Filed Pursuant to Rule 424(b)(5)
File Number 333-64775
PROSPECTUS SUPPLEMENT
(To prospectus dated November 10, 1998)
- ---------------
NOVASTAR MORTGAGE FUNDING TRUST,
SERIES 1999-1 $160,000,000
ISSUER
NOVASTAR HOME EQUITY LOAN
ASSET-BACKED BONDS, SERIES 1999-1
NOVASTAR MORTGAGE, INC.
SELLER AND SERVICER
RESIDENTIAL ASSET FUNDING CORPORATION
DEPOSITOR
- ---------------
NovaStar Mortgage Funding Trust, Series 1999-1 will issue four classes of
asset-backed bonds secured primarily by a pledge of the assets of the issuer.
The issuer's assets consist primarily of conventional, first mortgage loans on
one- to four-family residential properties.
- --------------------------------
CONSIDER CAREFULLY THE RISK
FACTORS STARTING ON PAGE S-11
OF THIS PROSPECTUS SUPPLE-
MENT AND PAGE 17 OF THE
PROSPECTUS BEFORE MAKING
A DECISION TO INVEST IN THE
BONDS.
The bonds represent asset-
backed debt secured prima-
rily by the mortgage loans
held by the issuer. The bonds
are not interests in or obli-
gations of any other person.
No governmental agency or
instrumentality has insured
or guaranteed the bonds or
the underlying mortgage loans.
- --------------------------------
THE BONDS --
The issuer will issue the four classes of bonds offered for sale by this
prospectus supplement.
Interest and principal on each class of bonds is scheduled to be paid monthly on
the 25th day of the month or, if such day is not a business day, the next
succeeding business day. The first scheduled payment date is February 25, 1999.
CREDIT ENHANCEMENT --
The assets of the issuer will initially exceed the principal balance of the
bonds and such overcollateralization will be available to absorb losses.
Excess interest from any of the four groups of mortgage loans may be utilized to
cover credit losses and certain interest shortfalls on the classes of bonds
relating to the other groups of mortgage loans.
The issuer will also issue two classes of subordinated bonds and a residual
certificate which are not offered by this prospectus supplement.
Each class of bonds will be unconditionally and irrevocably guaranteed as to the
timely payment of scheduled interest and ultimate principal pursuant to the
terms of a financial guarantee insurance policy to be issued by:
(FSA LOGO)
OFFERING INFORMATION:
<TABLE>
<CAPTION>
INITIAL AGGREGATE UNDERWRITING PROCEEDS TO THE
CLASS BOND BALANCE PRICE TO PUBLIC DISCOUNT DEPOSITOR(2)
- ------------------- ------------------- ----------------- -------------- ----------------
<S> <C> <C> <C> <C>
Class A-1 Bonds . $ 75,000,000 100.00% 0.35% $ 74,737,500
Class A-2 Bonds . $ 20,000,000 100.00% 0.35% $ 19,930,000
Class A-3 Bonds . $ 45,000,000 100.00%(1) 0.35% $ 44,842,500
Class A-4 Bonds . $ 20,000,000 100.00%(1) 0.35% $ 19,930,000
Total ........... $ 160,000,000 100.00% 0.35% $ 159,440,000
</TABLE>
- ---------
(1) Plus accrued interest, if any, from January 1, 1999.
(2) Before deducting expenses, estimated to be $350,000.
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 OR COMPLETE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Wheat First Securities, Inc., acting through First Union Capital Markets, a
division of Wheat First Securities, Inc. as underwriter, will offer the bonds
only after the bonds have been issued by the issuer, and delivered to, and
accepted by the underwriter. The underwriter has the right to reject any order.
We expect to deliver the bonds on or about January 29, 1999 through The
Depository Trust Company, CEDEL S.A. or the Euroclear System.
FIRST UNION CAPITAL MARKETS
The date of this prospectus supplement is January 22, 1999
<PAGE>
IMPORTANT NOTICE ABOUT THE INFORMATION PRESENTED IN THIS PROSPECTUS SUPPLEMENT
AND THE IMPORTANT ACCOMPANYING PROSPECTUS
We provide information to you about the offered bonds in two separate
documents that progressively provide more detail: (1) the accompanying
prospectus, which provides general information, some of which may not apply to
your series of bonds, and (2) this prospectus supplement, which describes the
specific terms of your series of bonds.
This prospectus supplement does not contain complete information about the
offering of the bonds. Additional information is contained in the prospectus.
You are urged to read both this prospectus supplement and the prospectus in
full. We cannot sell the offered bonds to you unless you have received both
this prospectus supplement and the prospectus.
THE PROSPECTUS CONTEMPLATES SEVERAL DIFFERENT TYPES OF SECURITIES, SOME OF
WHICH ARE NOT RELEVANT TO THIS OFFERING. YOU SHOULD RELY ON THE INFORMATION IN
THIS PROSPECTUS SUPPLEMENT WITH RESPECT TO THE FOUR CLASSES OF BONDS OFFERED
HEREBY.
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 bonds offered pursuant to this prospectus
supplement. This prospectus supplement and the prospectus, which form a part of
the registration statement, omit certain information contained in such
registration statement pursuant to the rules and regulations of the Commission.
You may inspect and copy the registration statement at the Public Reference
Room at the Commission at 450 Fifth Street, N.W., Washington, D.C. and the
Commission's regional offices at Seven World Trade Center, 13th Floor, New
York, New York, 10048 and Northwestern Atrium Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661. You can obtain copies of such materials at
prescribed rates from the Public Reference Section of the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549. In addition, the Commission
maintains a site on the World Wide Web containing reports, proxy materials,
information statements and other items. The address is http://www.sec.gov.
We include cross-references in this prospectus supplement and the
accompanying prospectus to captions in these materials where you can find
further related discussions. The following table of contents and the table of
contents included in the accompanying prospectus provide the pages on which
these captions are located.
<PAGE>
TABLE OF CONTENTS
TABLE OF CONTENTS.................................iii
SUMMARY.............................................1
Parties..........................................1
Description of the Bonds.........................1
Payments on the Bonds............................2
Subordinated Bonds and the Residual Certificate..5
Credit Enhancement...............................5
Mortgage Loan Pool...............................6
Pre-Funding Account and Interest Coverage
Account..........................................8
Optional Termination.............................9
Federal Income Tax Consequences..................9
ERISA Considerations.............................9
Legal Investment.................................9
Rating...........................................9
RISK FACTORS.......................................11
Underwriting Standards..........................11
Delinquencies and Potential Delinquencies.......11
Balloon Loans...................................12
Geographic Concentration........................12
Subsequent Mortgage Loans.......................12
Mandatory Prepayment............................12
Special Prepayment Considerations...............12
Special Yield Considerations....................13
Risk of Mortgage Loan Yield Reducing the
Interest Rate on the Bonds......................13
Sale of Converted Mortgage Loans................14
Year 2000 Issue.................................15
Year 2000 Issue and The Depository Trust
Company.........................................15
USE OF PROCEEDS....................................16
DESCRIPTION OF THE MORTGAGE POOL...................16
General.........................................16
Mortgage Rate Adjustment........................18
Six-Month LIBOR Index...........................18
One-Year CMT Index..............................18
Mortgage Loan Characteristics...................19
Conveyance of Subsequent Mortgage Loans
and the Pre-Funding Account.....................59
Underwriting Standards for the Mortgage Loans...60
Primary Mortgage Insurance Policies.............64
Additional Information..........................64
THE SELLER.........................................65
THE ISSUER.........................................65
THE CONVERTED LOAN PURCHASER.......................66
NFI................................................66
THE TRANSFEROR.....................................66
THE DEPOSITOR......................................66
THE OWNER TRUSTEE..................................67
THE INDENTURE TRUSTEE..............................67
THE BOND ADMINISTRATOR.............................67
THE BOND INSURER...................................67
General.........................................67
Reinsurance.....................................68
Ratings.........................................68
Capitalization..................................68
Incorporation of Certain Information by
Reference.......................................69
Insurance Regulation............................70
DESCRIPTION OF THE BONDS...........................70
General.........................................70
Book-Entry Bonds................................71
Assignment of Mortgage Loans....................75
Payments........................................77
Available Funds.................................78
Interest Payments on the Bonds..................78
Calculation of One-Month LIBOR..................80
Principal Payments on the Bonds.................81
Priority of Payment.............................82
Overcollateralization Provisions................83
Cross-Collateralization.........................85
Bond Insurance Policy...........................85
Advances........................................88
The Paying Agent................................89
Optional Termination............................89
Mandatory Prepayments on the Bonds..............89
Interest Coverage Account.......................89
CERTAIN YIELD AND PREPAYMENT CONSIDERATIONS........90
DESCRIPTION OF THE SERVICING AGREEMENT............101
The Servicer...................................101
Foreclosure and Delinquency Experience with
Subprime Mortgage Loans........................101
Servicing and Other Compensation...............102
Ninety-Day Renewable Terms.....................103
Sale of Converted Mortgage Loans...............104
Purchase of Delinquent Mortgage Loans..........105
THE INDENTURE.....................................105
Control by Bond Insurer........................105
Events of Default..............................106
Rights Upon Event of Default...................106
Limitation on Suits............................107
The Bond Administrator and the Indenture
Trustee........................................108
FEDERAL INCOME TAX CONSEQUENCES...................108
REMIC Elections................................108
METHOD OF DISTRIBUTION............................109
CERTAIN LEGAL MATTERS.............................110
RATINGS...........................................110
LEGAL INVESTMENT..................................110
ERISA CONSIDERATIONS..............................111
EXPERTS...........................................115
ANNEX I GLOBAL CLEARANCE,
SETTLEMENT AND TAX DOCUMENTATION
PROCEDURES........................................116
Initial Settlement.............................116
Secondary Market Trading.......................117
Certain U.S. Federal Income Tax
Documentation Requirements.....................119
INDEX OF PRINCIPAL TERMS..........................120
<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 bonds, 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 (i) in this prospectus supplement and on
page (i) in the accompanying prospectus.
PARTIES
ISSUER
NovaStar Mortgage Funding Trust, Series 1999-1, a Delaware trust. An election
will be made to treat certain assets of the Issuer as a "real estate mortgage
investment conduit" ("REMIC") for federal income tax purposes.
SELLER AND SERVICER
NovaStar Mortgage, Inc., a Virginia corporation. See "The Seller" and
"Description of the Servicing Agreement--The Servicer" herein.
TRANSFEROR
NovaStar Mortgage Funding Corporation II, a Delaware corporation. See "The
Transferor" herein.
THE DEPOSITOR
Residential Asset Funding Corporation, a North Carolina corporation. See "The
Depositor" herein.
OWNER TRUSTEE
Wilmington Trust Company, a Delaware banking corporation.
INDENTURE TRUSTEE
The Chase Manhattan Bank, a New York banking corporation. Chase will act as the
initial paying agent.
BOND ADMINISTRATOR
First Union National Bank, a national banking association. In its capacity as
bond administrator, First Union will act as the initial certificate registrar
and custodian in addition to performing other administrative functions on behalf
of the indenture trustee.
BOND INSURER
Financial Security Assurance Inc. See "The Bond Insurer" herein.
NFI
NovaStar Financial, Inc., a Maryland corporation. See "NFI" herein.
CONVERTED LOAN PURCHASER
NovaStar Capital, Inc., a Delaware corporation. See "Description of the
Servicing Agreement-- Sale of Converted Mortgage Loans" herein.
DESCRIPTION OF THE BONDS
The issuer will issue its Home Equity Loan Asset Backed Bonds, Series 1999-1 in
four
S-1
<PAGE>
classes: the Class A-1 Bonds, the Class A-2 Bonds, the Class A-3 Bonds and
the Class A-4 Bonds. The initial principal amount of each class of bonds is
indicated on the front cover.
THE ASSETS OF THE ISSUER
The bonds will be primarily secured by a pledge of the assets of the issuer. The
assets of the issuer will consist primarily of (i) four separate groups of
conventional, one- to four-family first lien mortgage loans; (ii) a security
interest in the related underlying property; (iii) principal and interest
payments on the mortgage loans; (iv) money on deposit in a pre-funding account
which shall be used to purchase additional mortgage loans; and (v) money on
deposit in other accounts which may be established with respect to the issuer.
Each group of mortgage loans secures only the related class of bonds (and the
subordinated bonds), except to the extent of cross-collateralization of excess
cash flow, as further described herein.
THE FINAL SCHEDULED PAYMENT DATE
The final scheduled payment date for all classes of bonds, on which the final
payment of principal must ultimately be made, is April 25, 2030. We anticipate,
however, that the actual final payment of principal and interest on the bonds
will occur significantly earlier.
BOOK-ENTRY FORMAT
The bonds will be issued, maintained and transferred on the book-entry records
of the Depository Trust Company. The bonds will be offered in registered form,
in minimum denominations of $25,000 and integral multiples of $1,000 in excess
thereof.
PAYMENTS ON THE BONDS
PAYMENT DATES
Principal and interest is scheduled to be paid to the bondholders on the 25th
day of each month, or, if such day is not a business day, on the next succeeding
business day, commencing on February 25, 1999.
RECORD DATES
The indenture trustee will make payments to the bondholders of record as of the
related record date. The record date for the Class A-1 and Class A-2 Bonds is
the last business day prior to a payment date. The record date for the Class A-3
and Class A-4 Bonds is the last day of the calendar month preceding a payment
date. For all classes of bonds, the record date for the first payment date shall
be the closing date.
DUE PERIODS
Generally, payments made to bondholders on each payment date will relate to the
collections of principal and interest on the mortgage loans in the related due
period. The due period commences on the second day of the calendar month
immediately before the month in which the related payment date occurs and ends
on the first day of the calendar month in which the related payment date occurs.
FUNDS AVAILABLE FOR PAYMENT OF INTEREST AND PRINCIPAL
The following funds will generally be available for the payment of interest and
principal on each class of bonds on each payment date:
o the aggregate amount of scheduled payments on the related mortgage loans
due on the related due date and received on or prior to the related
determination date;
o any amounts representing interest on amounts in the payment account and
miscellaneous fees and collections,
S-2
<PAGE>
including assumption fees and prepayment penalties with respect to the
mortgage loans in the related group (but excluding late fees);
o any unscheduled payments and receipts, including prepayments on the related
mortgage loans, received during the related prepayment period and proceeds
of repurchases, and adjustments in the case of substitutions and
terminations, net liquidation proceeds, insurance proceeds, proceeds from
any MI policy and proceeds from the sale of converted mortgage loans from
the related group;
o all advances made for such payment date in respect of the related mortgage
loans;
o the amount, if any, of payments received under the bond insurance policy
for such class; and
o during the funding period, an amount from the interest coverage account to
cover shortfalls in interest caused by the pre-funding feature, and at the
end of the funding period, amounts in the pre-funding account;
net of the bond insurance premium, servicing and other administrative fees and
other amounts reimbursable therefrom to the servicer and any subservicer
allocable to such class.
INTEREST
Interest on the bonds will accrue at the applicable bond interest rate during
the related interest period. Generally for the Class A-1 and Class A-2 Bonds,
the interest period will run from each payment date to and including the day
preceding the next payment date. In the case of the first payment date, interest
begins to accrue on the Class A-1 and Class A-2 Bonds on the day of the closing.
For the Class A-3 and Class A-4 Bonds, the interest period will be the calendar
month immediately preceding the related payment date.
Interest on the Class A-1 and Class A-2 Bonds will be calculated on the basis of
the actual number of days elapsed in the interest period in a year of 360 days.
Interest on the Class A-3 and Class A-4 Bonds will be calculated on the basis of
twelve 30-day months in a 360 day year.
BOND INTEREST RATE
The annual rate of interest on the Class A-1 Bonds will be equal to one-month
LIBOR plus 0.43%.
The annual rate of interest on the Class A-2 Bonds will be equal to one-month
LIBOR plus 0.52%.
The annual rate of interest on the Class A-3 Bonds will be 6.285%.
The annual rate of interest on the Class A-4 Bonds will be 6.386%.
For each payment date after the payment date on which the principal balance of
all mortgage loans is reduced to less than 10% of the sum of the principal
balance of the initial mortgage loans as of the cut-off date and the original
pre-funded amount, the rates of interest on each class of bonds will increase by
the following amounts:
CLASS RATE STEP UP
----- ------------
A-1 0.43%
A-2 0.52%
A-3 0.50%
A-4 0.50%
The rate of interest on each class of bonds is also subject to an available
funds cap rate. If the rate of interest described above for a class of bonds
would exceed the weighted average coupon for the mortgage loans in the related
group net of certain fees of the trust allocated to such class (expressed as an
annual rate) and, for the Class A-1 and Class A-2 Bonds, a minimum spread of
0.50%, then the bond interest rate will be accordingly reduced.
S-3
<PAGE>
If, on any payment date, the available funds cap rate limits the interest rate
on the Class A-1 or Class A-2 Bonds, then the amount of the resulting interest
shortfall will be carried forward and be due and payable on the following
payment date and shall accrue interest at the applicable bond interest rate
until paid. The bond insurance policy does not guarantee payment of this
interest shortfall.
There is no carry-forward feature with respect to the Class A-3 and Class A-4
Bonds.
PRINCIPAL
On each payment date, the bondholders are scheduled to receive an amount of
principal generally equal to the lesser of:
o the remainder of amounts described above under the heading "Funds Available
for Payment of Interest and Principal" for the related group after
reimbursing the bond insurer for amounts paid previously under the bond
insurance policy in respect of such class, and monthly interest on the
related class of bonds; and
o the sum of (i) the scheduled principal on the mortgage loans in the related
group collected or advanced during the related due period, (ii) unscheduled
principal on the mortgage loans in the related group collected during the
related prepayment period and (iii) an accelerated payment of principal
used to maintain the required overcollateralization amount.
ADVANCES
The servicer will make advances in respect of delinquent payments of principal
and interest on the mortgage loans. The servicer, however, is only required to
make such advances if it believes that it can recover the advance from later
proceeds or collections on the related mortgage loan. The purpose of such
advances is to maintain a regular cash flow to the bondholders, not to guarantee
or insure against losses. The Servicer may make advances from its own funds or
from funds held in the collection account.
COMPENSATING INTEREST PAYMENTS
The servicer will also make interest payments to compensate in part for any
shortfall in interest payments on the bonds which result from a mortgagor
prepaying all or part of a mortgage loan. The servicer's obligation to make such
payments is limited to the amount of its servicing fee. The servicer is not
entitled to recover compensating interest payments from the issuer.
APPLICATION OF EXCESS CASH
Generally, because the monthly payments of interest and principal on the
mortgage loans exceed the monthly payments of interest and principal and
administrative fees for the bonds, each month there will be excess cash above
that required to pay principal and interest on the bonds. Excess cash for each
group will be used to pay down the bond balance of the related class of bonds in
order to maintain the required level of overcollateralization and to reimburse
the bond insurer in respect of such bonds. Any excess cash remaining after
payments on the related class of bonds will be used with respect to the other
classes of bonds to make up any interest shortfalls, to fund their
overcollateralization requirement and to reimburse the bond insurer, as further
described herein. Any remaining excess cash will be paid to the holder of the
subordinated bonds and will not be available for any subsequent payments to the
bondholders or the bond insurer.
S-4
<PAGE>
SUBORDINATED BONDS AND THE RESIDUAL CERTIFICATE
The issuer will also issue two classes of subordinated bonds, and one class of
residual certificates. The subordinated bonds and residual certificates are
subordinate in right of payment to the bonds. The Transferor will be the initial
holder of the subordinated bonds and the residual certificates. The subordinated
bonds and the residual certificate are not offered by this prospectus
supplement.
CREDIT ENHANCEMENT
Credit enhancement reduces the risk of losses to bondholders created by
shortfalls in payments received and losses incurred on the mortgage loans. The
credit enhancement available to the bondholders will consist of the bond
insurance policy issued by Financial Security Assurance Inc., the bond insurer,
and the overcollateralization and excess cash flow cross-collateralization
provisions of the indenture.
