the mortgage loans is less than 10% of the
aggregate principal balance of the mortgage loans as of December 1, 1998.
Generally, the interest period will be the calendar month preceding a payment
date. In the case of the January 1999 payment date, interest begins to accrue on
December 1, 1998.
Interest on the notes will be calculated on the basis of a year of 360 days and
twelve 30 day months.
Principal
On each payment date, the noteholders are scheduled to receive an amount of
principal generally equal to the sum of all scheduled payments of principal made
or advanced on the mortgage loans and all other amounts collected or received or
otherwise recovered in respect of principal on the mortgage loans.
Servicer Advances
The servicer will make advances to pay all reasonable out-of-pocket costs, such
as the cost of pursuing judicial proceedings relating to the mortgages and the
costs of managing and liquidating mortgaged properties. The servicer is also
required to make advances with respect to delinquent payments of principal and
interest on the mortgage loans. The servicer, however, is only required to make
such advances if it believes that it can recover the advance from later proceeds
or collections on the related mortgage loan. The servicer may recover servicing
advances out of other amounts the servicer may collect with respect to the
mortgage loans.
Compensating Interest Payments
The servicer will also make interest payments to compensate in part for any
shortfall in interest payments on the notes which result from a mortgagor
prepaying all or part of a mortgage loan. The amount of such payments will not
exceed the servicing fee payable for the related period. The insurance policy
does not cover shortfalls in interest arising from prepayments. The servicer is
not entitled to recover compensating interest payments from the trust.
Application of Excess Cash
Generally, because the payments of interest and principal on the mortgage loans
exceed the sum of the amounts payable to the note insurer, the payment of
indenture trustee and servicing fees and payments of monthly interest and
principal to the noteholders, there will be excess cash each month above that
required to pay principal and interest on the notes. Excess cash will be used to
pay down the note balance in order to reach the required level of
overcollateralization. After reaching the required level of
overcollateralization, any excess cash remaining after payments on the notes and
payments to the note insurer in respect of the notes will be released to the
holder of the residual interest and will not be available for any subsequent
payments to the noteholders or the note insurer.
Trust Certificates
The trust will also issue a trust certificate or residual interest which
represents the ownership interest in the mortgage loans and is subordinate in
priority of payment to the notes. MLN Capital Corporation I, a Delaware
corporation and a wholly-owned subsidiary of the seller, will hold the trust
certificate. The trust certificate is
S-7
<PAGE>
not offered by this prospectus supplement
and the accompanying prospectus.
Credit Enhancement
Credit enhancement reduces the harm caused to noteholders by shortfalls in
collections received and losses incurred on the mortgage loans. The credit
enhancement available to the noteholders will consist of the insurance policy
issued by MBIA Insurance Corporation, the note insurer, and the
overcollateralization provisions of the trust.
Insurance Policy
MBIA Insurance Corporation will issue its financial guaranty insurance policy to
the indenture trustee for the benefit of the noteholders. The effect of the
insurance policy is to guaranty the timely payment of interest on, and the
ultimate payment of the principal amount of, the notes.
For any payment date, the amount paid by the note insurer will generally equal
(i) the sum of (a) the interest payable on the notes minus any funds available
for payment on such date, and (b) the amount necessary to keep the notes from
being undercollateralized (i.e., to ensure that the trust's liabilities do not
exceed its assets) plus (ii) the amount required to repay any amount previously
distributed to a noteholder that a bankruptcy court seeks to recover as a
voidable preference.
Payments Not Insured by the Insurance Policy
The insurance policy does not insure the payment of the following:
o any shortfall arising because the trust or the indenture trustee incurred
liability for withholding taxes;
o any shortfall in interest as a result of prepayments on the mortgage
loans; or
o shortfalls in interest due to the application of the Soldiers' and
Sailors' Relief Act of 1940, as amended;
o amounts the servicer is required to pay under the servicing agreement; or
o any shortfall created when the liquidation of a mortgaged property yields
less than the principal amount owed on the loan.
Overcollateralization
The cash flow provisions of the trust may result in a limited acceleration of
the notes relative to the amortization of the mortgage loans. This acceleration
feature creates overcollateralization which equals the excess of the total
principal balance of the trust's assets over the total principal balance of the
notes. The purpose of overcollateralization is to ensure that there are excess
funds available to pay interest and principal on the notes so that the
noteholders will have some protection against payment shortfalls and so that the
note balances will be reduced to zero no later than the date the notes are
scheduled to mature.
As of the closing date, the level of overcollateralization will be zero; on each
payment date, the indenture trustee will apply excess cash to pay down the note
balance until the required level of overcollateralization is reached.
The required level of overcollateralization may increase or decrease over time.
Any increase may result in an accelerated amortization of the notes until the
required level is reached. Any decrease will result in slower amortization of
the notes until the required level is reached.
Mortgage Loan Pool
Statistical Information
The statistical information on the mortgage loans presented in this prospectus
supplement is
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based on the pool of mortgage loans as of December 1, 1998.
Mortgage Loan Data
As of December 1, 1998, there were 1,849 mortgage loans secured by mortgages on
residential properties, exclusively, and having the following characteristics:
<TABLE>
<CAPTION>
<S> <C>
Number of
Mortgage Loans 1,849
Principal Balance
Aggregate Principal Balance $114,925,787.66
Average Principal Balance $62,155.65
Range of Principal
Balances $9,872.60-$223,876.36
Remaining Term to Maturity
Weighted Average
Remaining Term
to Maturity 255 months
Range of Remaining Term
to Maturity 57 - 360 months
Original Combined Loan-to-Value
Ratio Weighted Average
Combined Loan-to-Value Ratio 79.49%
Range of Combined Loan-to-Value
Ratios 8.33% - 125.48%
Interest Rate
Weighted Average Interest Rate 10.415%
Range of Interest Rates 7.200% - 17.500%
Percentage of Fixed Rate Loans 95.75%
Percentage of Adjustable Rate
Loans 4.25%
Percentage of Balloon Mortgage
Loans 34.79%
</TABLE>
Optional Redemption
The majority holders of the trust certificate and the servicer have the option
to redeem the notes, in full but not in part, on or after any payment date on
which the aggregate principal balance of the mortgage loans has declined to less
than 10% of the aggregate principal balance of the mortgage loans as of December
1, 1998.
TERMINATION OF MORTGAGE POOL
After the payment date upon which the remaining principal balance of the
mortgage loans is less than 20% of the original principal balance of the
mortgage pool as of the cut-off date, the indenture trustee will solicit bids to
purchase the remaining mortgage loans at their market value.
The indenture trustee will sell the mortgage loans only if (i) the indenture
trustee receives at least three bids on the mortgage loans, (ii) the highest bid
is equal to or greater than the fair market value of the mortgage loans and
(iii) the highest bid when added to any amounts available on the payment date,
equals or exceeds the sum of (a) all interest due on the notes, (b) the
aggregate remaining note balance, and (c) any accrued and unpaid amounts due to
the note insurer, the servicer, the indenture trustee and the owner trustee, and
(iv) the indenture trustee receives an opinion of counsel stating that the sale
will have no adverse tax consequences to the issuer, the noteholders and to the
tax characterization of the trust.
If the indenture trustee sells the mortgage loans, the proceeds of the sale will
be used to redeem the notes in full, and any excess shall go to the holder of
the residual interest. The indenture trustee will solicit bids on a quarterly
basis if the requirements for a sale listed above are not met.
Material Federal Income Tax Consequences
In the opinion of Dewey Ballantine LLP, the notes will be characterized as debt
for federal income tax purposes and the trust will not be characterized as an
association (or a publicly traded partnership) taxable as a corporation or as
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<PAGE>
a taxable mortgage pool. The issuer and the depositor agree and each noteholder,
by the acceptance of a note, will agree to treat the notes as indebtedness for
federal income tax purposes.
ERISA Considerations
Subject to the considerations discussed under "ERISA Considerations" herein, the
notes may be acquired and held by employee benefit plans and other retirement
plans and arrangements subject to the provisions of the Employee Retirement
Income Security Act of 1974, as amended, or Section 4975 of the Internal Revenue
Code of 1986, as amended.
Legal Investment Considerations
The notes will not constitute "mortgage related securities" for purposes of the
Secondary Mortgage Market Enhancement Act of 1984, as amended.
Rating of the Notes
Before the trust can issue the notes, the notes must receive a rating of "AAA"
from Standard & Poor's, a division of The McGraw-Hill Companies, Inc., and a
rating of "Aaa" from Moody's Investors Service, Inc. in order to be issued.
A security rating is not a recommendation to buy, sell or hold securities and
may be subject to revision or withdrawal at any time by the assigning rating
organization. A security rating does not address the frequency of principal
prepayments or the corresponding effect on yield to investors.
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RISK FACTORS
Prospective investors in the notes should consider the following
risk factors (as well as the factors set forth under "Risk Factors" in the
Prospectus) in connection with the purchase of the notes. Any statistical
information presented below is based upon the characteristics of the Mortgage
Loans as of December 1, 1998.
As a Result of the Underwriting Standards, the
Mortgage Loans are Likely to Experience Higher
Rates of Delinquency, Foreclosure and Bankruptcy
than those Underwritten in a More Traditional
Manner
The mortgage loans have been originated using underwriting standards
that are significantly less stringent than the underwriting standards applied by
other mortgage loan purchase programs such as those run by Fannie Mae or by
Freddie Mac. For example, the mortgage loans may have been made to mortgagors
having imperfect credit histories, ranging from minor delinquencies to
bankruptcies, or mortgagors with higher ratios of monthly mortgage payments to
income or higher ratios of total monthly credit payments to income. As a result
of the underwriting standards, the mortgage loans are likely to experience rates
of delinquency, foreclosure and bankruptcy that are higher, and that may be
substantially higher, than those experienced by mortgage loans underwritten in a
more traditional manner.
Delinquent Mortgage Loans May Result in Higher Losses
Approximately 1.86% of the mortgage loans by principal balance as of
December 1, 1998 were more than 30 days, but less than 60 days, past due. In
addition, because approximately 39.64% of the mortgage loans by principal
balance as of December 1, 1998 have a first scheduled monthly payment due date
occurring after December 1, 1998, it is not possible for such mortgage loans to
have had a scheduled monthly payment past due as of December 1, 1998.
Substantially all of the Mortgage Loans were originated or acquired within the
last three months and are not very seasoned. Accordingly, there can be no
assurance as to the likelihood of default by the mortgagors or as to the
likelihood of delinquency. The Mortgage Loans with higher loan-to-value ratios
or combined loan-to-value ratios may also present a greater risk of loss.
Approximately 35.96% of the mortgage loans by principal balance as of December
1, 1998, have combined loan-to-value ratios at origination in excess of 80%.
None of the mortgage loans will be insured by a primary mortgage insurance
policy.
No assurance can be given that the values of the mortgaged
properties will not decline from those on the dates the related mortgage loans
were originated and any such decline could render the information set forth
herein with respect to the combined loan-to-value ratios of such mortgage loans
an unreliable measure of security for the related debt. If the residential real
estate market should experience an overall decline in property values such that
the outstanding principal balances of the mortgage loans become equal to or
greater than the values of such mortgaged properties, the actual rate of
delinquencies, foreclosures and losses on the related mortgage loans could be
higher than those now generally experienced in the mortgage lending industry.
Even assuming that the mortgaged properties provide adequate security for the
mortgage loans, substantial delays could be encountered in connection with the
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foreclosure and liquidation of defaulted mortgage loans and corresponding delays
in the receipt of related proceeds by noteholders could occur. In the event that
any mortgaged properties fail to provide adequate security for the related
mortgage loans, any resulting losses will be covered by funds made available
through operation of the overcollateralization feature described herein, or, if
necessary, by amounts paid under the insurance policy to the extent of interest
due to the noteholders on the related payment date and the amount of any
overcollateralization deficit with respect to such payment date.
Origination Risks; Seller's Reliance on Brokers and Correspondents
Mortgage Lenders Network USA, Inc. depends largely on independent
mortgage brokers and, to a lesser extent, on correspondent lenders, for its
originations and purchases of mortgage loans, including the mortgage loans. All
brokers and correspondents in the Seller's network must undergo an approval
process and enter into an agreement with Mortgage Lenders Network USA, Inc.
pursuant to which the broker or correspondent agrees to comply with Mortgage
Lenders Network USA, Inc.'s eligibility and origination requirements. Mortgage
Lenders Network USA, Inc. underwrites all loans it funds through brokers and
re-underwrites all loans it purchases through correspondents, and regularly
reviews the performance of loans originated or purchased through its brokers and
correspondents. Mortgage Lenders Network USA, Inc. undertakes pre-closing and
post-closing quality control procedures involving random samples of loans to
confirm that the loans are being originated and underwritten in accordance with
Mortgage Lenders Network USA, Inc.'s guidelines (subject to exceptions approved
by Mortgage Lenders Network USA, Inc. prior to loan funding).
Mortgage Lenders Network USA, Inc. has no reason to believe that any
of the files for the mortgage loans included in the trust include defective
appraisals or falsified credit documents although no assurance can be given that
a mortgagor, broker, correspondent or appraiser has not submitted defective or
falsified documents.
Nature of Collateral May Lead to Delays or Shortfalls in Distributions to
Noteholders
Because the mortgage loans are secured in certain cases by second
liens that are subordinate to the rights of the mortgagee or beneficiary under
the related first mortgage or deed of trust, the proceeds from any liquidation,
insurance or condemnation proceedings will be available to satisfy the
outstanding balance of such a second mortgage loan only to the extent that the
claims of such senior mortgagee or beneficiary have been satisfied in full,
including any related foreclosure costs. In addition, a junior mortgagee may not
foreclose on the property securing a second mortgage unless it forecloses
subject to the senior mortgage, in which case it must either pay the entire
amount due on the senior mortgage to the senior mortgagee at or prior to the
foreclosure sale or undertake the obligation to make payments on the senior
mortgage in the event the mortgagor is in default thereunder. In servicing
second mortgages in its portfolio, it is generally the servicer's practice to
satisfy the senior mortgage at or prior to the foreclosure sale. The issuer will
have no source of funds to satisfy the senior mortgage or make payments due to
the senior mortgagee.
Even assuming that a mortgaged property provides adequate security
for the related mortgage loan, substantial delays could be encountered in
connection with the liquidation of a mortgage loan that is delinquent, and
resulting shortfalls in distributions to noteholders could occur. Liquidation
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expenses (such as legal fees, real estate taxes, and maintenance and
preservation expenses) will reduce the proceeds payable to noteholders and
thereby reduce the security for the mortgage loans. The combined loan-to-value
ratio for the mortgage loans ranged from 8.33% to 125.48% as of December 1,
1998, with a weighted average of 79.49% (based on December 1, 1998 principal
balances).
Approximately 9.52% of the mortgage loans by principal balance as of
December 1, 1998 are secured by second mortgages or deeds of trust. Mortgage
loans secured by second mortgages are entitled to proceeds that remain from the
sale of the related mortgaged property after any related senior mortgage loan
and prior statutory liens have been satisfied. In the event that such proceeds
are insufficient to satisfy such loans and prior liens in the aggregate, the
issuer and, accordingly, the noteholders, will bear (i) the risk of delay in
distributions while a deficiency judgment against the borrower is sought and
(ii) the risk of loss if the deficiency judgment cannot be obtained or is not
realized upon.
Higher Default Rates May Occur for Mortgage Loans with Balloon Payments
Approximately 34.79% of the mortgage loans by principal balance as
of December 1, 1998 are "balloon" loans that provide for the payment of the
outstanding 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 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.
Mortgage Lenders Network USA, Inc. 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. In
addition, the ability of a borrower to repay a balloon loan at maturity
frequently will depend on such borrower's ability to refinance the related
mortgage loan. The ability of a borrower to refinance such a mortgage loan will
be affected by a variety of factors, including the level of available mortgage
rates at the time, the value of the related mortgaged property, the borrower's
equity in the related mortgaged property, the financial condition of the
borrower and general economic conditions at the time. The inability of a
borrower to refinance a balloon loan may result in delinquencies or defaults.
Geographic Concentration of Mortgaged Properties
May Result in Higher Losses of Particular Regions
Experiencing Downturns
Approximately 11.39%, and 10.83% of the mortgage loans by principal
balance as of December 1, 1998 are secured by Mortgaged Properties located in
Ohio and Illinois, respectively. In general, declines in the residential real
estate markets in such states may adversely affect the values of the mortgaged
properties securing such mortgage loans such that the aggregate principal
balance of such mortgage loans will equal or exceed the value of such mortgaged
properties. In addition, adverse economic conditions in such states (which may
or may not affect real property values) may affect the timely payment by
borrowers of scheduled payments of principal and interest on such mortgage loans
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and, accordingly, the actual rates of delinquencies, foreclosures and losses on
such mortgage loans could be higher than those currently experienced in the
mortgage lending industry in general.
Given its Limited Operating History for the Type
of Mortgage Loans in the Trust, Mortgage Lenders
Network USA, Inc. Does Not Have Any Significant
Historical Loss and Delinquency Data
The servicer, Mortgage Lenders Network USA, Inc., commenced its
servicing activities for mortgage loans in April 1997. As a result, Mortgage
Lenders Network USA, Inc. has limited historical data available regarding loan
performance. Consequently, the servicer has been unable to develop meaningful
statistics relating to the historical performance of the mortgage loans in its
servicing portfolio. As a result, it is unknown how Mortgage Lenders Network
USA, Inc.'s mortgage loan portfolio will perform relative to the portfolios of
other mortgage lenders and servicers. Therefore, no assurance can be given as to
the level of losses and delinquencies that the mortgage loans will experience
Prepayment of the Mortgage Loans May Adversely
Affect the Yield to Maturity of the Notes
The mortgage loans may be prepaid by the related mortgagors in whole
or in part, at any time. However, approximately 45.57% of the mortgage loans by
principal balance as of December 1, 1998 require the payment of a fee in
connection with certain prepayments, which may discourage prepayments. The rate
of prepayments of the mortgage loans cannot be predicted and may be affected by
a wide variety of general economic, social, competitive and other factors,
including state and federal income tax policies, interest rates, the
availability of alternative financing and homeowner mobility. Therefore, no
assurance can be given as to the level of prepayments that the mortgage loans
will experience.
The average life of the notes, and, if purchased at other than par,
the yields realized by noteholders will be sensitive to levels of payment,
including prepayments, on the mortgage loans. In general, the yield on notes
purchased at a premium from the outstanding principal amount thereof will be
adversely affected by a higher than anticipated level of prepayments and
enhanced by a lower than anticipated level. Conversely, the yield on notes
purchased at a discount from the outstanding principal amount thereof will be
enhanced by a higher than anticipated level of prepayments and adversely
affected by a lower than anticipated level.
Insurance Policy Does Not Apply to Prepayment Risk
In general, the protection afforded by the insurance policy is
protection for credit risk and not for prepayment risk. A claim cannot be made
under the insurance policy in an attempt to guarantee or insure that any
particular rate of prepayment is experienced by the assets in the trust.
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Payments of Excess Cash May Affect the Yield to
Maturity on the Notes
Excess cash will be paid to reduce the outstanding principal balance
of the notes on any payment date if the level of overcollateralization required
at the time in question exceeds the actual level of overcollateralization on
such payment date. The rate at which excess cash is paid to noteholders will
affect the yield to maturity on a note, if purchased at a premium or a discount.
If the actual rate of such excess cash payments is slower than the rate
anticipated by an investor who purchases a note at a discount, the actual yield
to such investor will be lower than the investor's anticipated yield. If the
actual rate of excess cash payments is faster than the rate anticipated by an
investor who purchases a note at a premium, the actual yield to such investor
will be lower than such investor's anticipated yield.
The amount of excess cash on any payment date depends on the actual
amount of interest collected on the mortgage loans during the related collection
period. Collections of interest on the mortgage loans will be influenced by
changes in the weighted average of the interest rates on the mortgage loans
resulting from prepayments and liquidations of such mortgage loans as well as
from adjustments of interest rates on the adjustable rate loans included in the
trust. The amount of excess cash payments paid to reduce the note balance on
each payment date will be based on the level of overcollateralization required
at the time in question. The required level of overcollateralization may
increase or decrease over time. Any increase may result in an accelerated
amortization of the notes until the required level is reached. Any decrease will
result in slower amortization of the notes until the required level is reached.
Notes are Non-Recourse Obligations
The notes will be non-recourse obligations solely of the issuer and
will not represent an obligation of or interest in MBIA Insurance Corporation,
Mortgage Lenders Network USA, Inc., Norwest Bank Minnesota, National
Association, Wilmington Trust Company, Residential Asset Funding Corporation,
MLN Capital Corporation I or any of their respective affiliates, except as
described herein. The assets included in the trust and payments under the
insurance policy will be the sole source of payments on the notes, and there
will be no recourse to MBIA Insurance Corporation, Mortgage Lenders Network USA,
Inc., Norwest Bank Minnesota, National Association, Wilmington Trust Company,
Residential Asset Funding Corporation, MLN Capital Corporation I or any of their
respective affiliates, or any other entity, in the event that such assets or
payments are insufficient or otherwise unavailable to make all payments provided
for under the notes.
Book-Entry Registration
Issuance of the notes in book-entry form may reduce the liquidity of
the notes in the secondary trading market because investors may be unwilling to
purchase notes for which they cannot obtain physical certificates.
Because transactions in the Notes can be effected only through the
Depository Trust Company, Cedelbank, the Euroclear system, participating
organizations, indirect participants and certain banks, the ability of a
Beneficial Owner to pledge a note to persons or entities that do not participate
in
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the Depository Trust Company, Cedelbank or Euroclear system, or otherwise to
take actions in respect of such note, may be limited due to lack of a physical
certificate representing such note.
Beneficial owners may experience some delay in their receipt of
payments of interest of and principal on the notes because such payments will be
forwarded by the indenture trustee to the Depository Trust Company and the
Depository Trust Company will credit such payments to the accounts of its
participants, which will thereafter credit them to the accounts of beneficial
owners either directly or indirectly through indirect participants.
Year 2000 Issue May Adversely Affect the Distributions to Noteholders
As is the case with most companies using computers in their
operations, each of the servicer and the indenture trustee is faced with the
task of completing its compliance goals in connection with the year 2000 issue.
The year 2000 issue is the result of prior computer programs being written using
two digits, rather than four digits, to define the applicable year. Any of these
parties' computer programs that have time-sensitive software may recognize a
date using "00" as the year 1900 rather than the year 2000. Any such occurrence
could result in major computer system failure or miscalculations. Each of these
parties is expected to be engaged in various procedures to ensure that its
computer systems and software will be year 2000 compliant. However, in the event
that the servicer or the indenture trustee, or any of their suppliers,
customers, brokers or agents do not successfully achieve year 2000 compliance on
a timely basis, the performance of their obligations under the transaction
agreements could be materially adversely affected.
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DESCRIPTION OF THE NOTES
Mortgage Lenders Network Home Equity Loan Trust 1998-3 (the "Trust"
or the "Issuer") will be formed pursuant to a trust agreement, dated as of
December 1, 1998 (the "Trust Agreement"), between Residential Asset Funding
Corporation (the "Depositor") and Wilmington Trust Company (the "Owner
Trustee"). The Issuer will issue its Asset-Backed Notes, Series 1998-3 (the
"Notes") pursuant to an indenture, dated as of December 1, 1998 (the
"Indenture"), between the Issuer and Norwest Bank Minnesota, National
Association (the "Indenture Trustee"). The summaries of certain provisions of
the Indenture set forth below and under the caption "The Agreements" in the
Prospectus, while complete in material respects, do not purport to be
exhaustive. For more details regarding the terms of the Indenture, prospective
investors in the Notes are advised to review the Indenture, a copy of which
Mortgage Lenders Network USA, Inc. (the "Seller") will provide (without
exhibits) without charge upon written request addressed to the Seller at
Middlesex Corporate Center, 11th Floor, 213 Court Street, Middletown,
Connecticut 06457.
General
The Notes will be secured by the Trust Estate (as defined below)
created by the Indenture. The Notes represent non-recourse obligations of the
Issuer, and proceeds of the assets in the Trust Estate and payments under the
financial guaranty insurance policy (the "Insurance Policy") issued by MBIA
Insurance Corporation (the "Note Insurer"), if any, will be the only sources of
payments on the Notes. The Notes will not represent an interest in or obligation
of Residential Asset Funding Corporation, MLN Capital Corporation I (the
"Company"), Mortgage Lenders Network USA, Inc., as servicer (in such capacity,
the "Servicer") and as seller, the Indenture Trustee, the Owner Trustee, the
Depositor, the Underwriters (as defined herein), the Note Insurer, any of their
respective affiliates or any other entity, and will not represent an interest in
or recourse obligation of the Issuer.
The assets of the trust (the "Trust Estate") will consist of (i) a
pool (the "Mortgage Pool") of primarily fixed rate mortgage loans (the "Mortgage
Loans") secured by first and second lien mortgages or deeds of trust, on the
related mortgaged properties ("Mortgaged Properties"), and including the related
promissory notes (the "Mortgage Notes"); (ii) all payments in respect of
principal and interest on the Mortgage Loans (other than any principal or
interest payments due thereon on or prior to the opening of business on December
1, 1998 (the "Cut-off Date")); (iii) security interests in the Mortgaged
Properties; (iv) the Issuer's rights under the Sale Agreement (as defined below)
and the servicing agreement among the Issuer, the Servicer and Norwest Bank
Minnesota, National Association (the "Servicing Agreement"); and (v) certain
other property.
Payments on the Notes will be made on the 25th day of each month, or
if such day is not a business day, on the following business day (each, a
"Payment Date"), commencing January 25, 1999. All payments on the Notes will be
made by or on behalf of the Indenture Trustee to each holder of a Note (a
"Noteholder") of record on the business day immediately preceding the related
Payment Date (or, with respect to Notes in definitive form, the last day of the
month immediately preceding the month in which such Payment Date occurs) (the
"Record Date"). Payments on Notes issued in book-entry form will be made by or
on behalf of the Indenture Trustee to the Depository Trust Company ("DTC").
Payments on
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notes issued in definitive form ("Definitive Notes") generally will
be made either (i) by check mailed to the address of each Noteholder as it
appears in the register maintained by the Indenture Trustee or (ii) by wire
transfer of immediately available funds to the account of a Noteholder, if such
Noteholder (a) is the registered holder of Definitive Notes having an initial
principal amount of at least $1,000,000 and (b) has provided the Indenture
Trustee with wiring instructions in writing five days prior to the related
Record Date or has provided the Indenture Trustee with such instructions for any
previous Payment Date. A fee may be charged by the Indenture Trustee to a
Noteholder of Definitive Notes for any payment made by wire transfer.
Notwithstanding the above, the final payment in redemption of any Definitive
Note will be made only upon presentation and surrender of such Definitive Note
at the office or agency designated by the Indenture Trustee for that purpose.
The Notes will be issued in denominations of not less than $1,000
principal amount and in integral dollar multiples thereof, with the exception of
one Note which may be issued in a lesser amount.
The Trust will also issue a trust certificate (the "Residual
Interest") which represents the ownership interest in the Mortgage Loans and is
subordinate in priority of payment to the Notes. MLN Capital Corporation I, a
Delaware corporation and a wholly-owned subsidiary of the seller will hold the
trust certificate.
Book-Entry Registration and Definitive Notes
The Notes initially will be book-entry notes (the "Book-Entry
Notes"). Beneficial Owners will hold the Notes through DTC, in the United
States, or Cedelbank ("Cedel") or the Euroclear, system ("Euroclear") in Europe,
if they are participants of such systems, or indirectly through organizations
that are participants in such systems. The Book-Entry Notes initially will be
registered in the name of Cede & Co., the nominee of DTC. Cedel and Euroclear
will hold omnibus positions on behalf of Cedel Participants and Euroclear
Participants, respectively, through customers' securities accounts in Cedel's
and Euroclear's names on the books of their respective depositaries which in
turn will hold such positions in customers' securities accounts in the
depositaries' names on the books of DTC. Citibank N.A. ("Citibank") will act as
depositary for Cedel, and Morgan Guaranty Trust Company of New York ("Morgan")
will act as depositary for Euroclear (Citibank and Morgan, in such capacities,
individually the "Relevant Depositary" and collectively, the "European
Depositaries"). Except as described below, no person acquiring a Book-Entry Note
will be entitled to receive a Definitive Note. Unless and until Definitive Notes
are issued, it is anticipated that the only "Noteholder" will be Cede & Co., as
nominee of DTC or Citibank or Morgan, as nominees of Cedel and Euroclear,
respectively. Persons acquiring a beneficial ownership interest in a Note (each,
a "Beneficial Owner") will not be Noteholders as that term is used in the
Indenture. Beneficial Owners are permitted to exercise their rights only
indirectly through DTC and its Participants (including Cedel and Euroclear).
The beneficial ownership of a Book-Entry Note will be recorded on
the records of the brokerage firm, bank, thrift institution or other financial
intermediary (each, a "Financial Intermediary") that maintains the Beneficial
Owner's account for such purpose. In turn, the Financial Intermediary's
ownership of such Book-Entry Note 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
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DTC, if the Beneficial Owner's Financial Intermediary is not a Participant and
on the records of Cedel or Euroclear, as appropriate).
Beneficial Owners will receive all payments of principal of, and
interest on, the Notes from the Indenture Trustee through DTC and its
Participants (including Cedel and Euroclear). 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
is required to make book-entry transfers among Participants on whose behalf it
acts with respect to the Notes and is required to receive and transmit payments
of principal of, and interest on, the Notes. Participants and indirect
participants with whom Beneficial Owners have accounts with respect to
Book-Entry Notes are similarly required to make book-entry transfers and receive
and transmit such payments on behalf of their respective Beneficial Owners.
Accordingly, although Beneficial Owners will not possess certificates, the Rules
provide a mechanism by which Beneficial Owners will receive payments and will be
able to transfer their interests.
Beneficial Owners will not receive or be entitled to receive
certificates representing their respective interests in the Notes, except under
the limited circumstances described below. Unless and until Definitive Notes are
issued, Beneficial Owners who are not Participants may transfer ownership of
Notes only through Participants and indirect participants by instructing such
Participants and indirect participants to transfer Notes, by book-entry
transfer, through DTC for the account of the purchasers of the Notes, which
account is maintained with their respective Participants. Under the Rules and in
accordance with DTC's normal procedures, transfers 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 Participants and indirect participants
will make debits or credits, as the case may be, on their records on behalf of
the selling and purchasing Beneficial Owners.