BOND INSURANCE POLICY
Financial Security Assurance Inc., the bond insurer, will issue its irrevocable
and unconditional bond insurance policy on or before January 29, 1999 for the
benefit of the bondholders. The effect of the bond insurance policy is to
guaranty the timely payment of interest on, and the ultimate payment of the
principal amounts, of each class of bonds.
For any payment date, the amount paid by the bond insurer will generally equal
the sum of (a) the interest payable on the related class of bonds minus the
amount described above under the heading "Funds Available for Payment of
Interest and Principal" for such date and (b) the amount necessary to keep the
bonds from being undercollateralized (i.e., to ensure that the issuer's
liabilities do not exceed its assets).
PAYMENTS NOT INSURED BY THE BOND INSURANCE POLICY
The bond insurance policy does not insure the payment of the following:
o any interest shortfall arising where the available funds rate cap limits
the amount of interest paid on a class of bonds;
o any shortfall in compensating interest as a result of prepayments on the
mortgage loans; or
o shortfalls in interest due to the application of the Relief Act (as defined
in this prospectus supplement).
Payments of these amounts may only be funded from any excess cash which would
otherwise be distributed to the holders of the subordinated bonds.
OVERCOLLATERALIZATION
As of the closing date, the aggregate principal amount of the mortgage loans in
each group and the amount on deposit in the pre-funding account held for such
group is greater than the principal balance of the related class of bonds. This
excess of the issuer's assets over the total principal balance of the bonds is
known as "overcollateralization." The initial overcollateralization (as a
percentage of the related bond balance) for each class of bonds is as follows:
CLASS INITIAL OC
----- ----------
A-1 3.25%
A-2 3.25%
A-3 2.25%
A-4 2.25%
On each payment date, the indenture trustee will apply excess cash from each
group to pay down the bond balance of the related class as necessary to maintain
the required level of overcollateralization for such class.
S-5
<PAGE>
The required level of overcollateralization may increase or decrease over time.
Any increase may result in an accelerated amortization of the bonds until the
required level is reached. Any decrease will result in slower amortization of
the bonds until the required level is reached.
MORTGAGE LOAN POOL
STATISTICAL INFORMATION
The statistical information on the mortgage loans presented in this prospectus
supplement is based on the pool of mortgage loans (divided into four groups) to
be transferred to the issuer on the closing date and are stated as of the
cut-off date, January 1, 1999.
MORTGAGE LOAN DATA
The pool of mortgage loans have been divided into four mortgage loan groups:
Group I: adjustable rate mortgage loans which primarily secure the Class A-1
Bonds;
Group II: adjustable rate mortgage loans which primarily secure the Class A-2
Bonds;
Group III: fixed rate mortgage loans which primarily secure the Class A-3 Bonds;
and
Group IV: fixed rate mortgage loans which primarily secure the Class A-4 Bonds.
As of the cut-off date, there were 1,501 initial mortgage loans in the mortgage
pool secured by mortgages on residential properties, exclusively, and having the
following characteristics. Percentages of mortgage loans with a characteristic,
unless stated otherwise, are determined by weighted average principal amount as
of the cut-off date.
GROUP I INITIAL MORTGAGE LOANS
Number of Initial
Mortgage Loans 733
Principal Balance
Aggregate Principal
Balance $67,101,778.67
Average Principal
Balance $91,544.04
Range of Principal
Balances $22,944.02 - $238,213.17
Coupon Rates
Weighted Average
Coupon Rate 10.118%
Range of Coupon
Rates 7.375% - 13.250%
Remaining Term to Maturity
Weighted Average
Remaining Term to
Maturity 356
Range of Remaining
Term to Maturity 171 - 359
Original Loan-to-Value
Ratio
Weighted Average
Original
Loan-to-Value Ratio 82.11%
Range of Original
Loan-to-Value Ratios 9.43% - 97.83%
Percentage of Convertible
Mortgage Loans 96.21%
Number of
Convertible
Mortgage Loans 702
Aggregate Principal
Balance of
Convertible
Mortgage Loans $64,555,853.98
Percentage of First Lien
Mortgage Loans 100.00%
Delinquent Loans
30-59 days 6.42%
60-89 days 1.55%
S-6
<PAGE>
GROUP II INITIAL MORTGAGE LOANS
Number of Initial
Mortgage Loans 95
Principal Balance
Aggregate Principal
Balance $16,279,956.12
Average Principal
Balance $171,367.96
Range of Principal
Balances $28,769.74 - $618,530.02
Coupon Rates
Weighted Average
Coupon Rate 10.120%
Range of Coupon
Rates 7.500% - 12.250%
Remaining Term to Maturity
Weighted Average
Remaining Term to
Maturity 355
Range of Remaining
Term to Maturity 304 - 359
Original Loan-to-Value
Ratio
Weighted Average
Original
Loan-to-Value Ratio 82.03%
Range of Original
Loan-to-Value Ratios 46.16% - 90.00%
Percentage of Convertible
Mortgage Loans 92.01%
Number of
Convertible
Mortgage Loans 90
Aggregate Principal
Balance of
Convertible
Mortgage Loans $14,979,365.44
Percentage of First Lien
Mortgage Loans 100.00%
Delinquent Loans
30-59 days 8.22%
60-89 days 5.68%
GROUP III INITIAL MORTGAGE LOANS
Number of Initial
Mortgage Loans 527
Principal Balance
Aggregate
Principal Balance $39,442,140.31
Average Principal
Balance $74,842.77
Range of
Principal Balances $23,746.28 - $229,650.47
Coupon Rates
Weighted Average
Coupon Rate 10.079%
Range of Coupon
Rates 7.125% - 14.490%
Remaining Term to
Maturity
Weighted Average
Remaining Term to
Maturity 234
Range of
Remaining Term to
Maturity 115 - 359
Original Loan-to-Value
Ratio
Weighted Average
Original
Loan-to-Value
Ratio 80.10%
Range of Original
Loan-to-Value
Ratios 10.55% - 95.00%
Percentage of First
Lien Mortgage Loans 100.00%
Delinquent Loans
30-59 days 5.17%
60-89 days 0.71%
Percentage of
Balloon Loans* 51.67%
S-7
<PAGE>
GROUP IV INITIAL MORTGAGE LOANS
Number of Initial
Mortgage Loans 146
Principal Balance
Aggregate
Principal Balance $16,049,269.29
Average Principal
Balance $109,926.50
Range of
Principal Balances $24,957.53 - $865,395.27
Coupon Rates
Weighted Average
Coupon Rate 10.066%
Range of Coupon
Rates 7.750% - 14.490%
Remaining Term to
Maturity
Weighted Average
Remaining Term to
Maturity 240
Range of
Remaining Term to
Maturity 172 - 359
Original Loan-to-Value
Ratio
Weighted Average
Original
Loan-to-Value
Ratio 80.14%
Range of Original
Loan-to-Value
Ratios 16.54% - 95.00%
Percentage of First
Lien Mortgage Loans 100.00%
Delinquent Loans
30-59 days 2.31%
60-89 days 2.27%
Percentage of
Balloon Loans* 57.82%
* "Balloon loans" require monthly payments of principal based on 30-year
amortization schedules, but have scheduled maturity dates of 15 years from the
due date of the first monthly payment, in each case leaving a substantial
portion of the original principal amount due and payable on the respective
scheduled maturity date.
PRE-FUNDING ACCOUNT AND INTEREST COVERAGE ACCOUNT
The mortgage loans in each group will consist of initial mortgage loans held by
the issuer on the closing date and subsequent mortgage loans to be acquired by
the issuer. The issuer will deposit money into a segregated account (designated
as the "pre-funding account") which will be used from time to time on or before
April 28, 1999 to acquire subsequent mortgage loans for addition to each group
to secure the related class of bonds. These subsequent mortgage loans must
satisfy certain criteria described in this prospectus supplement. The prefunded
amount for each group, expressed as a percentage equal to the prefunded amount
divided by the sum of the total initial collateral balance and the prefunded
amount for such group is as follows:
Group Prefunding
-------------------------- --------------------------
I 13.44%
II 21.25%
III 14.32%
IV 21.56%
On the closing date, a portion of the sales proceeds of the bonds will be
deposited in an "interest coverage" account for application to cover shortfalls
in interest on the bonds attributable to the pre-funding feature during the
funding period.
MANDATORY PREPAYMENT OF PRINCIPAL FROM EXCESS MONEYS IN THE PRE-FUNDING ACCOUNT
To the extent that the issuer does not fully use amounts on deposit in the
pre-funding account to purchase additional mortgage loans for a group by April
28, 1999, the issuer will apply the remaining amounts for such group as a
prepayment of the principal of the related class of bonds on the payment date in
May 1999. Although no assurance is possible, the issuer
S-8
<PAGE>
anticipates that a substantial amount of the money initially deposited in the
pre-funding account will be used up to purchase additional mortgage loans, and
that there will be no material amount of principal prepaid on the bonds from
amounts in the pre-funding account.
OPTIONAL TERMINATION
The Servicer has the option to purchase the mortgage loans and cause a
redemption of the bonds, on or after any payment date on which the aggregate
principal balance of the mortgage loans in all four groups has declined to be
equal to or less than 10% of the sum of the principal balance of the initial
mortgage loans as of the cut-off date and the original pre-funded amount. Such
redemption must constitute a "qualified liquidation" within the meaning of
Section 860F of the Code, including, without limitation, the requirement that
the qualified liquidation takes place over a period not to exceed 90 days.
FEDERAL INCOME TAX CONSEQUENCES
The owner trustee will elect to treat certain assets of the issuer as a REMIC
for federal income tax purposes. The bonds and the subordinated bonds will be
designated as "regular interests" in a REMIC and the residual class of
certificates will be designated as the "residual interest" with respect to the
REMIC. Bondholders will include interest on the bonds in income in accordance
with an accrual method of accounting.
ERISA CONSIDERATIONS
The bonds may be purchased by pension, profit-sharing and other employee benefit
plans that are subject to the Employee Retirement Income Security Act of 1974,
as amended, provided that certain conditions described herein are satisfied. A
fiduciary of any such plan that is considering a purchase of bonds should, among
other things, consult with experienced legal counsel in determining whether all
required conditions for such purchase have been satisfied.
LEGAL INVESTMENT
The bonds will constitute "mortgage related securities" for purposes of the
Secondary Mortgage Market Enhancement Act of 1984, as amended, for so long as
they are rated in at least the second highest rating category by one or more
nationally recognized statistical rating agencies. Institutions whose investment
activities are subject to legal investment laws and regulations or to review by
certain regulatory authorities may be subject to restrictions on investment in
the bonds.
RATING
Before the issuer can issue the offered bonds, each class of bonds must receive
at least the following ratings from Standard & Poor's, a division of The
McGraw-Hill Companies, Inc., and Moody's Investors Service, Inc. in order to be
issued:
Rating
-------------------
S&P Moody's
--- -------
Class A-1 Bonds AAA Aaa
Class A-2 Bonds AAA Aaa
Class A-3 Bonds AAA Aaa
Class A-4 Bonds AAA Aaa
A security rating is not a recommendation to buy, sell or hold securities and
may be subject to revision or withdrawal at any time by the assigning rating
organization. A security rating does not address the frequency of principal
prepayments, the corresponding effect on yield to investors or the payment of
any shortfall
S-9
<PAGE>
arising due to the interest rate cap limiting the interest rate on the bonds.
S-10
<PAGE>
RISK FACTORS
Prospective investors should consider, among other things, the
items discussed under "Risk Factors" in the prospectus and the following factors
in connection with the purchase of the bonds:
UNDERWRITING STANDARDS
The initial mortgage loans were underwritten and the
subsequent mortgage loans will be underwritten generally in accordance with
underwriting standards described in "Description of the Mortgage
Pools--Underwriting Standards for Mortgage Loans" herein, which are primarily
intended to provide single family mortgage loans for non-conforming credits
which do not satisfy the requirements of typical "A" credit borrowers. A
"non-conforming credit" means a mortgage loan which is ineligible for purchase
by the Federal National Mortgage Association ("Fannie Mae") or the Federal Home
Loan Mortgage Corporation ("Freddie Mac") due to credit characteristics that do
not meet the Fannie Mae or Freddie Mac underwriting guidelines, including
mortgagors whose creditworthiness and repayment ability do not satisfy such
Fannie Mae or Freddie Mac underwriting guidelines and mortgagors who may have a
record of credit write-offs, outstanding judgments, prior bankruptcies and other
credit items that do not satisfy such Fannie Mae or Freddie Mac underwriting
guidelines. Accordingly, mortgage loans underwritten to non-conforming credit
underwriting standards or to standards that do not meet the requirements for
typical "A" credit borrowers are likely to experience rates of delinquency,
foreclosure and loss that are higher, and may be substantially higher, than
mortgage loans originated in accordance with the Fannie Mae or Freddie Mac
underwriting guidelines or to typical "A" credit borrowers.
DELINQUENCIES AND POTENTIAL DELINQUENCIES
Approximately 6.42%, 8.22%, 5.17% and 2.31% of the initial
mortgage loans in Group I, Group II, Group III and Group IV, respectively, were
thirty days or more but less than sixty days delinquent in their monthly
payments as of the cut-off date (all percentages in this section determined by
aggregate principal balance of the related loan group as of the Cut-off Date).
Approximately 1.55%, 5.68%, 0.71% and 2.27% of the initial mortgage loans in
Group I, Group II, Group III and Group IV, respectively, were sixty days or more
but less than ninety days delinquent as of the cut-off date. No mortgage loans
were 90 days or more delinquent as of the cut-off date.
Approximately 71.15%, 70.95%, 71.13% and 71.44%, respectively,
of the initial mortgage loans in Group I, Group II, Group III and Group IV will
be covered by a lender-paid mortgage insurance policy.
Approximately 58.09%, 56.47%, 48.24% and 53.49%, respectively,
of the initial mortgage loans in Group I, Group II, Group III and Group IV have
original loan-to-value ratios in excess of 80%. Mortgage loans with a
loan-to-value ratio in excess of 80% will be affected to a greater extent than
mortgage loans with a loan-to-value ratio equal to or less than 80% by any
decline in the value of the related property securing such mortgage loans. No
assurance can be given that values of the mortgaged properties have remained or
will remain at their levels on the dates of origination of the related mortgage
loans. If the residential real estate market should experience an overall
decline in property values such that the outstanding balances of the mortgage
loans, and any secondary financing on the mortgaged properties, become equal to
or greater than the value of the mortgaged properties, the actual rates of
S-11
<PAGE>
delinquencies, foreclosures and losses could be higher than those now generally
experienced in the mortgage lending industry.
BALLOON LOANS
Approximately 51.67% and 57.82% , respectively, of the initial
mortgage loans in Group III and Group IV are "balloon loans"; that is, they
require monthly payments of principal based on 30 year amortization schedules
and have scheduled maturity dates of 15 years from the due date of the first
monthly payment, in each case leaving a substantial portion of the original
principal amount due and payable on the respective scheduled maturity date. The
balloon loans entail a greater degree of risk for prospective investors because
the ability of a mortgagor to make a balloon payment typically will depend upon
the mortgagor's ability either to refinance the related balloon loan or to sell
the related mortgaged property. The mortgagor's ability to sell or refinance
will be affected by a number of factors, including the level of prevailing
mortgage rates at the time of sale or refinancing, the mortgagor's equity in the
related mortgaged property, the financial condition and credit profile of the
mortgagor, applicable tax laws and general economic conditions. No person is
obligated to refinance any balloon loan.
GEOGRAPHIC CONCENTRATION
Approximately 19.30%, 17.10%, 22.73% and 29.84%, respectively,
of the initial mortgage loans in Group I, Group II, Group III and Group IV are
secured by Mortgaged Properties located in the State of Florida. In the event
Florida experiences a decline in real estate values, losses on the mortgage
loans may be greater than otherwise would be the case.
SUBSEQUENT MORTGAGE LOANS
Subsequent mortgage loans may have characteristics different
from those of the initial mortgage loans. However, each subsequent mortgage loan
must satisfy the eligibility criteria referred to herein under "Description of
the Mortgage Pool--Conveyance of Subsequent Mortgage Loans and the Pre-Funding
Account" at the time of its conveyance to the trust estate and must be
underwritten in accordance with the criteria set forth under "Description of the
Mortgage Pool-- Underwriting Standards for the Mortgage Loans" herein.
MANDATORY PREPAYMENT
If the pre-funding account for a group is not fully applied to
the purchase of subsequent mortgage loans for such group by the end of the
funding period, the remaining funds will be used to make a principal prepayment
in the related class of bonds. Although no assurances can be given, the
depositor intends that the principal amount of subsequent mortgage loans sold to
the issuer will consume the pre-funding account and that there will be no
material principal prepayment on the bonds.
SPECIAL PREPAYMENT CONSIDERATIONS
The rate and timing of principal payments on the bonds will
depend, on the rate and timing of principal payments (including prepayments,
defaults, liquidations, purchases of the mortgage loans due to a breach of a
representation or warranty and the servicer's limited right to purchase
delinquent mortgage loans) on the related mortgage loans. Accordingly, the bonds
are subject to inherent cash-flow uncertainties because the mortgage loans may
be prepaid at any time. Generally, when prevailing interest rates increase,
prepayment rates on mortgage loans tend to decrease, resulting in a
S-12
<PAGE>
slower return of principal to investors at a time when reinvestment at such
higher prevailing rates would be desirable. Conversely, when prevailing interest
rates decline, prepayment rates on mortgage loans tend to increase, resulting in
a faster return of principal to investors at a time when reinvestment at
comparable yields may not be possible.
Approximately 83.87%, 77.93%, 82.12% and 75.28% of the initial
mortgage loans in Group I, Group II, Group III and Group IV (by aggregate
principal balance of the related mortgage loans as of the cut-off date),
respectively, are subject to prepayment penalties. Typically, the mortgage loans
with a prepayment penalty provision provide for a prepayment charge for partial
prepayments and full prepayments. Prepayment charges may be payable for a period
of time ranging from one to five years from the related origination date. Such
prepayment charges may reduce the rate of prepayment on the mortgage loans.
See "Certain Yield and Prepayment Considerations" herein, and
"Description of the Securities--Weighted Average Life of the Securities" in the
Prospectus.
SPECIAL YIELD CONSIDERATIONS
The yield to maturity on the bonds will depend on, among other
things, the rate and timing of principal payments (including prepayments,
defaults, liquidations and purchases of the mortgage loans due to a breach of a
representation or warranty) on the mortgage loans. The yield to maturity on the
bonds will also depend on the related bond interest rate and the purchase price
for such bonds.
If the bonds are purchased at a premium and principal payments
thereon occur at a rate faster than anticipated at the time of purchase, the
investor's actual yield to maturity will be lower than that assumed at the time
of purchase. Conversely, if the bonds are purchased at a discount and principal
payments thereon occur at a rate slower than that assumed at the time of
purchase, the investor's actual yield to maturity will be lower than that
assumed at the time of purchase. The Bonds were structured assuming, among other
things, a prepayment rate and corresponding weighted average lives as described
herein. The prepayment, yield and other assumptions to be used for pricing
purposes for the Bonds may vary as determined at the time of sale.
See "Certain Yield and Prepayment Considerations" herein and
"Description of the Securities--Weighted Average Life of the Securities" in the
Prospectus.
RISK OF MORTGAGE LOAN YIELD REDUCING THE INTEREST RATE ON THE BONDS
The Class A-1 bond interest rate and the Class A-2 bond
interest rate are based upon, the value of an index (one-month LIBOR) which is
different from the value of the indices applicable to the related mortgage loans
(six-month LIBOR and one-year CMT). The mortgage rate on each adjustable rate
mortgage loan adjusts semi-annually or annually, commencing after the Initial
Period, based upon the related Index, whereas the Class A-1 bond interest rate
and the Class A-2 bond interest rate adjust monthly based upon one-month LIBOR.