Because of time zone differences, credits of securities received in
Cedel or Euroclear as a result of a transaction with a Participant will be made
during subsequent securities settlement processing and dated the business day
following the DTC settlement date. Such credits or any transactions in such
securities settled during such processing will be reported to the relevant
Euroclear Participants 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 or Euroclear Participant will be received with value on the DTC
settlement date but will be available in the relevant Cedel or Euroclear cash
account only as of the business day following settlement in DTC. For information
with respect to tax documentation procedures relating to the Notes, see "Certain
Federal Income Tax Consequences--Debt Securities Backup Withholding," and
"--Foreign Investors" in the Prospectus and "--Information Reporting and Backup
Withholding" in "ANNEX A: Global Clearance, Settlement and Tax Documentation
Procedures--Certain U.S. Federal Income Tax Documentation Requirements" 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
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clearing system by the Relevant Depositary; however, such
cross-market transactions will require delivery of instructions to the relevant
European international clearing system by the counterparty in such system in
accordance with its rules and procedures and within its established deadlines
(European time). The relevant European international clearing system will, if
the transaction meets its settlement requirements, deliver instructions to the
Relevant Depositary to take action to effect final settlement on its behalf by
delivering or receiving securities in DTC, and making or receiving payment in
accordance with normal procedures for same day funds settlement applicable to
DTC. Cedel Participants and Euroclear Participants may not deliver instructions
directly to the European Depositaries.
DTC, which is a New York-chartered limited purpose trust company,
performs services for its participants ("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 Participant in the Book-Entry
Notes, whether held for its own account or as a nominee for another person. In
general, beneficial ownership of Book-Entry Notes will be subject to the rules,
regulations and procedures governing DTC and its Participants as in effect from
time to time.
Cedel is incorporated under the laws of Luxembourg as a professional
depository. Cedel holds securities for its participating organizations ("Cedel
Participants") and facilitates the clearance and settlement of securities
transactions between Cedel Participants through electronic book-entry changes in
accounts of Cedel Participants, thereby eliminating the need for physical
movement of certificates. Transactions may be settled in Cedel in any of 28
currencies, including United States Dollars. Cedel provides to its Cedel
Participants, among other things, services for safekeeping, administration,
clearance and settlement of internationally traded securities and securities
lending and borrowing. Cedel interfaces with domestic markets in several
countries. As a professional depositary, 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 its
participants ("Euroclear Participants") and to clear and settle transactions
between Euroclear Participants, through simultaneous electronic book-entry
delivery against payment, thereby eliminating the need for physical movement of
certificates and any risk from lack of simultaneous transfers of securities and
cash. Transactions may be settled through Euroclear in any of 32 currencies,
including United States Dollars. Euroclear provides 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
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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 that 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
(the "Federal Reserve Board") 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 to specific securities clearance accounts. The Euroclear Operator
acts under the Terms and Conditions only on behalf of Euroclear Participants,
and has no record of or relationship with persons holding through Euroclear
Participants.
Payments on the Book-Entry Notes will be made on each Payment Date
by the Indenture Trustee to DTC. DTC will be responsible for crediting the
amount of such payments to the accounts of the applicable Participants in
accordance with DTC's normal procedures. Each Participant will be responsible
for disbursing such payments to the Beneficial Owners that it represents and to
each Financial Intermediary for which it acts as agent. Each such Financial
Intermediary will be responsible for disbursing funds to the Beneficial Owners
that it represents.
Under a book-entry format, Beneficial Owners may experience some
delay in their receipt of payments because such payments will be forwarded by
the Indenture Trustee to Cede & Co. Payments with respect to Notes held through
Cedel or Euroclear will be credited to the cash accounts of Cedel Participants
or Euroclear Participants in accordance with the relevant system's rules and
procedures, to the extent received by the Relevant Depositary. Such payments
will be subject to tax reporting in accordance with relevant United States tax
laws and regulations. See "Certain Federal Income Tax Consequences--Debt
Securities," "--Backup Withholding," and "--Foreign Investors" in the Prospectus
and "--Information Reporting and Backup Withholding" in "ANNEX A: Global
Clearance, Settlement and Tax Documentation Procedures--Certain U.S. Federal
Income Tax Documentation Requirements" hereto. Because DTC has indicated that it
will act only on behalf of Financial Intermediaries, the ability of Beneficial
Owners to pledge Book-Entry Notes to persons or entities that do not participate
in the depository system or otherwise take actions in respect of such Book-Entry
Notes may be limited due to the lack of physical certificates representing such
Book-Entry Notes. In addition, issuance of the Book-Entry Notes in book-entry
form may reduce the liquidity of the Notes in the secondary market because
certain potential investors may be unwilling to purchase Notes for which they
cannot obtain physical certificates.
The monthly and annual statements with respect to the Mortgage Loans
and the Notes as described under "--Reports to Noteholders" herein will be
provided by the Indenture Trustee to Cede & Co., as nominee of DTC and a
Noteholder, and may be made available by such entity to Beneficial Owners upon
request, in accordance with the Rules, and to the Financial Intermediaries to
whose DTC accounts the related Book-Entry Notes are credited.
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DTC has advised the Indenture Trustee that, unless and until
Definitive Notes 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 Financial
Intermediaries to whose DTC accounts the Book-Entry Notes are credited, to the
extent that such actions are taken on behalf of Financial Intermediaries whose
holdings include such Book-Entry Notes. Cedel or the Euroclear Operator, as the
case may be, will take any other action permitted to be taken by a Noteholder
under the Indenture on behalf of a Cedel Participant or Euroclear Participant
only in accordance with its relevant rules and procedures and subject to the
ability of the Relevant Depositary to effect such actions on its behalf through
DTC. DTC may take actions, at the direction of the related Participants, with
respect to some Notes that conflict with actions taken with respect to other
Notes.
Definitive Notes will be issued in registered form to Beneficial
Owners, or their nominees, rather than to DTC, only if (i) DTC or the Issuer
advises the Indenture Trustee in writing that DTC is no longer willing or able
to discharge properly its responsibilities as nominee and depositary with
respect to the Notes and the Issuer or the Indenture Trustee is unable to locate
a qualified successor, (ii) the Issuer, at its option, advises the Indenture
Trustee that it elects to terminate the book-entry system through DTC, or (iii)
after a Note Event of Default under the Indenture, the Beneficial Owners
representing not less than 51% of the Note Balance of the Book-Entry Notes
advise the Indenture Trustee and DTC that the book-entry system is no longer in
the best interests of such Beneficial Owners. Upon issuance of Definitive Notes
to Beneficial Owners, the Notes will be transferable directly (and not
exclusively on a book-entry basis) and registered holders will deal directly
with the Indenture Trustee with respect to transfers, notices and payments. See
"The Agreements--Form of Securities" in the Prospectus.
Upon the occurrence of any of the events described in the
immediately preceding paragraph, the Indenture Trustee will be required to use
its best efforts to notify all Beneficial Owners of the occurrence of such event
and the availability through DTC of Definitive Notes. Upon surrender by DTC of
the global certificates representing the Book-Entry Notes and instructions for
re-registration, the Indenture Trustee will issue Definitive Notes and
thereafter the Indenture Trustee will recognize the holders of such Definitive
Notes as Noteholders under the Indenture.
Although DTC, Cedel and Euroclear have agreed to the foregoing
procedures in order to facilitate transfer of Notes among participants of DTC,
Cedel and Euroclear, they are under no obligation to perform or continue to
perform such procedures and such procedures may be discontinued at any time.
Assignment of Mortgage Loans
The Mortgage Loans were originated by the Seller or acquired by the
Seller, through its network of brokers and correspondents and retail origination
offices. On or prior to the date the Notes are issued, the Seller will convey
each Mortgage Loan to the Depositor pursuant to a sale agreement between the
Seller and the Depositor (the "Sale Agreement") and the Depositor in turn will
convey each such Mortgage Loan to the Issuer.
At the time of issuance of the Notes, the Issuer will pledge all of
its right, title and interest in and to the Mortgage Loans, including all
principal and interest due on each such Mortgage Loan after the Cut-off Date,
without recourse, to the Indenture Trustee pursuant to the Indenture as
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collateral for the Notes; provided, however, that the Seller will reserve and
retain all its right, title and interest in and to principal and interest due on
such Mortgage Loan on or prior to the Cut-off Date (whether or not received on
or prior to such Cut-off Date), and to prepayments received on or prior to the
Cut-off Date. The Indenture Trustee, concurrently with such assignment, will
authenticate and deliver the Notes at the direction of the Issuer in exchange
for, among other things, the Mortgage Loans.
The Indenture will require the Issuer to deliver the Mortgage Loans
to the Indenture Trustee or to a permitted custodian designated by the Indenture
Trustee, the related Mortgage Notes endorsed without recourse to the Indenture
Trustee, the related mortgages or deeds of trust with evidence of recording
thereon, the title policies with respect to the related Mortgaged Properties,
all intervening mortgage assignments, if applicable, and certain other documents
relating to the Mortgage Loans (the "Mortgage Files"). The Seller will be
required to cause to be prepared and, upon the occurrence of certain events,
recorded, at the expense of the Seller and within the time period specified in
the Indenture (or, if original recording information is unavailable, within such
later period as is permitted by the Indenture), assignments of the mortgages
from the Seller to the Indenture Trustee.
The Indenture Trustee or a custodian on behalf of the Indenture
Trustee will review the Mortgage Files delivered to it and if any document
required to be included in any Mortgage File is found to be missing or to be
defective in any material respect and such defect is not cured within 60 days
following notification thereof to the Issuer, the Depositor, the Note Insurer
and the Seller by the Indenture Trustee, the Indenture Trustee will require
either that the related Mortgage Loan be removed from the Mortgage Pool or that
a Mortgage Loan conforming to the requirements of the Indenture (a "Qualified
Replacement Mortgage") be substituted for the related Mortgage Loan in the
manner described below.
In connection with the transfer of the Mortgage Loans to the
Depositor, the Seller will make certain representations and warranties as to the
accuracy in all material respects of the information set forth on a schedule
identifying and describing each Mortgage Loan. In addition, the Seller will make
certain other representations and warranties regarding the Mortgage Loans,
including, for instance, that each Mortgage Loan, at its origination, complied
in all material respects with applicable state and federal laws, that each first
mortgage is a valid first priority lien and that each second mortgage is a valid
lien, that, as of the Cut-off Date, no Mortgage Loan will be more than two
payments past due, that each Mortgaged Property consists of a one- to
four-family residential property, mixed-use property or unit in a condominium or
planned unit development, that the Seller had good title to each Mortgage Loan
prior to such transfer and that the originator was authorized to originate each
Mortgage Loan. The rights of the Depositor to enforce remedies for breaches of
such representations and warranties in the Sale Agreement against the Seller
will be assigned to the Indenture Trustee pursuant to the Indenture.
If with respect to any Mortgage Loan (1) a defect in any document
constituting a part of the related Mortgage File remains uncured within the
period specified above and materially and adversely affects the value of any
such Mortgage Loan or materially and adversely affects the interest of the
Indenture Trustee therein, the Noteholders or the Note Insurer or (2) a breach
of any representation or warranty made by the Seller relating to such Mortgage
Loan occurs and such breach materially and adversely affects the value of any
such Mortgage Loan or materially and adversely affects the interests of the
Indenture Trustee, the Noteholders or the Note Insurer therein, the Indenture
Trustee will enforce the remedies for such defects or breaches against the
Seller by requiring the Seller to remove the related
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Mortgage Loan (any such Mortgage Loan, a "Defective Mortgage Loan") from the
Trust Estate by remitting to the Indenture Trustee an amount equal to the
Principal Balance (as defined herein) of such Defective Mortgage Loan together
with interest accruing at the Mortgage Rate (net of the applicable Servicing Fee
Rate) on such Defective Mortgage Loan from the date interest was last paid by
the related mortgagor to the end of the Collection Period immediately preceding
the related Deposit Date, less any payments received during the related
Collection Period in respect of such Defective Mortgage Loan (the "Release
Price"). The Seller will also have the option, but not the obligation, to
substitute for such Defective Mortgage Loan a Qualified Replacement Mortgage.
Upon delivery of a Qualified Replacement Mortgage and deposit of certain amounts
in the Note Account as set forth in the Indenture, or deposit of the Release
Price in the Note Account (as hereinafter defined) and receipt by the Indenture
Trustee and the Note Insurer of written notification of any such substitution or
removal, as the case may be, the Indenture Trustee shall execute and deliver an
instrument of transfer or assignment necessary to vest legal and beneficial
ownership of such Defective Mortgage Loan (including any property acquired in
respect thereof or proceeds of any insurance policy with respect thereto) to the
Seller and release such Defective Mortgage Loan from the Trust Estate.
The "Collection Period" with respect to a Payment Date shall be the
period beginning on the first day of the calendar month immediately preceding
the month in which such Payment Date occurs (or, in the case of the first
Payment Date, the period beginning on the Cut-Off Date) and ending on the last
day of such calendar month. The "Deposit Date" shall be the 18th day of the
month, or if such day is not a business day, the next succeeding business day).
The "Due Period" with respect to any Payment Date shall be the period commencing
on the second day of the calendar month immediately preceding the calendar month
in which such Payment Date occurs (or, with respect to the first Payment Date,
commencing on the day following the Cut-off Date for each Mortgage Loan) and
ending on the first day of the calendar month in which such Payment Date occurs.
The obligation of the Seller to cure, remove or substitute any
Mortgage Loan as described above will constitute the sole remedy available to
Noteholders, the Note Insurer (with certain exceptions) or the Indenture Trustee
for a Defective Mortgage Loan.
Payments on the Notes
Payments on the Notes will be made by the Indenture Trustee (in such
capacity, the "Paying Agent") on each Payment Date, commencing with the Payment
Date in January 1999, to Noteholders as of the Record Date in an amount equal to
the product of such Noteholders' Percentage Interest and the amount paid in
respect of the Notes. Payments on the Notes will be made solely from Available
Funds. The "Percentage Interest" represented by any Note will be equal to the
percentage obtained by dividing the aggregate principal balance of such Note by
the Note Balance.
On each Payment Date, the Paying Agent will be required to pay the
following amounts with respect to the Notes, in the following order of priority,
out of Available Funds:
(a) first, to the Note Insurer, as subrogee to the rights of the
Noteholders, the aggregate amount necessary to reimburse the Note Insurer
for any unreimbursed payments of Insured Payments (as defined herein)
(together with interest thereon at the Late Payment Rate specified in the
Insurance Agreement) in respect of the Notes on prior Payment Dates and
the
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amount of any unpaid Note Insurer Premiums for prior Payment Dates
(together with interest thereon at the Late Payment Rate specified in the
Insurance Agreement); provided, however, that the Note Insurer shall be
paid unreimbursed Insured Payments and unpaid Note Insurer Premiums (and
any interest thereon) with respect to such Payment Date only after the
Noteholders have received Note Interest and any Overcollateralization
Deficit with respect to such Payment Date;
(b) second, to the Noteholders, the Note Interest with respect to
such Payment Date;
(c) third, to the Noteholders, the amount of Monthly Principal for
the Notes with respect to such Payment Date, in reduction of the Note
Balance until the Note Balance is reduced to zero;
(d) fourth, to the Noteholders, the amount, if any, necessary for
the Overcollateralization Amount to equal the Required
Overcollateralization Amount on such Payment Date (after giving effect to
application of Monthly Principal for such Payment Date) in reduction of
the Note Balance until the Note Balance is reduced to zero; and
(e) fifth, to the Note Insurer, any amounts due and owing under the
Insurance Agreement that are not described in clause (a) above.
Any Available Funds remaining after application in the manner
specified above will be released to the holder(s) of the Residual Interest on
such Payment Date, free from the lien of the Indenture, and such amounts will
not be available to make payments on the Notes or payments to the Note Insurer
on any subsequent Payment Date.
In the event that, with respect to a particular Payment Date,
Available Funds on such date are not sufficient to pay any portion of Note
Interest for the Notes, the Indenture Trustee will file a claim on the Insurance
Policy in an amount equal to such deficiency and apply the Insured Payment in
respect of such claim to the payment of the deficiency in Note Interest. In
addition, the Indenture Trustee will file a claim on the Insurance Policy in an
amount equal to any Overcollateralization Deficit on a Payment Date (after
taking into account payments in respect of Monthly Principal and Excess Cash on
such Payment Date) and apply the portion of the Insured Payment related to such
Overcollateralization Deficit to reduce the Note Balance on such Payment Date by
the amount of such Overcollateralization Deficit. Any Insured Payment paid to
make up any Overcollateralization Deficit shall be paid to the Noteholders, in
reduction of the Note Balance, until the Note Balance is reduced to zero.
In no event will the aggregate payments of principal to Noteholders
exceed $114,925,000 (the "Original Note Balance").
The Note Insurer will be entitled to receive a monthly premium (the
"Note Insurer Premium") on each Payment Date payable from amounts on deposit in
the Note Account.
"Insurance Agreement" means the insurance agreement dated as of
December 1, 1998 among the Note Insurer, the Seller, the Servicer, the Depositor
and the Indenture Trustee.
"Note Interest" for any Payment Date will be an amount equal to
interest accrued during the related Interest Period at the Note Interest Rate on
the Note Balance as of the preceding Payment Date (after giving effect to the
payment, if any, in reduction of principal made on the Notes on such preceding
Payment Date).
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"Interest Period" means, with respect to any Payment Date, the
immediately preceding calendar month.
All calculations of interest on the Notes will be computed on the
basis of a year of 360 days and of twelve 30 day months.
The "Note Interest Rate" for each Interest Period prior to the
Initial Redemption Date (as defined herein) will be a per annum rate equal to
6.38%, and for each Interest Period thereafter, a per annum rate equal to 6.88%.
The "Note Balance" will equal, as of any Payment Date, the Original
Note Balance less all Monthly Principal and Excess Cash paid to the Noteholders
on previous Payment Dates in reduction of the Note Balance (exclusive, for the
sole purpose of effecting the Note Insurer's subrogation rights, of payments
made by the Note Insurer in respect of any Overcollateralization Deficit under
the Insurance Policy, except to the extent reimbursed to the Note Insurer
pursuant to the Indenture).
"Monthly Principal" for any Payment Date will be an amount equal to
(A) the aggregate of (i) all scheduled payments of principal received or
advanced with respect to the Mortgage Loans due during the related Due Period
and all other amounts collected, received or otherwise recovered in respect of
principal on such Mortgage Loans (including Principal Prepayments, but not
including Payments Ahead that are not allocable to principal for the related Due
Period) during or in respect of the related Collection Period, and (ii) the
aggregate of the amounts allocable to principal deposited in the Note Account on
the related Deposit Date by the Issuer, the Seller or the Note Insurer in
connection with a repurchase, release, removal or substitution of any such
Mortgage Loans pursuant to the Indenture, reduced by (B) the amount of any
Overcollateralization Surplus with respect to such Payment Date.
The "Principal Balance" of a Mortgage Loan with respect to any
Determination Date is the actual outstanding principal balance thereof as of the
close of business on the Determination Date in the preceding month (or, in the
case of the first Payment Date, as of the Cut-off Date), less (i) all scheduled
payments of principal received or advanced with respect to the Mortgage Loans
and due during the related Due Period and all other amounts collected, received
or otherwise recovered in respect of principal on the Mortgage Loans (including
Principal Prepayments, but not including Payments Ahead that are not allocable
to principal for the related Due Period) during or in respect of the related
Collection Period, Net Liquidation Proceeds and Insurance Proceeds allocable to
principal recovered or collected in respect of such Mortgage Loan during the
related Collection Period, (ii) the portion of the Release Price allocable to
principal remitted by the Issuer, the Servicer or the Note Insurer to the
Indenture Trustee on or prior to the next succeeding Deposit Date in connection
with a release and removal of such Mortgage Loan pursuant to the Indenture, to
the extent such amount is actually remitted on or prior to such Deposit Date,
and (iii) the amount to be remitted by the Seller to the Indenture Trustee on
the next succeeding Deposit Date in connection with a substitution of a
Qualified Replacement Mortgage for such Mortgage Loan pursuant to the Indenture,
to the extent such amount is actually remitted on or prior to such Deposit Date;
provided, however, that Mortgage Loans that have become Liquidated Mortgage
Loans since the preceding Determination Date (or, in the case of the first
Determination Date, since the Cut-off Date) will be deemed to have a Principal
Balance of zero on the current Determination Date.
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"Determination Date" means, as to any Payment Date, the last day of
the Due Period relating to such Payment Date.
"Payments Ahead" means any payment of one or more scheduled monthly
payments remitted by a mortgagor with respect to a Mortgage Note in excess of
the scheduled monthly payment due during the related Due Period with respect to
such Mortgage Note, which sums the related mortgagor has instructed the Servicer
to apply to scheduled monthly payments due in one or more subsequent Due
Periods. Payments Ahead will be deemed received in the Due Period in which they
would have become due had they not been paid in advance.
"Principal Prepayment" means any mortgagor payment or other recovery
in respect of principal on a Mortgage Loan (including Net Liquidation Proceeds
and Insurance Proceeds allocable to principal) which, in the case of a mortgagor
payment, is received in advance of its scheduled due date and is not accompanied
by an amount as to interest representing scheduled interest for any month
subsequent to the month of such payment, or that is accompanied by instructions
from the related mortgagor directing the Servicer to apply such payment to the
Principal Balance of such Mortgage Loan currently.
"Liquidated Mortgage Loan" means, as to any Payment Date, any
Mortgage Loan as to which the Servicer has determined during the related
Collection Period, in accordance with its customary servicing procedures, that
all Liquidation Proceeds which it expects to recover from or on account of such
Mortgage Loan have been recovered.
"Available Funds" with respect to any Payment Date will consist of
the sum of the amounts described in clauses (a) through (g) below, less (i) the
Administrative Fee Amount in respect of such Payment Date, (ii) Monthly Advances
and Servicing Advances (each as defined herein) previously made that are
reimbursable to the Servicer (other than those included in liquidation expenses
for any Liquidated Mortgage Loan and already reimbursed from the related
Liquidation Proceeds) in such Collection Period to the extent permitted by the
Servicing Agreement and (iii) the aggregate amounts (A) deposited into the
Collection Account or Note Account that may not be withdrawn therefrom pursuant
to a final and nonappealable order of a United States bankruptcy court of
competent jurisdiction imposing a stay pursuant to Section 362 of the United
States Bankruptcy Code and that would otherwise have been included in Available
Funds on such Payment Date and (B) received by the Indenture Trustee that are
recoverable and sought to be recovered from the Issuer as a voidable preference
by a trustee in bankruptcy pursuant to the United States Bankruptcy Code in
accordance with a final nonappealable order of a court of competent
jurisdiction:
(a) all scheduled payments of interest received with respect to the
Mortgage Loans due during the related Due Period and all other interest
payments on or in respect of such Mortgage Loans received by or on behalf
of the Servicer during the related Collection Period, net of amounts
representing interest accrued on such Mortgage Loans in respect of any
period prior to the Cut-off Date, plus any Compensating Interest Payments
made by the Servicer in respect of the Mortgage Loans and any net income
from related REO Properties for such Collection Period;
(b) all scheduled payments of principal received with respect to the
Mortgage Loans and due during the related Due Period and all other
principal payments (including Principal
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Prepayments, but excluding amounts described elsewhere in this definition)
received or deemed to be received during the related Collection Period in
respect of such Mortgage Loans;
(c) the aggregate of any proceeds from or in respect of any policy
of insurance covering a Mortgaged Property that are received during the
related Collection Period and applied by the Servicer to reduce the
Principal Balance of the related Mortgage Loan ("Insurance Proceeds")
(which proceeds will not include any amounts applied to the restoration or
repair of the related Mortgaged Property or released to the related
mortgagor in accordance with applicable law, the Servicer's customary
servicing procedures or the terms of the related Mortgage Loan);
(d) the aggregate of any other proceeds received by the Servicer
during the related Collection Period in connection with the liquidation of
any Mortgaged Property securing a Mortgage Loan, whether through trustee's
sale, foreclosure, condemnation, taking by eminent domain or otherwise
(including any Insurance Proceeds to the extent not duplicative of amounts
in clause (c) above) ("Liquidation Proceeds"), less expenses incurred by
the Servicer in connection with the liquidation of such Mortgage Loan
("Net Liquidation Proceeds");
(e) the aggregate of the amounts received in respect of any Mortgage
Loans that are required or permitted to be repurchased, released, removed
or substituted by the Seller during the related Collection Period as
described in "--Assignment of Mortgage Loans" and "Servicing of the
Mortgage Loans" herein, to the extent such amounts are received by the
Indenture Trustee on or before the related Deposit Date;
(f) the amount of any Monthly Advances made for such Payment Date;
and
(g) the aggregate of amounts deposited in the Note Account by the
Indenture Trustee, the Issuer or the Note Insurer, as the case may be,
during such Collection Period in connection with redemption of the Notes
as described under "--Redemption of the Notes" herein.
The "Administrative Fee Amount" for any Payment Date is equal to the
sum of the Servicing Fee, the Indenture Trustee Fee and the Note Insurer
Premium relating to such Payment Date.
Note Account
Pursuant to the Indenture, the Indenture Trustee shall establish and
maintain an account with respect to the Notes (a "Note Account") from which all
payments with respect to the Notes will be made. As described below, not later
than the Deposit Date, the Servicer will be required pursuant to the Servicing
Agreement to wire transfer to the Indenture Trustee for deposit in the Note
Account the sum (without duplication) of all amounts on deposit in the
Collection Account that constitute any portion of Available Funds for the
related Payment Date. See "The Trust Funds--Collection and Distribution
Accounts" in the Prospectus.
Investment of Note Account. All or a portion of the Note Account may
be invested and reinvested by the Indenture Trustee in one or more Permitted
Investments bearing interest or sold at a discount. The Indenture Trustee or any
affiliate thereof may be the obligor on any investment in the Note Account which
otherwise qualifies as a Permitted Investment. No investment in the Note Account
may mature later than the Business Day preceding the Payment Date.
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The Indenture Trustee will not in any way be held liable by reason
of any insufficiency in the Note Account resulting from any loss on any
Permitted Investment included therein (except to the extent the Indenture
Trustee is the obligor thereon or manages or advises such Permitted Investment).
All income or other gain from investments in the Note Account will
not be available to Noteholders or otherwise subject to any claims or rights of
the Noteholders and will be held in the Note Account for the benefit of the
Servicer, subject to withdrawal from time to time as permitted by the Indenture.
Any loss resulting from such investments will be for the account of the
Servicer. The Servicer will be required to deposit the amount of any such loss
immediately upon the realization of such loss to the extent such loss will not
be offset by other income or gain from investments in the Note Account and then
available for such application.
Permitted Investments. The Indenture will define "Permitted
Investments" generally as follows:
(a) direct obligations of, and obligations fully guaranteed by, the
United States of America, the Federal Home Loan Mortgage Corporation, Fannie
Mae, the Federal Home Loan Banks or any agency or instrumentality of the United
States of America, the obligations of which are backed by the full faith and
credit of the United States of America;
(b) (i) demand and time deposits in, certificates of deposit of,
banker's acceptances issued by or federal funds sold by any depository
institution or trust company (including the Indenture Trustee or its agent
acting in their respective commercial capacities) incorporated under the laws of
the United States of America or any state thereof and subject to supervision and
examination by federal and/or state authorities, so long as, at the time of such
investment or contractual commitment providing for such investment, such
depository institution or trust company or its ultimate parent has a short-term
unsecured debt rating in one of the two highest available rating categories of
S&P and the highest available rating category of Moody's and provided that each
such investment has an original maturity of no more than 365 days, and (ii) any
other demand or time deposit or deposit which is fully insured by the Federal
Deposit Insurance Corporation;
(c) repurchase obligations with a term not to exceed 30 days with
respect to any security described in clause (a) above and entered into with a
depository institution or trust company (acting as a principal) rated "A" or
higher by "S&P" and rated "A2" or higher by Moody's; provided, however, that
collateral transferred pursuant to such repurchase obligation must be of the
type described in clause (a) above and must (i) be valued daily at current
market price plus accrued interest, (ii) pursuant to such valuation, be equal,
at all times, to 105% of the cash transferred by the Indenture Trustee in
exchange for such collateral and (iii) be delivered to the Indenture Trustee or,
if the Indenture Trustee is supplying the collateral, an agent for the Indenture
Trustee, in such a manner as to accomplish perfection of a security interest in
the collateral by possession of certified securities;
(d) securities bearing interest or sold at a discount issued by any
corporation incorporated under the laws of the United States of America or any
state thereof which has a long-term unsecured debt rating in the highest
available rating category of each of the Rating Agencies at the time of such
investment;
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(e) commercial paper having an original maturity of less than 365
days and issued by an institution having a short-term unsecured debt rating in
the highest available rating category of each of the Rating Agencies at the time
of such investment;
(f) a guaranteed investment contract approved by each of the Rating
Agencies and the Note Insurer and issued by an insurance company or other
corporation having a long-term unsecured debt rating in the highest available
rating category of each of the Rating Agencies at the time of such investment;
(g) money market funds having ratings in one of the two highest
available rating categories of S&P and Moody's at the time of such investment
which invest only in other Permitted Investments (any such money market funds
which provide for demand withdrawals being conclusively deemed to satisfy any
maturity requirements for Permitted Investments set forth herein), including
money market funds of the Indenture Trustee and any such funds that are managed
by the Indenture Trustee or its affiliates or for which the Indenture Trustee or
any affiliate acts as advisor as long as such money market funds satisfy the
criteria of this subparagraph (g); and
(h) any investment approved in writing by the Note Insurer and
written evidence that any such investment will not result in a downgrading or
withdrawal of the rating by each Rating Agency on the Notes.
The Indenture Trustee may purchase from or sell to itself or an
affiliate, as principal or agent, the Permitted Investments listed above. All
Permitted Investments in a trust account under the Indenture shall be made in
the name of the Indenture Trustee for the benefit of the Noteholders and the
Note Insurer.
Overcollateralization Feature
Credit enhancement with respect to the Notes will be provided in
part by overcollateralization resulting from the aggregate Principal Balances of
the Mortgage Loans as of the end of each Due Period exceeding the Note Balance
for the related Payment Date (after taking into account the Monthly Principal
and Excess Cash to be paid on such Payment Date in reduction of the Note
Balance). The Indenture requires that the Overcollateralization Amount be
increased to, and thereafter maintained at, the Required Overcollateralization
Amount. This increase and subsequent maintenance is intended to be accomplished
by the application of monthly Excess Cash to accelerate the pay-down of the Note
Balance until the Overcollateralization Amount reaches the Required
Overcollateralization Amount. Such applications of Excess Cash, because they
consist of interest collections on the Mortgage Loans, but are distributed as
principal on the Notes, will increase the Overcollateralization Amount. Such
overcollateralization is intended to result in amounts received on the Mortgage
Loans in excess of the amount necessary to pay the Note Interest and Monthly
Principal required to be paid on the Notes on any Payment Date being applied to
reduce the Note Balance to zero no later than the Stated Maturity of the Notes.
The "Excess Cash" with respect to any Payment Date will be equal to
Available Funds for such Payment Date, reduced by the sum of (i) any amounts
payable to the Note Insurer for Insured Payments paid on prior Payment Dates and
not yet reimbursed and for any unpaid Note Insurer Premiums in prior Payment
Dates (in each case with interest thereon at the Late Payment Rate set forth in
the
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Insurance Agreement), (ii) the Note Interest for the related Payment Date
and (iii) the Monthly Principal for the related Payment Date. Certain Mortgage
Loans will not have their first monthly payment due until the Due Period
relating to the February 1999 Payment Date. Accordingly, in the case of the
January 1999 Payment Date, the amount of Excess Cash available will be lower
than it would have been otherwise.
The "Overcollateralization Amount" with respect to any Payment Date
is the amount, if any, by which (x) the aggregate Principal Balance of the
Mortgage Loans as of the end of the related Due Period exceeds (y) the Note
Balance of the Notes as of such Payment Date after taking into account payments
of Monthly Principal (disregarding any permitted reduction in Monthly Principal
due to an Overcollateralization Surplus) made on such Payment Date. The required
level of the Overcollateralization Amount with respect to any Payment Date (the
"Required Overcollateralization Amount") will be equal to the amount specified
as such in the Indenture. The Indenture generally provides that the Required
Overcollateralization Amount may, over time, decrease or increase, subject to
certain floors, caps and triggers including triggers that allow the Required
Overcollateralization Amount to decrease or "step down" based on the performance
on the Mortgage Loans with respect to certain delinquency rate tests specified
in the Indenture. In addition, Excess Cash will be applied to the payment in
reduction of principal of the Notes during the period that the Mortgage Loans
are unable to meet certain tests specified in the Insurance Agreement based on
delinquency rates. Any increase in the Required Overcollateralization Amount may
result in an accelerated amortization of the Notes until such Required
Overcollateralization Amount is reached. Conversely, any decrease in the
Required Overcollateralization Amount will result in a decelerated amortization
of the Notes until such Required Overcollateralization Amount is reached.
The application of Excess Cash to reduce the Note Balance on any
Payment Date will have the effect of accelerating the amortization of the Notes
relative to the amortization of the Mortgage Loans.
In the event that the Required Overcollateralization Amount is
permitted to decrease or "step down" on any Payment Date in the future, the
Indenture will provide that all or a portion of the Excess Cash that would
otherwise be paid to the Notes on any such Payment Date in reduction of the Note
Balance will be released to the holder(s) of the Residual Interest.
With respect to any Payment Date, an "Overcollateralization Surplus"
means, the amount, if any, by which (x) the Overcollateralization Amount for
such Payment Date exceeds (y) the then applicable Required Overcollateralization
Amount for such Payment Date. As a technical matter, an Overcollateralization
Surplus may result even prior to the occurrence of any decrease or "step down"
in the Required Overcollateralization Amount because the Notes will be entitled
to receive 100% of collected principal on the Mortgage Loans, even though the
Note Balance will, as a result of the accelerated amortization caused by the
application of the Excess Cash, be less than the aggregate Principal Balance of
the Mortgage Loans, in the absence of any Realized Losses on the Mortgage Loans.
The Indenture will provide that, on any Payment Date, all amounts
collected on the Mortgage Loans in respect of principal to be applied on such
Payment Date will be paid to Noteholders in reduction of the Note Balance on
such Payment Date, except as provided above with respect to any Payment Date for
which there exists an Overcollateralization Surplus. If any Mortgage Loan became
a Liquidated Mortgage Loan during such prior Collection Period, the Net
Liquidation Proceeds related
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thereto and allocated to principal may be less than
the Principal Balance of the related Mortgage Loan; the amount of any such
deficiency is a "Realized Loss." In addition, the Indenture will provide that
the Principal Balance of any Mortgage Loan that becomes a Liquidated Mortgage
Loan shall equal zero. The Indenture will not require that the amount of any
Realized Loss be paid to Noteholders on the Payment Date following the event of
loss. However, the occurrence of a Realized Loss will reduce the
Overcollateralization Amount for the Notes, and will result in more Excess Cash,
if any, being paid on the Notes in reduction of the Note Balance on subsequent
Payment Dates than would be the case in the absence of such Realized Loss.
Overcollateralization and the Insurance Policy. The Indenture will
require the Indenture Trustee to file a claim for an Insured Payment under the
Insurance Policy not later than 12:00 noon (New York City time) on the third
Business Day prior to any Payment Date as to which the Indenture Trustee has
determined that an Overcollateralization Deficit with respect to the Notes will
occur for the purpose of applying the proceeds of such Insured Payment as a
payment of principal to the Noteholders on such Payment Date. With respect to
any Payment Date, an "Overcollateralization Deficit" will mean the amount, if
any, by which (x) the Note Balance, after taking into account all payments to be
made on such Payment Date in reduction thereof, including any Excess Cash
payments, exceeds (y) the sum of aggregate Principal Balance of the Mortgage
Loans as of the end of the applicable Due Period. Accordingly, the Insurance
Policy is similar to the provisions described above with respect to the
overcollateralization provisions insofar as the Insurance Policy guarantees
ultimate collection of the full amount of the Note Balance, rather than current
payments of the amounts of any Realized Losses to the Noteholders. Investors in
the Notes should realize that, under certain loss or delinquency scenarios, they
may temporarily receive no payments in reduction of the Note Balance.
Reports to Noteholders
Concurrently with each payment to Noteholders, the Indenture Trustee
will mail a statement to each Noteholder, the Note Insurer and the Underwriters
in the form required by the Indenture and setting forth the following
information (to the extent the Servicer makes such information (other than the
information described in clause (b) below) available to the Indenture Trustee):
(a) the amount of such payment to the Noteholders on the related
Payment Date allocable to (i) Monthly Principal (separately setting forth
Principal Prepayments) and (ii) any Excess Cash payment;
(b) the amount of such payment to the Noteholders on such Payment
Date allocable to Note Interest;
(c) the Note Balance after giving effect to the payment of Monthly
Principal and any Excess Cash applied to reduce the Note Balance on such Payment
Date;
(d) the aggregate Principal Balance of the Mortgage Loans as of the
end of the related Due Period;
(e) the amount of Monthly Advances made with respect to such Payment
Date and the aggregate amount of unreimbursed Monthly Advances and Servicing
Advances, if any;
S-32
<PAGE>
(f) the number and the aggregate of the Principal Balances of the
Mortgage Loans delinquent (i) one month, (ii) two months and (iii) three or more
months as of the end of the related Collection Period;
(g) the aggregate of the Principal Balances of the Mortgage Loans in
foreclosure or other similar proceedings or in which the borrower is in
bankruptcy and the book value of any real estate acquired through foreclosure or
grant of a deed in lieu of foreclosure during the related Collection Period;
(h) the aggregate of the Principal Balances of the Mortgage Loans
repurchased by the Seller or the Servicer, separately setting forth the
aggregate of the Principal Balances of Mortgage Loans delinquent for three
consecutive monthly installments purchased by the Servicer at its option
pursuant to the Servicing Agreement;
(i) the Insured Payment, if any, for such Payment Date;
(j) the amount of the Servicing Fee paid to or retained by the
Servicer with respect to such Payment Date;
(k) the Overcollateralization Amount, the then applicable Required
Overcollateralization Amount, the Overcollateralization Surplus, if any, and the
Overcollateralization Deficit, if any, with respect to such Payment Date; and
(l) the aggregate outstanding principal balance of the three largest
outstanding Mortgage Loans.
In the case of information furnished pursuant to clauses (a) and (b)
above, the amounts shall be expressed as a dollar amount per Note with a $1,000
principal denomination.
Within 90 days after the end of each calendar year, the Indenture
Trustee will mail to each person who at any time during such calendar year was a
Noteholder and to the Underwriters, if requested in writing by any such person,
a statement containing the information set forth in clauses (a) and (b) above,
aggregated for such calendar year or, in the case of each person who was a
Noteholder for a portion of such calendar year, setting forth such information
for each month thereof. Such obligation of the Indenture Trustee shall be deemed
to have been satisfied to the extent that substantially comparable information
shall be prepared and furnished by the Indenture Trustee to Noteholders pursuant
to any requirements of the Code as are in force from time to time.
Redemption of the Notes
Optional Redemption. The Notes will be subject to redemption, in
whole but not in part, at the option of the holders of a majority of the
Residual Interest or, if not exercised, at the option of the Servicer, on or
after the first Payment Date (such date, the "Initial Redemption Date") on which
the aggregate Principal Balance of the Mortgage Loans has declined to less than
10% of the aggregate Principal Balance of the Mortgage Loans as of the Cut-off
Date (the date on which the Notes are to be redeemed, the "Redemption Date").
The Notes will be redeemed at a redemption price of 100% of the then
outstanding Note Balance, plus accrued but unpaid interest thereon through the
end of the Interest Period immediately preceding the related Payment Date;
provided, however, that no redemption may take place unless, in
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<PAGE>
connection with such redemption, any amounts due and owing to the Note Insurer
under the Insurance Agreement are paid in full to the Note Insurer. There will
be no prepayment premium in connection with such a redemption. Notice of an
optional redemption of the Notes must be mailed by the Indenture Trustee to the
Noteholders and the Note Insurer at least ten days prior to the Payment Date set
for such redemption.
The payment on the final Payment Date in connection with the
redemption of the Notes shall be in lieu of the payment otherwise required to be
made on such Payment Date in respect of the Notes.
Termination of the Mortgage Pool. Following the first Payment Date
(the "Auction Call Date") on which the aggregate Principal Balance of the
Mortgage Loans is less than 20% of the aggregate Principal Balance of the
Mortgage Loans as of the Cut-off Date, the Indenture Trustee will be required to
solicit competitive bids for the purchase of the Mortgage Loans for fair market
value. In the event that satisfactory bids are received as described below, the
proceeds of such sale shall be used to redeem the Notes in full and any excess
shall be paid to the holder of the Residual Interest (the "Residual Holder") on
the immediately succeeding Payment Date. The Indenture Trustee will solicit
good-faith bids from no fewer than three prospective purchasers that are
considered at the time to be competitive participants in the fixed-rate mortgage
loan market, which prospective purchasers may include the Seller or an affiliate
of either of the Underwriters. The Indenture Trustee will consult with the
Underwriters and any securities brokerage house then making a market in the
Notes to determine if the fair market value of the Mortgage Loans has been
offered.
Any purchaser of such Mortgage Loans must agree to the continuation
of the Servicer or any successor servicer then acting as servicer of the
Mortgage Loans on terms substantially similar to those contained in the
Servicing Agreement.
If the highest bid received by the Indenture Trustee from a
qualified bidder is not less than the fair market value of the Mortgage Loans
and would equal or exceed the amount set forth in the immediately succeeding
sentence, the Indenture Trustee will sell and assign such Mortgage Loans without
recourse to the highest bidder and will redeem the Notes. For the Indenture
Trustee to consummate the sale, the bid must be at least equal to an amount,
which, when added to Available Funds for the related Payment Date, would equal
the sum, without duplication, of (i) the accrued interest then due on such
Payment Date, (ii) the aggregate Note Balance as of such Payment Date, (iii) the
aggregate of all Insured Payments made by the Note Insurer to the Noteholders
remaining unreimbursed as of such Payment Date and any amounts owing to the Note
Insurer under the agreement governing the issuance of the Insurance Policy, plus
interest on such amount calculated at the Late Payment Rate as set forth in
agreement governing the issuance of the Insurance Policy, (iv) any accrued and
unpaid Servicing Fees and any Servicing Advances or any Monthly Advances
previously made by the Servicer and remaining unreimbursed as of such Payment
Date and (v) any accrued and unpaid fees owing to the Indenture Trustee or the
Owner Trustee as of such Payment Date. If such conditions are not met, the
Indenture Trustee will not consummate such sale. In addition, the Indenture
Trustee will decline to consummate such sale unless it receives an opinion of
counsel that such sale will not give rise to any adverse tax consequences to the
Issuer or the Noteholders or adversely affect the opinion of Tax Counsel that
the Notes will evidence indebtedness of the Issuer under the Code. In the event
such sale is not consummated
S-34
<PAGE>
in accordance with the foregoing, the Indenture Trustee will continue to solicit
bids on a quarterly basis for the purchase of such assets upon the terms
described above.
Payments to the Holder(s) of the Residual Interest
On each Payment Date, any portion of Available Funds remaining after
making payments of interest and principal due on the Notes and other
distributions required on such Payment Date will be released to the holder(s) of
the Residual Interest, free of the lien of the Indenture. Any such remaining
amounts will not be available to make payments on the Notes or payments to the
Note Insurer on any subsequent Payment Date.
The Indenture Trustee
Norwest Bank Minnesota, National Association, a national banking
association, will be the Indenture Trustee under the Indenture. The Indenture
will provide that the Indenture Trustee is entitled to a fee (the "Indenture
Trustee Fee"), payable monthly on each Payment Date at one-twelfth of 0.02% of
the aggregate Principal Balance of the Mortgage Loans as of the first day of the
related Due Period, and reimbursement of certain expenses. Norwest Bank
Minnesota, National Association, will also perform certain monitoring functions
and act as successor servicer under the Servicing Agreement and, upon a
termination of the Servicer, shall be obligated to succeed to the obligations of
the Servicer or to appoint an eligible successor servicer.
The Indenture also will provide that the Indenture Trustee may
resign at any time, upon notice to the Issuer, the Servicer, the Note Insurer
and any Rating Agency, in which event the Issuer will be obligated to appoint a
successor Indenture Trustee acceptable to the Note Insurer. The Issuer, with the
prior consent of the Note Insurer, may remove the Indenture Trustee if the
Indenture Trustee ceases to be eligible to continue as such under the Indenture
or if the Indenture Trustee becomes insolvent. Any resignation or removal of the
Indenture Trustee and appointment of a successor Indenture Trustee will not
become effective until acceptance of the appointment by the successor Indenture
Trustee. The Indenture will provide that the Indenture Trustee is under no
obligation to exercise any of the rights or powers vested in it by the Indenture
at the request or direction of any of the Noteholders, unless such Noteholders
shall have offered to the Indenture Trustee reasonable security or indemnity
against the costs, expenses and liabilities which might be incurred by it in
compliance with such request or direction. The Indenture Trustee may execute any
of the rights or powers granted by the Indenture or perform any duties
thereunder either directly or by or through its agents or attorneys; provided,
however, the Indenture Trustee shall remain liable for the performance of all of
its duties. Pursuant to the Indenture, the Indenture 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 Indenture. The Indenture Trustee and any director, officer,
employee or agent of the Indenture 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
Indenture. The Indenture Trustee will be indemnified by the Servicer for certain
losses and other events to the extent described in the Servicing Agreement.
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<PAGE>
Voting
Unless otherwise specified in the Indenture, with respect to any
provisions of the Indenture providing for the action, consent or approval of the
Noteholders evidencing specified "Voting Interests," each Noteholder will have a
Voting Interest equal to the Percentage Interest represented by such
Noteholder's Note. Unless a Note Insurer Default has occurred and is continuing,
the Voting Interests of the Noteholders will be exercised solely by or with the
consent of the Note Insurer.
Note Events of Default
An "Event of Default" with respect to the Notes shall occur if, on
any Payment Date, after taking into account all payments made in respect of the
Notes on such Payment Date, the Note Interest for such Payment Date remains
unpaid or an Overcollateralization Deficit still exists with respect to the
Notes. See "The Agreements--Events of Default; Rights upon Events of Default" in
the Prospectus for a description of the circumstances under which a default on
the Notes, other than a payment default, may occur. For a description of the
rights of Noteholders in connection with any Event of Default with respect to
the Notes, see "The Agreements--Events of Default; Rights upon Event of Default"
in the Prospectus. In the absence of a failure by the Note Insurer to pay
Insured Payments, no acceleration of the maturity of the Notes shall be
permitted without the consent of the Note Insurer.
THE ISSUER
The Issuer is a Delaware business trust established by the Depositor
pursuant to the Trust Agreement. After the Closing Date, the Residual Interest
representing all of the beneficial ownership interest in the Issuer will be held
by the Company, a limited purpose, wholly-owned subsidiary of the Seller. The
principal office of the Issuer is located in Wilmington, Delaware, c/o the Owner
Trustee, Rodney Square North, 1100 North Market Street, Wilmington, Delaware
19890-0001, Attention: Corporate Trust Administration. The Issuer does not have,
nor is it expected in the future to have, any significant assets, other than the
assets included in the Trust Estate.
MORTGAGE LENDERS NETWORK USA, INC.
Mortgage Lenders Network USA, Inc., the Seller under the Sale
Agreement and the Servicer under the Servicing Agreement, is a Delaware
corporation and a full service mortgage banker engaged in the business of
originating, purchasing, selling and servicing mortgage loans on one- to
four-family residential properties. The Seller's mortgage loans are primarily
made to borrowers whose borrowing needs are generally not being served by
traditional financial institutions because of impaired or limited credit
profiles. The Seller was formed in November 1996. The Seller currently
originates its mortgage loans primarily through independent licensed brokers and
its retail origination offices, and purchases mortgage loans from approved
correspondents. Each Mortgage Loan is underwritten by the Seller. See
"Description of the Mortgage Pool--Underwriting Standards" and "Servicing of the
Mortgage Loans--Historical Servicing Experience of the Servicer."
The Seller has its principal offices at Middlesex Corporate Center,
213 Court Street, Middletown, Connecticut 06457 (telephone number: (860)
344-5700).
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<PAGE>
DESCRIPTION OF THE MORTGAGE POOL
General
The following is a brief description of certain terms of the
Mortgage Loans as of the Cut-off Date. The information presented herein does not
take into account any Mortgage Loans which may prepay in full or be removed,
prior to the Closing Date, from the Mortgage Pool and that other Mortgage Loans
may be substituted therefor. As a result, the information regarding the Mortgage
Loans set forth herein may vary from comparable information based in the actual
composition of the Mortgage Pool at the Closing Date, although such variance
will not be material.
The Mortgage Pool will consist of primarily fixed rate mortgage
loans secured by first and second liens, on one- to four-family residential
properties located in 47 states and the District of Columbia. No Mortgage Loan
will have an original term to stated maturity in excess of 30 years or has a
scheduled maturity date later than December 4, 2028. All of the Mortgage Loans
will be originated or acquired by the Seller through its network of brokers and
correspondents and through its retail origination offices.
The Mortgage Loans have been originated using underwriting standards
that are significantly less stringent than the underwriting standards applied by
other mortgage loan purchase programs such as those administered by Fannie Mae
or by Freddie Mac. See "--Underwriting Standards" and "Risk Factors" herein.
The Mortgage Loans are generally not assumable pursuant to the terms
of the related Mortgage Note. See "Certain Prepayment and Yield Considerations"
herein.
None of the Mortgage Loans is or will be insured or guaranteed by
the Issuer, the Seller, the Company, the Depositor, the Servicer, the Indenture
Trustee, the Note Insurer, any originator or any of their respective affiliates,
or by any governmental agency or other person, except as described herein. None
of the Mortgage Loans will be insured by mortgage pool insurance policies or
primary mortgage insurance policies.
Approximately 45.57% of the Mortgage Loans by Principal Balance as
of the Cut-off Date will provide for the payment of a prepayment charge.
Prepayment charges received on the Mortgage Loans will not be included in
Available Funds for the related Collection Period but will instead by paid to
the Servicer as additional servicer compensation.
Mortgage Loan Characteristics
Set forth below is certain summary statistical information regarding
the Mortgage Loans as of the Cut-off Date. As of the Cut-off Date, the Mortgage
Loans consisted of 1,849 Mortgage Loans with an aggregate Principal Balance
totaling $114,925,787.66 (the "Initial Pool Balance").
As of the Cut-off Date, the average Principal Balance of the
Mortgage Loans was $62,155.65; the minimum and maximum Principal Balances of the
Mortgage Loans were $9,872.60 and $223,876.36, respectively; 90.48% of the
Mortgage Loans by Principal Balance as of the Cut-off Date are secured by first
lien mortgages on the related Mortgaged Properties and 9.52% of the Mortgage
Loans by Principal Balance as of the Cut-off Date are secured by second lien
mortgages on the related Mortgaged
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<PAGE>
Properties; 34.79% of the Mortgage Loans by
Principal Balance as of the Cut-off Date are loans that provide for the payment
of the outstanding Principal Balance in a single payment at maturity ("Balloon
Loans"); the weighted average interest rate (the "Mortgage Rate") of the
Mortgage Loans was 10.415% per annum; the Mortgage Rates of the Mortgage Loans
ranged from 7.200% to 17.500% per annum; the weighted average Combined
Loan-to-Value Ratio of the Mortgage Loans was 79.49% and these Combined
Loan-to-Value Ratios ranged from 8.33% to 125.48%. The weighted average
remaining term to maturity of the Mortgage Loans was 255 months and the
remaining terms to maturity of the Mortgage Loans ranged from 57 months to 360
months. As of the Cut-off Date, 62 Mortgage Loans were adjustable rate Mortgage
Loans, representing 4.25% of the Mortgage Loans by Principal Balance.
Approximately 1.86% of the Mortgage Loans were more than 30 days,
but less than 60 days, past due as of the Cut-off Date. As of the Cut-off Date,
none of the Mortgage Loans were 60 days or more delinquent in payment of
principal and interest. None of the Mortgage Loans will be covered by a primary
mortgage insurance policy. Approximately 35.96% of the Mortgage Loans by
Principal Balance as of the Cut-off Date are Mortgage Loans with Combined
Loan-to-Value Ratios at origination in excess of 80%. Approximately 45.57% of
the Mortgage Loans by Principal Balance as of the Cut-off Date require the
payment of a fee in connection with certain prepayments.
The "Combined Loan-to-Value Ratio" of a Mortgage Loan shall
generally mean that ratio, expressed as a percentage, borne by (a) the sum of
the principal amount of the Mortgage Loan at origination plus the then-current
principal balance of all mortgage loans (each a "Senior Loan" ) secured by liens
on the related Mortgaged Property having priorities senior to that of the lien
which secures such Mortgage Loan over (b) the appraised value of the related
Mortgaged Property at origination.
Set forth below is a description of certain additional
characteristics of the Mortgage Loans as of the Cut-off Date (except as
otherwise indicated). The information expressed below as a percentage of the
Initial Pool Balance may not total 100% due to rounding.
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<PAGE>
Principal Balance of the Mortgage Loans
<TABLE>
<CAPTION>
Aggregate
Number of Unpaid Percentage of
Range of Principal Mortgage Principal Initial Pool
Balances Loans Balance Balance
- -------------------- ------------- --------------- ---------------
<S> <C> <C> <C>
$ 0.01 -
25,000.00 202 $3,916,628.12 3.41%
25,000.01 -
50,000.00 655 25,372,704.69 22.08
50,000.01 -
75,000.00 483 29,544,963.17 25.71
75,000.01 -
100,000.00 255 21,968,454.97 19.12
100,000.01 -
125,000.00 125 14,009,344.83 12.19
125,000.01 -
150,000.00 61 8,274,850.04 7.20
150,000.01 -
175,000.00 42 6,736,735.02 5.86
175,000.01 -
200,000.00 17 3,193,719.33 2.78
200,000.01 -
225,000.00 9 1,908,387.49 1.66
------------- ---------------- ---------------
Total 1,849 $114,925,787.66 100.00%
</TABLE>
As of the Cut-off Date, the average Principal Balance of the Mortgage
Loans was approximately $62,155.65.
Mortgage Interest Rates of the Mortgage Loans
<TABLE>
<CAPTION>
Aggregate
Range of Number of Unpaid Percentage of
Mortgage Mortgage Principal Initial Pool
Interest Rates Loans Balance Balance
----------------- ------------- --------------- ---------------
<S> <C> <C> <C>
7.01 - 7.50% 1 $ 97,837.85 0.09%
7.51 - 8.00 17 1,409,769.03 1.23
8.01 - 8.50 135 8,625,233.27 7.51
8.51 - 9.00 164 11,029,141.32 9.60
9.01 - 9.50 169 12,636,807.47 11.00
9.51 -10.00 288 20,514,135.02 17.85
10.01 -10.50 211 15,008,477.22 13.06
10.51 -11.00 255 16,096,147.84 14.01
11.01 -11.50 139 8,611,269.69 7.49
11.51 -12.00 119 6,623,289.84 5.76
12.01 -12.50 65 3,443,444.24 3.00
12.51 -13.00 65 3,318,990.87 2.89
13.01 -13.50 51 1,920,800.02 1.67
13.51 -14.00 62 1,961,328.93 1.71
14.01 -14.50 21 904,739.60 0.79
14.51 -15.00 24 764,135.19 0.66
15.01 -15.50 18 606,671.54 0.53
15.51 -16.00 18 603,932.79 0.53
16.01 -16.50 15 391,961.98 0.34
16.51 -17.00 6 197,276.18 0.17
17.01 -17.50 6 160,397.77 0.14
------------- --------------- ----------------
Total 1,849 $114,925,787.66 100.00%
</TABLE>
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<PAGE>
Original Combined Loan-to-Value Ratios of the Mortgage Loans
<TABLE>
<CAPTION>
Aggregate
Range of Original Number of Unpaid Percentage of
Combined Mortgage Principal Initial Pool
Loan-to-Value Ratios Loans Balance Balance
- --------------------- ------------- --------------- -----------------
<S> <C> <C> <C>
0.01 - 10.00% 1 $ 35,000.00 0.03%
10.01 - 20.00 8 215,705.37 0.19
20.01 - 30.00 16 434,050.89 0.38
30.01 - 40.00 20 949,376.36 0.83
40.01 - 50.00 36 1,598,602.86 1.39
50.01 - 60.00 76 4,067,184.13 3.54
60.01 - 70.00 254 14,972,014.77 13.03
70.01 - 80.00 760 51,320,969.62 44.66
80.01 - 90.00 438 33,844,959.51 29.45
90.01 - 100.00 102 2,878,269.77 2.50
100.01 - 110.00 27 725,095.68 0.63
110.01 - 120.00 44 1,492,673.47 1.30
120.01 - 130.00 67 2,391,885.23 2.08
------------- --------------- ----------------
Total 1,849 $114,925,787.66 100.00%
</TABLE>
The weighted average Combined Loan-to-Value Ratio at origination of the
Mortgage Loans was approximately 79.49%.
Risk Classification of the Mortgage Loans
<TABLE>
<CAPTION>
Aggregate
Number of Unpaid Percentage of
Mortgage Principal Initial Pool
Risk Classification Loans Balance Balance
- --------------------- ------------- --------------- ---------------
<S> <C> <C> <C>
A 419 $29,282,448.27 25.48%
A+ 453 22,223,134.05 19.34
B 244 16,651,047.22 14.49
B+ 160 11,178,896.31 9.73
C 374 24,061,835.89 20.94
C- 129 7,462,566.74 6.49
D 70 4,065,859.18 3.54
------------- ---------------- ----------------
Total 1,849 $114,925,787.66 100.00%
</TABLE>
S-40
<PAGE>
Geographic Distribution of Mortgaged Properties of the Mortgage Loans
<TABLE>
<CAPTION>
Aggregate
Number of Unpaid Percentage of
Mortgage Principal Initial Pool
Location Loans Balance Balance
- --------------------- ------------- --------------- ---------------
<S> <C> <C> <C>
Alabama 45 $ 2,463,241.24 2.14%
Alaska 4 388,571.55 0.34
Arizona 40 1,963,748.97 1.71
Arkansas 6 222,969.76 0.19
California 1 39,912.56 0.03
Colorado 14 681,178.63 0.59
Connecticut 60 4,674,463.34 4.07
Delaware 5 381,017.45 0.33
Dist. of Columbia 4 232,242.89 0.20
Florida 82 4,338,544.03 3.78
Georgia 74 4,416,716.80 3.84
Idaho 17 1,100,366.25 0.96
Illinois 187 12,441,650.51 10.83
Indiana 42 2,044,686.38 1.78
Iowa 21 977,365.43 0.85
Kansas 20 887,283.59 0.77
Kentucky 79 4,348,964.63 3.78
Louisiana 13 823,845.94 0.72
Maine 12 681,476.66 0.59
Maryland 76 4,657,065.78 4.05
Massachusetts 48 4,473,927.04 3.89
Michigan 50 3,004,805.05 2.61
Minnesota 5 283,809.69 0.25
Mississippi 16 797,909.63 0.69
Missouri 53 2,861,240.72 2.49
Montana 2 178,762.23 0.16
Nebraska 2 114,900.00 0.10
Nevada 4 262,525.40 0.23
New Hampshire 8 533,997.92 0.46
New Jersey 11 1,024,193.83 0.89
New Mexico 45 2,869,271.65 2.50
New York 111 9,034,962.47 7.86
North Carolina 66 4,242,910.09 3.69
Ohio 215 13,094,541.89 11.39
Oklahoma 27 1,283,011.58 1.12
Oregon 6 776,623.40 0.68
Pennsylvania 75 3,640,224.51 3.17
Rhode Island 16 954,492.54 0.83
South Carolina 87 4,739,239.55 4.12
Tennessee 61 3,607,545.44 3.14
Texas 11 733,828.14 0.64
Utah 3 281,685.01 0.25
Vermont 19 1,180,811.02 1.03
Virginia 41 2,493,299.78 2.17
Washington 27 2,703,157.91 2.35
</TABLE>
S-41
<PAGE>
Geographic Distribution of Mortgaged Properties of the Mortgage Loans
(continued)
<TABLE>
<CAPTION>
Aggregate
Number of Unpaid Percentage of
Mortgage Principal Initial Pool
Location Loans Balance Balance
- --------------------- ------------- --------------- ---------------
<S> <C> <C> <C>
West Virginia 7 $ 308,951.19 0.27%
Wisconsin 30 1,593,688.75 1.39
Wyoming 1 86,158.84 0.07
------------- --------------- ----------------
Total 1,849 $114,925,787.66 100.00%
</TABLE>
No more than 0.72% of the Mortgage Loans will be secured by Mortgaged
Properties located in any one zip code area.