In addition, one-month LIBOR and the mortgage indices may respond differently to
economic and market factors, and there is not necessarily any correlation
between them. Moreover, the adjustable rate mortgage loans are subject to
periodic rate caps, maximum mortgage rates and minimum mortgage rates. Thus, it
is possible, for example, that one-month LIBOR may rise during periods in which
the mortgage indices are stable or falling or that, even if both one-month LIBOR
and the mortgage indices rise during the same period, one-month LIBOR may rise
much more rapidly
S-13
<PAGE>
than the mortgage indices. See "Description of the Bonds--Interest Payments on
the Bonds." The bond interest rates for the Class A-1 Bonds and Class A-2 Bonds
are limited by an available funds rate cap. While any reductions in the bond
interest rates will be carried forward and paid out of excess cashflows on
future payment dates, there can be no assurance that such cash flows will be
available. The bond insurance policy does not cover any such shortfalls.
There are 4 loans in Group III and 4 loans in Group IV,
representing 0.77% and 11.20%, respectively, by aggregate principal balance of
the initial mortgage loans in such Group which have a net weighted average
coupon lower than the related bond interest rate. After the rate step up date,
3.56% and 18.09%, respectively, of the initial loans in Group III and Group IV
will, if not prepaid prior to such date, have a net weighted average coupon
lower than the related bond interest rate. If these groups were to experience
prepayments on the mortgage loans in such groups bearing higher rates of
interest, it is possible that the remaining mortgage loans in such groups would
not be able to support these rates of interest. In such a case, the related bond
interest rates would be reduced by an available funds rate cap. There is no
carry forward feature for the Class A-3 and Class A-4 Bonds, and the bond
insurance policy does not cover any such shortfalls.
SALE OF CONVERTED MORTGAGE LOANS
Approximately 96.21% and 92.01% of the initial mortgage loans
in Groups I and II, respectively, are, and up to 100% of the subsequent mortgage
loans in Groups I and II may be, loans which are convertible, subject to certain
conditions, from a variable rate loan to a fixed rate loan at the option of the
borrower, as further described hereunder under "Description on the Servicing
Agreement--Sale of Converted Mortgage Loans." Within 30 days after conversion of
a convertible mortgage loan, the issuer is required to sell and NovaStar
Capital, Inc. is required to purchase such loan for a purchase price equal to
the then outstanding principal amount of such loan, plus accrued interest.
Proceeds of the sale of converted mortgage loans must be used to prepay
principal and interest on the Class A-1 Bonds or the Class A-2 Bonds in the same
manner as prepayments of mortgage loans. Accordingly, conversion of convertible
mortgage loans will have the effect of accelerating prepayments of principal,
and shortening the duration, of the Class A-1 Bonds and the Class A-2 Bonds.
The obligation of NovaStar Capital, Inc. to purchase converted mortgage
loans is guaranteed by its affiliate, NovaStar Financial, Inc. The servicer is
not obligated to purchase converted mortgage loans. However, if Fairbanks
Capital Corp. becomes the servicer, it will assume the obligation of NovaStar
Capital, Inc. to purchase converted mortgage loans.
In the event that a converted mortgage loan is not purchased
by the party obligated to do so, the bond insurer may, at its option, purchase
such converted mortgage loan.
The fixed interest rate on a converted mortgage loan in most
cases may be lower than the variable rate that would have been in effect on such
loan if it had not been converted. If NovaStar Capital, Inc., NovaStar
Financial, Inc. or the back-up servicer fails to purchase such converted
mortgage loans, then the weighted average coupon rate on the mortgage loans in
Group I and Group II may decline, possibly significantly. In such event, the
interest rate on the Class A-1 or Class A-2 Bonds may be reduced through
operation of the available funds cap rate.
See "The Servicer--Sale of Converted Mortgage Loans" herein.
S-14
<PAGE>
YEAR 2000 ISSUE
Many existing computer programs use only two digits to
identify a year in the date field. These programs were designed and developed
without considering the impact of the upcoming change in the century. If not
corrected, many computer applications could fail or create erroneous results on
or after January 1, 2000. In connection with this issue NovaStar Financial,
Inc., the parent company of the servicer, the seller and the transferor, has
completed the evaluation of its systems, applications and vendor lists, and is
implementing project plans to modify existing computer programs, convert to new
programs or replace systems, to the extent necessary to address the upcoming
change in the century. NovaStar Financial has identified its significant
business relationships, including, without limitation, vendors, customers, asset
management counterparties and funding counterparties. NovaStar Financial has
initiated communications with these third parties to determine the extent to
which NovaStar Financial is vulnerable to such third parties' failure to
remediate their own year 2000 issues. In the event that NovaStar Financial's
project plans are not timely or successfully completed, there can be no
assurance that the upcoming change in the century will not have a material
adverse effect on the operations of the servicer, the seller and the transferor
and NovaStar Financial, including a shut-down of operations for a period of
time, which may, in turn, have a material adverse effect on the bonds. In
addition, there can be no assurance that the systems used by outside service
providers or other third parties upon which the servicer, the seller, the
transferor and NovaStar Financial's systems rely, will be converted on a timely
basis. Further, there can be no assurance that a failure to convert by another
company, or a conversion that is incompatible with servicer's, the seller's, the
transferor's and NovaStar Financial's systems, would not have a material adverse
effect on their operations, which may, in turn, have a material adverse effect
on the bonds. In the event that the systems or programs of the bond
administrator, the indenture trustee, the owner trustee and the bond insurer are
not year 2000 compliant, there can be no assurance that there would not be a
material adverse effect on their respective operations, which may, in turn, have
a material adverse effect on the bonds.
YEAR 2000 ISSUE AND THE DEPOSITORY TRUST COMPANY
With respect to Year 2000 issues, the Depository Trust Company
("DTC") has informed members of the financial community that it has developed
and is implementing a program so that its systems, as the same related to the
timely payment of distributions (including principal and income payments) to
securityholders, book-entry deliveries, and settlement of trades within DTC
continue to function appropriately on and after January 1, 2000. This program
includes a technical assessment and a remediation plan, each of which is
complete. Additionally, DTC's plan includes a testing phase, which is expected
to be completed within appropriate time frames.
However, DTC's ability to perform properly its services is
also dependent upon other parties, including but not limited to, its
participating organizations (through which noteholders will hold their offered
notes), as well as the computer systems of third party service providers. DTC
has informed the financial community that it is contacting (and will continue to
contact) third party vendors from whom DTC acquires services to: (i) impress
upon them the importance of such services being Year 2000 compliant and (ii)
determine the extent of their efforts for year 2000 remediation (and, as
appropriate, testing) of their services. In addition, DTC has stated that it is
in the process of developing such contingency plans as it deems appropriate.
S-15
<PAGE>
If problems associated with the Year 2000 issue were to occur
with respect to DTC and the services described above, distributions to
noteholders could be delayed or otherwise adversely affected.
USE OF PROCEEDS
After deducting the estimated expenses of this offering, the
net proceeds to the Depositor from the sale of the Bonds offered hereby are
estimated to be $350,000. The Depositor anticipates that the entire net proceeds
will be used to purchase the Initial Mortgage Loans from the Transferor and to
fund the Pre-Funding Account and the Interest Coverage Account. The Transferor
anticipates that it will use the entire net proceeds to it to purchase the
Initial Mortgage Loans from the Seller. The Seller anticipates that it will use
the entire net proceeds to it to repay indebtedness and accrued interest under
its warehouse lines of credit, including a loan made to the Seller by an
affiliate of the Depositor. The Depositor and the Seller believe that funds
provided by the net proceeds of this offering will be sufficient to accomplish
the purposes set forth above.
DESCRIPTION OF THE MORTGAGE POOL
GENERAL
The statistical information presented in this Prospectus
Supplement describes only the mortgage loans included in the Trust Estate on the
Closing Date (the "Initial Mortgage Loans") and does not include mortgage loans
purchased by the Issuer and included in the Trust Estate after the Closing Date
(the "Subsequent Mortgage Loans" and, together with the Initial Mortgage Loans,
the "Mortgage Loans"). All statistical information is stated as of January 1,
1999 (the "Cut-Off Date") and all percentages, unless otherwise stated, are by
aggregate principal balance of the related loan group. The actual principal
balances of the Initial Mortgage Loans as of the Closing Date will be lower, and
may be significantly lower, than the principal balances thereof as of the
Cut-off Date as shown herein.
Subsequent Mortgage Loans are intended to be purchased by the
Issuer from the Seller from time to time on or before April 28, 1999, from funds
on deposit in the Pre-Funding Account. The Subsequent Mortgage Loans, if
available, will be sold by the Seller to the Transferor and from the Transferor
to the Issuer for inclusion in the Trust Estate. The Purchase Agreement (as
defined below) will provide that the Subsequent Mortgage Loans must conform to
certain specified characteristics described below under "--Conveyance of
Subsequent Mortgage Loans and the Pre-Funding Account." In the sole discretion
of the Bond Insurer, Subsequent Mortgage Loans with characteristics varying from
those described herein may be purchased by the Issuer and included in the Trust
Estate. In any case the addition of such Mortgage Loans will not materially
affect the aggregate characteristics of the Mortgage Loans.
The Mortgage Pool will consist of conventional, monthly
payment, first lien mortgage loans with terms to maturity of not more than 30
years from the date of origination or modification. The Mortgage Pool will
consist of four mortgage loan groups (each, a "Group"), and are segregated
according to whether such mortgage loans bear interest at adjustable (such
loans, "Adjustable Rate Mortgage Loans or fixed (such loans, "Fixed Rate
Mortgage Loans") rates of interest.
S-16
<PAGE>
MORTGAGE LOAN GROUPS
GROUP INTEREST RATE
-------------------------- --------------------
Group I Adjustable
Group II Adjustable
Group III Fixed
Group IV Fixed
NovaStar Mortgage, Inc. in its capacity as seller (the
"Seller"),will convey the Initial Mortgage Loans to the Transferor pursuant to a
mortgage loan purchase agreement (the "Purchase Agreement"). The Transferor will
convey the Initial Mortgage Loans to the Depositor, and the Depositor will
convey the Initial Mortgage Loans to the Issuer on the Closing Date. All of the
Mortgage Loans will be serviced by NovaStar Mortgage, Inc. (in such capacity,
the "Servicer"). The Seller will make certain representations and warranties
with respect to the Mortgage Loans under the Purchase Agreement and, as more
particularly described herein, will have certain repurchase or substitution
obligations in connection with a breach of any such representation or warranty,
as well as in connection with an omission or defect in respect of certain
constituent documents required to be delivered with respect to the Mortgage
Loans, in any event if such breach, omission or defect cannot be cured and it
materially and adversely affects the value of the related Mortgage Loan or the
interests of holders of the Bonds or the Bond Insurer. The obligations of the
Seller under the Purchase Agreement will be guaranteed by an affiliate, NovaStar
Financial, Inc. See "Description of the Bonds--Assignment of Mortgage Loans" in
this Prospectus Supplement.
The representations and warranties made by the Seller will be
assigned to the Indenture Trustee for the benefit of the Bondholders and the
Bond Insurer.
Approximately 58.09%, 56.47%, 48.24% and 53.49% of the Initial
Mortgage Loans in Group I, Group II, Group III and Group IV (by aggregate
principal balance of the related Group as of the Cut-off Date), respectively,
will have Loan-to-Value Ratios in excess of 80%. Approximately 71.15%, 70.95%,
71.13% and 71.44% of the Initial Mortgage Loans in Group I, Group II, Group III
and Group IV (by aggregate principal balance of the related Group as of the
Cut-off Date), respectively, are covered by a lender-paid primary mortgage
insurance policy (each, a "MI Policy") insuring first losses on the Principal
Balance of each such Initial Mortgage Loan. See "Description of the Mortgage
Pool--Primary Mortgage Insurance" herein. The remainder of the Initial Mortgage
Loans will not be covered by a MI Policy.
As of the Cut-off Date, the minimum Loan-to-Value Ratios at
origination for the Initial Mortgage Loans in Group I, Group II, Group III and
Group IV were approximately 9.43%, 46.16%, 10.55% and 16.54%, respectively, the
maximum Loan-to-Value Ratios at origination were approximately 97.83%, 90.00%,
95.00% and 95.00%, respectively, and the weighted average Loan-to-Value Ratios
at origination were approximately 82.11%, 82.03%, 80.10% and 80.14%,
respectively.
All of the Mortgage Loans will contain a customary
"due-on-sale" clause, although the Mortgage Loans may be assumable if permitted
by the Servicer under certain circumstances. See "Certain Yield and Prepayment
Considerations" herein. Pursuant to the terms of the Servicing Agreement, the
Servicer will be entitled to all late payment charges received on the Mortgage
Loans as additional servicing compensation and such amounts will not be
available for distribution on the Bonds.
S-17
<PAGE>
MORTGAGE RATE ADJUSTMENT
The Mortgage Rate on each Mortgage Loan in Group III and IV is
fixed. The Mortgage Rate on 95.05% and 88.84% of the Initial Mortgage Loans in
Group I and II, respectively, adjusts semi-annually. The Mortgage Rate on 4.95%
and 11.16% of the Initial Mortgage Loans in Group I and II, respectively,
adjusts annually.
Adjustments to the Mortgage Rates on the Adjustable Rate
Mortgage Loans commence after an initial period after origination (the "Initial
Period") of six months, one year, two years or three years, in each case on each
applicable Adjustment Date to a rate equal to the sum, generally rounded up to
the nearest one-eighth of one percentage point (12.5 basis points), of (i) the
related Index plus (ii) a fixed percentage (the "Gross Margin"). In addition,
the Mortgage Rate on each Adjustable Rate Mortgage Loan is subject on its first
Adjustment Date following its origination to a cap (the "Initial Periodic Rate
Cap") and on each Adjustment Date thereafter to a periodic rate cap (the
"Periodic Rate Cap"). All of the Adjustable Rate Mortgage Loans are also subject
to specified maximum and minimum lifetime Mortgage Rates ("Maximum Mortgage
Rates" and "Minimum Mortgage Rates," respectively). The initial Adjustable Rate
Mortgage Loans were generally originated with an initial Mortgage Rate below the
sum of the current Index and the Gross Margin. Due to the application of the
Periodic Rate Caps, Maximum Mortgage Rates and Minimum Mortgage Rates, the
Mortgage Rate on any initial Adjustable Rate Mortgage Loan, as adjusted on any
related Adjustment Date, may not equal the sum of the related Index and the
Gross Margin. The Due Date for substantially all the Initial Mortgage Loans is
the first day of the month.
Substantially all of the Adjustable Rate Initial Mortgage
Loans will not have reached their first Adjustment Date as of the Closing Date.
The initial Mortgage Rate is generally lower than the rate that would have been
produced if the applicable Gross Margin had been added to the related Index in
effect at origination. Adjustable Rate Mortgage Loans that have not reached
their first Adjustment Date are, therefore, subject to the Initial Periodic Rate
Cap on their first Adjustment Date.
SIX-MONTH LIBOR INDEX
The Index applicable to the determination of the Mortgage Rate
on approximately 95.05% and 88.84% of the Initial Mortgage Loans (by aggregate
principal balance of the related Group as of the Cut-off Date) in Group I and
II, respectively, will be the average of the interbank offered rates for
six-month United States dollar deposits in the London market based on quotations
of major banks, as published in the Western Edition of The Wall Street Journal
("Six-Month LIBOR") applicable on any Adjustment Date is the most recent index
figure available as of the date 30 days before such Adjustment Date.
ONE-YEAR CMT INDEX
The Index applicable to the determination of the Mortgage Rate
on approximately 4.95% and 11.16% of the Initial Mortgage Loans (by aggregate
principal balance of the related Group as of the Cut-off Date) in Group I and
II, respectively, will be the weekly average yield on U.S. Treasury securities
adjusted to a constant maturity of one year as published by the Federal Reserve
Board in Statistical Release H.15(519) and most recently available as of the
first business day generally 30 days prior to the Adjustment Date ("One-Year
CMT").
S-18
<PAGE>
MORTGAGE LOAN CHARACTERISTICS
All percentages of the Initial Mortgage Loans described herein
are approximate percentages (except as otherwise indicated) by aggregate
principal balance of the related Group as of the Cut-off Date.
Except with respect to mortgage loans that require monthly
payments of principal based on 30 year amortization schedules and have scheduled
maturity dates of 15 years from the due date of the first monthly payment (such
loans, "Balloon Loans"), the Initial Mortgage Loans generally have original
terms to stated maturity of approximately 30 years.
None of the Initial Mortgage Loans are secured by junior liens
on the related Mortgaged Properties.
None of the Initial Mortgage Loans are subject to temporary
buydown plans, pursuant to which the monthly payments made by the mortgage
during the early years of the loan are less than the scheduled monthly payments
thereon.
GROUP I: ADJUSTABLE RATE MORTGAGE LOANS
Effective with the first payment due on an Adjustable Rate
Initial Mortgage Loan after each related Adjustment Date, the Monthly Payment
will be adjusted to an amount that will fully amortize the outstanding principal
balance of the Mortgage Loan over its remaining term. The weighted average
number of months from the Cut-off Date to the next Adjustment Date for the
Initial Mortgage Loans in Group I is 20 months.
As of the Cut-off Date, each Initial Mortgage Loan in Group I
will have an unpaid principal balance of not less than $22,944.02 or more than
$238,213.17 and the average unpaid principal balance of the Initial Mortgage
Loans in Group I will be $91,544.04. The latest stated maturity date of any of
the Initial Mortgage Loans in Group I will be December 1, 2028; however, the
actual date on which any Initial Mortgage Loan is paid in full may be earlier
than the stated maturity date due to unscheduled payments of principal.
The weighted average remaining term to stated maturity of the
Initial Mortgage Loans in Group I will be approximately 356 months. The weighted
average original term to maturity of the Initial Mortgage Loans in Group I will
be approximately 360 months.
The earliest year of origination of any Initial Mortgage Loan
in Group I is 1994 and the latest month and year of origination of any Initial
Mortgage Loan in Group I will be November 1998.
Approximately 83.87% of the Mortgage Loans in Group I provide
for payment of a prepayment charge. As to each such Mortgage Loan, the
prepayment charge provisions typically provide for payment of a prepayment
charge for partial prepayments and full prepayments. Prepayments may be payable
for a period of time ranging from one to five years from the related origination
date. Prepayment charges received on the Mortgage Loans will be available for
distribution on the Bonds.
Approximately 96.21% of Initial Mortgage Loans in Group I are
Convertible Mortgage Loans.
Approximately 71.15% of the Initial Mortgage Loans in Group I
are covered by MI Policies.
S-19
<PAGE>
Set forth below is a description of certain additional
characteristics of the Initial Mortgage Loans in Group I as of the Cut-off Date
(except as otherwise indicated). Dollar amounts and percentages may not sum to
totals due to rounding.
S-20
<PAGE>
<TABLE>
<CAPTION>
GEOGRAPHIC DISTRIBUTION OF THE MORTGAGED PROPERTIES OF THE GROUP I INITIAL MORTGAGE LOANS
PERCENTAGE OF GROUP I
MORTGAGE LOANS BY
NUMBER OF AGGREGATE AGGREGATE PRINCIPAL
LOCATION MORTGAGE LOANS PRINCIPAL BALANCE BALANCE
- -------- -------------- ------------------- ----------------------
<S> <C> <C> <C>
Alaska 1 $ 70,019.13 0.10%
Arizona 25 2,465,632.12 3.67
California 30 3,008,979.22 4.48
Colorado 9 1,049,204.87 1.56
Connecticut 9 881,804.57 1.31
District of Columbia 2 222,483.91 0.33
Florida 139 12,951,730.28 19.30
Georgia 25 2,396,596.10 3.57
Idaho 6 471,915.59 0.70
Illinois 19 1,757,175.14 2.62
Indiana 20 1,565,503.07 2.33
Iowa 1 46,827.08 0.07
Kentucky 16 1,056,532.61 1.57
Louisiana 3 247,650.89 0.37
Maryland 8 716,617.64 1.07
Michigan 45 4,066,962.24 6.06
Minnesota 13 1,132,711.60 1.69
Mississippi 6 337,140.28 0.50
Missouri 39 3,153,209.33 4.70
Montana 1 106,105.65 0.16
Nebraska 1 36,923.16 0.06
Nevada 22 2,729,666.86 4.07
New Jersey 1 82,608.79 0.12
New Mexico 4 442,727.78 0.66
North Carolina 66 5,152,331.10 7.68
Ohio 37 3,170,307.15 4.72
Oklahoma 6 546,621.12 0.81
Oregon 7 986,452.63 1.47
Pennsylvania 23 1,818,775.23 2.71
South Carolina 10 807,940.25 1.20
Tennessee 18 1,317,008.70 1.96
Texas 57 5,314,342.15 7.92
Utah 17 1,964,628.32 2.93
Virginia 11 1,043,157.53 1.55
Washington 31 3,625,935.11 5.40
West Virginia 1 119,934.32 0.18
Wisconsin 4 237,617.15 0.35
-------------- ------------------- ----------------------
Total 733 $ 67,101,778.67 100.00%
============== =================== ======================
</TABLE>
No more than approximately 0.62% of the Group I Initial
Mortgage Loans will be secured by Mortgaged Properties located in any one zip
code.
S-21
<PAGE>
<TABLE>
<CAPTION>
MORTGAGE LOAN TYPE OF THE GROUP I INITIAL MORTGAGE LOANS
PERCENTAGE OF GROUP I
MORTGAGE LOANS BY
AGGREGATE AGGREGATE PRINCIPAL
MORTGAGE LOAN TYPE NUMBER OF MORTGAGE LOANS PRINCIPAL BALANCE BALANCE
- ------------------- ------------------------ --------------------- ----------------------
<S> <C> <C> <C>
One-Year CMT 35 $ 3,260,549.05 4.86%
One-Year CMT 15 yr. 2 62,127.53 0.09
2/28 6-Month LIBOR 641 58,344,100.30 86.95
3/27 6-Month LIBOR 42 4,197,903.26 6.26
Six-Month LIBOR 13 1,237,098.53 1.84
------------------------ --------------------- ----------------------
Total 733 $ 67,101,778.67 100.00%
======================== ===================== ======================
<CAPTION>
LOAN TO VALUE RATIOS AT ORIGINATION OF THE GROUP I INITIAL MORTGAGE LOANS
PERCENTAGE OF GROUP I
MORTGAGE LOANS BY
RANGE OF LOAN-TO-VALUE NUMBER OF AGGREGATE AGGREGATE PRINCIPAL
RATIOS AT ORIGINATION (%) MORTGAGE LOANS PRINCIPAL BALANCE BALANCE
- ------------------- ------------------------ --------------------- ----------------------
<S> <C> <C> <C>
5.01 - 10.00 1 $ 49,956.75 0.07%
30.01 - 35.00 1 22,944.02 0.03
35.01 - 40.00 3 256,608.71 0.38
40.01 - 45.00 2 179,620.72 0.27
45.01 - 50.00 2 238,664.17 0.36
50.01 - 55.00 5 380,950.93 0.57
55.01 - 60.00 9 743,103.71 1.11
60.01 - 65.00 45 3,278,178.47 4.89
65.01 - 70.00 35 2,537,247.07 3.78
70.01 - 75.00 83 6,163,368.13 9.19
75.01 - 80.00 153 14,269,157.55 21.26
80.01 - 85.00 144 13,726,296.09 20.46
85.01 - 90.00 244 24,672,008.88 36.77
90.01 - 95.00 5 471,331.79 0.70
95.01 - 100.00 1 112,341.68 0.17
------------------------ --------------------- ----------------------
Total 733 $ 67,101,778.67 100.00%
======================== ===================== ======================
</TABLE>
As of the Cut-off Date, the minimum and maximum Loan-to-Value
Ratios at origination for the Group I Initial Mortgage Loans were approximately
9.43% and 97.83%, respectively, and the weighted average Loan-to-Value Ratio at
origination of the Group I Initial Mortgage Loans was approximately 82.11%.
S-22
<PAGE>
<TABLE>
<CAPTION>
CUT-OFF DATE PRINCIPAL BALANCES OF THE GROUP I INITIAL MORTGAGE LOANS
PERCENTAGE OF GROUP I
MORTGAGE LOANS BY
RANGE OF CUT-OFF DATE PRINCIPAL AGGREGATE AGGREGATE PRINCIPAL
BALANCES ($) NUMBER OF MORTGAGE LOANS PRINCIPAL BALANCE BALANCE
- ------------------- ------------------------ --------------------- ----------------------
<S> <C> <C> <C>
15,000.01 - 25,000.00 1 $ 22,944.02 0.03%
25,000.01 - 50,000.00 102 4,104,224.88 6.12
50,000.01 - 75,000.00 192 12,132,827.04 18.08
75,000.01 - 100,000.00 180 15,492,532.69 23.09
100,000.01 - 125,000.00 124 13,959,469.65 20.80
125,000.01 - 150,000.00 69 9,328,422.43 13.90
150,000.01 - 175,000.00 27 4,361,162.84 6.50
175,000.01 - 200,000.00 18 3,341,011.31 4.98
200,000.01 - 225,000.00 16 3,422,348.66 5.10
225,000.01 - 250,000.00 4 936,835.15 1.40
------------------------ --------------------- ----------------------
Total 733 $ 67,101,778.67 100.00%
======================== ===================== ======================
</TABLE>
The average Cut-off Date principal balance of the Group I
Initial Mortgage Loans will be $91,544.04.
S-23
<PAGE>
<TABLE>
<CAPTION>
REMAINING TERMS TO MATURITY OF THE GROUP I INITIAL MORTGAGE LOANS
PERCENTAGE OF GROUP I
MORTGAGE LOANS BY
AGGREGATE AGGREGATE PRINCIPAL
MONTHS REMAINING TO MATURITY NUMBER OF MORTGAGE LOANS PRINCIPAL BALANCE BALANCE
- ------------------- ------------------------ --------------------- ----------------------
<S> <C> <C> <C>
171 - 175 2 $ 62,127.53 0.09%
306 - 310 3 210,996.51 0.31
311 - 315 1 95,294.37 0.14
316 - 320 1 219,662.51 0.33
326 - 330 3 226,753.52 0.34
331 - 335 4 316,730.92 0.47
336 - 340 7 589,569.44 0.88
341 - 345 2 139,165.99 0.21
346 - 350 4 367,180.62 0.55
351 - 355 177 16,245,810.23 24.21
356 145 13,862,437.17 20.66
357 164 14,849,953.96 22.13
358 149 13,271,468.17 19.78
359 71 6,644,627.73 9.90
------------------------ --------------------- ----------------------
Total 733 $ 67,101,778.67 100.00%
======================== ===================== ======================
</TABLE>
The weighted average remaining term to maturity of the Group I
Initial Mortgage Loans will be approximately 356 months.
<TABLE>
<CAPTION>
TYPES OF MORTGAGED PROPERTIES OF THE GROUP I INITIAL MORTGAGE LOANS
PERCENTAGE OF GROUP I
MORTGAGE LOANS BY
AGGREGATE AGGREGATE PRINCIPAL
PROPERTY TYPE NUMBER OF MORTGAGE LOANS PRINCIPAL BALANCE BALANCE
- ------------------- ------------------------ --------------------- ----------------------
<S> <C> <C> <C>
Attached Housing 5 $ 363,536.36 0.54%
Condominium Hi-Rise 7 731,938.90 1.09
Condominium Lo-Rise 15 948,163.31 1.41
Detached Housing 1 76,392.34 0.11
Manufactured Housing 102 8,029,146.68 11.97
Multiple Unit 21 2,414,950.13 3.60
PUD 23 2,884,091.52 4.30
PUD Deminimus 1 121,124.73 0.18
PUD Regular 8 831,226.43 1.24
Single Family Residence 549 50,589,419.70 75.39
Townhouse 1 111,788.57 0.17
------------------------ --------------------- ----------------------
Total 733 $ 67,101,778.67 100.00%
======================== ===================== ======================
S-24
<PAGE>
USE OF PROCEEDS OF THE GROUP I INITIAL MORTGAGE LOANS
PERCENTAGE OF GROUP I
MORTGAGE LOANS BY
NUMBER OF MORTGAGE AGGREGATE AGGREGATE PRINCIPAL
USE OF PROCEEDS LOANS PRINCIPAL BALANCE BALANCE
- ------------------- ------------------------ --------------------- ----------------------
<S> <C> <C> <C>
Const-Perm--- Equity Take-Out 21 $ 1,778,036.93 2.65%
Const-Perm--- No Equity Take-Out 16 1,199,442.18 1.79
Purchase 292 27,147,981.92 40.46
Refinance--- Equity Take-Out 313 28,997,057.61 43.21
Refinance--- No Equity Take-Out 91 7,979,260.03 11.89
------------------------ --------------------- ----------------------
Total 733 $ 67,101,778.67 100.00%
======================== ===================== ======================
</TABLE>
In general, in the case of a Mortgage Loan made for "no equity
take-out" refinance purposes, substantially all of the proceeds are used to pay
in full the principal balance of a previous mortgage loan of the mortgagor with
respect to the related property securing such Mortgage Loan (the related
"Mortgaged Property")and to pay origination and closing costs associated with
such refinancing. Mortgage Loans made for "equity take-out" refinance purposes
may involve the use of the proceeds to pay in full the principal balance of a
previous mortgage loan and related costs except that a portion of the proceeds
are generally retained by the mortgagor for uses unrelated to the Mortgaged
Property. The amount of such proceeds retained by the mortgagor may be
substantial.
<TABLE>
<CAPTION>
OCCUPANCY STATUS OF THE MORTGAGED PROPERTIES OF THE GROUP I INITIAL MORTGAGE LOANS
PERCENTAGE OF GROUP I
MORTGAGE LOANS BY
AGGREGATE AGGREGATE PRINCIPAL
OCCUPANCY STATUS NUMBER OF MORTGAGE LOANS PRINCIPAL BALANCE BALANCE
- ------------------- ------------------------ --------------------- ----------------------
<S> <C> <C> <C>
Investment Non-Owner Occupied 20 $ 1,504,869.33 2.24%
Investment Owner Occupied 1 29,947.84 0.04
Primary 698 64,243,503.85 95.74
Secondary 14 1,323,457.65 1.97
------------------------ --------------------- ----------------------
Total 733 $ 67,101,778.67 100.00%
======================== ===================== ======================
</TABLE>
S-25
<PAGE>
<TABLE>
<CAPTION>
DOCUMENTATION TYPE OF THE GROUP I INITIAL MORTGAGE LOANS
PERCENTAGE OF GROUP I
MORTGAGE LOANS BY
AGGREGATE AGGREGATE PRINCIPAL
DOCUMENTATION NUMBER OF MORTGAGE LOANS PRINCIPAL BALANCE BALANCE
- ------------------- ------------------------ --------------------- ----------------------
<S> <C> <C> <C>
Full 593 $ 52,888,002.37 78.82%
Limited 37 3,726,028.34 5.55
Stated 103 10,487,747.96 15.63
------------------------ --------------------- ----------------------
Total 733 $ 67,101,778.67 100.00%
======================== ===================== ======================
<CAPTION>
RISK CLASSIFICATIONS OF THE GROUP I INITIAL MORTGAGE LOANS
PERCENTAGE OF GROUP I
MORTGAGE LOANS BY
AGGREGATE AGGREGATE PRINCIPAL
RISK CLASSIFICATION NUMBER OF MORTGAGE LOANS PRINCIPAL BALANCE BALANCE
- ------------------- ------------------------ --------------------- ----------------------
<S> <C> <C> <C>
AA 85 $ 9,509,749.96 14.17%
A 235 22,471,248.89 33.49
A- 174 16,158,979.35 24.08
B 111 9,880,857.63 14.73
C 90 6,055,758.01 9.02
D 38 3,025,184.83 4.51
------------------------ --------------------- ----------------------
Total 733 $ 67,101,778.67 100.00%
======================== ===================== ======================
</TABLE>
DELINQUENCIES OF THE GROUP I INITIAL MORTGAGE LOANS
<TABLE>
<CAPTION>
PERCENTAGE OF GROUP I
MORTGAGE LOANS BY
AGGREGATE AGGREGATE PRINCIPAL
NUMBER OF DAYS DELINQUENT NUMBER OF MORTGAGE LOANS PRINCIPAL BALANCE BALANCE
- ------------------- ------------------------ --------------------- ----------------------
<S> <C> <C> <C>
0 - 29 678 $ 61,755,132.05 92.03%
30 - 59 44 4,305,687.22 6.42
60 - 89 11 1,040,959.40 1.55
------------------------ --------------------- ----------------------
Total 733 $ 67,101,778.67 100.00%
======================== ===================== ======================
</TABLE>
S-26
<PAGE>
CURRENT MORTGAGE RATES OF THE GROUP I INITIAL MORTGAGE LOANS
<TABLE>
<CAPTION>
PERCENTAGE OF GROUP I
MORTGAGE LOANS BY
RANGE OF CURRENT MORTGAGE AGGREGATE AGGREGATE PRINCIPAL
RATES (%) NUMBER OF MORTGAGE LOANS PRINCIPAL BALANCE BALANCE
- ------------------- ------------------------ --------------------- ----------------------
<S> <C> <C> <C>
7.001 - 7.500 1 $ 139,678.45 0.21%
7.501 - 8.000 6 682,019.01 1.02
8.001 - 8.500 33 3,155,655.92 4.70
8.501 - 9.000 58 6,135,306.81 9.14
9.001 - 9.500 93 8,665,036.35 12.91
9.501 - 10.000 163 15,339,315.63 22.86
10.001 - 10.500 133 12,450,421.62 18.55
10.501 - 11.000 117 10,374,924.68 15.46
11.001 - 11.500 49 3,753,867.00 5.59
11.501 - 12.000 45 3,433,259.98 5.12
12.001 - 12.500 24 2,107,433.39 3.14
12.501 - 13.000 8 744,272.97 1.11
13.001 - 13.500 3 120,586.86 0.18
------------------------ --------------------- ----------------------
Total 733 $ 67,101,778.67 100.00%
======================== ===================== ======================
</TABLE>
The weighted average current Mortgage Rate of the Initial
Mortgage Loans in Group I will be approximately 10.118% per annum.
MINIMUM RATES OF THE GROUP I INITIAL MORTGAGE LOANS
<TABLE>
<CAPTION>
PERCENTAGE OF GROUP I
MORTGAGE LOANS BY
RANGE OF MINIMUM AGGREGATE AGGREGATE PRINCIPAL
RATES (%) NUMBER OF MORTGAGE LOANS PRINCIPAL BALANCE BALANCE
- ------------------- ------------------------ --------------------- ----------------------
<S> <C> <C> <C>
7.001 - 7.500 2 $ 165,200.18 0.25%
7.501 - 8.000 6 682,019.01 1.02
8.001 - 8.500 34 3,206,813.03 4.78
8.501 - 9.000 61 6,562,773.88 9.78
9.001 - 9.500 93 8,639,136.64 12.87
9.501 - 10.000 167 15,625,872.65 23.29
10.001 - 10.500 124 11,685,618.40 17.41
10.501 - 11.000 117 10,374,924.68 15.46
11.001 - 11.500 49 3,753,867.00 5.59
11.501 - 12.000 45 3,433,259.98 5.12
12.001 - 12.500 24 2,107,433.39 3.14
12.501 - 13.000 8 744,272.97 1.11
13.001 - 13.500 3 120,586.86 0.18
------------------------ --------------------- ----------------------
Total 733 $ 67,101,778.67 100.00%
======================== ===================== ======================
</TABLE>
The weighted average Minimum Mortgage Rate of the Initial
Mortgage Loans in Group I as of the Cut-off Date will be approximately 10.106%
per annum.
S-27
<PAGE>
<TABLE>
<CAPTION>
INITIAL PERIODIC RATE CAP OF THE GROUP I INITIAL MORTGAGE LOANS
PERCENTAGE OF GROUP I
MORTGAGE LOANS BY
INITIAL PERIODIC RATE AGGREGATE AGGREGATE PRINCIPAL
CAP (%) NUMBER OF MORTGAGE LOANS PRINCIPAL BALANCE BALANCE
- ------------------- ------------------------ --------------------- ----------------------
<S> <C> <C> <C>
1.000 13 $ 1,237,098.53 1.84%
2.000 37 3,322,676.58 4.95
3.000 683 62,542,003.56 93.20
------------------------ --------------------- ----------------------
Total 733 $ 67,101,778.67 100.00%
======================== ===================== ======================
The weighted average Initial Periodic Rate Cap of the Initial Mortgage Loans in Group I is
2.914%.
</TABLE>
<TABLE>
<CAPTION>
PERIODIC RATE CAP OF THE GROUP I INITIAL MORTGAGE LOANS
PERCENTAGE OF GROUP I
MORTGAGE LOANS BY
AGGREGATE AGGREGATE PRINCIPAL
PERIODIC RATE CAP (%) NUMBER OF MORTGAGE LOANS PRINCIPAL BALANCE BALANCE
- ------------------- ------------------------ --------------------- ----------------------
<S> <C> <C> <C>
1.000 696 $ 63,779,102.09 95.05%
2.000 37 3,322,676.58 4.95
------------------------ --------------------- ----------------------
Total 733 $ 67,101,778.67 100.00%
======================== ===================== ======================
</TABLE>
The weighted average Periodic Rate Cap of Initial Mortgage
Loans in Group I is 1.050%.
S-28
<PAGE>
<TABLE>
<CAPTION>
MAXIMUM RATES OF THE GROUP I INITIAL MORTGAGE LOANS
PERCENTAGE OF GROUP I
MORTGAGE LOANS BY
RANGE OF MAXIMUM AGGREGATE AGGREGATE PRINCIPAL
RATES (%) NUMBER OF MORTGAGE LOANS PRINCIPAL BALANCE BALANCE
- ------------------- ------------------------ --------------------- ----------------------
<S> <C> <C> <C>
13.001 - 13.500 1 $ 25,521.73 0.04%
14.001 - 14.500 2 190,835.56 0.28
14.501 - 15.000 12 1,320,482.59 1.97
15.001 - 15.500 39 3,610,282.12 5.38
15.501 - 16.000 65 6,767,157.93 10.08
16.001 - 16.500 89 8,343,517.24 12.43
16.501 - 17.000 157 14,783,025.02 22.03
17.001 - 17.500 122 11,526,611.60 17.18
17.501 - 18.000 117 10,374,924.68 15.46
18.001 - 18.500 49 3,753,867.00 5.59
18.501 - 19.000 45 3,433,259.98 5.12
19.001 - 19.500 24 2,107,433.39 3.14
19.501 - 20.000 8 744,272.97 1.11
20.001 - 20.500 3 120,586.86 0.18
------------------------ --------------------- ----------------------
Total 733 $ 67,101,778.67 100.00%
======================== ===================== ======================
</TABLE>
The weighted average Maximum Mortgage Rate for Initial
Mortgage Loans in Group I will be approximately 17.073% per annum.