Mortgage Loan Purpose of the Mortgage Loans
<TABLE>
<CAPTION>
Aggregate
Number of Unpaid Percentage of
Mortgage Principal Initial Pool
Loan Purpose Loans Balance Balance
- --------------------- ------------- --------------- ----------------
<S> <C> <C> <C>
Purchase 212 $14,836,890.67 12.91%
Refi Cash Out 1,597 97,489,055.99 84.83
Refi Rate/Term 40 2,599,841.00 2.26
------------- ---------------- ----------------
Total 1,849 $114,925,787.66 100.00%
</TABLE>
Mortgage Loan Documentation Types of the Mortgage Loans
<TABLE>
<CAPTION>
Aggregate
Number of Unpaid Percentage of
Mortgage Principal Initial Pool
Documentation Loans Balance Balance
- --------------------- ------------- --------------- ----------------
<S> <C> <C> <C>
Full Documentation 1,651 $100,700,136.65 87.62%
Limited Documentation 81 6,962,291.35 6.06
No Income Verification 117 7,263,359.66 6.32
------------- ---------------- ----------------
Total 1,849 $114,925,787.66 100.00%
</TABLE>
Occupancy Status of the Mortgage Loans
<TABLE>
<CAPTION>
Aggregate
Number of Unpaid Percentage of
Mortgage Principal Initial Pool
Occupancy Loans Balance Balance
- --------------------- ------------- --------------- ----------------
<S> <C> <C> <C>
Investment 142 $ 7,642,882.72 6.65%
Owner Occupied 1,698 106,841,472.77 92.97
Second Home 9 441,432.17 0.38
------------- ---------------- ----------------
Total 1,849 $114,925,787.66 100.00%
</TABLE>
S-42
<PAGE>
Mortgaged Property Type of the Mortgage Loans
<TABLE>
<CAPTION>
Aggregate
Number of Unpaid Percentage of
Mortgage Principal Initial Pool
Property Type Loans Balance Balance
- --------------------- ------------- --------------- ----------------
<S> <C> <C> <C>
2-4 Family 126 $10,213,675.59 8.89%
Condominium 41 2,208,908.80 1.92
Manufactured Homes 80 4,676,856.53 4.07
Mixed Use 2 210,168.36 0.18
Multi-Family Home 4 351,676.26 0.31
PUD 7 520,590.03 0.45
Single Family Home 1,589 96,743,912.09 84.18
------------- ---------------- ----------------
Total 1,849 $114,925,787.66 100.00%
</TABLE>
Seasoning of the Mortgage Loans
<TABLE>
<CAPTION>
Aggregate
Number of Unpaid Percentage of
Mortgage Principal Initial Pool
Months of Seasoning Loans Balance Balance
- --------------------- ------------- --------------- ----------------
<S> <C> <C> <C>
0 647 $43,830,492.82 38.14%
1 -12 1,192 70,402,460.93 61.26
13 -24 10 692,833.91 0.60
------------- ---------------- ----------------
Total 1,849 $114,925,787.66 100.00%
</TABLE>
As of the Cut-off Date, the weighted average seasoning of the
Mortgage Loans was approximately two months.
Original Term to Maturity of the Mortgage Loans
<TABLE>
<CAPTION>
Aggregate
Original Term to Number of Unpaid Percentage of
Maturity Mortgage Principal Initial Pool
(in months) Loans Balance Balance
- --------------------- ------------- --------------- ----------------
<S> <C> <C> <C>
56 -60 4 $ 80,294.67 0.07%
71 -75 3 84,077.28 0.07
81 -85 1 36,085.00 0.03
96 -100 1 26,514.71 0.02
116 -120 45 1,253,335.18 1.09
141 -145 1 37,950.00 0.03
176 -180 848 51,773,526.07 45.05
236 -240 300 14,952,877.73 13.01
296 -300 116 6,325,229.21 5.50
360 530 40,355,897.81 35.11
------------- ---------------- ----------------
Total 1,849 $114,925,787.66 100.00%
</TABLE>
S-43
<PAGE>
Remaining Terms to Maturity of the Mortgage Loans
<TABLE>
<CAPTION>
Aggregate
Number of Unpaid Percentage of
Months Remaining Mortgage Principal Initial Pool
to Maturity Loans Balance Balance
- -------------------- ------------- --------------- ----------------
<S> <C> <C> <C>
56 - 60 4 $ 80,294.67 0.07%
71 - 75 3 84,077.28 0.07
81 - 85 1 36,085.00 0.03
91 - 95 1 26,514.71 0.02
106 -110 1 21,882.61 0.02
111 -115 4 81,365.05 0.07
116 -120 40 1,150,087.52 1.00
141 -145 1 37,950.00 0.03
161 -165 2 84,427.20 0.07
166 -170 9 324,365.53 0.28
171 -175 46 2,422,097.40 2.11
176 -180 791 48,942,635.94 42.59
221 -225 2 86,013.35 0.07
226 -230 4 316,425.72 0.28
231 -235 37 1,620,356.28 1.41
236 -240 257 12,930,082.38 11.25
286 -290 1 40,300.69 0.04
291 -295 4 240,000.17 0.21
296 -300 111 6,044,928.35 5.26
341 -345 2 183,126.12 0.16
346 -350 6 409,115.30 0.36
351 -355 37 3,080,237.48 2.68
356 24 2,095,241.26 1.82
357 43 2,985,418.41 2.60
358 98 7,348,904.43 6.39
359 122 9,068,314.54 7.89
360 198 15,185,540.27 13.21
------------- ---------------- ----------------
Total 1,849 $114,925,787.66 100.00%
</TABLE>
As of the Cut-off Date, the weighted average remaining term to
maturity of the Mortgage Loans was approximately 255 months.
S-44
<PAGE>
Maximum Interest Rates of the Adjustable Rate Mortgage Loans
<TABLE>
<CAPTION>
Aggregate Percentage of
Unpaid Aggregate
Principal Unpaid
Number of Balance of Principal
Adjustable the Balance of the
Rate Adjustable Adjustable
Range of Maximum Mortgage Rate Mortgage Rate Mortgage
Interest Rates Loans Loans Loans
- -------------------- ------------- --------------- ----------------
<S> <C> <C> <C>
15.51 -16.00% 4 $ 282,388.28 5.78%
16.01 -16.50 13 1,296,112.50 26.52
16.51 -17.00 10 721,562.16 14.76
17.01 -17.50 9 674,632.86 13.80
17.51 -18.00 5 475,049.84 9.72
18.01 -18.50 8 474,721.11 9.71
18.51 -19.00 7 341,690.46 6.99
19.01 -19.50 5 484,460.30 9.91
19.51 -20.00 1 137,185.45 2.81
------------- ---------------- ----------------
Total 62 $4,887,802.96 100.00%
</TABLE>
Minimum Interest Rates of the Adjustable Rate Mortgage Loans
<TABLE>
<CAPTION>
Aggregate Percentage of
Unpaid Aggregate
Principal Unpaid
Number of Balance of Principal
Adjustable the Balance of the
Rate Adjustable Adjustable
Range of Minimum Mortgage Rate Mortgage Rate Mortgage
Interest Rates Loans Loans Loans
- -------------------- ------------- --------------- ----------------
<S> <C> <C> <C>
8.51 - 9.00% 4 $ 282,388.28 5.78%
9.01 - 9.50 13 1,296,112.50 26.52
9.51 -10.00 10 721,562.16 14.76
10.01 -10.50 9 674,632.86 13.80
10.51 -11.00 5 475,049.84 9.72
11.01 -11.50 8 474,721.11 9.71
11.51 -12.00 7 341,690.46 6.99
12.01 -12.50 5 484,460.30 9.91
12.51 -13.00 1 137,185.45 2.81
------------- ---------------- ----------------
Total 62 $4,887,802.96 100.00%
</TABLE>
S-45
<PAGE>
Next Interest Rate Adjustment Date of the Adjustable Rate Mortgage Loans
<TABLE>
<CAPTION>
Aggregate Percentage of
Unpaid Aggregate
Principal Unpaid
Number of Balance of Principal
Adjustable the Balance of the
Month and Year of Rate Adjustable Adjustable
Next Interest Rate Mortgage Rate Mortgage Rate Mortgage
Adjustment Loans Loans Loans
- -------------------- ------------- --------------- ----------------
<S> <C> <C> <C>
01/00 1 $ 27,890.92 0.57%
01/99 2 187,207.61 3.83
02/00 3 223,707.37 4.58
02/99 1 55,120.08 1.13
03/00 3 199,567.90 4.08
03/99 3 278,658.14 5.70
04/00 3 298,145.99 6.10
04/99 3 211,217.88 4.32
05/00 4 353,000.89 7.22
05/99 4 352,916.16 7.22
06/00 3 216,161.58 4.42
06/99 1 50,297.70 1.03
07/00 5 301,672.45 6.17
08/00 10 726,259.86 14.86
09/00 5 387,673.71 7.93
09/99 1 121,208.90 2.48
10/00 5 533,832.01 10.92
10/99 1 112,781.38 2.31
12/00 1 65,000.00 1.33
12/98 3 185,482.43 3.79
------------- ---------------- ----------------
Total 62 $4,887,802.96 100.00%
</TABLE>
S-46
<PAGE>
UNDERWRITING STANDARDS
The Mortgage Loans will be sold by the Seller to the Depositor, sold
by the Depositor to the Issuer and then pledged by the Issuer to the Indenture
Trustee. All of the Mortgage Loans were or will be originated by the Seller or
acquired by the Seller from mortgage bankers or brokers generally in accordance
with the underwriting criteria described herein.
The Seller's underwriting standards are primarily intended to assess
the ability and willingness of the borrower to repay the debt and to evaluate
the adequacy of the mortgaged property as collateral for the mortgage loan. All
of the Mortgage Loans were underwritten with a view toward the resale thereof in
the secondary mortgage market. The Seller considers, among other things, a
mortgagor's credit history, repayment ability and debt service to income ratio
("debt-to-income ratio"), as well as the value, type and use of the mortgaged
property. The Mortgage Loans generally bear higher rates of interest than
mortgage loans that are originated in accordance with FNMA and FHLMC standards,
and may experience rates of delinquency and foreclosure that are higher, and
that may be substantially higher, than those experienced by portfolios of
mortgage loans underwritten in accordance with such FNMA or FHLMC standards.
Approximately 78.22% of the Mortgage Loans originated by the Seller
are based on loan application packages submitted through mortgage brokerage
companies with whom the Seller has a relationship (such mortgage loans,
"Indirect Retail Mortgage Loans"). The brokers and/or companies must meet
minimum standards based on an analysis of information submitted with an
application for approval, including resumes of the principals, valid broker's
license(s), and a satisfactory credit report. Once approved, mortgage brokerage
companies are eligible to submit loan application packages in compliance with
the terms of a signed broker agreement. All Indirect Retail Mortgage Loans are
originated in the Seller's regional offices located in Horsham, Pennsylvania,
Oak Brook, Illinois, Atlanta, Georgia, Phoenix, Arizona and Seattle, Washington.
All Indirect Retail Mortgage Loans are underwritten according to the Seller's
underwriting guidelines by the Seller in both the regional offices and the
corporate office located in Middletown, Connecticut (the "Corporate Office").
All Indirect Retail Mortgage Loans are initially reviewed by a loan officer for
pre-approval. The credit file is processed and reviewed by an underwriter for
final approval.
Approximately 21.78% of the Mortgage Loans were originated by the
Seller directly through its retail operation under the name "Family Credit
Connection" (such mortgage loans, "Retail Mortgage Loans"). Retail Mortgage
Loans are underwritten based on the Seller's underwriting guidelines by the
Seller in the Corporate Office. All Retail Mortgage Loans are originated at the
Illinois, Florida, Maryland or Connecticut retail office or the referral
department in Middletown, Connecticut. Retail Mortgage Loans are initially
reviewed by a loan officer to determine whether the loan application meets the
Seller's underwriting guidelines. The credit file is processed and reviewed by
an underwriter for final approval.
On a case-by-case basis, the Seller may determine that, based upon
compensating factors, a prospective mortgagor not strictly qualifying under the
underwriting risk category guidelines described below warrants an underwriting
exception. Compensating factors may include, but are not limited to, low
loan-to-value ratio and/or large down payment, proven ability to handle high
debt-to-income levels,
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<PAGE>
low debt-to-income ratio, large cash flow, significant verified savings, good
credit history, stable employment, excellent mortgage history, a large reduction
in monthly cash outflows and time in residence at the applicant's current
address. It is expected that a number of the Mortgage Loans to be included in
the Mortgage Pool will contain one or more loans which have been underwritten
according to such practice.
On "full-documentation" loans, the Seller's underwriters generally
verify the income of each applicant from various sources in the following
manner: salaried and hourly borrowers and those borrowers on commissions,
whether at a full time or part time job, are required to submit W-2 forms for
the past one or two years of employment and pay stubs from within the past 30
days; rental income must be shown from the latest year's tax returns, or from
leases; pension income must be verified from a check, direct deposit slip, a
bank statement disclosing funds directly deposited, a W-2 form or a letter from
the pension administrator; bonus income must be demonstrated over eighteen
months via W-2 forms; alimony and child support must be documented by a court
order and proof of receipt of payment; and self-employed individuals must submit
two years of tax returns with all schedules attached.
The applicant must have a sufficiently established credit history to
qualify for the appropriate credit grade (as described below). This credit
history is substantiated by a report prepared by an independent merged credit
report agency. The report typically considers the applicant's entire credit
history and contains information relating to such matters as credit history with
local and national merchants and lenders, installment debt payments and any
record of defaults, bankruptcy, repossession, suits or judgments. The applicant
must generally provide a letter explaining all late payments on mortgage debt
and other consumer (non-mortgage) debt within the last two years.
The Seller originates loans secured by single-family residences
(which may be detached, attached, part of a two-to-four unit dwelling, a
condominium unit, townhouse or unit in a planned unit development) and
manufactured housing. The Seller's guidelines are applied in accordance with a
procedure which complies with applicable federal and state laws and regulations
and require an appraisal of the mortgaged property which conforms to FNMA and
the Financial Institutions Reform and Recovery Act ("FIRREA") standards.
Appraisals may only be provided by independent appraisers who satisfy the
necessary licensing standards.
Each appraisal includes a market data analysis based on recent sales
of comparable homes in the area and, where deemed appropriate, replacement cost
analysis based on the current cost of constructing a similar home. Full
appraisals are required for all loans that are submitted. If additional
collateral information is required, the Seller may require a desk, field, or
drive-by review of the mortgaged property.
The Seller requires title insurance on all mortgage loans. The
Seller also requires that fire and extended coverage casualty insurance be
maintained on the mortgaged property in an amount at least equal to the lesser
of the principal balance of the related residential loan or the appraised value
less the value of the land (replacement coverage will be required, if
applicable). None of the Mortgage Loans will be covered by a primary mortgage
insurance policy.
S-48
<PAGE>
A quality control department performs a monthly quality control
audit of a sample of all loans. The monthly underwriting analysis consists of a
review of a random sample of at least 10% of all closed loans.
In addition to the quality control audit, each underwriter will have
10% of their loans audited by the chief underwriter or his designee each month.
The loan review confirms the existence and accuracy of legal documents, credit
documentation, income computation, appraisal analysis, and underwriting
decisions. The review function allows the Seller to assess programs for
potential guideline changes, program enhancements, appraisal policies, areas of
risk to be reduced or eliminated, and need for additional underwriter training.
Under the Seller's mortgage loan programs, various risk categories
are used to grade the likelihood that the applicant will satisfy the repayment
conditions of the loan. These risk categories establish the maximum permitted
loan-to-value ratio and loan amount, given the occupancy status of the mortgaged
property and the applicant's credit history and debt ratio. In general, higher
credit risk mortgage loans are graded in categories which reflect higher debt
ratios and more (or more recent) major derogatory credit items such as
outstanding judgments or prior bankruptcies; however, as compensating factors,
these loan programs establish lower maximum Loan-to-Value ratios and maximum
loan amounts for loans graded in such categories.
The Seller's guidelines have the following categories and criteria
for grading the potential likelihood that the applicant will satisfy the
repayment obligations of a mortgage loan, however, on a case-by-case basis, the
Seller may determine that, based on compensating factors, a prospective
mortgagor not strictly qualifying under such underwriting risk category
guidelines warrants an underwriting exception:
"A+": Under the A+ risk category, the applicant generally must have
repaid installment and revolving debt according to its terms with a maximum of 3
payments no more than 30 days delinquent in the past 12 months. The history over
the prior 13-24 months must not exhibit 90+ day delinquency on more than 50% of
the total consumer balances. One 30-day late payment within the last 12 months
is permitted on an existing mortgage loan. Judgments or liens must have been
paid off within 2 years prior to the funding of the loan. Any bankruptcy must
have been discharged more than 5 years ago. Borrowers with current or dismissed
bankruptcy within 5 years are not eligible. No foreclosures may be in the
borrower's credit file. Generally, the mortgaged property must be in at least
average condition. Generally, a maximum Loan-to-Value ratio of 90% is permitted
for owner occupied one- to four-unit and townhouse properties secured by first
mortgages. The maximum Loan-to-Value ratio generally is reduced by 10% on a
mortgaged property consisting of a second home with proof of owner occupancy for
part of the year and rental properties. Generally, properties with rural
characteristics are limited to an 80% Loan-to-Value ratio. The debt-to-income
ratio may not exceed 45%. Second lien positions warrant a 5% reduction in the
Loan-to-Value ratio. On those second lien mortgage loans for which the Combined
Loan-to-Value Ratio ("CLTV") exceeds 90%, the CLTV may be as high as 125%. This
can be in the form of a second position loan with another lender.
"A": Under the A risk category, the applicant's credit report may
exhibit 30 day delinquency on all credit and a maximum of 60 day delinquency on
no more than 25% of total consumer
S-49
<PAGE>
balances over the last 12 months. A maximum of two 30-day late payments within
the past 12 months is permitted on an existing mortgage loan. Generally, a
Loan-to-Value ratio for the applied-for mortgage of 90% or less is required on
all owner occupied one-to-four unit properties secured by a first mortgage. For
purposes of determining whether a prospective mortgagor has been 30 days late,
the Seller uses a "rolling 30-day period," i.e., a continuous sequence of 30-day
late payments will be considered as a single 30-day late payment. Judgments or
liens must have been paid off within two years prior to the funding of the loan.
No collection accounts or charge-off may remain open after the funding of the
loan except that those under $500 are treated on a case-by-case basis. No
bankruptcy, discharge or notice of default filings may have occurred during the
preceding three years and no foreclosures may be in the applicant's file.
Generally, the mortgaged property must be in at least average condition. The
maximum Loan-to-Value ratio generally is limited to 80% on properties with rural
characteristics. Loan-to-Value ratios for non-owner-occupied properties and
second homes are limited to 80%. The debt-to-income ratio generally may not
exceed 50%.
"B+": Under the B+ risk category, the applicant must have generally
repaid installment and revolving debt according to its terms with a maximum of
60-day delinquency for minor and major creditors. A maximum of three 30-day late
payments within the last 12 months are permitted on an existing mortgage loan.
No bankruptcy, discharge or notice of default filings may have occurred during
the preceding two years and no foreclosures may be in the applicant's file
within the previous 5 years. Non-medical charge-off accounts, judgments,
collection accounts and liens exceeding $500 should be more than six months old.
Generally, the mortgaged property must be in at least average condition.
Generally, a maximum Loan-to-Value ration of 85% is permitted for an
owner-occupied one-to-four-unit condominium or townhouse property with a first
mortgage. The maximum Loan-to-Value ratio is generally limited to 80% on
properties with rural characteristics. Loan-to-Value ratios for
non-owner-occupied properties and second homes are limited to 75%. The
debt-to-income ratio generally may not exceed 50%.
"B": Under the B risk category, consumer credit may exhibit 60 day
delinquency on all credit with a maximum of 90 day delinquency on no more than
25% of the total consumer balances. A maximum of 30-day late payments within the
last 12 months are permitted on an existing mortgage loan. No bankruptcy,
discharge or notice of default filings may have occurred during the preceding
two years and no foreclosures within the past five years may be in the
applicant's file. Non-medical charge-off accounts, judgments, collection
accounts and liens exceeding $500 should be more than six months old. Generally,
the mortgaged property must be in at least average condition. Generally, a
maximum Loan-to-Value ratio of 85% is permitted for an owner-occupied one- to
four- unit or townhouse property with a first mortgage. The maximum
Loan-to-Value ratio generally is reduced by 5% on properties with rural
characteristics. Loan-to-Value ratios for non-owner-occupied properties
generally are limited to 75%. Generally, the debt-to-income ratio must be 50% or
less.
"C": Under the C risk category, the applicant may have experienced
significant credit problems in the past. A maximum of 60-day late payments
within the last 12 months are permitted on an existing mortgage loan. An
existing mortgage loan is not required to be current at the time the application
is submitted. No notice of foreclosure filing may have occurred during the
preceding 3 years. No bankruptcy filing or discharge may have occurred during
the preceding 12 months. Generally, the
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<PAGE>
mortgaged property must be in at least average condition. Generally, a maximum
Loan-to-Value ratio of 80% is permitted for an owner-occupied one-to-four unit
or townhouse property secured by a first mortgage, while 65% is permitted for
non-owner-occupied properties or second homes with proof of owner occupancy for
part of the year. The maximum Loan-to-Value ratio is generally reduced by 5% on
properties in rural areas. Generally, the debt-to-income ratio must be 50% or
less.
"C-": Under the C- risk category, the applicant may have experienced
significant credit problems in the past. A maximum of two 90-day late payments
within the past 12 months is permitted on an existing mortgage loan for full
documentation loans. A maximum of one 90-day delinquency within the past 12
months is permitted on an existing mortgage loan for limited and stated
documentation loans. An existing mortgage loan is not required to be current at
the time the application is submitted. A notice of foreclosure filing may have
occurred in the past. Bankruptcy must be discharged . Generally, the mortgaged
property must be in at least average condition. Generally, a maximum
Loan-to-Value ratio of 75% is permitted for an owner-occupied one-to-four unit
or townhouse property secured by a first or second mortgage, while 65% is
permitted for non-owner-occupied properties or second homes with proof of owner
occupancy for part of the year. The maximum Loan-to-Value ratio generally is
reduced by 5% on properties in rural areas. Generally, the debt-to-income ratio
must be 55% or less.
"D": Under the D risk category, the applicant may have experienced
significant credit problems in the past. An existing mortgage loan is not
required to be current at the time the application is submitted. Generally, the
mortgaged property must be in at least average condition. Generally, a maximum
Loan-to-Value ratio of 70% is permitted for an owner-occupied one-to-four unit
or townhouse property secured by a first mortgage. The maximum Loan-to-Value
ratio is generally reduced by 10% on non-owner-occupied properties. Generally,
the debt-to-income ratio may not exceed 55%.
The Seller's standards applicable to the Mortgage Loans include the
foregoing categories and characteristics as guidelines only. The foregoing risk
grade classifications are based on factors that are exclusive of the additional
protection against loss that primary mortgage insurance customarily provides on
loans which have Loan-to-Value Ratios or Combined Loan-to-Value Ratios in excess
of 80%. None of the Mortgage Loans have primary mortgage insurance coverage.
Approximately 35.96% of the Mortgage Loans by Principal Balance as of the
Cut-off Date, have Combined Loan-to-Value Ratios, in excess of 80%.
Based on the indicated underwriting standards applicable for
mortgage loans with risk features originated thereunder, and in particular
Mortgage Loans in loan classes C and D as described herein, such Mortgage Loans
are likely to experience greater rates of delinquency, foreclosure and loss, and
may experience substantially greater rates of delinquency, foreclosure and loss,
than mortgage loans underwritten under more stringent underwriting standards.
CERTAIN PREPAYMENT AND YIELD CONSIDERATIONS
GENERAL
The effective yield of the Notes will be affected by the rate and
timing of payments of principal on the Mortgage Loans securing the Notes
(including, for this purpose, prepayments and
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<PAGE>
amounts received by virtue of refinancings, liquidations of Mortgage Loans due
to defaults, casualties, condemnations, and repurchases, whether optional or
required, by the Seller or the Note Insurer), the amount and timing of mortgagor
delinquencies and defaults resulting in realized losses, and the application of
Excess Cash on the Notes. Such yield may be adversely affected by a higher or
lower than anticipated rate of principal payments (including principal
prepayments) on the Mortgage Loans. The rate of principal payments on such
Mortgage Loans will in turn be affected by the amortization schedules of such
Mortgage Loans, the rate and timing of principal prepayments thereon by the
mortgagors, liquidations of defaulted Mortgage Loans and optional or required
repurchases of Mortgage Loans as described herein. The timing of changes in the
rate of prepayments, liquidations and repurchases of the Mortgage Loans may, and
the timing of Realized Losses could, significantly affect the yield to an
investor, even if the average rate of principal payments experienced over time
is consistent with an investor's expectation. Since the rate and timing of
principal payments on the Mortgage Loans will depend on future events and on a
variety of factors (as described more fully herein), no assurance can be given
as to such rate or the timing of principal prepayments on the Notes.
Because all amounts available for payment on the Notes after
payments in respect of interest on the Notes, including all or a portion of the
Excess Cash, are applied as reductions of the Note Balance, the weighted average
life of the Notes will also be influenced by the amount of Excess Cash so
applied. Because Excess Cash attributable to the overcollateralization feature
is derived from interest collections on the Mortgage Loans and will be applied
to reduce the Note Balance, the aggregate payments in reduction of the Note
Balance on a Payment Date will usually be greater than the aggregate amount of
principal payments (including Principal Prepayments) on the Mortgage Loans
payable on such Payment Date until the Required Overcollateralization Amount is
reached and assuming an Overcollateralization Deficit does not occur. As a
consequence, Excess Cash available for payment in reduction of the Note Balance
for the Notes will increase in proportion to the outstanding Note Balance over
time in the absence of offsetting Realized Losses for the Mortgage Loans.
Excess Cash will be paid on the Notes in reduction of the Note
Balance on each Payment Date to the extent the then applicable Required
Overcollateralization Amount exceeds the related Overcollateralization Amount on
such Payment Date. Any remaining Excess Cash will be released to the holder(s)
of the Residual Interest. If a Note is purchased at other than par, its yield to
maturity will be affected by the rate at which the Excess Cash is paid to the
Noteholders. If the actual rate of Excess Cash payments on the Notes applied in
reduction of the Note Balance is slower than the rate anticipated by an investor
who purchases a Note at a discount, the actual yield to such investor will be
lower than such investor's anticipated yield. If the actual rate of Excess Cash
payments applied in reduction of the Note Balance is faster than the rate
anticipated by an investor who purchases a Note at a premium, the actual yield
to such investor will be lower than such investor's anticipated yield. The
amount of Excess Cash on any Payment Date will be affected by, among other
things, the actual amount of interest received, collected or recovered in
respect of the Mortgage Loans during the related Collection Period and such
amount will be influenced by changes in the weighted average of the Mortgage
Rates resulting from prepayment and liquidations of the Mortgage Loans. The
amount of Excess Cash paid to the Noteholders applied to the Note Balance on
each Payment Date will be based on the Required Overcollateralization Amount.
The Indenture generally provides that the Required Overcollateralization Amount
may, over
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<PAGE>
time, decrease, or increase, subject to certain floors, caps and
triggers, including triggers that allow the Required Overcollateralization
Amount to decrease or "step down" based on the performance on the Mortgage Loans
with respect to certain tests specified in the Indenture based on delinquency
rates. Any increase in the Required Overcollateralization Amount may result in
an accelerated amortization until such Required Overcollateralization Amount is
reached. Conversely, any decrease in the Required Overcollateralization Amount
will result in a decelerated amortization of the Notes until such Required
Overcollateralization Amount is reached.
The Mortgage Loans generally may be prepaid in full or in part at
any time, although a substantial portion of the Mortgage Loans provide for
payment of a prepayment charge. The Mortgage Loans generally are not assumable
and the related Mortgaged property will be due on sale, in which case the
Servicer shall enforce any due-on-sale clause contained in any Mortgage Note or
Mortgage, to the extent permitted under applicable law and governmental
regulations; provided, however, if the Servicer determines that it is reasonably
likely that the mortgagor will bring, or if any mortgagor does bring legal
action to declare invalid or otherwise avoid enforcement of a due-on-sale clause
contained in any Mortgage Note or Mortgage, the Servicer shall not be required
to enforce the due-on-sale clause or to contest such action.
The rate of defaults on the Mortgage Loans will also affect the rate
and timing of principal payments on the Mortgage Loans. See "Risk Factors"
herein and in the Prospectus. The rate of default on Mortgage Loans that are
refinance or limited documentation mortgage loans, and on Mortgage Loans with
high Loan-to-Value Ratios, may be higher than for other types of Mortgage Loans.
As a result of the underwriting standards applicable to the Mortgage Loans, the
Mortgage Loans are likely to experience rates of delinquency, foreclosure,
bankruptcy and loss that are higher, and that may be substantially higher, than
those experienced by mortgage loans underwritten in accordance with the
standards applied by Fannie Mae and Freddie Mac mortgage loan purchase programs.
See "Description of the Mortgage Pool--Underwriting Standards." In addition,
because of such underwriting criteria and their likely effect on the
delinquency, foreclosure, bankruptcy and loss experience of the Mortgage Loans,
the Mortgage Loans will generally be serviced in a manner intended to result in
a faster exercise of remedies, which may include foreclosure, in the event
Mortgage Loan delinquencies and defaults occur, than would be the case of the
Mortgage Loans were serviced in accordance with such other programs.
Furthermore, the rate and timing of prepayments, defaults and liquidations on
the Mortgage Loans will be affected by the general economic condition of the
region of the country in which the related Mortgaged Properties are located. The
risk of delinquencies and loss is greater and prepayments are less likely in
regions where a weak or deteriorating economy exists, as may be evidenced by,
among other factors, increasing unemployment or falling property values. To the
extent that the locations of the Mortgaged Properties are concentrated in a
given region, the risk of delinquencies, loss and involuntary prepayments
resulting from adverse economic conditions in such region or from other factors,
such as fires, storms, landslides and mudflows and earthquakes, is increased.
Certain information regarding the location of the Mortgaged Properties is set
forth under "Description of the Mortgage Pool--Mortgage Loan Characteristics"
herein. See "Risk Factors--Risks Associated with Geographic Concentration of the
Mortgage Properties" herein.
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<PAGE>
Certain of the Mortgage Loans are Balloon Loans. Balloon Loans
involve a greater degree of risk than fully amortizing loans because the ability
of the borrower to make a Balloon Payment typically will depend upon its ability
either to refinance the loan or to sell the related Mortgaged Property. The
ability of a borrower to accomplish either of these goals will be affected by a
number of factors, including the level of available mortgage rates at the time
of the attempted sale or refinancing, the borrower's equity in the related
Mortgaged Property, the financial condition of the borrower and operating
history of the related Mortgaged Property, tax laws, prevailing economic
conditions and the availability of credit for commercial real estate projects
generally.
Other factors affecting prepayment of Mortgage Loans include changes
in mortgagors' housing needs, job transfers, unemployment and mortgagors' net
equity in the mortgaged properties. Since the rate of payment of principal of
the Notes will depend on the rate of payment (including prepayments) of the
principal of the Mortgage Loans, the actual maturity of the Notes could occur
significantly earlier than the Stated Maturity. See "--Weighted Average Life"
herein.
In addition, the yield to maturity of the Notes will depend on the
price paid by the holders of the Notes and the Note Interest Rate. The extent to
which the yield to maturity of a Note is sensitive to prepayments will depend
upon the degree to which it is purchased at a discount or premium.
Prepayments of principal on the Mortgage Loans will generally be
passed through to the Indenture Trustee and included in the Available Funds in
the month following the month of receipt thereof by the Servicer. Any prepayment
of a Mortgage Loan or liquidation of a Mortgage Loan (by foreclosure proceedings
or by virtue of the repurchase of a Mortgage Loan) will have the effect of
resulting in payments on the Notes of amounts that otherwise would be paid in
amortized increments over the remaining term of such Mortgage Loan.
To the extent that principal prepayments with respect to the
Mortgage Loans result in prepayments on the Notes during periods of generally
lower interest rates, Noteholders may be unable to reinvest such principal
prepayments in securities having a yield and rating comparable to the Notes.
The yield on the Notes may be affected by any delays in receipt of
payments thereon as described under "Description of the Notes--Book-Entry
Registration and Definitive Notes" herein and "Risk Factors--Book Entry
Registration" and "Description of the Securities--Book Entry Registration" in
the Prospectus.
The yield on the Notes may also be affected by a redemption of the
Notes as described under " Description of the Notes--Redemption of the Notes"
herein.
NO REPRESENTATION IS MADE AS TO THE RATE OF PRINCIPAL PAYMENTS ON THE MORTGAGE
LOANS OR AS TO THE YIELD TO MATURITY OF THE NOTES. AN INVESTOR IS URGED TO MAKE
AN INVESTMENT DECISION WITH RESPECT TO THE NOTES BASED ON THE ANTICIPATED YIELD
TO MATURITY OF THE NOTES RESULTING FROM ITS PRICE AND SUCH INVESTOR'S OWN
DETERMINATION AS TO ANTICIPATED MORTGAGE LOAN PREPAYMENT RATES. PROSPECTIVE
INVESTORS ARE URGED TO ANALYZE FULLY THE EFFECT OF MORTGAGE LOAN PRINCIPAL
PREPAYMENTS AND MARKET CONDITIONS ON THE YIELD AND VALUE OF THE NOTES, BEFORE
ACQUIRING ANY NOTES. IN PARTICULAR, INVESTORS THAT ARE REQUIRED TO PERFORM
PERIODIC VALUATIONS ON THEIR INVESTMENT PORTFOLIOS SHOULD CONSIDER THE EFFECT OF
SUCH FLUCTUATIONS IN VALUE. IN ADDITION, INVESTORS SHOULD CAREFULLY CONSIDER THE
FACTORS DISCUSSED UNDER "RISK FACTORS--PREPAYMENT OF THE MORTGAGE LOANS MAY
ADVERSELY AFFECT THE YIELD TO MATURITY OF THE NOTES" HEREIN.
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WEIGHTED AVERAGE LIFE
Weighted average life refers to the amount of time that will elapse
from the date of issuance of a security until each dollar of principal of such
security will be repaid to the investor. The weighted average lives of the Notes
will be influenced by the rate at which principal on the Mortgage Loans is paid,
which may be in the form of scheduled payments or prepayments (including
prepayments of principal by the borrower as well as amounts received by virtue
of repurchases, condemnation, insurance or foreclosure with respect to the
Mortgage Loans), and the timing thereof.
The weighted average life of the Notes also will be influenced by
the overcollateralization of the Notes because interest collections are applied
as principal payments to the Notes until the outstanding Note Balance is less
than the aggregate Principal Balance of the Mortgage Loans by an amount equal to
the Required Overcollateralization Amount. These payments have the effect of
accelerating the amortization of the Notes, thereby shortening their respective
weighted average life.
Prepayments on mortgage loans are commonly measured relative to a
prepayment model or standard. A common model ("Constant Prepayment Rate" or
"CPR") represents an assumed constant rate of prepayment each month, expressed
as an annual rate, relative to the then outstanding principal balance on a pool
of mortgage loans for the life of such loans. The model used in the Prospectus
Supplement with respect to the Notes is the Home Equity Prepayment assumption
("HEP"). HEP assumes that a pool of loans prepays in the first month of the life
of such loans at a CPR that corresponds to one tenth the given HEP percentage
and increases by an additional one-tenth each month thereafter until the tenth
month, where it remains at a CPR equal to the given HEP percentage. For example,
with respect to a pool of mortgage loans, a 25% HEP assumes a CPR of 2.5% in the
first month of the life of such loans and an increase of 2.5% CPR each month
thereafter until the tenth month. Beginning in the tenth month and in each month
thereafter during the life of such mortgage loans, 25% HEP assumes a CPR of 25%
each month. Neither the prepayment model used herein nor any other prepayment
model or assumption purports to be an historical description of prepayment
experience or a prediction of the anticipated rate of prepayment of any pool of
mortgage loans, including the Mortgage Loans included in the Mortgage Pool.
Each of the following tables is based on the following assumptions
(the "Modeling Assumptions"): (i) the Mortgage Pool consists of Mortgage Loans
with the characteristics set forth in the table below, (ii) distributions on the
Notes are received, in cash, on the 25th day of each month, commencing in
January 1999, (iii) the Mortgage Loans prepay at the percentage of HEP
indicated, (iv) the Notes are not redeemed on the Initial Redemption Date (other
than as set forth in the Weighted Average Life to 10% Call in Years) or the
Auction Call Date (as defined herein), (v) no defaults or delinquencies occur in
the payment by mortgagors of principal and interest on the Mortgage Loans and no
shortfalls due to the application of the Soldiers' and Sailors' Relief Act of
1940, as amended (the "Relief Act"), are incurred, (vi) none of the Seller, the
Servicer or any other person purchases from the Trust any Mortgage Loan pursuant
to any obligation or option under the Sale Agreement, the Servicing Agreement or
others, (vii) scheduled monthly payments of principal and interest on the
Mortgage Loans are received on the first day of each month commencing in January
1999, and are computed prior to giving effect to any prepayments received in the
prior month, (viii) prepayments representing payment in full of individual
Mortgage Loans are received on the last day of each month commencing in December
1998, and include 30 days' interest thereon, (ix) the scheduled monthly payment
for each Mortgage Loan is
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calculated based on its Principal Balance, gross coupon rate and remaining
amortization term, such that the Mortgage Loan will amortize in amounts
sufficient to repay the remaining principal balance of such Mortgage Loan by its
remaining amortization term, (x) the coupon on the Notes is as set forth herein,
(xi) the Notes are purchased on December 18, 1998, (xii) no investment earnings
on the Note Account or the Collection Account is available for payment to the
Noteholders, (xiii) the Servicing Fee is equal to 0.50% per annum of the
aggregate Principal Balance of the Mortgage Loans, (xiv) the Indenture Trustee
Fee is equal to 0.02% per annum of the aggregate Principal Balance of the
Mortgage Loans and the Note Insurer Premium is equal to the amount set forth in
the Insurance Agreement, (xv) the Required Overcollateralization Amount is as
set forth in the Indenture and all collateral performance tests have been
satisfied, (xvi) the level of six-month LIBOR remains constant at 5.065% and
(xvii) the gross coupon rate for each adjustable rate Mortgage Loan is adjusted
on its next rate adjustment date (and on subsequent rate adjustment dates, if
necessary) to equal the sum of (a) the level of six-month-LIBOR and (b) the
respective gross margin (subject to applicable interest rate caps and floors).
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MORTGAGE LOAN POOL CHARACTERISTICS
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Number of
Gross Original Remaining Remaining Months until
Principal Coupon Amortization Amortization Term To Gross Initial Ongoing Lifetime next rate
Pool Balance Rate Term Term Maturity Margin Periodic Periodic Lifetime Floor adjustment
Number ($) (%) (months) (months) (months) (%) Cap (%) Cap (%) Cap (%) (%) date
- -------- ---------- ------ --------------- -------------- ---------- ------- -------- -------- -------- -------- ----------
1 13,295,709.55 10.6132 173 171 171 N/A N/A N/A N/A N/A N/A
2 14,952,877.73 10.7132 240 238 238 N/A N/A N/A N/A N/A N/A
3 6,325,229.21 10.6070 300 299 299 N/A N/A N/A N/A N/A N/A
4 35,484,893.88 10.1631 360 359 359 N/A N/A N/A N/A N/A N/A
5 39,979,274.33 10.4312 360 359 179 N/A N/A N/A N/A N/A N/A
6 1,320,900.00 10.0751 360 354 354 7.2125 1.0000 1.0000 17.0751 10.0751 3
7 3,566,902.96 10.5236 359 353 353 7.1754 3.0000 1.0000 17.5236 10.5236 18
</TABLE>
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There will be discrepancies between the characteristics of the
actual Mortgage Loans and the characteristics assumed in preparing the table.
Any such discrepancy may have an effect upon the percentages of the initial Note
Balance outstanding (and the weighted average life) of the Notes set forth in
the table. In addition, since the actual Mortgage Loans will have
characteristics that differ from those assumed in preparing the table set forth
below the Notes may mature earlier or later than indicated by the table. Based
on the foregoing assumptions, the table indicates the weighted average life of
the Notes and sets forth the percentages of the initial Note Balance that would
be outstanding after each of the Payment Dates shown, at various percentages of
HEP. Variations in the prepayment experience and the balance of the Mortgage
Loans that prepay may increase or decrease the percentages of initial Note
Balances (and weighted average lives) shown in the following table. Such
variations may occur even if the average prepayment experience of all such
Mortgage Loans equals any of the specified percentages of HEP. The following
table indicates the percentage of the initial Note Balance that would be
outstanding after each of the dates shown at various percentages of HEP and the
corresponding weighted average lives of the Notes.
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PERCENT OF ORIGINAL PRINCIPAL BALANCE OUTSTANDING AT THE
FOLLOWING HEP PERCENTAGES
Payment Date 15% 20% 25% 30% 35%
--- --- --- --- ---
Initial Percentage 100 100 100 100 100
December 25, 1999 85 81 78 74 70
December 25, 2000 68 61 54 48 42
December 25, 2001 56 47 39 32 27
December 25, 2002 46 37 29 22 17
December 25, 2003 38 29 21 15 11
December 25, 2004 32 23 16 11 7
December 25, 2005 27 18 12 7 4
December 25, 2006 22 14 8 5 2
December 25, 2007 18 11 6 3 1
December 25, 2008 15 8 4 2 1
December 25, 2009 12 7 3 1 0
December 25, 2010 10 5 2 0 0
December 25, 2011 8 4 1 0 0
December 25, 2012 7 3 1 0 0
December 25, 2013 3 1 0 0 0
December 25, 2014 2 0 0 0 0
December 25, 2015 2 0 0 0 0
December 25, 2016 1 0 0 0 0
December 25, 2017 1 0 0 0 0
December 25, 2018 0 0 0 0 0
December 25, 2019 0 0 0 0 0
December 25, 2020 0 0 0 0 0
December 25, 2021 0 0 0 0 0
December 25, 2022 0 0 0 0 0
December 25, 2023 0 0 0 0 0
December 25, 2024 0 0 0 0 0
December 25, 2025 0 0 0 0 0
December 25, 2026 0 0 0 0 0
December 25, 2027 0 0 0 0 0
December 25, 2028 0 0 0 0 0
Weighted Average
Life to Maturity
(in Years)(1) 5.10 4.02 3.29 2.76 2.37
Weighted Average
Life to 10% Call
(in Years)(1) 4.88 3.77 3.07 2.57 2.21
(1) The weighted average life of the Notes is determined by (i) multiplying the
amount of each principal payment by the number of years from the date of
issuance to the related Payment Date, (ii) adding the results, and (iii)
dividing the sum by the original Note Balance.
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There is no assurance that prepayments of the Mortgage Loans will
conform to any of the levels of the Prepayment Assumption indicated in the
tables above, or to any other level, or that the actual weighted average life of
the Notes will conform to any of the weighted average lives set forth in the
tables above. Furthermore, the information contained in the tables with respect
to the weighted average life of the Notes is not necessarily indicative of the
weighted average life that might be calculated or projected under different or
varying prepayment assumptions.
The characteristics of the Mortgage Loans will differ from those
assumed in preparing the table above. In addition, it is unlikely that any
Mortgage Loan will prepay at any constant percentage until maturity or that all
of the Mortgage Loans will prepay at the same rate. The timing of changes in the
rate of prepayments may significantly affect the actual yield to maturity to
investors, even if the average rate of principal prepayments is consistent with
the expectations of investors.
SERVICING OF THE MORTGAGE LOANS
GENERAL
The Mortgage Loans will be serviced by Mortgage Lenders Network USA,
Inc., as Servicer (the "Servicer"). The information set forth in the following
paragraphs has been provided by the Servicer.
The Servicer was incorporated in November 1996, commenced closing
mortgage loans in April 1997, and began servicing such mortgages loans in the
same month. The principal business of the Servicer historically has been the
origination and sale of non-conforming mortgage loans on both a servicing
released and a servicing retained basis. The Servicer does not have a
significant history of servicing mortgage loans. The loans serviced by the
Servicer's mortgage servicing department were loans made to residents throughout
the United States.
The Servicer will service and administer the Mortgage Loans in
accordance with the policies, procedures and practices customarily employed by
the Servicer in servicing other comparable mortgage loans and pursuant to the
provisions of the Servicing Agreement. The Servicer will not amend or modify in
any material respect its policies, procedures and practices with respect to the
Mortgage Loans (other than as required by applicable laws and regulations)
without the prior consent of the Note Insurer.
The Servicer's mortgage servicing department maintains a centralized
portfolio management department which services the mortgage loans that are not
sold, are sold servicing retained, are sub-serviced, as well as those mortgage
loans that are securitized. Servicing includes collecting payments from
borrowers, accounting for principal and interest, contacting delinquent
borrowers, ensuring that insurance is in place, monitoring payment of real
estate property taxes, and supervising foreclosures and bankruptcies in the
event of unremedied defaults. The Servicer has increased its servicing
capabilities and staffing significantly since 1997 in light of its origination
growth.
Consistent with the servicing standard described above, the
Servicer, in its discretion, may (a) waive any late payment charges, charges for
checks returned for insufficient funds or other fees
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that may be collected in the ordinary course of servicing a Mortgage Loan, (b)
arrange a schedule for the payment of delinquent payments on the Mortgage Loan,
subject to conditions set forth in the Servicing Agreement, if a mortgagor is in
default or about to be in default because of such mortgagor's financial
condition or (c) modify monthly payments on Mortgage Loans in accordance with
the Servicer's general policy on Mortgage Loans subject to the Relief Act;
provided, however, the Servicer may not, without the prior consent of the Note
Insurer, permit any waiver, modification or variance of a Mortgage Loan which
would (i) change the Mortgage Rate, (ii) forgive the payment of any principal or
interest, (iii) lessen the lien priority or (iv) extend the final maturity date
on a Mortgage Loan past twelve months prior to the maturity date of the Notes,
in any case except to the extent required under the Relief Act. The Servicer,
acting as agent for the Indenture Trustee, will not consent to the subsequent
placement of a deed of trust or mortgage, as applicable, on any Mortgaged
Property that is of equal or higher priority to that of the lien securing the
related Mortgage Loan unless such Mortgage Loan is prepaid in full and thereby
removed from the Mortgage Pool.
CUSTOMARY SERVICING PROCEDURES
The procedures of the Servicer with respect to day to day servicing
of the Mortgage Loans may vary considerably depending on the particular Mortgage
Loan, the Mortgaged Property, the mortgagor and the laws of the jurisdiction in
which the Mortgaged Property is located. Generally, it is the current practice
of the Servicer to send borrowers coupon books periodically reflecting their
Monthly Payments and the due dates therefor. Although borrowers generally make
loan payments within ten to fifteen days after the due date, if a borrower fails
to pay the monthly payment within such time period, the Servicer will commence
collection efforts by notifying the borrower of the delinquency. Under the terms
of each Mortgage Loan, the mortgagor agrees to pay a late charge (which the
Servicer is entitled to retain as additional servicing compensation under the
Servicing Agreement) if a monthly payment on a Mortgage Loan is not received
within the number of days specified in the Mortgage Note after its due date. If
the Mortgage Loan remains delinquent, the Servicer will attempt to contact the
mortgagor to determine the cause of the delinquency and to obtain a commitment
to cure the delinquency at the earliest possible time.
Collection efforts generally begin when an account is over five days
past due. At the time, the Servicer's loan counseling department attempts to
contact the borrower to determine the reason for the delinquency and cause the
account to become current. After an account becomes 8 days past due, letters are
sent to the borrower. In general, at 30 days past due, a right to cure letter is
sent; at 61 days a demand letter is sent and the account is reviewed for
foreclosure action. In addition to written notices, the Servicer attempts to
maintain telephone contact with the Borrower throughout the period of
delinquency. If the status of the account continues to deteriorate, the loan
counseling department undertakes an analysis to determine the appropriate
action. In limited circumstances, when a borrower is experiencing difficulty in
making timely payments, the loan counseling department may temporarily adjust
the borrower's payment schedule without changing the loan's delinquency status.
The determination of how to work out a delinquent loan is based upon a number of
factors, including the borrower's payment history and the reason for the current
inability to make timely payments.
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When a loan is 90 days past due in accordance with its original
terms, it is placed on non-accrual status, is forwarded to the Servicer's
default servicing center and foreclosure proceedings are generally initiated. In
connection with such foreclosure, the loan and the facts surrounding its
delinquency are reviewed, and the underlying property may be appraised.
Regulations and practices regarding foreclosures and the rights of the mortgagor
in default vary greatly from state to state. See "Certain Legal Aspects of the
Mortgage Loans and Contracts - Security Interests" in the Prospectus.
THE SERVICING AGREEMENT
The summaries of certain provisions of the Servicing Agreement set
forth below and in other places in this Prospectus Supplement, while complete in
material respects, do not purport to be exhaustive. For more details regarding
the terms of the Servicing Agreement, prospective investors in the Notes are
advised to review the Servicing Agreement, a copy of which the Seller will
provide (without exhibits) without charge upon written request addressed to the
Seller.
Generally, the Servicer will be authorized and empowered pursuant to
the Servicing Agreement (i) to execute and deliver (or procure the execution and
delivery by the Indenture Trustee of) 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 Mortgaged
Properties and (ii) to institute foreclosure proceedings or obtain deeds in lieu
of foreclosure so as to convert title to of any Mortgaged Property in the name
of the Indenture Trustee on behalf of the Noteholders and the Note Insurer.
PAYMENTS ON MORTGAGE LOANS AND ESTABLISHMENT OF COLLECTION ACCOUNT.
The Servicer shall establish and maintain one or more accounts (collectively,
the "Collection Account") at one or more institutions meeting the requirements
set forth in the Servicing Agreement. The Collection Account, and all amounts
deposited therein from time to time, shall be part of the Trust Estate. The
Servicer will deposit into the Collection Account not later than two Business
Days after receipt, all payments on or in respect of the Mortgage Loans received
from or on behalf of mortgagors and all proceeds of the Mortgage Loans, net of
servicing fees, all other items of servicing compensation, and reimbursable
outstanding Servicing Advances and Monthly Advances, to the extent the
Servicer's automated system deducts such amounts prior to deposit to the
Collection Account. On or prior to each Deposit Date, funds to be remitted to
the Note Account will be remitted from the Collection Account to the Indenture
Trustee for deposit into the Note Account. Notwithstanding the foregoing,
payments and collections that do not constitute Available Funds (e.g., amounts
representing interest accrued on Mortgage Loans in respect of any period prior
to the Cut-off Date, fees, late payment charges, prepayment charges, charges for
checks returned for insufficient funds, extension or other administrative
charges or other amounts received for application towards the payment of taxes,
insurance premiums, assessments and similar items) will not be required to be
deposited into the Collection Account. The Servicer may make withdrawals from
the Collection Account only for the following purposes: (a) to make deposits
into the Note Account as described above; (b) to pay itself any monthly
Servicing Fees and other items of servicing compensation and investment income
on Permitted Investments to the extent permitted by the Servicing Agreement; (c)
to make any Servicing Advance to the extent permitted by the Servicing Agreement
or to reimburse itself for any Servicing Advance or Monthly Advance previously
made to the extent permitted by the Servicing
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Agreement; (d) to withdraw amounts that have been deposited to the Collection
Account in error; and (e) to clear and terminate the Collection Account.
INVESTMENT OF COLLECTION ACCOUNT. All or a portion of the Collection
Account may be invested and reinvested in one or more Permitted Investments
bearing interest or sold at a discount, at the Servicer's direction. The
Indenture Trustee or any affiliate thereof may be the obligor on, or manager or
advisor of, any investment in any Collection Account which otherwise qualifies
as a Permitted Investment. No investment in the Collection Account may mature
later than the Deposit Date next succeeding the date of investment.
The Indenture Trustee will not in any way be held liable by reason
of any insufficiency in the Collection Account resulting from any loss on any
Permitted Investment included therein (except to the extent the Indenture
Trustee is the obligor thereon).
All income or other gain from investments in the Collection Account
will be held in the Collection Account for the benefit of the Servicer and will
be subject to withdrawal from time to time as permitted by the Servicing
Agreement. Any loss resulting from such investments will be for the account of
the Servicer. The Servicer will be required to deposit the amount of any such
loss immediately upon the realization of such loss to the extent such loss will
not be offset by other income or gain from investments in the Collection Account
and then available for such application.
MONTHLY ADVANCES. In order to maintain a regular flow of scheduled
interest to Noteholders (rather than to guarantee or insure against losses), the
Servicing Agreement will require that, not later than the close of business on
the Deposit Date prior to each Payment Date, the Servicer will remit or cause to
be remitted a Monthly Advance, if necessary, to the Indenture Trustee for
deposit in the Note Account to be paid on the related Payment Date. A "Monthly
Advance" will be equal to the sum of (i) the interest and principal portions of
the aggregate amount of monthly payments (net of the related Servicing Fee) due
on the Mortgage Loans during the related Due Period but delinquent so as not to
have been deposited into the Collection Account as of the close of business on
the last day before the related Deposit Date and with respect to each Mortgaged
Property that was acquired in foreclosure or similar action (each, an "REO
Property") during or prior to the related Collection Period and as to which
final sale did not occur during the related Collection Period, an amount equal
to the excess, if any, of interest on the Principal Balance of the Mortgage Loan
relating to such REO Property for the related Collection Period at the related
Mortgage Rate (net of the Servicing Fee) over the net income from the REO
Property transferred to the Note Account for such Payment Date.
The Servicing Agreement provides that the Servicer may pay all or a
portion of any Monthly Advance out of amounts on deposit in the Collection
Account which are being held for payment on a subsequent Payment Date; any such
amounts so used are required to be replaced by the Servicer by deposit to the
Collection Account on or before the Deposit Date relating to such subsequent
Payment Date.
The Servicer may recover Monthly Advances, if not theretofore
recovered from the mortgagor on whose behalf such Monthly Advance was made, from
subsequent collections on the related Mortgage Loan, including Liquidation
Proceeds, Insurance Proceeds (but only to the extent of such Insurance Proceeds
or Liquidation Proceeds) and such other amounts as may be collected by the
Servicer
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from the mortgagor or otherwise relating to the Mortgage Loan. To the extent the
Servicer, in its good faith business judgment, determines that any Monthly
Advance will not be ultimately recoverable from subsequent collections,
Insurance Proceeds, Liquidation Proceeds on the related Mortgage Loans or
otherwise ("Nonrecoverable Advances"), the Servicer may reimburse itself on the
first Deposit Date thereafter out of collections received on other Mortgage
Loans.
The Servicer will not be required to make any Monthly Advance that
it determines would be a Nonrecoverable Advance.
COMPENSATING INTEREST PAYMENTS. With respect to each Mortgage Loan
as to which a prepayment in whole or in part was received, the Servicer will be
required with respect to such Payment Date to remit to the Indenture Trustee no
later than the related Deposit Date, from amounts otherwise payable to the
Servicer as the Servicing Fee for the related Payment Date, an amount equal to
the excess, if any, of (a) 30 days' interest on the Principal Balance of each
such Mortgage Loan (immediately prior to such payment) at the related Mortgage
Rate, less (b) the amount of interest actually received on such Mortgage Loan
during the related Due Period (each such amount, a "Compensating Interest
Payment") for payment on the Notes on such Payment Date. The Servicer will not
be entitled to be reimbursed from collections on the Mortgage Loans or any
assets of the Trust Estate for any Compensating Interest Payments made.
Realization upon Defaulted Mortgage Loans. The Servicing Agreement
will require the Servicer, acting as the agent of the Indenture Trustee, to
foreclose upon or otherwise comparably convert to ownership in the name of the
Indenture Trustee, on behalf of the Noteholders and the Note Insurer, Mortgaged
Properties securing such of the Mortgage Loans as come into default, as to which
no satisfactory arrangements can be made for the collection of delinquent
payments and which the Servicer has not reacquired pursuant to the option
described below; provided, however, that if the Servicer has actual knowledge or
reasonably believes that any Mortgaged Property is contaminated by hazardous or
toxic wastes or substances, the Servicer will cause an environmental inspection
of the Mortgaged Property that complies with Fannie Mae's selling and servicing
guide applicable to single family homes and its servicing procedures to be
conducted. If the environmental inspection reveals any potentially hazardous
substances, the Servicer will notify the Indenture Trustee and the Note Insurer,
and the Servicer will not foreclose or accept a deed in lieu of foreclosure on
the Mortgaged Property without the consent of the Indenture Trustee and the Note
Insurer. In connection with such foreclosure or other conversion, the Servicer
will follow such practices as it deems necessary or advisable and as are in
keeping with its general mortgage loan servicing activities; provided, however,
that the Servicer will not be required to expend its own funds in connection
with foreclosure or other conversion, correction of a default on a senior deed
of trust or restoration of any Mortgaged Property unless the Servicer determines
that such foreclosure, correction or restoration will increase Net Liquidation
Proceeds.
In servicing the Mortgage Loans, the Servicer will be required to
determine, with respect to each defaulted Mortgage Loan, 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 will be charged off and will become a Liquidated
Mortgage Loan.
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The Servicer may have the right and the option under the Servicing
Agreement, but not the obligation, to reacquire for its own account any Mortgage
Loan which becomes delinquent, in whole or in part, as to three consecutive
monthly installments or any Mortgage Loan as to which enforcement proceedings
have been brought by the Servicer. Any such Mortgage Loan so reacquired will be
withdrawn from the Mortgage Pool on a Deposit Date at the Release Price
therefor.
Evidence as to Compliance. The Servicing Agreement provides that on
or before a specified date in each year, a firm of independent public
accountants will furnish a report to the Indenture Trustee, the Rating Agencies
and the Note Insurer to the effect that on the basis of certain procedures
substantially in conformance with the Uniform Single Attestation Program for
Mortgage Bankers ("USAP") (to the extent the procedures are applicable to the
servicing obligations set forth in the Servicing Agreement), the servicing by or
on behalf of the Servicer of mortgage loans, and such procedures have disclosed
no exceptions or errors in records relating to the mortgage loans serviced by
the Servicer for others which, in the opinion of such firm, such firm's required
to report under USAP, except for such exceptions as will be referred to in the
report. The Servicing Agreement will provide that the Servicer will be required
to deliver to the Indenture Trustee, the Rating Agencies and the Note Insurer,
on or before a specified date in each year, an annual statement signed by an
officer of the Servicer to the effect that the Servicer has fulfilled its
material obligations under the Servicing Agreement throughout the preceding
year.
Removal of Servicer; Certain Matters Regarding Servicer's Servicing
Obligations. The Servicing Agreement provides that the Servicer shall be hired
for a term of no longer than two calendar months and may be re-hired for
additional terms of no longer than two calendar months each, but only with the
consent of the Note Insurer, in its sole and absolute discretion. The Servicing
Agreement will provide that the Servicer may not resign from, or not agree to be
re-hired with respect to, its obligations and duties as the Servicer thereunder,
except upon the delivery, at the Servicer's expense, of an opinion of counsel
addressed to the Issuer, the Indenture Trustee and the Note Insurer and in form
and substance acceptable to the Indenture Trustee and the Note Insurer to the
effect that its duties thereunder are no longer permissible under applicable law
or regulation or are in material conflict by reason of applicable law or
regulation with any other of its activities carried on as of the date of the
Servicing Agreement. No such resignation will become effective until the
Indenture Trustee or a successor servicer approved by the Note Insurer has
assumed the servicing obligations and duties of the Servicer under the Servicing
Agreement.
The Servicing Agreement will also provide that neither the Servicer,
nor any of its directors, officers, employees or agents, will be liable to the
Indenture Trustee, the Trust or the Noteholders for any action taken or for
refraining from the taking of any action by the Servicer pursuant to the
Servicing Agreement, or for errors in judgment; provided, however, that neither
the Servicer nor any such person will be protected against any liability which
would otherwise be imposed by reason of willful misfeasance, bad faith or
negligence in the performance of duties of the Servicer, or by reason of
reckless disregard of obligations and duties of the Servicer, thereunder.
In addition, the Servicing Agreement will provide that the Servicer
will not be under any obligation to appear in, prosecute or defend any legal
action which is not incidental to its duties to service
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the Mortgage Loans under the Servicing Agreement and which in its opinion may
involve it in any expense or liability.
The Servicing Agreement will provide that any corporation or other
entity (a) into which the Servicer may be merged or consolidated, (b) that may
result from any merger, conversion or consolidation to which the Servicer shall
be a party or (c) that may succeed to all or substantially all of the business
of the Servicer, will, in any case where an assumption is not effected by
operation of law, execute an agreement of assumption to perform every obligation
of the Servicer under the Servicing Agreement, and will be the successor to the
Servicer thereunder without the execution or filing of any document or any
further act by any of the parties to the Servicing Agreement; provided, however,
that if the Servicer in any of the foregoing cases is not the surviving entity,
the surviving entity shall execute an agreement of assumption to perform every
obligation of the Servicer thereunder and the corporation or other entity
satisfies the eligibility requirements for a successor Servicer.
Servicer Events of Default. Events of default (each, a "Servicer
Event of Default") under the Servicing Agreement will include (a) any failure by
the Servicer to make a required Monthly Advance on the related Deposit Date as
required or any failure by the Servicer to deposit in the Collection Account or
Note Account any other amount required to be so deposited under the Servicing
Agreement; (b) any failure by the Servicer to duly observe or perform in any
material respect any other of its covenants or agreements in the Servicing
Agreement or the Sale Agreement which materially and adversely affects the
rights of Noteholders and continues unremedied for the applicable cure period,
if any, after the giving of written notice of such failure to the Servicer by
the Indenture Trustee, at the direction of the Note Insurer, or by the Note
Insurer or, with the consent of the Note Insurer, the Noteholders evidencing
Voting Interests represented by all Notes aggregating not less than 51%; (c)
certain events of insolvency, readjustment of debt, marshaling of assets and
liabilities or similar proceedings regarding the Servicer and certain actions by
the Servicer indicating its insolvency or inability to pay its obligations; (d)
any representation or warranty made by the Servicer in the Servicing Agreement
or the Sale Agreement or certificate delivered by the Servicer pursuant thereto
having been incorrect in any material respect as of the time made and the
circumstance in respect of which such representation and warranty is incorrect,
if capable of being cured, not having been cured within any applicable cure
period after notice is given to the Servicer by the Indenture Trustee, at the
direction of the Note Insurer, or the Note Insurer, or, with the consent of the
Note Insurer, the Noteholders evidencing Voting Interests represented by all
Notes aggregating not less than 51%; (e) the failure by the Servicer to satisfy
certain net worth and other financial requirements of the Note Insurer; and (f)
the occurrence of delinquencies and/or losses in respect of the Mortgage Loans
in excess of a level, and for a period of time, as specified in the Servicing
Agreement.