S-29
<PAGE>
<TABLE>
<CAPTION>
NEXT INTEREST ADJUSTMENT DATE OF THE GROUP I INITIAL MORTGAGE LOANS
PERCENTAGE OF GROUP I
MORTGAGE LOANS BY
AGGREGATE AGGREGATE PRINCIPAL
NEXT ADJUSTMENT DATE NUMBER OF MORTGAGE LOANS PRINCIPAL BALANCE BALANCE
- ------------------- ------------------------ --------------------- ----------------------
<S> <C> <C> <C>
01/01/00 1 $ 62,468.70 0.09%
02/01/00 1 84,487.19 0.13
02/01/99 8 722,565.70 1.08
03/01/99 7 692,730.86 1.03
04/01/99 7 504,781.34 0.75
05/01/99 5 299,697.61 0.45
06/01/99 1 78,971.43 0.12
07/01/00 32 3,164,809.71 4.72
07/01/01 4 377,181.68 0.56
07/01/99 1 150,074.68 0.22
08/01/00 118 10,572,935.72 15.76
08/01/01 11 1,052,298.77 1.57
08/01/99 6 535,625.71 0.80
09/01/99 8 929,362.62 1.39
09/01/00 124 11,675,250.85 17.40
09/01/01 12 1,112,896.03 1.66
10/01/00 151 13,472,999.21 20.08
10/01/01 8 929,724.30 1.39
10/01/99 6 498,611.90 0.74
11/01/00 146 12,899,993.37 19.22
11/01/01 3 371,474.80 0.55
11/01/99 1 147,353.26 0.22
12/01/00 67 6,290,300.05 9.37
12/01/01 4 354,327.68 0.53
12/01/99 1 120,855.50 0.18
------------------------ --------------------- ----------------------
Total 733 $ 67,101,778.67 100.00%
======================== ===================== ======================
</TABLE>
The weighted average remaining months to the next Adjustment
Date of the Initial Mortgage Loans in Group I as of the Cut-off Date will be
approximately 20 months.
S-30
<PAGE>
<TABLE>
<CAPTION>
GROSS MARGINS OF THE GROUP I INITIAL MORTGAGE LOANS
PERCENTAGE OF GROUP I
MORTGAGE LOANS BY
RANGE OF GROSS AGGREGATE AGGREGATE PRINCIPAL
MARGINS (%) NUMBER OF MORTGAGE LOANS PRINCIPAL BALANCE BALANCE
- ------------------- ------------------------ --------------------- ----------------------
<S> <C> <C> <C>
3.001 - 3.500 3 $ 210,996.51 0.31%
3.501 - 4.000 7 534,371.62 0.80
4.001 - 4.500 15 1,359,375.98 2.03
4.501 - 5.000 96 8,845,435.01 13.18
5.001 - 5.500 230 22,827,939.56 34.02
5.501 - 6.000 187 16,661,881.72 24.83
6.001 - 6.500 85 6,732,451.35 10.03
6.501 - 7.000 33 3,232,533.47 4.82
7.001 - 7.500 37 3,164,651.85 4.72
7.501 - 8.000 21 1,916,917.69 2.86
8.001 - 8.500 15 1,273,069.26 1.90
8.501 - 9.000 3 251,276.89 0.37
9.001 - 9.500 1 90,877.76 0.14
------------------------ --------------------- ----------------------
Total 733 $ 67,101,778.67 100.00%
======================== ===================== ======================
</TABLE>
The weighted average Gross Margin of the Initial Mortgage
Loans in Group I will be approximately 5.758% per annum.
S-31
<PAGE>
GROUP II: ADJUSTABLE RATE MORTGAGE LOANS
Effective with the first payment due on an Adjustable Rate
Initial Mortgage Loan after each related Adjustment Date, the Monthly Payment
will be adjusted to an amount that will fully amortize the outstanding principal
balance of the Mortgage Loan over its remaining term. The weighted average
number of months from the Cut-off Date to the next Adjustment Date for the
Initial Mortgage Loans in Group II is 20 months.
As of the Cut-off Date, each Initial Mortgage Loan in Group II
will have an unpaid principal balance of not less than $28,769.74 or more than
$618,530.02 and the average unpaid principal balance of the Initial Mortgage
Loans in Group II will be $171,367.96. The latest stated maturity date of any of
the Initial Mortgage Loans in Group II will be December 1, 2028; however, the
actual date on which any Initial Mortgage Loan is paid in full may be earlier
than the stated maturity date due to unscheduled payments of principal.
The weighted average remaining term to stated maturity of the
Initial Mortgage Loans in Group II will be approximately 355 months. The
weighted average original term to maturity of the Initial Mortgage Loans in
Group II will be approximately 360 months.
The earliest year of origination of any Initial Mortgage Loan
in Group II is 1994 and the latest month and year of origination of any Initial
Mortgage Loan in Group II will be November 1998.
Approximately 77.93% of the Mortgage Loans in Group II provide
for payment of a prepayment charge. As to each such Mortgage Loan, the
prepayment charge provisions typically provide for payment of a prepayment
charge for partial prepayments and full prepayments. Prepayments may be payable
for a period of time ranging from one to five years from the related origination
date. Prepayment charges received on the Mortgage Loans will be available for
distribution on the Bonds.
Approximately 92.01% of Initial Mortgage Loans in Group II are
Convertible Mortgage Loans.
Approximately 70.95% of the Initial Mortgage Loans in Group II
are covered by MI Policies.
Set forth below is a description of certain additional
characteristics of the Initial Mortgage Loans in Group II as of the Cut-off Date
(except as otherwise indicated). Dollar amounts and percentages may not sum to
totals due to rounding.
S-32
<PAGE>
<TABLE>
<CAPTION>
GEOGRAPHIC DISTRIBUTION OF THE MORTGAGED PROPERTIES OF THE GROUP II INITIAL MORTGAGE LOANS
PERCENTAGE OF GROUP II
MORTGAGE LOANS BY
AGGREGATE AGGREGATE PRINCIPAL
LOCATION NUMBER OF MORTGAGE LOANS PRINCIPAL BALANCE BALANCE
- ------------------- ------------------------ --------------------- ----------------------
<S> <C> <C> <C>
Alaska 1 $ 315,609.64 1.94%
Arizona 1 314,363.06 1.93
California 6 2,220,340.91 13.64
Connecticut 1 118,278.95 0.73
Florida 16 2,783,673.24 17.10
Georgia 3 821,609.54 5.05
Illinois 2 190,648.77 1.17
Indiana 1 138,424.14 0.85
Kansas 1 35,974.21 0.22
Maryland 2 623,724.24 3.83
Michigan 6 607,320.54 3.73
Minnesota 2 110,279.39 0.68
Missouri 3 486,411.71 2.99
Nebraska 1 369,435.07 2.27
Nevada 3 790,832.30 4.86
New Mexico 1 113,642.87 0.70
North Carolina 10 716,224.50 4.40
Ohio 3 191,922.20 1.18
Oklahoma 1 89,460.41 0.55
Oregon 2 417,915.32 2.57
Pennsylvania 7 687,314.36 4.22
South Carolina 2 103,866.93 0.64
Tennessee 5 959,378.97 5.89
Texas 10 2,425,706.62 14.90
Virginia 1 62,839.12 0.39
Washington 4 584,759.11 3.59
------------------------ --------------------- ----------------------
Total 95 $ 16,279,956.12 100.00%
======================== ===================== ======================
</TABLE>
No more than approximately 3.80% of the Group II Initial
Mortgage Loans will be secured by Mortgaged Properties located in any one zip
code.
S-33
<PAGE>
<TABLE>
<CAPTION>
MORTGAGE LOAN TYPE OF THE GROUP II INITIAL MORTGAGE LOANS
PERCENTAGE OF GROUP II
MORTGAGE LOANS BY
AGGREGATE AGGREGATE PRINCIPAL
MORTGAGE LOAN TYPE NUMBER OF MORTGAGE LOANS PRINCIPAL BALANCE BALANCE
- ------------------- ------------------------ --------------------- ----------------------
<S> <C> <C> <C>
One-Year CMT 4 $ 1,230,072.95 7.56%
2/28 6-Month LIBOR 83 13,113,174.93 80.55
3/27 6-Month LIBOR 6 1,350,677.39 8.30
3/27 One-Year CMT 2 586,030.85 3.60
------------------------ --------------------- ----------------------
Total 95 $ 16,279,956.12 100.00%
======================== ===================== ======================
<CAPTION>
LOAN TO VALUE RATIOS AT ORIGINATION OF THE GROUP II INITIAL MORTGAGE LOANS
PERCENTAGE OF GROUP II
MORTGAGE LOANS BY
RANGE OF LOAN-TO-VALUE NUMBER OF AGGREGATE AGGREGATE PRINCIPAL
RATIOS AT ORIGINATION (%) MORTGAGE LOANS PRINCIPAL BALANCE BALANCE
- ------------------- ------------------------ --------------------- ----------------------
<S> <C> <C> <C>
45.01 - 50.00 1 $ 298,179.40 1.83%
55.01 - 60.00 1 56,959.17 0.35
60.01 - 65.00 5 332,464.45 2.04
65.01 - 70.00 5 792,792.97 4.87
70.01 - 75.00 14 1,163,398.10 7.15
75.01 - 80.00 26 4,443,123.49 27.29
80.01 - 85.00 26 4,730,245.41 29.06
85.01 - 90.00 17 4,462,793.13 27.41
------------------------ --------------------- ----------------------
Total 95 $ 16,279,956.12 100.00%
======================== ===================== ======================
</TABLE>
As of the Cut-off Date, the minimum and maximum Loan-to-Value
Ratios at origination for the Group II Initial Mortgage Loans were approximately
46.16% and 90.00%, respectively, and the weighted average Loan-to-Value Ratio at
origination of the Group II Initial Mortgage Loans was approximately 82.03%.
S-34
<PAGE>
<TABLE>
<CAPTION>
CUT-OFF DATE PRINCIPAL BALANCES OF THE GROUP II INITIAL MORTGAGE LOANS
PERCENTAGE OF GROUP II
MORTGAGE LOANS BY
RANGE OF CUT-OFF DATE PRINCIPAL AGGREGATE AGGREGATE PRINCIPAL
BALANCES ($) NUMBER OF MORTGAGE LOANS PRINCIPAL BALANCE BALANCE
- ------------------- ------------------------ --------------------- ----------------------
<S> <C> <C> <C>
25,000.01 - 50,000.00 11 $ 472,195.14 2.90%
50,000.01 - 75,000.00 24 1,525,019.42 9.37
75,000.01 - 100,000.00 9 741,021.34 4.55
100,000.01 - 125,000.00 9 1,029,704.08 6.32
125,000.01 - 150,000.00 3 412,289.22 2.53
150,000.01 - 175,000.00 2 332,729.13 2.04
175,000.01 - 200,000.00 2 377,220.82 2.32
225,000.01 - 250,000.00 4 982,549.81 6.04
250,000.01 - 275,000.00 7 1,869,822.29 11.49
275,000.01 - 300,000.00 8 2,339,142.14 14.37
300,000.01 - 325,000.00 3 952,378.43 5.85
325,000.01 - 350,000.00 3 1,028,783.98 6.32
350,000.01 - 375,000.00 3 1,086,009.06 6.67
375,000.01 - 400,000.00 2 756,703.20 4.65
400,000.01 - 425,000.00 1 408,985.14 2.51
425,000.01 - 450,000.00 2 862,665.40 5.30
475,000.01 - 500,000.00 1 484,207.50 2.97
600,000.01 - 625,000.00 1 618,530.02 3.80
------------------------ --------------------- ----------------------
Total 95 $ 16,279,956.12 100.00%
======================== ===================== ======================
</TABLE>
The average Cut-off Date principal balance of the Group II
Initial Mortgage Loans will be $171,367.96.
S-35
<PAGE>
<TABLE>
<CAPTION>
REMAINING TERMS TO MATURITY OF THE GROUP II INITIAL MORTGAGE LOANS
PERCENTAGE OF GROUP II
MORTGAGE LOANS BY
AGGREGATE AGGREGATE PRINCIPAL
MONTHS REMAINING TO MATURITY NUMBER OF MORTGAGE LOANS PRINCIPAL BALANCE BALANCE
- ------------------- ------------------------ --------------------- ----------------------
<S> <C> <C> <C>
301 - 305 1 $ 270,676.18 1.66%
336 - 340 1 287,851.45 1.77
341 - 345 1 295,728.45 1.82
346 - 350 1 148,155.20 0.91
351 - 355 23 4,859,808.64 29.85
356 18 2,734,390.07 16.80
357 20 2,900,864.40 17.82
358 20 3,517,108.33 21.60
359 10 1,265,373.40 7.77
------------------------ --------------------- ----------------------
Total 95 $ 16,279,956.12 100.00%
======================== ===================== ======================
The weighted average remaining term to maturity of the Group
II Initial Mortgage Loans will be approximately 355 months.
<CAPTION>
TYPES OF MORTGAGED PROPERTIES OF THE GROUP II INITIAL MORTGAGE LOANS
PERCENTAGE OF GROUP II
MORTGAGE LOANS BY
AGGREGATE AGGREGATE PRINCIPAL
PROPERTY TYPE NUMBER OF MORTGAGE LOANS PRINCIPAL BALANCE BALANCE
- ------------------- ------------------------ --------------------- ----------------------
<S> <C> <C> <C>
Attached Housing 2 $ 128,058.97 0.79%
Condominium Hi-Rise 2 370,362.23 2.27
Condominium Lo-Rise 1 247,984.21 1.52
Manufactured Housing 13 825,875.97 5.07
Multiple Unit 3 560,421.86 3.44
PUD 8 2,625,740.46 16.13
PUD Regular 2 218,888.20 1.34
Single Family Residence 64 11,302,624.22 69.43
------------------------ --------------------- ----------------------
Total 95 $ 16,279,956.12 100.00%
======================== ===================== ======================
</TABLE>
S-36
<PAGE>
<TABLE>
<CAPTION>
USE OF PROCEEDS OF THE GROUP II INITIAL MORTGAGE LOANS
PERCENTAGE OF GROUP II
MORTGAGE LOANS BY
NUMBER OF MORTGAGE AGGREGATE AGGREGATE
USE OF PROCEEDS LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------- ------------------------ --------------------- ----------------------
<S> <C> <C> <C>
Const-Perm--- Equity Take-Out 6 $ 432,443.21 2.66%
Const-Perm--- N/A 1 77,490.11 0.48
Const-Perm--- No Equity Take-Out 1 76,203.54 0.47
Purchase 41 7,736,483.88 47.52
Refinance--- Equity Take-Out 31 5,500,330.30 33.79
Refinance--- No Equity Take-Out 15 2,457,005.08 15.09
------------------------ --------------------- ----------------------
Total 95 $ 16,279,956.12 100.00%
======================== ===================== ======================
<CAPTION>
OCCUPANCY STATUS OF THE MORTGAGED PROPERTIES OF THE GROUP II INITIAL MORTGAGE LOANS
PERCENTAGE OF GROUP II
MORTGAGE LOANS BY
AGGREGATE AGGREGATE PRINCIPAL
OCCUPANCY STATUS NUMBER OF MORTGAGE LOANS PRINCIPAL BALANCE BALANCE
- ------------------- ------------------------ --------------------- ----------------------
<S> <C> <C> <C>
Investment Non-Owner Occupied 3 $ 538,417.60 3.31%
Primary 91 15,675,329.32 96.29
Secondary 1 66,209.20 0.41
------------------------ --------------------- ----------------------
Total 95 $ 16,279,956.12 100.00%
======================== ===================== ======================
</TABLE>
S-37
<PAGE>
<TABLE>
<CAPTION>
DOCUMENTATION TYPE OF THE GROUP II INITIAL MORTGAGE LOANS
PERCENTAGE OF GROUP II
MORTGAGE LOANS BY
AGGREGATE AGGREGATE PRINCIPAL
DOCUMENTATION NUMBER OF MORTGAGE LOANS PRINCIPAL BALANCE BALANCE
- ------------------- ------------------------ --------------------- ----------------------
<S> <C> <C> <C>
Full 76 $ 11,836,280.09 72.70%
Limited 6 1,823,370.31 11.20
Stated 13 2,620,305.72 16.10
------------------------ --------------------- ----------------------
Total 95 $ 16,279,956.12 100.00%
<CAPTION>
RISK CLASSIFICATIONS OF THE GROUP II INITIAL MORTGAGE LOANS
PERCENTAGE OF GROUP II
MORTGAGE LOANS BY
AGGREGATE AGGREGATE PRINCIPAL
RISK CLASSIFICATION NUMBER OF MORTGAGE LOANS PRINCIPAL BALANCE BALANCE
- ------------------- ------------------------ --------------------- ----------------------
<S> <C> <C> <C>
AA 13 $ 3,810,884.58 23.41%
A 17 5,341,297.00 32.81
A- 18 2,985,164.56 18.34
B 22 2,399,497.55 14.74
C 21 1,410,244.61 8.66
D 4 332,867.82 2.04
------------------------ --------------------- ----------------------
Total 95 $ 16,279,956.12 100.00%
======================== ===================== ======================
<CAPTION>
DELINQUENCIES OF THE GROUP II INITIAL MORTGAGE LOANS
PERCENTAGE OF GROUP II
MORTGAGE LOANS BY
AGGREGATE AGGREGATE PRINCIPAL
NUMBER OF DAYS DELINQUENT NUMBER OF MORTGAGE LOANS PRINCIPAL BALANCE BALANCE
- ------------------- ------------------------ --------------------- ----------------------
<S> <C> <C> <C>
0 - 29 81 $ 14,016,851.48 86.10%
30 - 59 9 1,338,206.58 8.22
60 - 89 5 924,898.06 5.68
------------------------ --------------------- ----------------------
Total 95 $ 16,279,956.12 100.00%
======================== ===================== ======================
</TABLE>
S-38
<PAGE>
<TABLE>
<CAPTION>
CURRENT MORTGAGE RATES OF THE GROUP II INITIAL MORTGAGE LOANS
PERCENTAGE OF GROUP II
MORTGAGE LOANS BY
RANGE OF CURRENT MORTGAGE AGGREGATE AGGREGATE PRINCIPAL
RATES (%) NUMBER OF MORTGAGE LOANS PRINCIPAL BALANCE BALANCE
- ------------------- ------------------------ --------------------- ----------------------
<S> <C> <C> <C>
7.001 - 7.500 1 $ 298,179.40 1.83%
7.501 - 8.000 3 216,196.79 1.33
8.001 - 8.500 3 944,244.16 5.80
8.501 - 9.000 3 801,425.11 4.92
9.001 - 9.500 6 1,741,952.02 10.70
9.501 - 10.000 12 3,791,825.27 23.29
10.001 - 10.500 23 3,617,765.93 22.22
10.501 - 11.000 12 1,625,979.75 9.99
11.001 - 11.500 17 2,026,481.58 12.45
11.501 - 12.000 14 1,029,259.32 6.32
12.001 - 12.500 1 186,646.79 1.15
------------------------ --------------------- ----------------------
Total 95 $ 16,279,956.12 100.00%
======================== ===================== ======================
</TABLE>
The weighted average Current Mortgage Rate of the Initial
Mortgage Loans in Group II will be approximately 10.120% per annum.
<TABLE>
<CAPTION>
MINIMUM RATES OF THE GROUP II INITIAL MORTGAGE LOANS
PERCENTAGE OF GROUP II
MORTGAGE LOANS BY
RANGE OF MINIMUM AGGREGATE AGGREGATE PRINCIPAL
RATES (%) NUMBER OF MORTGAGE LOANS PRINCIPAL BALANCE BALANCE
- ------------------- ------------------------ --------------------- ----------------------
<S> <C> <C> <C>
7.001 - 7.500 1 $ 298,179.40 1.83%
7.501 - 8.000 3 216,196.79 1.33
8.001 - 8.500 4 1,214,920.34 7.46
8.501 - 9.000 2 530,748.93 3.26
9.001 - 9.500 6 1,741,952.02 10.70
9.501 - 10.000 12 3,791,825.27 23.29
10.001 - 10.500 23 3,617,765.93 22.22
10.501 - 11.000 12 1,625,979.75 9.99
11.001 - 11.500 17 2,026,481.58 12.45
11.501 - 12.000 14 1,029,259.32 6.32
12.001 - 12.500 1 186,646.79 1.15
------------------------ --------------------- ----------------------
Total 95 $ 16,279,956.12 100.00%
======================== ===================== ======================
</TABLE>
The weighted average Minimum Mortgage Rate of the Initial
Mortgage Loans in Group II as of the Cut-off Date will be approximately 10.112%
per annum.