Rights Upon Servicer Events of Default. Upon the occurrence of a
Servicer Event of Default, the Note Insurer or, with the consent of the Note
Insurer, Noteholders evidencing Voting Interests represented by all Notes
aggregating not less than 51% or the Indenture Trustee, at the direction of the
Note Insurer, may terminate all of the rights and obligations of the Servicer
under the Servicing Agreement, whereupon the Indenture Trustee will be obligated
to appoint a successor Servicer or, if it does not, succeed to all the
responsibilities, duties and liabilities of the Servicer under the Servicing
Agreement and will be entitled to such compensation as the Servicer would have
been entitled to under
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the Servicing Agreement. In the event that the Indenture Trustee fails to
appoint a successor Servicer and the Indenture Trustee is unwilling or legally
unable to act as Servicer, it may petition a court of competent jurisdiction for
the appointment of a successor Servicer. Any such successor Servicer must be an
established housing and home finance institution or any institution that
regularly services nonconforming residential mortgage loans, that is currently
servicing a nonconforming residential mortgage loan portfolio, that has all
licenses, permits and approvals required by applicable law and a net worth of at
least $10,000,000. The appointment of any such successor Servicer (other than
the Indenture Trustee) shall be acceptable to the Note Insurer and shall not
result in the qualification, reduction or withdrawal of the implied rating
assigned to the Notes by the Rating Agencies (without taking into account the
Insurance Policy). Pending appointment of a successor Servicer, unless the
Indenture Trustee is prohibited by law from so acting, the Indenture Trustee
shall be obligated to act as Servicer. The Indenture Trustee and such successor
Servicer may agree upon the servicing compensation to be paid, which in no event
may be greater than the compensation described above.
No Noteholder, solely by virtue of its status as a Noteholder, will
have any right under the Servicing Agreement to institute any action, suit or
proceeding with respect to the Servicing Agreement unless the Note Insurer shall
have consented thereto, unless such Noteholder previously has given to the
Indenture Trustee written notice of default and unless Noteholders evidencing
Voting Interests represented by all Notes aggregating not less than 51% have
made written request upon the Indenture Trustee to institute such action, suit
or proceeding in its own name as Indenture Trustee thereunder and have offered
to the Indenture Trustee reasonable indemnity for costs, expenses and
liabilities to be incurred, and the Indenture Trustee for 60 days has neglected
or refused to institute any such action, suit or proceeding. However, the
Indenture Trustee will be under no obligation to exercise any of the rights or
powers vested in it by the Servicing Agreement 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 which may be incurred therein or thereby.
Amendments. Subject to the prior written consent of the Note
Insurer, at any time and from time to time, without the consent of the
Noteholders, the Indenture Trustee, the Issuer and the Servicer may amend the
Servicing Agreement for the purposes of (a) curing any ambiguity or correcting
or supplementing any provision of such agreement that may be inconsistent with
any other provision of such agreement or (b) complying with the requirements of
the Code; provided, however, that such action shall not materially and adversely
affect the interests of any Noteholder, as evidenced by an opinion of counsel
delivered to the Indenture Trustee to such effect (which opinion shall not be at
the expense of the Indenture Trustee) or written confirmation from each of the
Rating Agencies that such action will not result in a qualification, reduction
or withdrawal of the implied ratings on the Notes (without taking into account
the Insurance Policy).
The Servicing Agreement may also be amended by the Indenture
Trustee, the Issuer and the Servicer, at any time and from time to time, with
the prior written approval of the Rating Agencies, the Note Insurer and not less
than a majority of the Voting Interests represented by the Notes 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 Noteholders thereunder; PROVIDED,
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HOWEVER, that no such amendment shall (a) reduce in any manner the amount of, or
delay the timing of, payments which are required to be paid to the Note Account
without the consent of all Noteholders or (b) reduce the aforesaid percentages
of Voting Interests which are required to consent to any such amendments,
without the consent of all Noteholders.
SERVICING AND OTHER COMPENSATION; PAYMENT OF EXPENSES
The Servicing Fee will be the primary compensation to be paid to or
retained by the Servicer in respect of its servicing activities under the
Servicing Agreement and will be paid to the Servicer on each Deposit Date out of
collections of interest received on or in respect of the Mortgage Loans for the
related Collection Period. The servicing fee (the "Servicing Fee") will equal
one-twelfth (1/12) of the product of (a) 0.50% (the "Servicing Fee Rate") and
(b) the aggregate Principal Balance of the Mortgage Loans as of the first day of
the related Due Period. The Servicer shall be entitled to retain the Servicing
Fee from amounts to be deposited in the Collection Account. In addition, the
Servicer will retain the benefit, if any, from any deposit, maintenance or
investment of funds in the Collection Account. Assumption fees, late payment
charges, prepayment charges, charges for checks returned for insufficient funds,
and extension and other administrative charges, to the extent collected from
mortgagors, will be retained by the Servicer as additional servicing
compensation.
Subject to its right to refuse to make Nonrecoverable Advances as
described below, the Servicer will be required to pay all reasonable and
customary "out-of-pocket" costs and expenses incurred in the performance of its
servicing obligations, including, but not limited to, the payment of fees for
any sub-servicer and the cost of (i) any enforcement or judicial proceedings
relating to the mortgagors, including foreclosures, and (ii) the management and
liquidation of Mortgaged Properties acquired in satisfaction of the related
Mortgage Loans. Such expenditures (each, a "Servicing Advance") may include
costs of collection efforts, reappraisals, forced placement of hazard insurance
if a borrower allows his hazard policy to lapse, legal fees in connection with
foreclosure actions, advancing delinquent property taxes and upkeep and
maintenance of the Mortgaged Property if it is acquired through foreclosure and
similar types of expenses.
The Servicing Agreement provides that the Servicer may pay all or a
portion of any Servicing Advance out of amounts on deposit in the Collection
Account which are being held for payment on a subsequent Payment Date relating
to such Collection Period; any such amounts so used are required to be replaced
by the Servicer by deposit to the Collection Account on or before the Deposit
Date relating to such subsequent Payment Date.
The Servicer may recover Servicing Advances, if not theretofore
recovered from the mortgagor on whose behalf such Servicing Advance was made,
from subsequent collections on the related Mortgage Loan, including Liquidation
Proceeds, Insurance Proceeds and such other amounts as may be collected by the
Servicer from the mortgagor or otherwise relating to the Mortgage Loan. To the
extent the Servicer, in its good faith business judgment, determines that any
Servicing Advance will be or has become a Nonrecoverable Advance, the Servicer
may reimburse itself for such advance from the Collection Account.
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The Servicer will not be required to make any Servicing Advance that
it determines would be a Nonrecoverable Advance if made.
HISTORICAL SERVICING EXPERIENCE OF THE SERVICER
The Servicer has provided the Company with the following information
regarding the servicing of mortgage loans which it considers non-conforming
credits and none of the Company, the Depositor, the Issuer or the Underwriters
make any representations or warranties as to the accuracy or completeness of
such information. The table below sets forth the overall delinquency experience
on residential one-to-four-family mortgage loans for nonconforming credits which
are currently serviced by the Servicer. No mortgage loan is considered
delinquent for purposes of the table until a payment is 30 days past due on a
contractual basis. It should be noted that the Servicer commenced its servicing
activities in April 1997. Accordingly, the Servicer does not have significant
historical delinquency, bankruptcy foreclosure or default experience that may be
referred to for estimating the future delinquency and loss experience of the
Mortgage Loans. THE INFORMATION IN THE TABLE BELOW IS NOT INTENDED TO INDICATE
OR PREDICT THE EXPECTED DELINQUENCY EXPERIENCE ON PAST CURRENT OR FUTURE POOLS
OF MORTGAGE LOANS FOR WHICH THE SERVICER IS THE PRIMARY SERVICER.
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MORTGAGE LENDERS NETWORK USA, INC.
NON-CONFORMING MORTGAGE LOAN PORTFOLIO EXPERIENCE
<TABLE>
<CAPTION>
As of
September December March June 30, September
30, 1997 31, 1997 31, 1998 1998 30, 1998
(000s omitted)
<S> <C> <C> <C> <C> <C>
Total principal balance (at period
end).............................. $690,256 $790,410 $998,727 $1,256,927 $1,426,203
Average portfolio principal
balance(1)........................ $670,399 $754,273 $918,748 $1,166,465 $1,384,187
DELINQUENCIES (at period end).....
30-59 Days:
Principal balance(2)........... $10,349 $8,608 $9,917 $19,394 $31,040
Percent(3)..................... 1.50% 1.09% 1.00% 1.54% 2.18%
60-89 Days:
Principal balance(2)........... $1,942 $2,105 $1,805 $5,041 $4,922
Percent(3)..................... 0.28% 0.27% 0.18% 0.40% 0.35%
90 Days or More:
Principal balance.............. $1,077 $1,314 $2,453 $1,335 $4,736
Percent(3)..................... 0.16% 0.17% 0.25% 0.11% 0.33%
Total Delinquencies:
Principal balance(4)........... $13,368 $12,027 $14,175 $25,770 $40,698
Percent(3)..................... 1.94% 1.52% 1.42% 2.05% 2.85%
FORECLOSURES
Principal balance.............. $1,511 $3,106 $5,129 $9,262 $13,550
Percent(3)..................... 0.22% 0.39% 0.51% 0.74% 0.95%
REO (at period end)............... 0 0 $508 $436 $1,391
Net gains/(losses) on liquidated
loans............................. 0 0 0 0 ($161)
Percentage of net gains/(losses)
on liquidated loans (based on
average portfolio principal
balance)....................... 0.00% 0.00% 0.00% 0.00% 0.00%
</TABLE>
(1) Calculated by summing the actual outstanding principal balances at the end
of each month and dividing the total by the number of months in the applicable
period.
(2) Delinquency information includes loans in foreclosure.
(3) Percentages are expressed based upon the total outstanding principal balance
at the end of the indicated period.
(4) Delinquency information does not include loans in foreclosure or REO.
It is unlikely that the delinquency experience of the Mortgage Loans
comprising the Mortgage Pool will correspond to the delinquency experience of
the mortgage portfolios set forth in the foregoing tables. The statistics shown
above represent the delinquency experience for the indicated mortgage servicing
portfolios only for the periods presented, whereas the aggregate delinquency
experience on the Mortgage Loans comprising the Mortgage Pool will depend on the
results obtained over the life of the Mortgage Pool. The mortgage servicing
portfolios set forth above include mortgage loans that were originated using a
variety of different underwriting procedures and standards which may have been
more selective. They include mortgage loans with a variety of payment and other
characteristics (including geographic location) which are not necessarily
representative of the payment and other characteristics of the Mortgage Loans
comprising the Mortgage Pool. In addition, a substantial number of the mortgage
loans in the servicing portfolio were not originated by the Seller and were
originated on the basis of underwriting standards that are more stringent than
those applicable to the Mortgage Loans. As a result, there can be no assurance
that the Mortgage Loans comprising the Mortgage Pool will perform consistently
with the delinquency or foreclosure experience described herein. It should
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be noted that if the residential real estate market should experience an overall
decline in property values, the actual rates of delinquencies and foreclosures
could be higher than those previously experienced by the Servicer. In addition,
adverse economic conditions may affect the timely payment by mortgagors of
scheduled payments of principal and interest on the Mortgage Loans and,
accordingly, the actual rates of delinquencies and foreclosures with respect to
the Mortgage Pool.
THE NOTE INSURANCE
THE INSURANCE POLICY
The information set forth in this section has been provided by the
Note Insurer. No representation is made by the Underwriters, the Issuer, the
Seller, the Servicer, the Company or any of their affiliates as to the accuracy
or completeness of such information or any information related to the Note
Insurer incorporated by reference herein.
The Note Insurer, in consideration of the payment of the premium and
subject to the terms of the Note Guaranty Insurance Policy (the "Policy"),
thereby unconditionally and irrevocably guarantees to any Owner that an amount
equal to each full and complete Insured Payment will be received by the
Indenture Trustee or its successor, as trustee for the Owners, on behalf of the
Owners from the Note Insurer, for distribution by the Indenture Trustee to each
Owner of each Owner's proportionate share of the Insured Payment. The Note
Insurer's obligations under the Policy with respect to a particular Insured
Payment shall be discharged to the extent funds equal to the applicable Insured
Payment are received by the Indenture Trustee, whether or not such funds are
properly applied by the Indenture Trustee. Insured Payments shall be made only
at the time set forth in the Policy and no accelerated Insured Payments shall be
made regardless of any acceleration of the Notes, unless such acceleration is at
the sole option of the Note Insurer.
Notwithstanding the foregoing paragraph, the Policy does not cover
shortfalls, if any, attributable to the liability of the Issuer, the Trust, or
the Indenture Trustee for withholding taxes, if any (including interest and
penalties in respect of any such liability). The Policy does not cover
shortfalls to Note Interest resulting from the application of the Soldiers' and
Sailors' Relief Act of 1940, as amended, or shortfalls due to Principal
Prepayments on the Mortgage Loans.
The Note Insurer will pay any Insured Payment that is a Preference
Amount on the Business Day following receipt on a Business Day by the Fiscal
Agent (as described below) of (a) a certified copy of the order requiring the
return of such preference payment, (b) an opinion of counsel satisfactory to the
Note Insurer that such order is final and not subject to appeal, (c) an
assignment in such form as is reasonably required by the Note Insurer,
irrevocably assigning to the Note Insurer all rights and claims of the Owner
relating to or arising under the Notes against the debtor which made such
preference payment or otherwise with respect to such preference payment and (d)
appropriate instruments to effect the appointment of the Note Insurer as agent
for such Owner in any legal proceeding related to such preference payment, such
instruments being in a form satisfactory to the Note Insurer; provided, that if
such documents are received after 12:00 noon, New York City time on such
Business Day, they will be deemed to be received on the following Business Day.
Such payments shall be disbursed to the receiver
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or trustee in bankruptcy named in the final order of the court exercising
jurisdiction on behalf of the Owner and not to any Owner directly unless such
Owner has returned principal or interest paid on the Notes to such receiver or
trustee in bankruptcy, in which case such payment shall be disbursed to such
Owner.
The Note Insurer will pay any other amount payable under the Policy
no later than 12:00 noon New York City time, on the later of the Payment Date on
which the Deficiency Amount is due or the third Business Day following receipt
in New York, New York, on a Business Day by State Street Bank and Trust Company,
N.A., as Fiscal Agent for the Note Insurer or any successor fiscal agent
appointed by the Note Insurer (the "Fiscal Agent") of a Notice (as described
below); provided that if such Notice is received after 12:00 noon New York City
time on such Business Day, it will be deemed to be received on the following
Business Day. If any such Notice received by the Fiscal Agent is not in proper
form or is otherwise insufficient for the purpose of making a claim under the
Policy, it shall be deemed not to have been received by the Fiscal Agent for
purposes of this paragraph, and the Note Insurer or the Fiscal Agent, as the
case may be, shall promptly so advise the Indenture Trustee and the Indenture
Trustee may submit an amended Notice.
Insured Payments due under the Policy, unless otherwise stated
therein, will be disbursed by the Fiscal Agent to the Indenture Trustee on
behalf of Owners by wire transfer of immediately available funds in the amount
of the Insured Payment less, in respect of Insured Payments related to
Preference Amounts, any amount held by the Indenture Trustee for the payment of
such Insured Payment and legally available therefor.
The Fiscal Agent is the agent of the Note Insurer only and the
Fiscal Agent shall in no event be liable to Owners for any acts of the Fiscal
Agent or any failure of the Note Insurer to deposit or caused to be deposited,
sufficient funds to make payment due under the Policy.
Subject to the terms of the Agreement, the Note Insurer shall be
subrogated to the rights of each Owner to receive payments under the Notes to
the extent of any payment by the Note Insurer under the Policy.
As used in the Policy, the following terms shall have the following
meanings:
"Agreement" means the Indenture, dated as of December 1, 1998, by
and between the Issuer and the Indenture Trustee, without regard to any
amendment or supplement thereto, unless such amendment or supplement has been
approved in writing by the Note Insurer.
"Business Day" means any day other than a Saturday, a Sunday or a
day on which the Note Insurer or banking institutions in New York City,
Maryland, Middletown, Connecticut, or the city in which the corporate trust
office of the Indenture Trustee under the Indenture is located are authorized or
obligated by law or executive order to close.
"Deficiency Amount" means, with respect to any Payment Date the sum
of (i) the Note Interest for such Payment Date minus Available Funds and (ii)
the then existing Overcollateralization Deficit, if any, after application of
such Available Funds to reduce the Note Balance on such Payment Date.
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"Insured Payment" means, with respect to any Payment Date, (i) the
Deficiency Amount and (ii) any Preference Amount due and then owing under the
Policy.
"Notice" means the telephonic or telegraphic notice, promptly
confirmed in writing by telecopy substantially in the form of Exhibit A attached
to the Policy, the original of which is subsequently delivered by registered or
certified mail, from the Indenture Trustee specifying the Insured Payment which
shall be due and owing on the applicable Payment Date.
"Owner" means each Noteholder (as defined in the Indenture) who, on
the applicable Payment Date, is entitled under the terms of the applicable Note
to payment thereunder.
"Preference Amount" means any amount previously distributed to an
Owner on the Notes that is recoverable and sought to be recovered as a voidable
preference by a trustee in bankruptcy pursuant to the United States Bankruptcy
Code (11 U.S.C.), as amended from time to time, in accordance with a final
nonappealable order of a court having competent jurisdiction.
Capitalized terms used in the Policy and not otherwise defined
therein will have the respective meanings set forth in the Agreement as of the
date of execution of the Policy, without giving effect to any subsequent
amendment to or modification of the Agreement unless such amendment or
modification has been approved in writing by the Note Insurer.
Any notice under the Policy or service of process on the Fiscal
Agent of the Note Insurer may be made at the address listed below for the Fiscal
Agent of the Note Insurer or such other address as the Note Insurer shall
specify in writing to the Indenture Trustee.
The notice address of the Fiscal Agent is 15th Floor, 61 Broadway,
New York, New York, 10006, Attention: Municipal Registrar and Paying Agency, or
such other address as the Fiscal Agent shall specify to the Indenture Trustee in
writing.
The Policy is being issued under and pursuant to, and shall be
construed under, the laws of the State of New York, without giving effect to the
conflict of laws principles thereof.
THE INSURANCE PROVIDED BY THE POLICY IS NOT COVERED BY THE
PROPERTY/CASUALTY INSURANCE SECURITY FUND SPECIFIED IN ARTICLE 76 OF THE NEW
YORK INSURANCE LAW.
The Policy is not cancelable for any reason. The premium on the
Policy is not refundable for any reason including payment, or provision being
made for payment, prior to the maturity of the Notes.
THE NOTE INSURER
The Note Insurer is the principal operating subsidiary of MBIA Inc.,
a New York Stock Exchange listed company. MBIA Inc. is not obligated to pay the
debts of or claims against the Note Insurer. The Note Insurer is domiciled in
the State of New York and licensed to do business in and is subject to
regulation under the laws of all 50 states, the District of Columbia, the
Commonwealth of Puerto Rico, the Commonwealth of the Northern Mariana Islands,
the Virgin Islands of the United States and the Territory of Guam. The Note
Insurer has two European branches, one in the Republic of France
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and the other in the Kingdom of Spain. New York has laws prescribing minimum
capital requirements, limiting classes and concentration of investments and
requiring the approval of policy rates and forms. State laws also regulate the
amount of both the aggregate and individual risks that may be insured, the
payment of dividends by the Note Insurer, changes in control and transactions
among affiliates. Additionally, the Note Insurer is required to maintain
contingency reserves on its liabilities in certain amounts and for certain
periods of time.
Effective February 17, 1998, MBIA Inc. acquired all of the
outstanding stock of Capital Markets Assurance Corporation ("CMAC") through a
merger with its parent CapMAC Holdings Inc. Pursuant to a reinsurance agreement,
CMAC has ceded all of its net insured risks (including any amounts due but
unpaid from third party reinsurers), as well as its unearned premiums and
contingency reserves, to the Note Insurer. MBIA Inc. is not obligated to pay the
debts of or claims against CMAC.
The consolidated financial statements of the Note Insurer, a
wholly-owned subsidiary of MBIA Inc., and its subsidiaries as of December 31,
1997 and December 31, 1996 and for each of the three years in the period ended
December 31, 1997, prepared in accordance with generally accepted accounting
principles, included in the Annual Report on Form 10-K of MBIA Inc. for the year
ended December 31, 1997 and the consolidated financial statements of the Note
Insurer and its subsidiaries as of September 30, 1998 and for the nine-month
periods ended September 30, 1998 and September 30, 1997 included in the
Quarterly Report on Form 10-Q of MBIA Inc. for the period ended September 30,
1998 are hereby incorporated by reference into this Prospectus Supplement and
shall be deemed to be a part hereof. Any statement contained in a document
incorporated by reference herein shall be modified or superseded for purposes of
this Prospectus Supplement to the extent that a statement contained herein or in
any other subsequently filed document which also is incorporated by reference
herein modifies or supersedes such statement. Any statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Prospectus Supplement.
All financial statements of the Note Insurer and its subsidiaries
included in documents filed by MBIA Inc. pursuant to Section 13(a), 13(c), 14 or
15(d) of the Securities Exchange Act of 1934, as amended, subsequent to the date
of this Prospectus Supplement and prior to the termination of the offering of
the Notes shall be deemed to be incorporated by reference into this Prospectus
Supplement and to be a part hereof from the respective dates of filing such
documents.
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The tables below present selected financial information of the Note
Insurer determined in accordance with statutory accounting practices prescribed
or permitted by insurance regulatory authorities ("SAP") and generally accepted
accounting principles ("GAAP"):
SAP
------------------------------
December 31, September 30,
1997 1998
---- ----
(Audited) (Unaudited)
(In millions)
Admitted Assets $5,256 $6,318
Liabilities 3,496 4,114
Capital and Surplus 1,760 2,204
GAAP
------------------------------
December 31, September 30,
1997 1998
---- ----
(Audited) (Unaudited)
(In millions)
Assets $5,988 $7,439
Liabilities 2,624 3,268
Shareholder's Equity 3,364 4,171
----------------------------------
Copies of the financial statements of the Note Insurer incorporated
by reference herein and copies of the Note Insurer's 1997 year-end audited
financial statements prepared in accordance with statutory accounting practices
are available, without charge, from the Note Insurer. The address of the Note
Insurer is 113 King Street, Armonk, New York 10504. The telephone number of the
Note Insurer is (914) 273-4545.
The Note Insurer does not accept any responsibility for the accuracy
of completeness of this Prospectus Supplement or any information or disclosure
contained herein, or omitted herefrom, other than with respect to the accuracy
of the information regarding the Insurance Policy and Note Insurer set forth
under the headings "The Note Insurance--The Insurance Policy" and "--The Note
Insurer" herein. Additionally, the Note Insurer makes no representation
regarding the Notes or the advisability of investing in the Notes.
Moody's Investor Service, Inc. rates the financial strength of the
Note Insurer "Aaa".
Standard & Poor's Rating Services, a division of The McGraw-Hill
Companies, Inc. rates the financial strength of the Note Insurer "AAA".
Fitch IBCA, Inc. (formerly known as Fitch Investors Service, L.P.)
rates the financial strength of the Note Insurer "AAA".
Each rating of the Note Insurer should be evaluated independently.
The ratings reflect the respective rating agency's current assessment of the
creditworthiness of the Note Insurer and its ability
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to pay claims on its policies of insurance. Any further explanation as to the
significance of the above ratings may be obtained only from the applicable
rating agency.
The above ratings are not recommendations to buy, sell or hold the
Notes and such ratings may be subject to revision or withdrawal at any time by
the rating agencies. Any downward revision or withdrawal of any of the above
ratings may have an adverse effect on the market price of the Notes. The Note
Insurer does not guaranty the market price of the Notes nor does it guaranty
that the ratings on the Notes will not be revised or withdrawn.
YEAR 2000 READINESS DISCLOSURE
An area of potential risk to the Note Insurer's financial guarantee
business would be the inability of an issuer or its trustee or paying agent to
make payments on a Note Insurer insured transaction because of their failure to
be Year 2000 ready. To mitigate this risk, the Note Insurer has been surveying
all trustees, all paying agents and selected high volume issuers to determine
their state of readiness. While the survey is not complete, the results to-date
are that all respondents are either ready or planning to be ready by late 1999.
If the Note Insurer is asked to pay in those situations where the issuer's
system fails, it will do so and would expect to recover any such payment in a
fairly short time period. It is not possible at this time to evaluate the extent
of such payments. The Note Insurer believes that it has adequate sources of
liquidity to cover these payments.
CREDIT ENHANCEMENT DOES NOT APPLY TO PREPAYMENT RISK
In general, the protection afforded by the Insurance Policy is
protection for credit risk and not for prepayment risk. A claim may not be made
under the Insurance Policy, in an attempt to guarantee or insure that any
particular rate of prepayment is experienced by the Trust Estate.
ERISA CONSIDERATIONS
Section 406 of the Employee Retirement Income Security Act of 1974,
as amended ("ERISA"), and Section 4975 of the Internal Revenue Code of 1986, as
amended (the "Code"), prohibit a pension, profit sharing or other employee
benefit plan, as well as individual retirement accounts and annuities and
certain Keogh Plans, and entities deemed to hold assets of such plans (each, a
"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 such Plan. A violation of these "prohibited
transaction rules" may generate excise tax and other penalties and liabilities
under ERISA and the Code for such persons. Title I of ERISA also requires that
fiduciaries of a Plan subject to ERISA make investments that are prudent,
diversified (except if prudent not to do so) and in accordance with governing
plan documents.
Under regulations of the Department of Labor set forth in 29 C.F.R.
(ss). 2510.3-101 (the "Plan Asset Regulations"), the assets of a Plan generally
include not only securities held by a Plan but also the underlying assets of the
issuer of any equity securities (the "Look-Through Rule") unless one or more
exceptions specified in the Plan Asset Regulations are satisfied. For purposes
of those Regulations, an equity security is a security other than a security
that is treated as debt under applicable local law and
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that has no substantial equity features. The Issuer believes that the Notes will
be treated as debt obligations without significant equity features for purposes
of the Plan Asset Regulations. Accordingly, a Plan that acquires a Note should
not be treated as having acquired a direct interest in the assets of the Issuer.
However, there can be no complete assurance that the Notes will be treated as
debt obligations without significant equity features for purposes of the Plan
Asset Regulations. If the Notes are treated as having substantial equity
features, the purchaser of a Note could be treated as having acquired a direct
interest in the Mortgage Loans securing the Notes. In that event, the purchase,
holding, or resale of the Notes could result in a transaction that is prohibited
under ERISA or the Code.
However, even if the Notes are treated as debt for such purposes,
the acquisition or holding of Notes by or on behalf of a Plan could be
considered to give rise to a prohibited transaction if the Issuer or any of its
affiliates is or becomes a "party in interest" under ERISA or a "disqualified
person" under the Code with respect to such Plan. In such case, certain
exemptions from the prohibited transaction rules could be applicable depending
on the type and circumstances of the plan fiduciary making the decision to
acquire Notes. Included among these exemptions are: Prohibited Transaction Class
Exemption ("PTCE") 96-23, regarding transactions effected by "in-house asset
managers"; 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;
and PTCE 84-14, regarding transactions effected by "qualified professional asset
managers". A purchaser of a Note should be aware, however, that even if the
conditions specified in one or more exemptions are met, the scope of the relief
provided by an exemption might not cover all acts that might be construed as
prohibited transactions. The purchase of a Note will be deemed a representation
by the acquirer that either (i) it is not, and is not purchasing a Note on
behalf of or with the assets of a Plan, or (ii) the acquisition and holding of a
Note by the acquirer qualifies for exemptive relief under PTCE 95-60, PTCE
96-23, PTCE 91-38, PTCE 90-1, PTCE 84-14 or another Department of Labor Class
Exemption.
A governmental plan as defined in Section 3(32) of ERISA is not
subject to Title I of ERISA or Section 4975 of the Code. However, such a
governmental plan may be subject to a federal, state, or local law which is, to
a material extent, similar to the foregoing provisions of ERISA or the Code
("Similar Law"). A fiduciary of a governmental plan should make its own
determination as to the need for and the availability of any exemptive relief
under Similar Law.
A Plan fiduciary considering the purchase of Notes should consult
its tax and/or legal advisors regarding the applicability of the fiduciary
responsibility provisions of ERISA to such investment, whether the assets of the
Issuer would be considered plan assets, the possibility of exemptive relief from
the prohibited transaction rules, and other related issues and their potential
consequences. The sale of Notes to a Plan is in no respect a representation by
the Issuer or the Underwriters that this investment meets all relevant legal
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. See "ERISA Considerations" in the Prospectus.
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USE OF PROCEEDS
The Issuer intends to use the net proceeds to be received from the
sale of the Notes to acquire the Mortgage Loans from the Depositor and the
Seller and to pay other expenses associated with the pooling of the Mortgage
Loans and the issuance of the Notes.
LEGAL INVESTMENT CONSIDERATIONS
The Notes will not constitute "mortgage related securities" for
purposes of the Secondary Mortgage Market Enhancement Act of 1984 ("SMMEA").
Institutions whose activities are subject to review by federal or state
regulatory authorities may be or may become subject to restrictions, which may
be retroactively imposed by such regulatory authorities, on the investment by
such institutions in certain forms of mortgage related securities. See "Legal
Investment" in the Prospectus.
UNDERWRITING
Under the terms set forth in the Underwriting Agreement, dated the
date hereof (the "Underwriting Agreement"), the Depositor has agreed to cause
the Issuer to sell, and First Union Capital Markets and Prudential Securities
Incorporated (together, the "Underwriters") have agreed, subject to the terms
and conditions set forth therein, to purchase the entire principal amount of the
Notes.
Each of the Underwriters has informed the Depositor that it proposes
to offer the Notes for sale from time to time in one or more negotiated
transactions, or otherwise, at varying prices to be determined, in each case, at
the time of the related sale. The Underwriters may effect such transactions by
selling the Notes to or through dealers, and such dealers may receive
compensation in the form of underwriting discounts, concessions or commissions
from the Underwriter. In connection with the sale of the Notes, the Underwriters
may be deemed to have received compensation from the Depositor in the form of
underwriting compensation. The Underwriters and any dealers that participate
with the Underwriters in the distribution of the Notes may be deemed to be
underwriters and any commissions received by them and any profit on the resale
of the Notes by them may be deemed to be underwriting discounts and commissions
under the Securities Act of 1933, as amended (the "Securities Act").
The Depositor and the Seller have agreed to indemnify the
Underwriters against certain liabilities including liabilities under the
Securities Act.
The Depositor has been advised by the Underwriters that the
Underwriters intend to make a market in the Notes, as permitted by applicable
laws and regulations and subject to the provisions of Rule 104 of Regulation M.
The Underwriters are not obligated, however, to make a market in the Notes and
such market-making may be discontinued at any time at the sole discretion of the
Underwriters. Accordingly, no assurance can be given as to the liquidity of, or
trading markets for, the Notes.
First Union Capital Markets, a division of Wheat First Securities,
Inc. ("First Union"), or affiliates of First Union (collectively referred to as
First Union for the purposes of this paragraph) provide warehouse financing
facilities to the Seller.
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The Depositor is an affiliate of First Union.
All of the Mortgage Loans included in the Trust Estate will have
been acquired in a privately negotiated transaction with the Seller.
REPORT OF EXPERTS
The consolidated balance sheets of MBIA Insurance Corporation and
Subsidiaries as of December 31, 1997 and December 31, 1996 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 December 31, 1997,
incorporated by reference into this Prospectus Supplement have been audited by
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
that firm as experts in accounting and auditing.
CERTAIN 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 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 Notes.
Treatment of the Notes as Indebtedness. The Seller 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, tax counsel to the Depositor ("Tax
Counsel") is of the opinion that, while no transaction closely comparable to
that contemplated has been subject to any Treasury regulation, revenue ruling or
judicial decision, and therefore the matter is subject to interpretation, for
federal income tax purposes, the Notes will be treated as indebtedness of the
Trust, and not as an ownership interest in the Mortgage Loans, or an equity
interest in the Trust or in a separate association taxable as a corporation or
other taxable entity. Further, Tax Counsel is of the opinion that neither the
Issuer nor the Mortgage Pool will
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be characterized as an association (or as a publicly traded partnership) taxable
as a corporation or as a taxable mortgage pool.
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 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 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. 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 foreign persons are strongly advised 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
25% HEP.
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 the 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
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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. 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). 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
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described above in respect of market discount and except that a loss
attributable to accrued but unpaid interest may be an ordinary loss.
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 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 should
consult their own tax advisors with respect to the various state and local tax
consequences of an investment in the Notes.
LEGAL MATTERS
Certain legal matters will be passed upon for the Seller by Brown &
Wood LLP, Washington, D.C. Dewey Ballantine LLP, New York, New York or Dewey
Ballantine LLP, Washington, D.C., will act as counsel for the Underwriters and
will pass upon certain federal income tax matters for the Issuer. Certain legal
matters relating to the Note Insurer and the Insurance Policy will be passed
upon for the Note Insurer by Kutak Rock, Omaha, Nebraska.
RATING OF THE NOTES
It is a condition to the issuance of the Notes that each shall be
rated "Aaa" by Moody's Investors Service, Inc ("Moody's") and "AAA" by Standard
& Poor's, a division of The McGraw-Hill Companies, Inc. ("S&P" and, together
with Moody's, the "Rating Agencies").
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Explanations of the significance of such ratings may be obtained
from Moody's, 99 Church Street, New York, New York 10007, and S&P, 25 Broadway,
New York, New York 10004. Each rating will be the view only of the assigning
Rating Agency.
The ratings on the Notes are based in substantial part on the
claims-paying ability of the Note Insurer. Any changes in the ratings of the
Note Insurer by the Rating Agencies may result in a change in the ratings of the
Notes.
The ratings assigned to the Notes do not represent any assessment of
the likelihood or rate of principal prepayments and do not address the
possibility that Noteholders might suffer a lower than anticipated yield.
There is no assurance that any rating assigned to the Notes 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 or liquidity of the Notes.
The ratings of the Notes should be evaluated independently form
similar ratings on other types of securities. A security rating is not a
recommendation to buy, sell or hold securities.
There can be no assurances as to whether any other rating agency
will rate the Notes, or, if one does, what rating will be assigned by such other
rating agency. A rating on the Notes by another rating agency, if assigned at
all, may be lower than the ratings assigned to the Notes by Moody's or S&P.
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INDEX OF PRINCIPAL TERMS
Page
----
Administrative Fee Amount......S-28
Agreement......................S-72
Auction Call Date..............S-34
Available Funds................S-27
Balloon Loans..................S-38
Beneficial Owner...............S-18
Book-Entry Notes...............S-18
Business Day...................S-72
Cedel..........................S-18
Cedel Participants.............S-20
Citibank.......................S-18
CLTV...........................S-49
CMAC...........................S-74
Code...........................S-76
Collection Account.............S-62
Collection Period..............S-24
Combined Loans-to-Ratio........S-38
Company........................S-17
Compensating Interest Payment..S-64
Corporate Office...............S-47
Cut-off Date...................S-17
debt-to-income ratio...........S-47
Defective Mortgage Loan........S-24
Deficiency Amount..............S-72
Definitive Notes...............S-18
Deposit Date...................S-24
Depositor......................S-17
Determination Date.............S-27
DTC............................S-17
Due Period.....................S-24
ERISA..........................S-76
Euroclear......................S-18
Euroclear Operator.............S-20
Euroclear Participants.........S-20
European Depositaries..........S-18
Event of Default...............S-36
Excess Cash....................S-30
Financial Intermediary.........S-18
FIRREA.........................S-48
First Union....................S-78
Fiscal Agent...................S-72
GAAP...........................S-75
Indenture......................S-17
Indenture Trustee..............S-17
Indenture Trustee Fee..........S-35
Indirect Retail Mortgage Loans.S-47
Page
----
Initial Pool Balance...........S-37
Initial Redemption Date........S-33
Insurance Agreement............S-25
Insurance Policy...............S-17
Insured Payment................S-73
Interest Period................S-26
IRS............................S-79
Issuer.........................S-17
Liquidated Mortgage Loan.......S-27
Liquidation Proceeds...........S-28
Look-Through Rule..............S-76
Modeling Assumptions...........S-55
Monthly Advance................S-63
Monthly Principal..............S-26
Moody's........................S-82
Mortgage Files.................S-23
Mortgage Loans.................S-17
Mortgage Notes.................S-17
Mortgage Pool..................S-17
Mortgage Rate..................S-38
Mortgaged Properties...........S-17
Net Liquidation Proceeds.......S-28
Nonrecoverable Advances........S-64
Note Account...................S-28
Note Balance...................S-26
Note Insurer...................S-17
Note Insurer Premium...........S-25
Note Interest..................S-25
Note Interest Rate.............S-26
Noteholder.....................S-17
Notes..........................S-5
Notes..........................S-17
Notice.........................S-73
OID............................S-80
Original Note Balance..........S-25
Overcollateralization Amount...S-31
Overcollateralization Deficit..S-32
Overcollateralization Surplus..S-31
Owner..........................S-73
Owner Trustee..................S-17
Participants...................S-20
Paying Agent...................S-24
Payment Date...................S-17
Payments Ahead.................S-27
Percentage Interest............S-24
Permitted Investments..........S-29
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Plan Asset Regulations..........S-76
Preference Amount...............S-73
Principal Balance...............S-26
Principal Prepayment............S-27
PTCE............................S-77
Qualified Replacement Mortgage..S-23
Rating Agencies.................S-82
Realized Loss...................S-32
Record Date.....................S-17
Redemption Date.................S-33
Release Price...................S-24
Relief Act......................S-55
REO Property....................S-63
Required Overcollateralization
Amount........................S-31
Residual Holder.................S-34
Residual Interest...............S-18
Retail Mortgage Loans...........S-47
S&P.............................S-82
Sale Agreement..................S-22
SAP.............................S-75
Securities Act..................S-78
Seller..........................S-17
Senior Loan.....................S-38
Servicer........................S-17
Servicer Event of Default.......S-66
Servicing Advance...............S-68
Servicing Agreement.............S-17
Servicing Fee...................S-68
Servicing Fee Rate..............S-68
Similar Law.....................S-77
SMMEA...........................S-78
Tax Counsel.....................S-79
Trust...........................S-17
Trust Agreement.................S-17
Trust Estate....................S-17
Underwriters....................S-78
Underwriting Agreement..........S-78
S-85
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ANNEX A
GLOBAL CLEARANCE, SETTLEMENT AND
TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered Asset
Backed Notes, Series 1998-3 (the "Global Securities"), will be available only in
book-entry form. Investors in the Global Securities may hold such Global
Securities through DTC, Cedel or Euroclear. The Global Securities will be
traceable as home market instruments in both the European and U.S. domestic
markets. Initial settlement and all secondary trades will settle in same-day
funds.
Secondary market trading between investors holding Global Securities
through Cedel and Euroclear will be conducted in the ordinary way in accordance
with their normal rules and operating procedures and in accordance with
conventional eurobond practice (i.e., seven calendar day settlement).
Secondary market trading between investors holding Global Securities through DTC
will be conducted according to the rules and procedures applicable to U.S.
corporate debt obligations.
Secondary cross-market trading between participants of Cedel or
Euroclear and Participants holding Notes will be effected on a
delivery-against-payment basis through the Relevant Depositaries of Cedel and
Euroclear (in such capacity) and as Participants.
Non-U.S. holders (as described below) of Global Securities will be
subject to U.S. withholding taxes unless such holders meet certain requirements
and deliver appropriate U.S. tax documents to the securities clearing
organizations or their participants.
INITIAL SETTLEMENT
All Global Securities will be held in book-entry form by DTC in the
name of Cede, 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
Depositaries, which in turn will hold such positions in accounts as
Participants.
Investors selecting to hold their Global Securities through DTC will
follow DTC settlement practice. 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
securities custody accounts on the settlement date against payment in same-day
funds.
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SECONDARY MARKET TRADING
Because the purchaser determines the place of delivery, it is
important to establish at the time of the trade where both the purchaser's and
seller's accounts are located to ensure that settlement can be made on the
desired value date.
Trading between Participants. Secondary market trading between
Participants will be settled using the procedures applicable to prior
asset-backed Note issues in same-day funds.
Trading between Cedel and/or Euroclear Participants. Secondary
market trading between Cedel Participants or Euroclear Participants will be
settled using the Procedures applicable to conventional eurobonds in same-day
funds.
Trading between DTC Seller and Cedel or Euroclear Participants. When
Global Securities are to be transferred from the account of a Participant to the
account of a Cedel Participant or a Euroclear Participant, the purchaser will
send instructions to Cedel or Euroclear through a Cedel Participant or Euroclear
Participant at least one Business Day prior to settlement. Cedel or Euroclear
will instruct the respective Depositary, as the case may be, to receive the
Global Securities against payment. Payment will include interest accrued on the
Global Securities from and including the last coupon payment date to and
excluding the settlement date, on the basis of the actual number of days in such
accrual period and a year assumed to consist of 360 days. For transactions
settling on the 31st of the month, payment will include interest accrued to and
excluding the first day of the following month. Payment will then be made by the
respective Depositary to the 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 accounts one day later.
As an alternative, if Cedel or Euroclear has extended a line of
credit to them, Cedel Participants or Euroclear Participants can elect not to
preposition funds and allow that credit line to be drawn upon to finance
settlement. Under this procedure, Cedel Participants or Euroclear Participants
purchasing Global Securities would incur overdraft charges for one day, assuming
they clear the overdraft when the Global Securities are 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
A-2
<PAGE>
overdraft charges, although this result will depend on each Cedel
Participant's or Euroclear Participant's particular cost of funds.
Because the settlement is taking place during New York business
hours, Participants can employ their usual procedures for sending Global
Securities to the respective European Depositary for the benefit of Cedel
Participants or Euroclear Participants. The sale proceeds will be available to
the DTC seller on the settlement date. Thus, to the Participants a cross-market
transaction will settle no differently than a trade between two Participants.
Trading between Cedel or Euroclear Seller and DTC Purchaser. Due to
time zone differences in their favor, Cedel Participants and Euroclear
Participants may employ their customary procedures for transactions in which
Global Securities are to be transferred by the respective clearing system,
through the respective Depositary, to a 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 Relevant Depositary, as appropriate, to deliver
the Global Securities to the 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 the Cedel Participant or
Euroclear Participant the following day, and receipt of the cash proceeds in the
Cedel Participant's or Euroclear Participant's account would be back-valued to
the value date (which would be the preceding day, when settlement occurred in
New York). Should the Cedel Participant or Euroclear Participant have a line of
credit with its respective clearing system and elect to be in debt in
anticipation of receipt of the sale proceeds in its account, the back valuation
will extinguish any overdraft incurred over that one-day period. If settlement
is not completed on the intended value date (i.e., the trade fails), receipt of
the cash proceeds in the Cedel Participant's or Euroclear Participant's account
would instead be valued as of the actual settlement date.
Finally, day traders that use Cedel or Euroclear and that purchase
Global Securities from Participants for delivery to Cedel Participants or
Euroclear Participants should note that these trades would automatically fail on
the sale side unless affirmative action were taken. At least three techniques
should be readily available to eliminate this potential problem:
(a) borrowing through Cedel or Euroclear for one day (until the
purchase side of the day trade is reflected in their Cedel or Euroclear
accounts) in accordance with the clearing system's customary procedures;
(b) borrowing the Global Securities in the U.S. from a 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 Participant is at least
one day prior to the value date for the sale to the Cedel Participant or
Euroclear Participant.
A-3
<PAGE>
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, unless (i) each clearing system, bank or other financial
institution that holds customers' securities in the ordinary course of its trade
or business in the chain of intermediaries between such beneficial owner and the
U.S. entity required to withhold tax complies with applicable certification
requirements and (ii) such beneficial owner takes one of the following steps to
obtain an exemption or reduced tax rate:
Exemption for non-U. S. Persons (Form W-8). Beneficial owners of
Global Securities that are Non-U.S. Persons can obtain a complete exemption from
the withholding tax by filing a signed Form W-8 (Certificate of Foreign
Status). If the information shown on Form W-8 changes, a new Form W-8 must be
filed within 30 days of such change.
Exemption for non-U.S. Persons with effectively connected income
(Form 4224). A non-U.S. Person, including a non-U.S. corporation or bank with a
U.S. branch, for which the interest income is effectively connected with its
conduct of a trade or business in the United States, can obtain an exemption
from the withholding tax by filing Form 4224 (Exemption from Withholding of Tax
on Income Effectively Connected with the Conduct of a Trade of 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 the beneficial owners or their agents.
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 beneficial owner of
a Global Security or, in the case of a Form 1001 or a Form 4224 filer, his
agent, files by submitting the appropriate form to the person through whom it
holds (the clearing agency, in the case of persons holding directly on the books
of the clearing agency). Form W-8 and Form 1001 are effective for three calendar
years, and Form 4224 is effective for one calendar year.
The term "U.S. Person" means (i) a citizen or resident of the United
States, (ii) a corporation or partnership organized in or under the laws of the
United States or any political subdivision thereof, (iii) an estate that is
subject to United States federal income tax, regardless of the source of its
income or (iv) a trust if (a) a court in the United States is able to exercise
primary supervision over the administration of the trust, and (b) one or more
United States persons have 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 summary does not deal with all aspects of U.S. federal income tax
withholding that may be relevant to foreign holders of Global Securities or with
the application of recently issued Treasury
A-4
<PAGE>
Regulations relating to tax documentation requirements that are generally
effective with respect to payments made after December 31, 1999. Investors are
advised to consult their own tax advisors for specific tax advice concerning
their holding and disposing of Global Securities.
A-5
<PAGE>
===============================================================================
$114,925,000 Asset-Backed Notes, Series 1998-3
Mortgage Lenders Network Home Equity Loan Trust 1998-3
Issuer
[LOGO]
Mortgage Lenders Network USA, Inc.
Seller and Servicer
Residential Asset Funding Corporation
Depositor
--------------------------
Prospectus Supplement
--------------------------
FIRST UNION CAPITAL MARKETS
PRUDENTIAL SECURITIES INCORPORATED
December 11, 1998
You should rely only on the information incorporated by reference or provided in
this prospectus supplement and the accompanying prospectus. We have not
authorized anyone else to provide you with different information.
We are not offering the notes offered hereby in any state where such offer is
not permitted.
We represent the accuracy of the information in this prospectus supplement and
the accompanying prospectus only as of the dates on their respective covers.
Dealers will be required to deliver a prospectus supplement and prospectus when
acting as underwriters of the notes offered hereby and with respect to their
unsold allotments or subscriptions. In addition, all dealers selling the notes,
whether or not participating in this offering, may be required to deliver a
prospectus supplement and prospectus until March 11, 1999.
===============================================================================
<PAGE>
<PAGE>
PROSPECTUS
Asset Backed Notes and Asset Backed Certificates, issuable in Series
Residential Asset Funding Corporation
(Depositor)
Residential Asset Funding Corporation (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) loans (the "Mortgage Loans") that are secured
by mortgages on residential properties and that may be secured by fixtures, as
further described herein and (ii) manufactured housing conditional sale
contracts and installment agreements (the "Contracts") that are secured by
Manufactured Homes, as further described herein, and (iii) securities backed or
secured by Mortgage Loans and/or Contracts (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,
and/or Contracts, 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. The
Contracts will be secured by security interests taken in the Manufactured Homes.
(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.
--------------------
For a discussion of material risks associated with an investment in the
Securities, see the information herein under "Risk Factors" beginning on
page 17.
--------------------
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.
--------------------
The Securities offered by this Prospectus and by the related Prospectus
Supplement are offered by First Union Capital Markets, a division of Wheat First
Securities, Inc. 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 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.
--------------------
First Union Capital Markets
November 10, 1998
<PAGE>
(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, Contracts 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.
2
<PAGE>
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.
3
<PAGE>
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.
4
<PAGE>
SUMMARY OF PROSPECTUS
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus and by reference to
the information with respect to each Series of Securities contained in the
Prospectus Supplement to be prepared and delivered in connection with the
offering of 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...........................Residential Asset Funding Corporation (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
5
<PAGE>
"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, Contracts or
Underlying Loans relating to the Private
Securities, as applicable and/or as
prepayments occur with respect to such
Mortgage Loans, Contracts 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, Contracts 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
6
<PAGE>
Scheduled Distribution Date as a result of
the application of 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, Contracts 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, Contracts 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 the
related Originator, Servicer, Credit
Enhancer, or an affiliate thereof at the
price set forth in the related Agreement
(which would not be less than an amount
necessary to pay all principal and interest
on the securities outstanding). Each such
redemption or repurchase may occur 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 percentage (which
percentage shall not exceed 20%) specified
in the related Agreement. 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 failure of the holder of the
optional termination right to exercise such
right, the required party shall solicit bids
for the purchase of all Mortgage Loans
and/or Contracts remaining in the Trust. In
the event that satisfactory bids are
received (which would not be less than an
amount necessary to pay all principal and
interest on the securities outstanding), the
net sale proceeds will be distributed to
Holders, in the same order of priority as
collections received in respect of the
Mortgage Loans and/or Contracts. If
satisfactory bids are not received, such
party shall decline to sell the Mortgage
Loans and/or Contracts and shall not be
under any obligation to solicit any further
bids or otherwise negotiate any further sale
of the Mortgage Loans and/or Contracts. 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
7
<PAGE>
limitation, the requirement that the
qualified liquidation takes place over a
period not to exceed 90 days.
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 loans which
are secured by mortgages on residential
properties and which may be secured by
fixtures (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 "purchase
money" loans, as distinguished from "home
equity" 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). The
Mortgage Loans, in addition to being secured
by mortgages on real estate, may also be
secured by "fixtures" treated as personal
property under local state law. Although
fixtures may turn up more frequently in the
case of loans in which the proceeds are used
to fund home improvements, fixtures as a
part of the collateral package may be a part
of either a "home equity" or "purchase
money" loan.
A "purchase money" mortgage is a loan the
proceeds of which are used to purchase the
related mortgaged property; the proceeds of
a "home equity" loan are not applied to the
purchase of the related mortgaged property.
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
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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 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) Contracts Each Contract Pool (as defined herein) will
consist of fixed or adjustable rate
manufactured housing installment sales
contracts and installment loan agreements.
Each Contract may be secured by a new or
used Manufactured Home (as defined herein).
(3) 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 and/or Contracts (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 and not purchased as
part of the original distribution 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
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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 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
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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
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<PAGE>
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.
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
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<PAGE>
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 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 and/or Contracts for a
Series. In addition, the Servicer may act as
custodian and be responsible for maintaining
custody of the Mortgage Loans and/or
Contracts and related documentation on
behalf of the Trustee. Advances with respect
to delinquent payments of principal or
interest on a Mortgage Loan and/or Contracts
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
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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 and/or Contracts or from
other recoveries relating to such Mortgage
Loan or Contract (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 and/or Contracts 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 "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 REMICs) 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 conform
to the 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
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<PAGE>
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 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, Contracts 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
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<PAGE>
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 "Risk
Factors" herein and in the related
Prospectus Supplement.
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<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 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,
Contracts 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,
Contracts or Underlying Loans due to conversion of adjustable-rate 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 and/or Contracts. 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 and/or Contracts. 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 and/or Contracts than other
classes of Securities.
The Mortgage Loans and/or Contracts 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 and/or Contracts 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 and/or Contracts), 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 and/or Contracts 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 and/or Contracts. The
related Prospectus Supplement will specify whether any or all of the Mortgage
Loans contain "due-on-sale" provisions.
Collections on the Mortgage Loans and/or Contracts may vary due to the
level of incidence of delinquent payments and of prepayments. Collections on the
Mortgage Loans and/or Contracts may also vary due to seasonal purchasing and
payment habits of borrowers.
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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 such time as the
aggregate outstanding principal amount of the Primary Assets is less than the
amount or percentage specified in the related Agreement, (such amount or
percentage not to exceed 20% 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 of failure of borrowers to maintain adequately
the Mortgaged Properties or of natural disasters that are not necessarily
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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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Security Interests in the Manufactured Homes may not be perfected and the Trust
Fund may not realize upon the full amount due under the related Contract.
Each Contract is secured by a security interest in a Manufactured Home
together with, in the case of land secured contracts, the real estate on which
the related Manufactured home is located (such Contracts, the "Land Secured
Contracts"). Perfection of security interests in the Manufactured Homes and
enforcement of rights to realize upon the value of the Manufactured Homes as
collateral for the Contracts are subject to a number of federal and state laws,
including the Uniform Commercial Code (the "UCC") as adopted in the states in
which the Manufactured Homes are located and such states' certificate of title
statutes, but generally not their real estate laws. Under such federal and state
laws, a number of factors may limit the ability of a holder of a perfected
security interest in Manufactured Homes to realize upon such Manufactured Homes
or may limit the amount realized to less than the amount due under the related
Contract.
In addition, because of the expense and administrative inconvenience
involved, the seller of the Manufactured Home ("Seller") may not amend any
certificates of the title related to any Manufactured Home to change the
lienholder specified therein to the Trustee, and may not execute any transfer
instrument (including, among other instruments, UCC-3 assignments) relating to
any Manufactured Home in favor of the Trustee or note thereon the Trustee's
interest. Such amendment would require, consistent with the law of the related
State, filings at the state or county level for each Contract. As a result, the
Seller will remain the lienholder on the certificate of title relating to the
Manufactured Home. In some states, in the absence of such an amendment,
execution or notation, the assignment to the Trustee of the security interest in
the Manufactured Homes located therein may not be effective or such security
interest may not be perfected. If any otherwise effectively assigned security
interest in favor of the Trustee is not perfected, such assignment of the
security interest to the Trustee may not be effective against creditors of the
Seller to the extent it continues to be specified as lienholder on any
certificate of title or as secured party on any UCC filing, or against a trustee
in bankruptcy of the Seller.
Each Contract (other than a Land Secured Contract) will be "chattel paper"
as defined in the UCC in effect in the jurisdiction in which the related
Manufactured Home was located at origination. Under the UCC as in effect in each
such jurisdiction, the sale of chattel paper is treated in a manner similar to
perfection of a security interest in chattel paper. Under the related Agreement,
the Trustee will have possession of the Contracts. In addition, the Seller will
make appropriate filings of UCC-1 financing statements in the office of the
Secretary of State of the state where its principal place of business is located
to give notice of the Trustee's ownership of the Contracts. The Trustee's
interest in the Contracts could, through the fraud or negligence of the Trustee,
be defeated if a subsequent purchaser were able to take physical possession of
the Contracts without notice of such assignment.
Further, because of the expenses and administrative inconvenience
involved, the assignment of mortgages or deeds of trust to the Trustee may not
be recorded with respect to the mortgages or deeds of trust securing each Land
Secured Contract. Recordation of such assignments would require the Seller to
retain counsel in the respective state, and make the appropriate filing at the
local level. The failure to record the assignments to the Trustee of the
mortgage securing Land Secured Contracts may result in the sale of such
Contracts or the Trustee's rights in the land secured by the mortgage being
ineffective against creditors of the Seller or against a trustee in bankruptcy
of the Seller or against a subsequent purchaser of such Contracts from the
Seller, without notice of the sale to the Trustee.
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)
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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.
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/or Contracts, 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.
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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 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, Contracts 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, Contracts 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.
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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.
Optional Redemption, Purchase or Termination
One or more Classes of Securities of any Series may be subject to optional
redemption or repurchase, in whole or in part, on any Distribution Date by the
related Originator, Servicer or Credit Enhancer or an affiliate thereof. 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, is less than a
percentage not to exceed 20% 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 (which would not
be less than an amount necessary to pay all principal and interest on the
securities outstanding) 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.
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There is, however, no assurance that prepayment of the Mortgage Loans,
Contracts 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, Contracts 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, Contracts or Underlying Loans, as applicable, for a Series 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,
Contracts or Underlying Loans relating to the Private Securities, as applicable.
If any Mortgage Loans, Contracts 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) any Manufactured Home which initially
secured a Contract and which is acquired by repossession and (v) 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 and/or Contracts 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.
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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, Contracts and Private Securities, to the extent
and as specified in the related Prospectus Supplement. Some of the Mortgage
Loans and/or Contracts may be delinquent to the extent and as specified in the
related Prospectus Supplement. The percentage of those Mortgage Loans and/or
Contracts 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 and/or Contracts expected
to be included in the related Trusts.
The Mortgage Loans
Mortgage Loans. The Primary Assets for a Series may consist, in whole or
in part, of 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 "purchase money" loans, as distinguished from "home equity" 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).
The Mortgage Loans, in addition to being secured by mortgages on real estate,
may also be secured by "fixtures" treated as personal property under local state
law. Although fixtures may turn up more frequently in the case of loans in which
the proceeds are used to fund home improvements, fixtures as a part of the
collateral package may be a part of either a "home equity" or "purchase money"
loan.
A "purchase money" mortgage is a loan the proceeds of which are used to
purchase the related mortgaged property; the proceeds of a "home equity" loan
are not applied to the purchase of the related mortgaged property.
The Mortgage Loans may be (i) "conventional" 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.
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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 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
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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 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 equal to 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 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
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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 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.
The Contracts
Contracts. Each Pool of Contracts in a Trust Fund ("Contract Pool") will
consist of conventional manufactured housing installment sales contracts and
installment loan agreements (collectively, the "Contracts") originated by a
manufactured housing dealer in the ordinary course of business and purchased by
the Seller. Each Contract will be secured by Manufactured Homes (as defined
below), each of which will be located in any of the fifty states or the District
of Columbia. The Contracts will be fully amortizing and will bear interest at a
fixed or adjustable annual percentage rate (the "APR" or "Contract Rate"). The
Contract Pool may include Contracts with respect to which a Fixed Retained Yield
has been retained, in which event references herein to Contracts and payments
thereon shall mean the Contracts exclusive of such Fixed Retained Yield. The
Prospectus Supplement for a Series will specify whether there will be any Fixed
Retained Yield in any Contract, and if so, the owner thereof. A "Fixed Retained
Yield" in a Contract represents a specified portion of the interest payable
thereon.
The Seller of the Contracts will represent that the Manufactured Homes
securing the Contracts consist of manufactured homes within the meaning of 42
United States Code, Section 5402(6), which defines a "manufactured home" as "a
structure, transportable in one or more sections, which in the traveling mode,
is eight body feet or more in width or forty body feet or more in length, or,
when erected on site, is three hundred twenty or more square feet, and which is
built on a permanent chassis designed to be used as a dwelling with or without a
permanent foundation when connected to the required utilities, and includes the
plumbing, heating, air-conditioning, and electrical systems contained therein;
except that such term shall include any structure which meets all the
requirements of [this] paragraph except the size requirements and with respect
to which the manufacturer voluntarily files a certification required by the
Secretary of Housing and Urban Development and complies with the standards
established under [this] chapter."
Manufactured Homes, unlike site-built homes, generally depreciate in
value. Consequently, at any time after origination it is possible, especially in
the case of Contracts with high Loan-to-Value Ratios at origination, that
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the market value of a Manufactured Home may be lower than the principal amount
outstanding under the related Contract.
The Prospectus Supplement for each Series will set forth certain
characteristics of the related Contracts, which may include the aggregate
principal balance of the Contracts in the Contract Pool underlying such Series
as of the Cut-Off Date for such Series (the "Cut-Off Date Aggregate Principal
Balance"), the range of original terms to maturity of the Contracts in the
Contract Pool, the weighted average remaining term to stated maturity at the
Cut-Off Date of such Contracts, the earliest and latest origination dates of
such Contracts, the range of Contract Rates and net contract rates borne by such
Contracts ("Net Contract Rates"), the weighted average Net Contract Rate at the
Cut-Off Date of such Contracts, the range of such Contracts which had
Loan-to-Value Ratios at the time of origination of the Contracts and the highest
outstanding principal balance at origination of any such Contract.
The "Loan-to-Value Ratio" is the ratio, expressed as a percentage, of the
principal amount of the Contract outstanding at the origination of such loan
divided by the fair market value of the Manufactured Home. The fair market value
of the Manufactured Home securing any Contract is, unless otherwise specified in
the applicable Prospectus Supplement, either (x) the appraised value of the
related Manufactured Home determined in an appraisal obtained by the originator
at origination and (y) the sale price for such property, plus, in either case,
sales and other taxes and, to the extent financed, filing and recording fees
imposed by law, premiums for related insurance and prepaid finance charges. A
maximum of 5% (by Cut-Off Date Aggregate Principal Balance) of the aggregate
Contracts that are included in a Trust Fund will deviate from the
characteristics that are described in the related Prospectus Supplement.