S-39
<PAGE>
<TABLE>
<CAPTION>
INITIAL PERIODIC RATE CAP OF THE GROUP II INITIAL MORTGAGE LOANS
PERCENTAGE OF GROUP II
MORTGAGE LOANS BY
INITIAL PERIODIC RATE AGGREGATE AGGREGATE PRINCIPAL
CAP (%) NUMBER OF MORTGAGE LOANS PRINCIPAL BALANCE BALANCE
- ------------------- ------------------------ --------------------- ----------------------
<S> <C> <C> <C>
2.000 4 $ 1,230,072.95 7.56%
3.000 91 15,049,883.17 92.44
------------------------ --------------------- ----------------------
Total 95 $ 16,279,956.12 100.00%
======================== ===================== ======================
The weighted average Initial Periodic Rate Cap of the Initial Mortgage Loans in Group II is
2.924%.
<CAPTION>
PERIODIC RATE CAP OF THE GROUP II INITIAL MORTGAGE LOANS
PERCENTAGE OF GROUP II
MORTGAGE LOANS BY
AGGREGATE AGGREGATE PRINCIPAL
PERIODIC RATE CAP (%) NUMBER OF MORTGAGE LOANS PRINCIPAL BALANCE BALANCE
- ------------------- ------------------------ --------------------- ----------------------
<S> <C> <C> <C>
1.000 89 $ 14,463,852.32 88.84%
2.000 6 1,816,103.80 11.16
------------------------ --------------------- ----------------------
Total 95 $ 16,279,956.12 100.00%
======================== ===================== ======================
</TABLE>
The weighted average Periodic Rate Cap of the Initial Group II
Mortgage Loans is 1.112%.
S-40
<PAGE>
<TABLE>
<CAPTION>
MAXIMUM RATES OF THE GROUP II INITIAL MORTGAGE LOANS
PERCENTAGE OF GROUP II
MORTGAGE LOANS BY
RANGE OF MAXIMUM AGGREGATE AGGREGATE
RATES (%) NUMBER OF MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------- ------------------------ --------------------- ----------------------
<S> <C> <C> <C>
13.001 - 13.500 1 $ 298,179.40 1.83%
14.001 - 14.500 1 270,676.18 1.66
14.501 - 15.000 4 504,048.24 3.10
15.001 - 15.500 3 944,244.16 5.80
15.501 - 16.000 1 242,897.48 1.49
16.001 - 16.500 6 1,741,952.02 10.70
16.501 - 17.000 12 3,791,825.27 23.29
17.001 - 17.500 24 3,913,494.38 24.04
17.501 - 18.000 12 1,625,979.75 9.99
18.001 - 18.500 16 1,730,753.13 10.63
18.501 - 19.000 14 1,029,259.32 6.32
19.001 - 19.500 1 186,646.79 1.15
------------------------ --------------------- ----------------------
Total 95 $ 16,279,956.12 100.00%
======================== ===================== ======================
</TABLE>
The weighted average Maximum Mortgage Rate of the Initial
Mortgage Loans in Group II as of the Cut-off Date will be approximately 17.041%.
S-41
<PAGE>
<TABLE>
<CAPTION>
NEXT INTEREST ADJUSTMENT DATE OF THE GROUP II INITIAL MORTGAGE LOANS
PERCENTAGE OF GROUP II
MORTGAGE LOANS BY
AGGREGATE AGGREGATE PRINCIPAL
NEXT ADJUSTMENT DATE NUMBER OF MORTGAGE LOANS PRINCIPAL BALANCE BALANCE
- ------------------- ------------------------ --------------------- ----------------------
<S> <C> <C> <C>
02/01/00 1 $ 148,155.20 0.91%
04/01/00 1 287,851.45 1.77
05/01/01 1 298,179.40 1.83
05/01/99 1 270,676.18 1.66
07/01/00 3 193,888.45 1.19
08/01/00 19 4,367,740.79 26.83
09/01/00 14 1,714,319.95 10.53
09/01/01 1 60,673.35 0.37
09/01/99 4 1,255,125.22 7.71
10/01/00 19 2,585,254.76 15.88
10/01/01 1 315,609.64 1.94
11/01/00 18 2,869,326.46 17.62
11/01/01 2 647,781.87 3.98
12/01/00 8 938,760.87 5.77
12/01/01 2 326,612.53 2.01
------------------------ --------------------- ----------------------
Total 95 $ 16,279,956.12 100.00%
======================== ===================== ======================
</TABLE>
The weighted average remaining months to the next Adjustment
Date of the Initial Mortgage Loans in Group II as of the Cut-off Date will be
approximately 20 months.
<TABLE>
<CAPTION>
GROSS MARGINS OF THE GROUP II INITIAL MORTGAGE LOANS
PERCENTAGE OF GROUP II
MORTGAGE LOANS BY
RANGE OF GROSS AGGREGATE AGGREGATE PRINCIPAL
MARGINS (%) NUMBER OF MORTGAGE LOANS PRINCIPAL BALANCE BALANCE
- ------------------- ------------------------ --------------------- ----------------------
<S> <C> <C> <C>
3.001 - 3.500 1 $ 270,676.18 1.66%
3.501 - 4.000 2 676,149.96 4.15
4.001 - 4.500 5 1,187,317.75 7.29
4.501 - 5.000 3 688,791.18 4.23
5.001 - 5.500 21 5,278,920.10 32.43
5.501 - 6.000 36 5,077,434.15 31.19
6.001 - 6.500 15 1,339,892.52 8.23
6.501 - 7.000 2 244,456.46 1.50
7.001 - 7.500 1 86,814.44 0.53
7.501 - 8.000 7 1,299,658.90 7.98
8.001 - 8.500 2 129,844.48 0.80
------------------------ --------------------- ----------------------
Total 95 $ 16,279,956.12 100.00%
======================== ===================== ======================
</TABLE>
The weighted average Gross Margin of the Initial Mortgage
Loans in Group II will be approximately 5.644% per annum.
S-42
<PAGE>
GROUP III: FIXED RATE MORTGAGE LOANS
As of the Cut-off Date, each Initial Mortgage Loan in Group
III will have an unpaid principal balance of not less than $23,746.28 or more
than $229,650.47 and the average unpaid principal balance of the Initial
Mortgage Loans in Group III will be $74,842.77. The latest stated maturity date
of any of the Initial Mortgage Loans in Group III will be December 1, 2028;
however, the actual date on which any Initial Mortgage Loan is paid in full may
be earlier than the stated maturity date due to unscheduled payments of
principal.
The weighted average remaining term to stated maturity of the
Initial Mortgage Loans in Group III will be approximately 234 months. The
weighted average original term to maturity of the Initial Mortgage Loans in
Group III will be approximately 237 months.
The earliest year of origination of any Initial Mortgage Loan
in Group III is 1997 and the latest month and year of origination of any Initial
Mortgage Loan in Group III will be December 1998.
Approximately 82.12% of the Mortgage Loans in Group III
provide for payment of a prepayment charge. As to each such Mortgage Loan, the
prepayment charge provisions typically provide for payment of a prepayment
charge for partial prepayments and full prepayments. Prepayments may be payable
for a period of time ranging from one to five years from the related origination
date. Prepayment charges received on the Mortgage Loans will be available for
distribution on the Bonds.
Approximately 71.13% of the Initial Mortgage Loans in Group
III are covered by MI Policies.
Set forth below is a description of certain additional
characteristics of the Initial Mortgage Loans in Group III as of the Cut-off
Date (except as otherwise indicated). Dollar amounts and percentages may not sum
to totals due to rounding.
S-43
<PAGE>
<TABLE>
<CAPTION>
GEOGRAPHIC DISTRIBUTION OF THE MORTGAGED PROPERTIES OF THE GROUP III INITIAL MORTGAGE LOANS
PERCENTAGE OF GROUP III
MORTGAGE LOANS BY
AGGREGATE AGGREGATE PRINCIPAL
LOCATION NUMBER OF MORTGAGE LOANS PRINCIPAL BALANCE BALANCE
- ------------------- ------------------------ --------------------- ----------------------
<S> <C> <C> <C>
Alaska 1 $ 128,647.40 0.33%
Arizona 8 715,913.24 1.82
Arkansas 1 55,695.01 0.14
California 20 2,473,662.71 6.27
Colorado 1 185,675.95 0.47
Connecticut 4 280,489.00 0.71
Delaware 4 194,399.11 0.49
Florida 121 8,966,000.55 22.73
Georgia 20 1,415,642.84 3.59
Illinois 8 583,695.49 1.48
Indiana 32 1,963,536.99 4.98
Kansas 3 229,840.23 0.58
Kentucky 6 523,644.65 1.33
Louisiana 1 112,702.54 0.29
Maryland 5 430,033.41 1.09
Michigan 24 1,631,161.90 4.14
Minnesota 3 185,935.69 0.47
Mississippi 6 492,631.17 1.25
Missouri 14 685,516.83 1.74
Montana 1 104,819.40 0.27
Nevada 3 349,384.58 0.89
North Carolina 52 4,054,980.99 10.28
Ohio 36 2,122,248.54 5.38
Oklahoma 6 361,553.17 0.92
Oregon 5 492,573.73 1.25
Pennsylvania 23 1,640,664.67 4.16
South Carolina 43 2,497,055.85 6.33
South Dakota 1 56,928.56 0.14
Tennessee 38 3,223,264.17 8.17
Texas 15 1,397,381.29 3.54
Utah 3 240,900.92 0.61
Virginia 8 670,424.81 1.70
Washington 7 786,433.93 1.99
West Virginia 4 188,700.99 0.48
------------------------ --------------------- ----------------------
Total 527 $ 39,442,140.31 100.00%
======================== ===================== ======================
</TABLE>
No more than approximately 1.28% of the Group III Initial
Mortgage Loans will be secured by Mortgaged Properties located in any one zip
code.
S-44
<PAGE>
<TABLE>
<CAPTION>
LOAN TO VALUE RATIOS AT ORIGINATION OF THE GROUP III INITIAL MORTGAGE LOANS
PERCENTAGE OF GROUP III
MORTGAGE LOANS BY
RANGE OF LOAN-TO-VALUE NUMBER OF AGGREGATE AGGREGATE PRINCIPAL
RATIOS AT ORIGINATION (%) MORTGAGE LOANS PRINCIPAL BALANCE BALANCE
- ------------------- ------------------------ --------------------- ----------------------
<S> <C> <C> <C>
10.01 - 15.00 1 $ 39,949.59 0.10%
15.01 - 20.00 1 32,042.61 0.08
20.01 - 25.00 1 29,989.59 0.08
25.01 - 30.00 2 49,841.68 0.13
35.01 - 40.00 3 83,632.26 0.21
40.01 - 45.00 4 236,628.46 0.60
45.01 - 50.00 5 231,398.75 0.59
50.01 - 55.00 8 488,426.60 1.24
55.01 - 60.00 10 477,931.27 1.21
60.01 - 65.00 35 2,229,979.81 5.65
65.01 - 70.00 33 2,540,857.17 6.44
70.01 - 75.00 74 5,239,399.48 13.28
75.01 - 80.00 122 8,734,713.55 22.15
80.01 - 85.00 102 8,137,249.40 20.63
85.01 - 90.00 110 9,172,620.75 23.26
90.01 - 95.00 16 1,717,479.34 4.35
------------------------ --------------------- ----------------------
Total 527 $ 39,442,140.31 100.00%
======================== ===================== ======================
</TABLE>
As of the Cut-off Date, the minimum and maximum Loan-to-Value
Ratios at origination for the Group III Initial Mortgage Loans were
approximately 10.55% and 95.00%, respectively, and the weighted average
Loan-to-Value Ratio at origination of the Group III Initial Mortgage Loans was
approximately 80.10%.
S-45
<PAGE>
<TABLE>
<CAPTION>
MORTGAGE RATES OF THE GROUP III INITIAL MORTGAGE LOANS
PERCENTAGE OF GROUP III
MORTGAGE LOANS BY
RANGE OF MORTGAGE AGGREGATE AGGREGATE PRINCIPAL
RATES (%) NUMBER OF MORTGAGE LOANS PRINCIPAL BALANCE BALANCE
- ------------------- ------------------------ --------------------- ----------------------
<S> <C> <C> <C>
7.001 - 7.500 2 $ 340,752.94 0.86%
7.501 - 8.000 11 767,696.70 1.95
8.001 - 8.500 29 2,302,643.60 5.84
8.501 - 9.000 54 5,197,655.40 13.18
9.001 - 9.500 59 4,799,143.98 12.17
9.501 - 10.000 102 7,431,806.36 18.84
10.001 - 10.500 66 5,117,098.28 12.97
10.501 - 11.000 86 5,732,305.21 14.53
11.001 - 11.500 49 3,129,665.86 7.93
11.501 - 12.000 43 2,920,310.73 7.40
12.001 - 12.500 14 925,506.46 2.35
12.501 - 13.000 9 562,427.20 1.43
13.001 - 13.500 2 156,656.47 0.40
14.001 - 14.500 1 58,471.12 0.15
------------------------ --------------------- ----------------------
Total 527 $ 39,442,140.31 100.00%
The weighted average Mortgage Rate of the Initial Mortgage
Loans in Group III will be approximately 10.079% per annum.
<CAPTION>
CUT-OFF DATE PRINCIPAL BALANCES OF THE GROUP III INITIAL MORTGAGE LOANS
PERCENTAGE OF GROUP III
MORTGAGE LOANS BY
RANGE OF CUT-OFF DATE PRINCIPAL AGGREGATE AGGREGATE PRINCIPAL
BALANCES ($) NUMBER OF MORTGAGE LOANS PRINCIPAL BALANCE BALANCE
- ------------------- ------------------------ --------------------- ----------------------
<S> <C> <C> <C>
15,000.01 - 25,000.00 8 $ 196,318.30 0.50%
25,000.01 - 50,000.00 133 5,244,653.55 13.30
50,000.01 - 75,000.00 184 11,360,648.93 28.80
75,000.01 - 100,000.00 102 8,795,757.32 22.30
100,000.01 - 125,000.00 45 5,011,194.52 12.71
125,000.01 - 150,000.00 28 3,798,132.67 9.63
150,000.01 - 175,000.00 9 1,466,374.58 3.72
175,000.01 - 200,000.00 9 1,663,913.62 4.22
200,000.01 - 225,000.00 8 1,675,496.35 4.25
225,000.01 - 250,000.00 1 229,650.47 0.58
------------------------ --------------------- ----------------------
Total 527 $ 39,442,140.31 100.00%
======================== ===================== ======================
The average Cut-off Date principal balance of the Group III Initial Mortgage Loans will be
$74,842.77.
</TABLE>
S-46
<PAGE>
<TABLE>
<CAPTION>
REMAINING TERMS TO MATURITY OF THE GROUP III INITIAL MORTGAGE LOANS
PERCENTAGE OF GROUP III
MORTGAGE LOANS BY
AGGREGATE AGGREGATE PRINCIPAL
MONTHS REMAINING TO MATURITY NUMBER OF MORTGAGE LOANS PRINCIPAL BALANCE BALANCE
- ---------------------------- ------------------------ --------------------- ----------------------
<S> <C> <C> <C>
111 - 115 1 $ 45,494.98 0.12%
116 - 120 3 145,135.39 0.37
166 - 170 1 91,313.04 0.23
171 - 175 86 6,223,867.01 15.78
176 49 3,690,811.22 9.36
177 46 3,499,828.23 8.87
178 89 6,836,687.19 17.33
179 82 5,942,902.99 15.07
180 1 52,000.00 0.13
231 - 235 2 231,961.21 0.59
236 - 240 6 298,969.03 0.76
346 - 350 1 55,695.01 0.14
351 - 355 36 3,200,368.41 8.11
356 30 1,575,123.21 3.99
357 26 1,892,344.62 4.80
358 39 2,968,509.40 7.53
359 29 2,691,129.37 6.82
------------------------ --------------------- ----------------------
Total 527 $ 39,442,140.31 100.00%
======================== ===================== ======================
The weighted average remaining term to maturity of the Group
III Initial Mortgage Loans will be approximately 234 months.
<CAPTION>
ORIGINAL TERMS TO MATURITY OF THE GROUP III INITIAL MORTGAGE LOANS
PERCENTAGE OF GROUP III
MORTGAGE LOANS BY
AGGREGATE AGGREGATE PRINCIPAL
RANGE OF ORIGINAL TERMS (MONTHS) NUMBER OF MORTGAGE LOANS PRINCIPAL BALANCE BALANCE
- ------------------- ------------------------ --------------------- ----------------------
<S> <C> <C> <C>
116 - 120 4 $ 190,630.37 0.48%
176 - 180 354 26,337,409.68 66.77
236 - 240 8 530,930.24 1.35
356 - 360 161 12,383,170.02 31.40
------------------------ --------------------- ----------------------
Total 527 $ 39,442,140.31 100.00%
======================== ===================== ======================
</TABLE>
The weighted average Original Term to Maturity of the Group
III Initial Mortgage Loans will be approximately 237 months.
S-47
<PAGE>
<TABLE>
<CAPTION>
TYPES OF MORTGAGED PROPERTIES OF THE GROUP III INITIAL MORTGAGE LOANS
PERCENTAGE OF GROUP III
MORTGAGE LOANS BY
AGGREGATE AGGREGATE PRINCIPAL
PROPERTY TYPE NUMBER OF MORTGAGE LOANS PRINCIPAL BALANCE BALANCE
- ------------------- ------------------------ --------------------- ----------------------
<S> <C> <C> <C>
Attached Housing 1 $ 39,506.04 0.10%
Condominium Hi-Rise 2 127,471.44 0.32
Condominium Lo-Rise 6 375,273.32 0.95
Manufactured Housing 103 6,604,800.83 16.75
Multiple Unit 24 1,941,862.77 4.92
PUD 8 1,006,257.12 2.55
PUD Regular 5 553,094.26 1.40
Single Family Residence 378 28,793,874.53 73.00
------------------------ --------------------- ----------------------
Total 527 $ 39,442,140.31 100.00%
======================== ===================== ======================
<CAPTION>
USE OF PROCEEDS OF THE GROUP III INITIAL MORTGAGE LOANS
PERCENTAGE OF GROUP III
MORTGAGE LOANS BY
NUMBER OF MORTGAGE AGGREGATE AGGREGATE PRINCIPAL
USE OF PROCEEDS LOANS PRINCIPAL BALANCE BALANCE
- ------------------- ------------------------ --------------------- ----------------------
<S> <C> <C> <C>
Const-Perm 17 $ 1,336,379.25 3.39%
Const-Perm--- Equity Take-Out 1 72,707.63 0.18
Const-Perm--- No Equity Take-Out 4 287,666.14 0.73
Purchase 140 10,299,642.47 26.11
Refinance--- Equity Take-Out 314 23,232,877.44 58.90
Refinance--- No Equity Take-Out 51 4,212,867.38 10.68
------------------------ --------------------- ----------------------
Total 527 $ 39,442,140.31 100.00%
======================== ===================== ======================
</TABLE>
S-48
<PAGE>
<TABLE>
<CAPTION>
OCCUPANCY STATUS OF THE MORTGAGED PROPERTIES OF THE GROUP III INITIAL MORTGAGE LOANS
PERCENTAGE OF GROUP III
MORTGAGE LOANS BY
AGGREGATE AGGREGATE PRINCIPAL
OCCUPANCY STATUS NUMBER OF MORTGAGE LOANS PRINCIPAL BALANCE BALANCE
- ------------------- ------------------------ --------------------- ----------------------
<S> <C> <C> <C>
Investment Non-Owner Occupied 40 $ 2,263,521.00 5.74%
Investment Owner Occupied 5 317,727.52 0.81
Primary 477 36,455,092.71 92.43
Secondary 5 405,799.08 1.03
------------------------ --------------------- ----------------------
Total 527 $ 39,442,140.31 100.00%
======================== ===================== ======================
<CAPTION>
DOCUMENTATION TYPE OF THE GROUP III INITIAL MORTGAGE LOANS
PERCENTAGE OF GROUP III
MORTGAGE LOANS BY
AGGREGATE AGGREGATE PRINCIPAL
DOCUMENTATION NUMBER OF MORTGAGE LOANS PRINCIPAL BALANCE BALANCE
- ------------------- ------------------------ --------------------- ----------------------
<S> <C> <C> <C>
Full 415 $ 30,965,078.94 78.51%
Limited 30 2,206,640.94 5.59
Stated 82 6,270,420.43 15.90
------------------------ --------------------- ----------------------
Total 527 $ 39,442,140.31 100.00%
======================== ===================== ======================
<CAPTION>
RISK CLASSIFICATIONS OF THE GROUP III INITIAL MORTGAGE LOANS
PERCENTAGE OF GROUP III
MORTGAGE LOANS BY
AGGREGATE AGGREGATE PRINCIPAL
RISK CLASSIFICATION NUMBER OF MORTGAGE LOANS PRINCIPAL BALANCE BALANCE
- ------------------- ------------------------ --------------------- ----------------------
<S> <C> <C> <C>
AA 82 $ 7,280,336.24 18.46%
A 158 11,951,076.71 30.30
A- 131 10,077,013.55 25.55
B 87 6,140,283.29 15.57
C 56 3,342,414.12 8.47
D 13 651,016.40 1.65
------------------------ --------------------- ----------------------
Total 527 $ 39,442,140.31 100.00%
======================== ===================== ======================
</TABLE>
S-49
<PAGE>
<TABLE>
<CAPTION>
DELINQUENCIES OF THE GROUP III INITIAL MORTGAGE LOANS
PERCENTAGE OF GROUP III
MORTGAGE LOANS BY
AGGREGATE AGGREGATE PRINCIPAL
NUMBER OF DAYS DELINQUENT NUMBER OF MORTGAGE LOANS PRINCIPAL BALANCE BALANCE
- ------------------- ------------------------ --------------------- ----------------------
<S> <C> <C> <C>
0 - 29 494 $ 37,122,081.36 94.12%
30 - 59 29 2,040,212.55 5.17
60 - 89 4 279,846.40 0.71
------------------------ --------------------- ----------------------
Total 527 $ 39,442,140.31 100.00%
======================== ===================== ======================
</TABLE>
S-50
<PAGE>
GROUP IV: FIXED RATE MORTGAGE LOANS
As of the Cut-off Date, each Initial Mortgage Loan in Group IV
will have an unpaid principal balance of not less than $24,957.53 or more than
$865,395.27 and the average unpaid principal balance of the Initial Mortgage
Loans in Group IV will be $109,926.50. The latest stated maturity date of any of
the Initial Mortgage Loans in Group IV will be December 1, 2028; however, the
actual date on which any Initial Mortgage Loan is paid in full may be earlier
than the stated maturity date due to unscheduled payments of principal.
The weighted average remaining term to stated maturity of the
Initial Mortgage Loans in Group IV will be approximately 240 months. The
weighted average original term to maturity of the Initial Mortgage Loans in
Group IV will be approximately 243 months.
The earliest year of origination of any Initial Mortgage Loan
in Group IV is 1998 and the latest month and year of origination of any Initial
Mortgage Loan in Group IV will be November 1998.
Approximately 75.28% of the Mortgage Loans in Group IV provide
for payment of a prepayment charge. As to each such Mortgage Loan, the
prepayment charge provisions typically provide for payment of a prepayment
charge for partial prepayments and full prepayments. Prepayments may be payable
for a period of time ranging from one to five years from the related origination
date. Prepayment charges received on the Mortgage Loans will be available for
distribution on the Bonds.
Approximately 71.44% of the Initial Mortgage Loans in Group IV
are covered by MI Policies.
Set forth below is a description of certain additional
characteristics of the Initial Mortgage Loans in Group IV as of the Cut-off Date
(except as otherwise indicated). Dollar amounts and percentages may not sum to
totals due to rounding.
S-51
<PAGE>
<TABLE>
<CAPTION>
GEOGRAPHIC DISTRIBUTION OF THE MORTGAGED PROPERTIES OF THE GROUP IV INITIAL MORTGAGE LOANS
PERCENTAGE OF GROUP IV
MORTGAGE LOANS BY
AGGREGATE AGGREGATE PRINCIPAL
LOCATION NUMBER OF MORTGAGE LOANS PRINCIPAL BALANCE BALANCE
- ------------------- ------------------------ --------------------- ----------------------
<S> <C> <C> <C>
Arizona 1 $ 122,246.95 0.76%
California 12 2,741,075.97 17.08
Florida 49 4,788,611.13 29.84
Georgia 3 381,853.60 2.38
Illinois 3 196,301.09 1.22
Indiana 1 47,951.33 0.30
Maryland 2 454,554.59 2.83
Michigan 6 839,058.93 5.23
Minnesota 3 190,526.83 1.19
Mississippi 3 260,431.19 1.62
Missouri 4 352,403.46 2.20
Nebraska 1 53,888.02 0.34
Nevada 4 508,783.43 3.17
New Mexico 1 59,471.86 0.37
North Carolina 12 911,928.08 5.68
Ohio 10 724,986.45 4.52
Oregon 1 219,387.82 1.37
Pennsylvania 4 277,216.56 1.73
South Carolina 7 544,427.25 3.39
Tennessee 10 681,306.92 4.25
Texas 4 862,476.01 5.37
Washington 4 790,487.12 4.93
West Virginia 1 39,894.70 0.25
------------------------ --------------------- ----------------------
Total 146 $ 16,049,269.29 100.00%
======================== ===================== ======================
</TABLE>
No more than approximately 6.45% of the Group IV Initial
Mortgage Loans will be secured by Mortgaged Properties located in any one zip
code.
S-52
<PAGE>
<TABLE>
<CAPTION>
LOAN TO VALUE RATIOS AT ORIGINATION OF THE GROUP IV INITIAL MORTGAGE LOANS
AGGREGATE PERCENTAGE OF GROUP IV
RANGE OF LOAN-TO-VALUE NUMBER OF ------------------------- MORTGAGE LOANS BY
RATIOS AT ORIGINATION (%) MORTGAGE LOANS PRINCIPAL BALANCE AGGREGATE PRINCIPAL BALANCE
- ------------------- ------------------------ --------------------- ----------------------
<S> <C> <C> <C>
15.01 - 20.00 1 $ 85,178.45 0.53%
20.01 - 25.00 1 28,741.11 0.18
25.01 - 30.00 2 63,788.91 0.40
30.01 - 35.00 1 33,945.12 0.21
35.01 - 40.00 3 113,269.98 0.71
40.01 - 45.00 1 24,957.53 0.16
50.01 - 55.00 1 29,967.54 0.19
55.01 - 60.00 3 223,752.44 1.39
60.01 - 65.00 10 584,961.29 3.64
65.01 - 70.00 9 990,358.23 6.17
70.01 - 75.00 27 2,306,436.98 14.37
75.01 - 80.00 24 2,978,711.66 18.56
80.01 - 85.00 33 4,509,036.28 28.09
85.01 - 90.00 26 3,647,984.74 22.73
90.01 - 95.00 4 428,179.03 2.67
------------------------ --------------------- ----------------------
Total 146 $ 16,049,269.29 100.00%
======================== ===================== ======================
</TABLE>
As of the Cut-off Date, the minimum and maximum Loan-to-Value
Ratios at origination for the Group IV Initial Mortgage Loans were approximately
16.54% and 95.00%, respectively, and the weighted average Loan-to-Value Ratio at
origination of the Group IV Initial Mortgage Loans was approximately 80.14%.
S-53
<PAGE>
<TABLE>
<CAPTION>
MORTGAGE RATES OF THE GROUP IV INITIAL MORTGAGE LOANS
PERCENTAGE OF GROUP IV
MORTGAGE LOANS BY
RANGE OF MORTGAGE AGGREGATE AGGREGATE PRINCIPAL
RATES (%) NUMBER OF MORTGAGE LOANS PRINCIPAL BALANCE BALANCE
- ------------------- ------------------------ --------------------- ----------------------
<S> <C> <C> <C>
7.501 - 8.000 4 $ 1,796,912.53 11.20%
8.001 - 8.500 2 1,105,836.46 6.89
9.001 - 9.500 7 450,918.47 2.81
9.501 - 10.000 31 3,882,128.92 24.19
10.001 - 10.500 49 4,261,171.05 26.55
10.501 - 11.000 24 2,286,857.77 14.25
11.001 - 11.500 16 1,271,943.32 7.93
11.501 - 12.000 2 233,279.31 1.45
12.001 - 12.500 3 163,096.61 1.02
12.501 - 13.000 5 360,236.99 2.24
13.501 - 14.000 2 182,314.82 1.14
14.001 - 14.500 1 54,573.04 0.34
------------------------ --------------------- ----------------------
Total 146 $ 16,049,269.29 100.00%
======================== ===================== ======================
</TABLE>
The weighted average Mortgage Rate of the Initial Mortgage
Loans in Group IV will be approximately 10.066% per annum.
S-54
<PAGE>
<TABLE>
<CAPTION>
CUT-OFF DATE PRINCIPAL BALANCES OF THE GROUP IV INITIAL MORTGAGE LOANS
PERCENTAGE OF GROUP IV
MORTGAGE LOANS BY
RANGE OF CUT-OFF DATE PRINCIPAL AGGREGATE AGGREGATE PRINCIPAL
BALANCES ($) NUMBER OF MORTGAGE LOANS PRINCIPAL BALANCE BALANCE
- ---------------------------------- ------------------------ --------------------- ----------------------
<S> <C> <C> <C>
15,000.01 - 25,000.00 1 $ 24,957.53 0.16%
25,000.01 - 50,000.00 28 1,117,702.72 6.96
50,000.01 - 75,000.00 45 2,722,450.76 16.96
75,000.01 - 100,000.00 27 2,344,259.78 14.61
100,000.01 - 125,000.00 12 1,356,708.13 8.45
125,000.01 - 150,000.00 9 1,212,212.24 7.55
150,000.01 - 175,000.00 4 630,254.87 3.93
175,000.01 - 200,000.00 3 582,786.47 3.63
200,000.01 - 225,000.00 3 650,732.08 4.05
225,000.01 - 250,000.00 2 488,052.64 3.04
250,000.01 - 275,000.00 2 533,354.83 3.32
275,000.01 - 300,000.00 2 573,973.81 3.58
300,000.01 - 325,000.00 1 305,875.08 1.91
325,000.01 - 350,000.00 1 339,849.59 2.12
350,000.01 - 375,000.00 2 717,383.85 4.47
450,000.01 - 475,000.00 1 462,042.68 2.88
475,000.01 - 500,000.00 1 477,483.18 2.98
625,000.01 - 650,000.00 1 643,793.78 4.01
850,000.01 - 875,000.00 1 865,395.27 5.39
------------------------ --------------------- ----------------------
Total 146 $ 16,049,269.29 100.00%
======================== ===================== ======================
</TABLE>
The average Cut-off Date principal balance of the Group IV
Initial Mortgage Loans will be $109,926.50.
S-55
<PAGE>
<TABLE>
<CAPTION>
REMAINING TERMS TO MATURITY OF THE GROUP IV INITIAL MORTGAGE LOANS
PERCENTAGE OF GROUP IV
MORTGAGE LOANS BY
AGGREGATE AGGREGATE
MONTHS REMAINING TO MATURITY NUMBER OF MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------- ------------------------ --------------------- ----------------------
<S> <C> <C> <C>
171 - 175 16 $ 2,350,074.90 14.64%
176 19 1,142,595.10 7.12
177 7 500,293.89 3.12
178 37 3,095,463.38 19.29
179 21 3,129,167.89 19.50
236 - 240 1 116,604.05 0.73
296 - 300 1 357,543.45 2.23
351 - 355 9 1,264,387.08 7.88
356 6 1,076,349.93 6.71
357 10 896,981.95 5.59
358 10 1,059,195.09 6.60
359 9 1,060,612.58 6.61
------------------------ --------------------- ----------------------
Total 146 $ 16,049,269.29 100.00%
======================== ===================== ======================
The weighted average remaining term to maturity of the Group
IV Initial Mortgage Loans will be approximately 240 months.
<CAPTION>
ORIGINAL TERMS TO MATURITY OF THE GROUP IV INITIAL MORTGAGE LOANS
PERCENTAGE OF GROUP IV
MORTGAGE LOANS BY
RANGE OF ORIGINAL AGGREGATE AGGREGATE PRINCIPAL
TERMS (MONTHS) NUMBER OF MORTGAGE LOANS PRINCIPAL BALANCE BALANCE
- ------------------- ------------------------ --------------------- ----------------------
<S> <C> <C> <C>
176 - 180 100 $ 10,217,595.16 63.66%
236 - 240 1 116,604.05 0.73
296 - 300 1 357,543.45 2.23
356 - 360 44 5,357,526.63 33.38
------------------------ --------------------- ----------------------
Total 146 $ 16,049,269.29 100.00%
======================== ===================== ======================
</TABLE>
The weighted average Original Term to Maturity of the Group IV
Initial Mortgage Loans will be approximately 243 months.
S-56
<PAGE>
<TABLE>
<CAPTION>
TYPES OF MORTGAGED PROPERTIES OF THE GROUP IV INITIAL MORTGAGE LOANS
PERCENTAGE OF GROUP IV
MORTGAGE LOANS BY
AGGREGATE AGGREGATE
PROPERTY TYPE NUMBER OF MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------- ------------------------ --------------------- ----------------------
<S> <C> <C> <C>
Attached Housing 1 $ 54,918.20 0.34%
Condominium Hi-Rise 1 94,424.56 0.59
Condominium Lo-Rise 2 90,759.42 0.57
Manufactured Housing 21 1,273,906.50 7.94
Multiple Unit 8 640,339.34 3.99
PUD 8 642,730.65 4.00
PUD Regular 2 263,790.49 1.64
Single Family Residence 103 12,988,400.13 80.93
------------------------ --------------------- ----------------------
Total 146 $ 16,049,269.29 100.00%
======================== ===================== ======================
<CAPTION>
USE OF PROCEEDS OF THE GROUP IV INITIAL MORTGAGE LOANS
PERCENTAGE OF GROUP IV
MORTGAGE LOANS BY
NUMBER OF MORTGAGE AGGREGATE AGGREGATE
USE OF PROCEEDS LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------- ------------------------ --------------------- ----------------------
<S> <C> <C> <C>
Const-Perm 4 $ 260,844.94 1.63%
Const-Perm--- No Equity Take-Out 5 460,007.06 2.87
Other 1 66,945.80 0.42
Purchase 42 5,570,740.13 34.71
Refinance--- Equity Take-Out 77 7,175,859.06 44.71
Refinance--- No Equity Take-Out 17 2,514,872.30 15.67
------------------------ --------------------- ----------------------
Total 146 $ 16,049,269.29 100.00%
======================== ===================== ======================
</TABLE>
S-57
<PAGE>
<TABLE>
<CAPTION>
OCCUPANCY STATUS OF THE MORTGAGED PROPERTIES OF THE GROUP IV INITIAL MORTGAGE LOANS
PERCENTAGE OF GROUP IV
MORTGAGE LOANS BY
AGGREGATE AGGREGATE
OCCUPANCY STATUS NUMBER OF MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------- ------------------------ --------------------- ----------------------
<S> <C> <C> <C>
Investment Non-Owner Occupied 19 $ 1,435,520.87 8.94%
Primary 127 14,613,748.42 91.06
------------------------ --------------------- ----------------------
Total 146 $ 16,049,269.29 100.00%
======================== ===================== ======================
<CAPTION>
DOCUMENTATION TYPE OF THE GROUP IV INITIAL MORTGAGE LOANS
PERCENTAGE OF GROUP IV
MORTGAGE LOANS BY
AGGREGATE AGGREGATE PRINCIPAL
DOCUMENTATION NUMBER OF MORTGAGE LOANS PRINCIPAL BALANCE BALANCE
- ------------------- ------------------------ --------------------- ----------------------
<S> <C> <C> <C>
Full 109 $ 11,219,210.83 69.90%
Limited 8 1,441,018.09 8.98
Stated 29 3,389,040.37 21.12
------------------------ --------------------- ----------------------
Total 146 $ 16,049,269.29 100.00%
======================== ===================== ======================
<CAPTION>
RISK CLASSIFICATIONS OF THE GROUP IV INITIAL MORTGAGE LOANS
PERCENTAGE OF GROUP IV
MORTGAGE LOANS BY
AGGREGATE AGGREGATE PRINCIPAL
RISK CLASSIFICATION NUMBER OF MORTGAGE LOANS PRINCIPAL BALANCE BALANCE
- ------------------- ------------------------ --------------------- ----------------------
<S> <C> <C> <C>
AA 25 $ 4,311,255.88 26.86%
A 34 4,720,331.20 29.41
A- 32 2,783,925.85 17.35
B 26 2,422,570.34 15.09
C 24 1,459,058.69 9.09
D 5 352,127.33 2.19
------------------------ --------------------- ----------------------
Total 146 $ 16,049,269.29 100.00%
======================== ===================== ======================
</TABLE>
S-58
<PAGE>
<TABLE>
<CAPTION>
DELINQUENCIES OF THE GROUP IV INITIAL MORTGAGE LOANS
PERCENTAGE OF GROUP IV
MORTGAGE LOANS BY
AGGREGATE AGGREGATE PRINCIPAL
NUMBER OF DAYS DELINQUENT NUMBER OF MORTGAGE LOANS PRINCIPAL BALANCE BALANCE
- ------------------- ------------------------ --------------------- ----------------------
<S> <C> <C> <C>
0 - 29 136 $ 15,313,310.26 95.41%
30 - 59 7 371,293.01 2.31
60 - 89 3 364,666.02 2.27
------------------------ --------------------- ----------------------
Total 146 $ 16,049,269.29 100.00%
======================== ===================== ======================
</TABLE>
CONVEYANCE OF SUBSEQUENT MORTGAGE LOANS AND THE PRE-FUNDING ACCOUNT
Under the Purchase Agreement, following the initial issuance
of the Bonds, the Seller will be obligated from time to time to sell to the
Transferor and the Transferor will be obligated to sell to the Issuer for
inclusion in the Trust Estate during the Funding Period, subject to the
availability thereof, the Subsequent Mortgage Loans secured by first liens on
fee simple interests in one- to four-family residential real properties. Each
Subsequent Mortgage Loan will have been underwritten in accordance with the
criteria set forth herein under "Description of the Mortgage Pool--Underwriting
Standards for the Mortgage Loans." Subsequent Mortgage Loans will be transferred
to the Issuer pursuant to subsequent transfer instruments (the "Subsequent
Transfer Instruments") among the Seller, the Transferor and the Issuer. In
connection with the purchase of Subsequent Mortgage Loans for each Group on such
dates of transfer (the "Subsequent Transfer Dates"), the Issuer will be required
to pay from amounts on deposit in the Pre-Funding Account (as defined below)
held with respect to such Group a cash purchase price of 100% of the principal
balance thereof. The Issuer will designate each Subsequent Transfer Date as the
cut-off date (the "Subsequent Cut-off Date") with respect to the Subsequent
Mortgage Loans acquired on such date. The amount paid from the Pre-Funding
Account on each Subsequent Transfer Date will not include accrued interest on
the Subsequent Mortgage Loans. Following each Subsequent Transfer Date, the
aggregate Principal Balance of the Mortgage Loans in each related Group will
increase by an amount equal to the aggregate Principal Balance of the Subsequent
Mortgage Loans so acquired for such Group and the amount in the Pre-Funding
Account held with respect to such Group will decrease accordingly.