The Contracts in a Trust Fund will generally have monthly payments due on
the first of each month (each, a "Due Date") and will be fully-amortizing
Contracts. Contracts may have Due Dates which occur on a date other than the
first of each month. The Contract Pools may include adjustable rate Contracts
that provide for payment adjustments to be made less frequently than adjustments
in the Contract Rates. Each adjustment in the Contract Rate which is not made at
the time of a corresponding adjustment in payments (and which adjusted amount of
interest is not paid currently on a voluntary basis by the obligor) will result
in a decrease (if the Contract Rate rises) or an increase (if the Contract Rate
declines) in the rate of amortization of the Contract. Moreover, such payment
adjustments on the Contracts may be subject to certain limitations, as specified
in the Prospectus Supplement, which may also affect the rate of amortization on
the Contract. As a result of such provisions, the amount of interest accrued in
any month may equal or exceed the scheduled monthly payment on the Contract. In
any such month, no principal would be payable on the Contract, and if the
accrued interest exceeded the scheduled monthly payment, such excess interest
due would become "Deferred Interest" that is added to the principal balance of
the Contract. Deferred Interest will bear interest at the Contract Rate until
paid. If such limitations prevent the payments from being sufficient to amortize
fully the Contract by its stated maturity date, a lump sum payment equal to the
remaining unpaid principal balance will be due on such stated maturity date.
The geographic distribution of Manufactured Homes will be set forth in the
Prospectus Supplement. Each Prospectus Supplement will set forth the percentage
of the Cut-Off Date Aggregate Principal Balance of any Contracts in the Contract
Pool which are secured by Manufactured Homes which have become permanently
affixed to real estate. Each Prospectus Supplement will also set forth the
percentage of the Cut-Off Date Aggregate Principal Balance of the Contracts in
the related Contract Pool representing the refinancing of existing mortgage
indebtedness.
If specific information respecting the Contracts to be included in a Trust
Fund is not known to the Sponsor at the time the Securities of a Series are
initially offered, more general information of the nature described above will
be provided in the Prospectus Supplement and final specific information will be
set forth in a Current Report on Form 8-K to be available to investors on the
date of issuance thereof and to be filed with the Commission promptly after the
initial issuance of such 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 and/or Contracts (the "Underlying Loans") or (b) collateralized
obligations secured by Underlying
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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 and not purchased as part of the original
distribution 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 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;
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(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 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
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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.
Pool Insurance Policy. The related Prospectus Supplement will describe any
pool insurance policy obtained by the Depositor for the Mortgage Loans and/or
Contracts 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 or the Manufactured Home underlying a Contract (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 Manufactured Home, 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 Manufactured Home or (ii) upon transfer
of such Mortgaged Property or
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Manufactured Home to the special hazard insurer, the unpaid principal balance of
such Mortgage Loan or Contract 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 or
Manufactured Home. Any amount paid as the cost of repair of such Mortgaged
Property or Manufactured Home 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 or replacement of the Manufactured
Home with the proceeds described under (i) above is expected to satisfy the
condition under any pool insurance policy that such Mortgaged Property be
restored or Manufactured Home replaced before a claim under such pool insurance
policy may be validly presented with respect to the defaulted Mortgage Loan or
Contract secured by such Mortgaged Property or Manufactured Home, as applicable.
The payment described under (ii) above will render unnecessary presentation of a
claim in respect of such Mortgage Loan or Contract 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 or Contract 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 or the Manufactured Home securing the Contract at an
amount less than the then-outstanding principal balance of such Mortgage Loan or
Contract. The amount of the secured debt could be reduced to such value, and the
holder of such Mortgage Loan or Contract thus would become an unsecured creditor
to the extent the outstanding principal balance of such Mortgage Loan or
Contract exceeds the value so assigned to the Mortgaged Property or the
Manufactured Home by the bankruptcy court. In addition, certain other
modifications of the terms of a Mortgage Loan or Contract 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 Contract or a reduction by such court of the principal amount
of a Mortgage Loan or Contract 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 and/or
Contracts 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/or Contracts, and will not be restored.
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.
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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 and/or
Contracts 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/or Contracts 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 or Contract 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 or Contract.
The Servicer, to the extent permitted by law, will establish and maintain
escrow or impound accounts ("Escrow Accounts") with respect to Mortgage Loans
and/or Contracts in which payments by obligors to pay taxes, assessments,
mortgage and hazard insurance premiums, and other comparable items will be
deposited. Mortgage Loans and/or Contracts 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 and/or
Contracts. 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 or
Manufactured Home securing the related Contract 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.
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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. 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 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 Manufactured Home 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
(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 and/or Contracts (including, for this purpose, Liquidation
Proceeds and amounts representing proceeds of insurance policies covering
the related Mortgaged Property or Manufactured
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Home, as applicable) 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 or Manufactured Home 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 or
Contract, 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 or Contract;
(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 or Contract
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 and/or Contracts. 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 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 and/or Contracts 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 or
Contract, 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.
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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 or Contract 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 or Manufactured Home is
located. The standard hazard insurance policies will provide for coverage at
least equal to the applicable state standard form of fire insurance policy with
extended coverage for property of the type securing the related Mortgage Loans
and/or Contracts. In general, the standard form of fire and extended coverage
policy will cover physical damage to or destruction of, the related Mortgaged
Property or Manufactured Home caused by fire, lightning, explosion, smoke,
windstorm, hail, riot, strike and civil commotion, subject to the conditions and
exclusions particularized in each policy. Because the standard hazard insurance
policies relating to the Mortgage Loans and/or Contracts will be underwritten by
different hazard insurers and will cover Mortgaged Properties and Manufactured
Homes 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 or Manufactured Home Securing a Contract typically will
contain a "coinsurance" clause which, in effect, will require the insured at all
times to carry hazard insurance of a specified percentage (generally 80% to 90%)
of the full replacement value of the Mortgaged Property or Manufactured Home,
including the improvements on any Mortgaged Property or Manufactured Home, in
order to recover the full amount of any partial loss. If the insured's coverage
falls below this specified percentage, 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 or Manufactured Home, 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 or
Manufactured Home and improvements. Since the amount of hazard insurance to be
maintained on the improvements securing the Mortgage Loans and Manufactured
Homes declines as the principal balances owing thereon decrease, and since the
value of the Mortgaged Properties or Manufactured Home will fluctuate in value
over time, the effect of this requirement in the event of partial loss may be
that hazard insurance proceeds will be insufficient to restore fully the damage
to the affected Mortgaged Property or Manufactured Home.
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 or Contract. 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.
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 or Manufactured Home, 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 and/or Contracts, 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
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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 or possession of the Manufactured
Homes securing the Contracts as come into and continue in default and as to
which no satisfactory arrangements can be made for collection of delinquent
payments. In connection with such foreclosure, repossession 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 repossession or
towards the restoration of the Mortgaged Property or Manufactured Home unless it
determines that (i) such restoration, repossession or foreclosure will increase
the Liquidation Proceeds in respect of the related Mortgage Loan or Contract
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 or
Contract a modification of such Mortgage Loan or Contract (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 or Manufactured Homes in
connection with a defaulted Contract, as will be further specified in the
related Prospectus Supplement,.
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,
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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 or Contract, 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 or Contract (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 or
Contracts. 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 or
Contract 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 or Contract, 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 and/or Contracts 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.
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)
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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.
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
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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. If any
document required to be in the file relating to the Primary Assets delivered by
the Depositor to the Trustee (or Custodian) is found by the Trustee within a
period not to exceed 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 a period not to exceed
90 days, the Depositor or Originator will, not later than a period not to exceed
90 days 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.
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
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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;
(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;
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(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 and/or Contracts 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 and/or Contracts (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.
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
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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
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
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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/or Contracts), 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 re-registration, 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 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 Trust
Estate.
The mandatory termination may take the form of an auction sale. Within a
certain period following the failure of the holder of the optional termination
right to exercise such right, the required party shall solicit bids for the
purchase of all Mortgage Loans remaining in the Trust. In the event that
satisfactory bids (which would not be less than an amount necessary to pay all
principal and interest on the securities outstanding) are received as specified
in the related 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 and/or Contracts. If satisfactory bids are not received, such party shall
decline to sell the Mortgage Loans and/or Contracts and shall not be under any
obligation to solicit any further bids or otherwise negotiate any further sale
of the Mortgage Loans and/or Contracts. 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 and Contracts, 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 loan on a debtor's residence by paying arrearages within a
reasonable time period and reinstating the original loan payment schedule even
though the lender accelerated the loan and final judgment of foreclosure had
been entered in state court (provided no sale of the residence had yet occurred)
prior to the filing of the debtor's petition. Some courts with federal
bankruptcy jurisdiction have approved plans, based on the particular facts of
the reorganization case, that effected the curing of a loan default by paying
arrearages over a number of years.
Court with federal bankruptcy jurisdiction also have indicated that the
terms of a loan secured by property of the debtor may be modified. These courts
have allowed modifications that include reducing the amount of each monthly
payment, changing the rate of interest, altering the repayment schedule,
forgiving all or a portion of the debt and reducing the lender's security
interest to the value of the residence, thus leaving the lender a general
unsecured creditor for the difference between the value of the residence and the
outstanding balance of the loan.
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 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
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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
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 loans and fail to
comply with the provisions of the law. In some cases, this liability may affect
assignees of the loans.
Security Interests
Real Estate Mortgages. The Mortgage Loans for a Series will be secured by
either mortgages or deeds of trust or deeds to secure debt depending upon the
prevailing practice in the state in which the Mortgaged Property subject to a
Mortgage Loan is located. The filing of a mortgage, deed of trust or deed to
secure debt creates a lien or title interest upon the real property covered by
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 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,
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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 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.
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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 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" 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.
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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 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
loans having higher mortgage rates, may increase the likelihood of refinancing
or other early retirements of such 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 loans originated by certain lenders after March 31, 1980.
Similar federal statutes were in effect with respect to 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 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 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
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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.
General -- Contracts
General
As a result of the assignment of the Contracts to the Trustee, the Trust
Fund will succeed collectively to all of the rights (including the right to
receive payment on the Contracts) and will assume the obligations of the obligee
under the Contracts. Each Contract evidences both (a) the obligation of the
obligor to repay the loan evidenced thereby, and (b) the grant of a security
interest in the Manufactured Home to secure repayment of such loan. Certain
aspects of both features of the Contracts are described more fully below.
The Contracts generally are "chattel paper" as defined in the Uniform
Commercial Code (the "UCC") in effect in the states in which the Manufactured
Homes initially were registered. Pursuant to the UCC, the sale of chattel paper
is treated in a manner similar to perfection of a security interest in chattel
paper. Under the Pooling and Servicing Agreement, the Servicer will transfer
physical possession of the Contracts to the Trustee or a designated custodian or
may retain possession of the Contracts as custodian for the Trustee. In
addition, the Servicer will make an appropriate filing of a UCC-1 financing
statement in the appropriate states to give notice of the Trustee's ownership of
the Contracts. Unless otherwise specified in the related Prospectus Supplement,
the Contracts will not be stamped or marked otherwise to reflect their
assignment from the Sponsor to the Trustee. Therefore, if through negligence,
fraud or otherwise, a subsequent purchaser were able to take physical possession
of the Contracts without notice of such assignment, the Trustee's interest in
Contracts could be defeated.
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Security Interests in the Manufactured Homes
The Manufactured Homes securing the Contracts may be located in all 50
states. Security interests in manufactured homes may be perfected either by
notation of the secured party's lien on the certificate of title or by delivery
of the required documents and payment of a fee to the state motor vehicle
authority, depending on state law. In some non-title states, perfection pursuant
to the provisions of the UCC is required. The Servicer may effect such notation
or delivery of the required documents and fees, and obtain possession of the
certificate of title, as appropriate under the laws of the state in which any
manufactured home securing a manufactured housing conditional sales contract is
registered. In the event the Servicer fails, due to clerical errors, to effect
such notation or delivery, or files the security interest under the wrong law
(for example, under a motor vehicle title statute rather than under the UCC, in
a few states), the securityholders may not have a first priority security
interest in the Manufactured Home securing a Contract. As manufactured homes
have become larger and often have been attached to their sites without any
apparent intention to move them, courts in many states have held that
manufactured homes, under certain circumstances, may become subject to real
estate title and recording laws. As a result, a security interest in a
manufactured home could be rendered subordinate to the interests of other
parties claiming an interest in the home under applicable state real estate law.
In order to perfect a security interest in a manufactured home under real estate
laws, the secured party must file either a "fixture filing" under the provisions
of the UCC or a real estate mortgage under the real estate laws of the state
where the home is located. These filings must be made in the real estate records
office of the county where the home is located. Substantially all of the
Contracts contain provisions prohibiting the borrower from permanently attaching
the Manufactured Home to its site. So long as the borrower does not violate this
agreement, a security interest in the Manufactured Home will be governed by the
certificate of title laws or the UCC, and the notation of the security interest
on the certificate of title or the filing of a UCC financing statement will be
effective to maintain the priority of the security interest in the Manufactured
Home. If, however, a Manufactured Home is permanently attached to its site,
other parties could obtain an interest in the Manufactured Home which is prior
to the security interest originally retained by the Seller and transferred to
the Sponsor. With respect to a Series of Securities and if so described in the
related Prospectus Supplement, the Servicer may be required to perfect a
security interest in the Manufactured Home under applicable real estate laws.
The Servicer will represent that at the date of the initial issuance of the
related Securities it has obtained a perfected first priority security interest
by proper notation or delivery of the required documents and fees with respect
to substantially all of the Manufactured Homes securing the Contracts.
The Sponsor will cause the security interests in the Manufactured Homes to
be assigned to the Trustee on behalf of the securityholders. Unless otherwise
specified in the related Prospectus Supplement, neither the Sponsor nor the
Trustee will amend the Certificates of title to identify the Trustee or the
Trust Fund as the new secured party, and neither the Sponsor nor the Servicer
will deliver the Securities of title to the Trustee or note thereon the interest
of the Trustee. Accordingly, the Servicer (or the seller) which continue to be
named as the secured party on the certificate of title relating to the
Manufactured Homes. In many states, such assignment is an effective conveyance
of such security interest without amendment of any lien noted on the related
certificate of title and the new secured party succeeds to the Sponsor's rights
as the secured party. However, in some states there exists a risk that, in the
absence of an amendment to the certificate of title, such assignment of the
security interest in the Manufactured Home might not be effective or perfected
or that, in the absence of such notation or delivery to the Trustee, the
assignment of the security interest in the Manufactured Home might not be
effective against creditors of the Servicer (or the Seller) or a trustee in
bankruptcy of the Servicer (or the Seller).
In the absence of fraud, forgery or permanent affixation of the
Manufactured Home to its site by the Manufactured Home owner, or administrative
error by state recording officials, the notation of the lien of the Servicer (or
the Seller) on the certificate of title or delivery of the required documents
and fees will be sufficient to protect the securityholders against the rights of
subsequent purchasers of a Manufactured Home or subsequent lenders who take a
security interest in the Manufactured Home. If there are any Manufactured Homes
as to which the security interest assigned to the Trustee is not perfected, such
security interest would be subordinate to, among others, subsequent purchasers
for value of Manufactured Homes and holders of perfected security interests.
There also exists a risk in not identifying the Trustee as the new secured party
on the certificate of title that, through fraud or negligence, the security
interest of the Securityholders could be released.
In the event that the owner of a Manufactured Home moves it to a state
other than the state in which such Manufactured Home initially is registered,
under the laws of most states the perfected security interest in the
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Manufactured Home would continue for four months after such relocation and
thereafter until the owner re-registers the Manufactured Home in such state. If
the owner were to relocate a Manufactured Home to another state and not
re-register the Manufactured Home in such state, and if steps are not taken to
re-perfect the Trustee's security interest in such state, the security interest
in the Manufactured Home would cease to be perfected. A majority of states
generally require surrender of a certificate of title to re-register a
Manufactured Home; accordingly, the Trustee must surrender possession if it
holds the certificate of title to such Manufactured Home or, in the case of
Manufactured Homes registered in states which provide for notation of lien, the
Servicer would receive notice of surrender if the security interest in the
Manufactured Home is noted on the certificate of title. Accordingly, the Trustee
would have the opportunity to re-perfect its security interest in the
Manufactured Home in the state of relocation. In states which do not require a
certificate of title for registration of a manufactured home, re-registration
could defeat perfection. In the ordinary course of servicing the manufactured
housing conditional sales contracts, the Servicer takes steps to effect such
re-perfection upon receipt of notice of registration or information from the
obligor as to relocation. Similarly, when an obligor under a manufactured
housing conditional sales contract sells a manufactured home, the Trustee (or
its custodian) must surrender possession of the certificate of title or the
Servicer will receive notice as a result of its lien noted thereon and
accordingly will have an opportunity to require satisfaction of the related
manufactured housing conditional sales contract before release of the lien.
Under the Pooling and Servicing Agreement, the Servicer is obligated to take
steps, at the Servicer's expense, as are necessary to maintain perfection of
security interests in the Manufactured Homes.
Under the laws of most states, liens for repairs performed on a
Manufacturer Home and liens for personal property taxes take priority over a
perfected security interest. The Seller will represent in the Pooling and
Servicing Agreement that it has no knowledge of any such liens with respect to
any Manufactured Home securing payment on any Contract. However, such liens
could arise at any time during the term of a Contract. No notice will be given
to the Trustee or Securityholders in the event such a lien arises.
Enforcement of Security Interests in Manufactured Homes
The Servicer on behalf of the Trustee, to the extent required by the
related Pooling and Servicing Agreement, may take action to enforce the
Trustee's security interest with respect to Contracts in default by repossession
and resale of the Manufactured Homes securing such defaulted Contracts. So long
as the Manufactured Home has not become subject to the real estate law, a
creditor can repossess a Manufactured Home securing a Contract by voluntary
surrender, by "self-help" repossession that is "peaceful" (i.e., without breach
of the peace) or, in the absence of voluntary surrender and the ability to
repossess without breach of the peace, by judicial process. The holder of a
Contract must give the debtor a number of days' notice, which varies from 10 to
30 days depending on the state, prior to commencement of any repossession. The
UCC and consumer protection laws in most states place restrictions on
repossession sales, including requiring prior notice to the debtor and
commercial reasonableness in effecting such a sale. The law in most states also
requires that the debtor be given notice of any sale prior to resale of the unit
so that the debtor may redeem at or before such resale. In the event of such
repossession and resale of a Manufactured Home, the Trustee would be entitled to
be paid out of the sale proceeds before such proceeds could be applied to the
payment of the claims of unsecured creditors or the holders of subsequently
perfected security interests or, thereafter, to the debtor.
Under the laws applicable in most states, a creditor is entitled to obtain
a deficiency judgment from a debtor for any deficiency on repossession and
resale of the manufactured home securing such a debtor's loan. However, some
states impose prohibitions or limitations on deficiency judgments, and in many
cases the defaulting borrower would have no assets with which to pay a judgment.
Certain other statutory provisions, including federal and state bankruptcy
and insolvency laws and general equitable principles, may limit or delay the
ability of a lender to repossess and resell collateral or enforce a deficiency
judgment.
Consumer Protection Laws
The so-called "Holder-in-Due-Course" rule of the Federal Trade Commission
is intended to defeat the ability of the transferor of a consumer credit
contract which is the seller of goods which gave rise to the transaction (and
certain related lenders and assignees) to transfer such contract free of notice
of claims by the debted thereunder.
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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 asset 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.
Transfers of Manufactured Homes; Enforceability of "Due-on-Sale" Clauses
The Contracts, in general, prohibit the sale or transfer of the related
Manufactured Homes without the consent of the Servicer and permit the
acceleration of the maturity of the Contracts by the Servicer upon any such sale
or transfer that is not consented to.
In the case of a transfer of a Manufactured Home after which the Servicer
desires to accelerate the maturity of the related Contract, the Servicer's
ability to do so will depend on the enforceability under state law of the
"due-on-sale" clause. The Garn-St Germain Depository Institutions Act of 1982
preempts, subject to certain exceptions and conditions, state laws prohibiting
enforcement of "due-on-sale" clauses applicable to the Manufactured Homes.
Consequently, in some states the Servicer may be prohibited from enforcing a
"due-on-sale" clause in respect of certain Manufactured Homes.
Applicability of Usury Laws
Title V of the Depository Institutions Deregulation and Monetary Control
Act of 1980, as amended ("Title V"), provides that, subject to the following
conditions, state usury limitations shall not apply to any loan which is secured
by a first lien on certain kinds of manufactured housing. The Contracts would be
covered if they satisfy certain conditions, among other things, governing the
terms of any prepayments, late charges and deferral fees and requiring a 30-day
notice period prior to instituting any action leading to repossession of the
related unit.
Title V authorized any state to reimpose limitations on interest rates and
finance charges by adopting before April 1, 1983 a law or constitutional
provision which expressly rejects application of the federal law. Fifteen states
adopted such a law prior to the April 1, 1983 deadline. In addition, even where
Title V was not so rejected, and state is authorized by the law to adopt a
provision limiting discount points or other charges on loans covered by Title V.
The Seller will represent that all of the Contracts comply with applicable usury
law.
Formaldehyde Litigation with Respect to Contracts
A number of lawsuits have been brought in the United States alleging
personal injury from exposure to the chemical formaldehyde, which is preset in
many building materials, including such components of manufactured housing as
plywood flooring and wall paneling. Some of these lawsuits were brought against
manufacturers of manufactured housing, suppliers of component parts, and related
persons in the distribution process. Sponsor is aware of a limited number of
cases in which plaintiffs have won judgments in these lawsuits.
The holder of any Contract secured by a Manufactured Home with respect to
which a formaldehyde claim has been successfully asserted may be liable to the
obligor for the amount paid by the obligor on the related Contract and may be
unable to collect amounts still due under the Contract. The successful assertion
of such claim constitutes a breach of a representation or warranty of the person
specified in the related Prospectus Supplement, and the Securityholders would
suffer a loss only to the extent that (i) such person breached its obligation to
repurchase the Contract in the event an obligor is successful in asserting such
a claim, and (ii) such person, the Servicer or the Trustee were unsuccessful in
asserting any claim of contribution or subrogation on behalf of the
Securityholders against the manufacturer or other persons who were directly
liable to the plaintiff for the damages. Typical products liability insurance
policies held by manufacturers and component suppliers of manufactured homes may
not cover liabilities arising from formaldehyde in manufactured housing, with
the result that recoveries from
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such manufacturers, suppliers or other persons may be limited to their corporate
assets without the benefit of insurance.
Soldiers' and Sailors' Civil Relief Act of 1940
Under the 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 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, Contracts 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.
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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.
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 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 and/or Contracts 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 and/or Contracts 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 and/or Contracts 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."
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 and/or Contracts
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(including amounts used to pay reasonable servicing fees and other expenses but
excluding amounts payable to beneficial owners of any corresponding Grantor
Trust Strip Securities) and, subject to the limitations described below, will be
entitled to deduct their shares of any 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/or Contracts 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/or Contracts 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, 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
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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 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.
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The requirement that each beneficial owner of a REMIC Residual Security
report its daily portion of the taxable income or net loss of the REMIC Trust
will continue until there are no Securities of any class outstanding, even
though the beneficial owner of the REMIC Residual Security may have received
full payment of the stated interest and principal on its REMIC Residual
Security.
The Trustee will provide to beneficial owners of REMIC Residual Securities
of each series of Securities (i) 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
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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 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
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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.
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
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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
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
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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 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
the Securities will be classified as debt secured by the related Mortgage Loans
and/or Contracts. Consequently, the Debt Securities will not be treated as
ownership interests in the Mortgage Loans and/or Contracts or the Trust.
Beneficial owners will be required to report income received with respect to the
Debt Securities in accordance with their normal method of accounting. For
additional tax consequences relating to Debt Securities purchased at a discount
or with premium, see "--Discount and Premium," below.
Special Tax Attributes
As described above, REMIC Securities will possess certain special tax
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.
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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.
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 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 and/or Contracts.
Special Tax Attributes
As described above, REMIC Securities will possess certain special tax
attributes by virtue of the REMIC 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,
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the terminated partnership distributes interests in the new partnership to the
purchasing partner and remaining partners in proportion to their interests in
liquidation of the terminated partnership.
Sale or Exchange of Partnership Interests
Generally, capital gain or loss will be recognized on a sale or exchange
of Partnership Interests in an amount equal to the difference between the amount
realized and the seller's tax basis in the Partnership Interests sold. A
beneficial owner of a Partnership Interest's tax basis in a Partnership Interest
will generally equal the beneficial owner's cost increased by the beneficial
owner's share of Trust income (includible in income) and decreased by any
distributions received with respect to 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
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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.
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, 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
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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 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
is unclear the extent to which tax on such transactions
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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 Depositor anticipates that the Prepayment Assumption
for each series of Securities will be consistent with this standard. The
Depositor 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. The Trustee will report original issue
discount based on accrual periods of no longer than one year either (i)
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 or (ii)
beginning on the next day following a payment date and ending on 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
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aggregate amount of accrued market discount on such Security not previously
included in income. With respect to 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
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acquisition premium. A beneficial owner should consult its own tax advisor
regarding the time and manner of making and the scope of the election and the
implementation of the constant yield method.
Backup Withholding
Distributions of interest and principal, as well as distributions of
proceeds from the sale of Securities, may be subject to the "backup withholding
tax" under section 3406 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
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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 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
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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.
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
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(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 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 Depositor, 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, a division of Wheat First Securities, Inc. ("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. 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 in servicing such Mortgage Loan.
"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 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 Residential Asset Funding Corporation
"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 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.
"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.
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"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.
"Residual Interest" means a residual interest in a REMIC.
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"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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Page
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SUMMARY OF PROSPECTUS........................................................5
RISK FACTORS................................................................17
DESCRIPTION OF THE SECURITIES...............................................22
THE TRUST FUNDS.............................................................25
CREDIT ENHANCEMENT..........................................................33
SERVICING OF MORTGAGE LOANS.................................................35
THE AGREEMENTS..............................................................41
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS.....................................50
THE DEPOSITOR...............................................................60
USE OF PROCEEDS.............................................................60
MATERIAL FEDERAL INCOME TAX CONSEQUENCES....................................61
STATE TAX CONSIDERATIONS....................................................77
ERISA CONSIDERATIONS........................................................77
LEGAL INVESTMENT............................................................80
PLAN OF DISTRIBUTION........................................................80
LEGAL MATTERS...............................................................80
FINANCIAL INFORMATION.......................................................80
GLOSSARY OF TERMS...........................................................81
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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
APR.........................................................................29
ARM Loans...................................................................18
Balloon Loan.................................................................9
bankruptcy bond.............................................................34
Book-Entry Securities.......................................................48
Business Day................................................................12
Capitalized Interest Account................................................12
Cede........................................................................48
CERCLA......................................................................20
Certificate Schedule........................................................42
Certificates..............................................................1, 5
Class........................................................................2
Code........................................................................61
Collection Account..........................................................10
Combined Loan-to-Value Ratio.................................................9
Commission...................................................................3
Condominium Units...........................................................26
Contract Rate...............................................................29
Contracts...................................................................29
Cooperative Dwellings.......................................................26
Credit Enhancement..........................................................12
Credit Enhancer.............................................................11
Current Interest Rates.......................................................9
Custodian...................................................................41
Cut-Off Date.................................................................8
Cut-Off Date Aggregate Principal Balance....................................30
D&P.........................................................................78
Debt Securities.........................................................14, 61
Deferred Interest...........................................................30
Deleted Primary Asset.......................................................42
Deposit Agreement...........................................................13
Depositor....................................................................1
Depositor Securities........................................................60
Distribution Account........................................................11
Distribution Date............................................................2
DOL.........................................................................78
Due Date....................................................................30
Eligible Investments....................................................12, 32
ERISA.......................................................................14
Escrow Accounts.............................................................35
Event of Default............................................................40
Exchange Act.................................................................4
FASIT...................................................................14, 61
FASIT High-Yield Securities.................................................14
FASIT Ownership Security....................................................14
FASIT Regular Securities....................................................14
FASIT Securities............................................................61
FDIC........................................................................36
FHA.........................................................................26
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FHLMC.......................................................................54
Final Scheduled Distribution Date............................................6
First Union.................................................................80
fully taxable bonds.........................................................75
Garn-St. Germain Act........................................................54
Grantor Trust...............................................................61
Grantor Trust Securities....................................................14
Holders......................................................................3
Indenture...................................................................22
Indirect Participant........................................................48
IRS.........................................................................62
Issuer.......................................................................5
Lifetime Rate Caps...........................................................9
Liquidation Proceeds........................................................36
Loan Rate....................................................................9
Loan Schedule...............................................................42
Loan-to-Value Ratio......................................................9, 30
Minimum Principal Payment Agreement.........................................13
Modification................................................................39
Mortgage Loans........................................................1, 8, 26
Notes.....................................................................1, 5
Notional Amount..............................................................6
Originator...................................................................1
OTS.........................................................................55
Owner Trust..................................................................5
Owner Trustee................................................................6
PAC..........................................................................5
Participants................................................................48
Partnership.................................................................61
Partnership Interests...................................................14, 61
Physical Certificates.......................................................48
Plan........................................................................77
Plan Assets Regulation......................................................78
Pool.........................................................................1
Pooling and Servicing Agreement.............................................22
Pre-Funded Amount...........................................................11
Pre-Funding Account.........................................................11
Pre-Funding Period..........................................................11
Premium Security............................................................75
Prepayment Assumption.......................................................73
Primary Assets...............................................................1
Prospectus Supplements.......................................................1
PS Agreement................................................................31
PS Servicer.................................................................10
PS Sponsor..................................................................10
PS Trustee..................................................................10
PTCE........................................................................79
Qualifying Substitute Primary Asset.........................................42
Rating Agency...............................................................12
REMIC...................................................................14, 61
REMIC Regular Securities....................................................14
REMIC Regulations...........................................................63
REMIC Residual Securities...................................................14
REMIC Securities............................................................61
REO Property................................................................37
Reserve Fund................................................................13
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Restricted Group............................................................79
Retained Interests..........................................................41
Rule of 78s Mortgage Loan...................................................27
Securities...................................................................1
Security Registrar..........................................................48
Series.......................................................................1
Servicer.....................................................................1
Servicing Agreement.........................................................25
Servicing Fee...............................................................14
Settlement Date.............................................................63
Simple Interest Mortgage Loan...............................................27
Single Family Properties....................................................26
SMMEA.......................................................................15
Title I Program.............................................................28
Title V.................................................................55, 59
Trust Agreement..............................................................5
Trust Fund...................................................................1
Trustee......................................................................5
UCC.....................................................................48, 56
Underlying Loans.............................................................9
Underwriter Exemptions......................................................78