On the Closing Date, approximately $25,814,233.76 will be
deposited in an account (the "Pre-Funding Account"), which account will be in
the name of the Indenture Trustee and shall be part of the Trust Estate and
which amount will be used to acquire Subsequent Mortgage Loans. Of such amount,
$10,417,601.18, $4,391,878,50, $6,593,665.31 and $4,411,088.77 (the related
"Original Pre-Funded Amount") is held with respect to Group I, Group II, Group
III and Group IV, respectively. During the Funding Period (as defined herein),
the related Original Pre-Funded Amount will be reduced (on any date of
determination, the related Original Pre-Funded Amount as so reduced, the related
"Pre-Funded Amount") by the amount thereof used to purchase Subsequent Mortgage
Loans for such Group. The "Funding Period" is the period commencing on the
Closing Date and ending on the earlier to occur of (i) the date on which the
amount on deposit in the Funding Account is less than $10,000 and (ii) April 28,
1999.
S-59
<PAGE>
Any conveyance of Subsequent Mortgage Loans on a Subsequent
Transfer Date is subject to certain conditions including, but not limited to:
(a) each such Subsequent Mortgage Loan must satisfy the representations and
warranties specified in the related Subsequent Transfer Instrument and the
Purchase Agreement; (b) the Seller will not select such Subsequent Mortgage
Loans in a manner that it reasonably believes is adverse to the interests of the
Bondholders or the Bond Insurer; (c) the Seller and the Transferor will deliver
certain opinions of counsel acceptable to the Bond Insurer, the Issuer and the
Bond Administrator with respect to the validity of the conveyance of such
Subsequent Mortgage Loans; and (d) as of each Subsequent Cut-off Date, each
Subsequent Mortgage Loan will satisfy the following criteria: (i) such
Subsequent Mortgage Loan may not be 30 or more days contractually delinquent as
of the related Subsequent Cut-off Date; (ii) the remaining stated term to
maturity of such Subsequent Mortgage Loan will not exceed 360 months; (iii) the
lien securing any such Subsequent Mortgage Loan must be first priority; (iv)
such Subsequent Mortgage Loan must have an outstanding Principal Balance of at
least $10,000 as of the Subsequent Cut-off Date; (v) such Subsequent Mortgage
Loan will be underwritten in accordance with the criteria set forth under
"Description of the Mortgage Pool--Underwriting Standards for the Mortgage
Loans" herein; (vi) such Subsequent Mortgage Loan must have a Loan-to-Value
Ratio of no more than 95%; (vii) the stated maturity of such Subsequent Mortgage
Loan will be no later than April 30, 2029, (viii) such Subsequent Mortgage Loan
shall not provide for negative amortization; (ix) such Subsequent Mortgage Loan
must have a fixed Mortgage Rate of at least 7.125% or, if an adjustable rate
loan, a Gross Margin of at least 3.500% and following the purchase of such
Subsequent Mortgage Loans by the Issuer, the Mortgage Loans included in the
Trust Estate must have a weighted average interest rate, a weighted average
remaining term to maturity and a weighted average Loan-to-Value Ratio as of each
respective Subsequent Cut-off Date which will not vary materially from the
Initial Mortgage Loans included initially in the Trust Estate; (x) each
Subsequent Mortgage Loan that is underwritten to the Seller's underwriting
standards for AA, A and A- credit risks must be covered by a MI Policy
acceptable to the Bond Insurer; and (xi) if such Subsequent Mortgage Loan
relates to Group I or II, bears interest at an adjustable rate, and if such
Subsequent Mortgage Loan related to Group III or IV, bears interest at a fixed
rate. In addition, the Bond Administrator shall not agree to any transfer of
Subsequent Mortgage Loans without (i) a signed certification from the Bond
Insurer that the Subsequent Mortgage Loans are acceptable to the Bond Insurer
and (ii) a confirmation from the rating agencies that the acquisition of such
Subsequent Mortgage Loans will not result in a downgrade, withdrawal or
qualification of the ratings then in effect for the outstanding Bonds, without
regard to the Bond Insurance Policy. In the sole discretion of the Bond Insurer,
Subsequent Mortgage Loans with characteristics varying from those set forth
above may be purchased by the Issuer and included in the Trust Estate; provided,
however, that the addition of such Subsequent Mortgage Loans will not materially
affect the aggregate characteristics of the entire pool of Mortgage Loans. Upon
the end of the Funding Period, the Bond Insurer, in its sole discretion, may
adjust the Required Subordination Amount with respect to each Class of Bonds.
UNDERWRITING STANDARDS FOR THE MORTGAGE LOANS
All of the Initial Mortgage Loans were originated or purchased
by the Seller in the ordinary course of business on a loan by loan basis
directly from mortgage brokers and mortgage loan originators.
The underwriting guidelines of the Seller are intended to
evaluate the credit history of the potential borrower, the capacity and
willingness of the borrower to repay the loan and the adequacy of the
S-60
<PAGE>
collateral securing the loan. Each loan applicant completes an application that
includes information with respect to the applicant's income, assets, liabilities
and employment history. A credit report is also submitted by the broker along
with the loan application which provides detailed information concerning the
payment history of the borrower on all of their debts. Prior to issuing an
approval on the loan, the underwriter runs an independent credit report to
verify that the information submitted by the broker is still accurate and up to
date. An appraisal is also required on all loans and in many cases a review
appraisal or second appraisal may be required depending on the value of the
property and the underwriter's comfort with the original valuation. All
appraisals are required to conform to the Uniform Standards of Professional
Appraisal Practice adopted by the Appraisal Standards Board of the Appraisal
Foundation and are generally on forms acceptable to Fannie Mae and FHLMC. The
properties securing the Mortgage Loans are generally appraised by qualified
independent appraisers who are generally approved by the related originator. The
mortgagor may also include information regarding verification of deposits at
financial institutions where the mortgagor had demand or savings accounts. In
the case of investment properties, income derived from the mortgage property may
have been used for underwriting purposes.
The underwriting guidelines include three levels of applicant
documentation requirements, referred to as "Full Documentation," "Limited
Documentation" and "Stated Income." Under the Full Documentation program
applicants generally are required to submit two written forms of verification of
stable income for at least 12 months. Under the Limited Documentation program,
no such verification is required, however, bank statements for the most recent
consecutive 6-month period are required to evidence cash flow. If business bank
statements are used in lieu of personal statements, an unaudited current profit
loss statement must accompany the bank statements. Under the Stated Income
program, an applicant may be qualified based on monthly income as stated in the
loan application. Mortgage Loans originated under the "Limited Documentation"
and "Stated Income" programs require less documentation and verification than do
traditional "Full Documentation" programs. Generally, under such programs,
minimal investigation into a mortgagor's credit history and income profile would
have been undertaken by the originator and the underwriting for such mortgage
loans will place a greater emphasis on the value of the mortgaged property.
Given that the Seller primarily lends to subprime borrowers, it places great
emphasis on the ability of collateral to protect against losses in the event of
default by borrowers.
On a case-by-case basis, exceptions to the underwriting
guidelines are made where the Seller believes compensating factors exist.
Compensating factors may consist of factors like length of time in residence,
lowering of the borrower's monthly debt service payments, the Loan-to-Value
Ratio or Combined Loan-to-Value Ratio on the loan, as applicable, or other
criteria that in the judgment of the underwriter warrants an exception. All
loans in excess of $350,000 currently require the approval of the Chief Credit
Officer of the Seller. In addition, the President of the Seller approves all
loans in excess of $750,000.
With respect to each Mortgage Loan secured by a second lien on
the related Mortgaged Property, the "Combined Loan-to-Value Ratio" at any given
time generally will be the ratio, expressed as a percentage, the numerator of
which is the sum of (i) the original principal balance of the Mortgage Loan plus
(ii) the unpaid principal balance of any first lien on the related Mortgaged
Property as of such date, and the denominator of which is the lesser of (i) the
appraised value of the related Mortgaged Property as of the date of the
appraisal used by or on behalf of the Seller to underwrite such Mortgage Loan or
(ii) the sale price of the related Mortgaged Property if such a sale occurred at
origination of the Mortgage Loan.
S-61
<PAGE>
The Initial Mortgage Loans were underwritten by the Seller
using the following categories and criteria for grading the credit history of
potential borrowers and the maximum Loan-to-Value Ratios and Combined
Loan-to-Value Ratios allowed for each category.
S-62
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
AA RISK A RISK A-RISK B RISK C RISK D RISK
-------------- -------------- -------------- ------------- ------------ --------------
Mortgage History No 30-day Maximum one Maximum two Maximum three Maximum five Maximum six
late within 30-day late 30-day lates 30-day lates 30-day lates, 30-day lates,
last 24 months. and no 60-day and no 60-day and one 60-day two 60-day three 60-day
late within late within late within lates and one lates and two
last 12 months. last 12 months. last 12 months. 90-day late 90-day lates
within last within last 12
12 months. months.
Consumer Credit Limited 30-day Limited 30-day Isolated Isolated Isolated Discretionary.
lates within lates within 60-day lates 60-day lates 90-day lates Credit is
last 24 last 12 within last within last within last generally
months. months. 12 months. 12 months. 12 months. expected to
be late pay.
Bankruptcy Chapter 7: 2 Chapter 7: 2 Chapter 7: 2 Chapter 7: 2 Chapter 7: 1 Chapter 7: 1
Filings years since years since years since years since year since year since
filing date. filing date. filing date. filing date. filing date. filing date.
Chapter 13: 2 Chapter 13: Chapter 13: Chapter 13: Chapter 13: Chapter 13:
years since Discharged 1 Discharged 1 Discharged. No Minimum 12 No seasoning
discharge date. year with year with seasoning month required;
re-established re-established required satisfactory buy-out
credit. credit. pay history; required.
buy-out
required.
Prior Not allowed. 36 months. 36 months. 24 months. 24 months. 12 months
Foreclosures/ (current
NOD foreclosures
with certain
restrictions;
owner-occupied
only).
Debt to Service 45% 50% 50% 50% 55% 60%
Ratio
Maximum 95% 90% 90% 85% 80% 65%
Loan-to-Value
Ratio
Maximum Combined 100% 100% 100% 100% 100% No junior
Loan-to-Value liens
Ratio permitted.
</TABLE>
Close attention is paid to geographic diversification in
managing credit risk. The Seller believes one of the best tools for managing
credit risk is to diversify the markets in which it originates and purchases
mortgage loans. The Seller has established a diversification policy to be
followed in managing this credit risk which states that no one market can
represent a percentage of total mortgage loans owned by the Seller higher than
twice that market's percentage of the total national market share.
S-63
<PAGE>
Quality control reviews are conducted to ensure that all
mortgage loans meet quality standards. The type and extent of the reviews depend
on the production channel through which the mortgage loan was obtained and the
characteristics of the mortgage loan. The Seller reviews a high percentage of
mortgage loans with (i) principal balances in excess of $450,000, (ii) higher
Loan-to-Value ratios or Combined Loan-to-Value Ratios (in excess of 75%), (iii)
limited documentation, or (iv) made for 'cash out' refinance purposes. The
Seller also performs appraisal reviews and compliance reviews as part of the
quality control process to ensure adherence to state and federal regulations.
PRIMARY MORTGAGE INSURANCE POLICIES
Approximately 71.15%, 70.95%, 71.13% and 71.44% of the Initial
Mortgage Loans in Group I, Group II, Group III and Group IV, respectively (by
aggregate principal balance of the related Group as of the Cut-off Date) are
covered by a MI Policy issued by Commonwealth Mortgage Assurance Company (the
"MI Insurer"). The remainder of the Initial Mortgage Loans will not be covered
by a MI Policy. Each MI Policy insures losses on the Principal Balance of each
such Mortgage Loan in an amount generally equal to, at the option of the MI
Insurer, either (a) the sum of (i) the Principal Balance of the Mortgage Loan,
(ii) unpaid accumulated interest due on the Mortgage Loan at the Mortgage Rate
(for a maximum period of two years) and (iii) the amount of certain advances
(such as hazard insurance, taxes, maintenance expenses and foreclosure costs)
made by the Servicer, reduced by certain mitigating amounts collected with
respect thereto (collectively, the "Loss Amount"), in which case the MI Insurer
would take title to the Mortgaged Property, or (b) an amount equal to the
product of (i) the Loss Amount and (ii) the percentage of coverage (the
"Coverage Percentage") specified in the MI Policy, in which case the Issuer
would retain title to (and the proceeds obtained in a foreclosure and sale of)
the Mortgaged Property. The Coverage Percentage specified in each MI Policy will
be different depending upon the original Loan-to-Value Ratio of the related
Mortgage Loan (Mortgage Loans with higher Loan-to-Value Ratios will generally
have a higher Coverage Percentage and Mortgage Loans with lower Loan-to-Value
Ratios will generally have a lower Coverage Percentage). Each MI Policy will
remain in place for the life of the related Mortgage Loan (provided that no MI
Insurer Insolvency Event (as defined herein) has occurred and is continuing),
even if the related Loan-to-Value Ratio decreases below 80%. If a MI Insurer
Insolvency Event has occurred or is continuing, the Issuer shall, at the
direction of the Bond Insurer, and may in the case of a Bond Insurer Default,
terminate the MI Policy on any Mortgage Loan that is not then past due.
Claim payments, if any, under a MI Policy will be made to the
Servicer, deposited in the Collection Account and treated in the same manner as
a prepayment of the related Mortgage Loan. Premiums payable on the MI Policies
(the "MI Premiums") will be paid monthly by the Servicer with funds withdrawn
from the Collection Account with respect to the related Mortgage Loans.
The Bond Insurer requires that, in the event of a downgrade in
the rating of the MI Insurer or a cumulative claims denial by the MI Insurer in
an amount greater than a specified amount, the Required Overcollateralization
Amount will step up to an amount specified in the Insurance Agreement.
ADDITIONAL INFORMATION
Prior to the issuance of the Bonds, certain of the Initial
Mortgage Loans may be removed from the Trust Estate as a result of incomplete
documentation or otherwise, if the Depositor deems such removal necessary or
appropriate. A limited number of other mortgage loans may be included in the
Mortgage Pool prior to the issuance of the Bonds. The Depositor believes that
the information set forth
S-64
<PAGE>
herein will be substantially representative of the characteristics of the
Mortgage Pool as it will be constituted at the time the Bonds are issued,
although the range of Mortgage Rates and maturities and certain other
characteristics of the Mortgage Loans in the Mortgage Pool may vary, although
such variance will not be material.
THE SELLER
NovaStar Mortgage, Inc., a Virginia corporation in its
capacity as Seller, (the "Seller") is a wholly-owned subsidiary of NFI Holding
Corporation, Inc., a Delaware corporation ("Holding").
The Seller originates subprime residential mortgage loans
through a network of unaffiliated wholesale loan brokers. The Seller utilizes a
network of approximately 700 wholesale loan brokers in 42 different states. In
addition, the Seller services loans nationwide, and is qualified to do business
as a foreign corporation in more than 45 states. The Seller's principal
executive offices are located at 1900 W. 47th Place, Suite 205, Westwood, Kansas
66205. The principal office for the Seller's mortgage lending operations are in
Irvine, California. The Seller is an approved HUD lender.
NFI has guaranteed the Seller's obligations with respect to
the representations and warranties respecting the Mortgage Loans and the
remedies for any breach thereof that are assigned to the Indenture Trustee for
the benefit of the Bondholders and the Bond Insurer. See "NFI" below. NFI and
the Seller have only limited assets available to perform the repurchase
obligations in respect of any breach of such representations and warranties,
relative to the potential amount of repurchase liability, and the total
potential amount of repurchase liability is expected to increase over time as
the Seller and NFI continue to originate, acquire and sell mortgage loans. There
can be no assurance that either the Seller or NFI will continue to generate
operating earnings, or that it will be successful under its current business
plan. Therefore, prospective investors in the Bonds should consider the
possibility that the Seller or NFI will not have sufficient assets with which to
satisfy its repurchase obligations in the event that a substantial amount of
Mortgage Loans are required to be repurchased due to breaches of representations
and warranties.
NovaStar Mortgage, Inc. will also act as the Servicer of the
Mortgage Loans. See "Description of the Servicing Agreement--The Servicer"
herein.
THE ISSUER
NovaStar Mortgage Funding Trust, Series 1999-1 (the "Issuer")
is a trust formed under the laws of the State of Delaware and governed by the
Amended and Restated Trust Agreement, dated as of January 29, 1999 (the "Trust
Agreement"), between the Depositor and Wilmington Trust Company, as the Owner
Trustee, for the transactions described in this Prospectus Supplement. After its
formation, the Issuer will not engage in any activity other than (i) acquiring
and holding the Mortgage Loans and the other assets of the Issuer and proceeds
therefrom, (ii) issuing the Bonds, the Subordinated Bonds and the Residual
Certificates, (iii) making payments on the Bonds, the Subordinated Bonds and the
Residual Certificates and (iv) engaging in other activities that are necessary,
suitable or convenient to accomplish the foregoing or are incidental thereto or
connected therewith. The Issuer is not expected to have any significant assets
other than those pledged as collateral to secure the Bonds.
The assets of the Issuer will consist of the Mortgage Loans,
the MI Policies and certain related assets pledged to secure the Bonds.
S-65
<PAGE>
The Issuer's principal offices are in Wilmington, Delaware, in
care of Wilmington Trust Company, as Owner Trustee.
THE CONVERTED LOAN PURCHASER
NovaStar Capital, Inc., a Delaware corporation (the "Converted
Loan Purchaser"), is a wholly-owned subsidiary of Holding and an affiliate of
the Seller. The Converted Loan Purchaser's principal executive offices are
located at 1900 W. 47th Place, Suite 205, Westwood, Kansas 66205.
The Converted Loan Purchaser will purchase from the Issuer
each Converted Mortgage Loan from Group I or Group II. See "Description of the
Servicing Agreement--Sale of Converted Mortgage Loans" herein.
NFI
NovaStar Financial, Inc. ("NFI") was incorporated in the State
of Maryland on September 13, 1996. The common stock of NFI is registered under
the Securities Act of 1933 and traded on the New York Stock Exchange. NFI is
subject to the reporting requirements of the Securities and Exchange Act of
1934, and in accordance therewith, files reports and other information with the
Commission.
NFI is a specialty finance company which (i) originates,
acquires, and services residential subprime mortgage loans; (ii) leverages its
assets using bank warehouse lines and repurchase agreements; (iii) issues
collateralized debt obligations through special purpose subsidiaries to finance
its subprime mortgage loans on a long-term basis; (iv) purchases high quality
mortgage securities in the secondary mortgage market; and (v) manages the
resulting combined portfolio of mortgage loans in its structure as a real estate
investment trust (a "REIT").
NFI has elected to be taxed for federal income tax purposes as
a REIT. As a result, NFI is generally not subject to federal income tax to the
extent that it distributes its earnings to stockholders and maintains its
qualifications as a REIT. The principal executive offices of NFI are at 1901 W.
47th Place, Suite 105, Westwood, Kansas 66205.
THE TRANSFEROR
NovaStar Mortgage Funding Corporation II, a Delaware
corporation (the "Transferor"). The Transferor is a wholly-owned subsidiary of
Holding and an affiliate of the Seller.
The Seller will convey the Initial Mortgage Loans to the
Transferor, who will in turn convey the Initial Mortgage Loans to the Depositor.
THE DEPOSITOR
Residential Asset Funding Corporation, a North Carolina
corporation (the "Depositor"), was incorporated in the State of North Carolina
on December 29, 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. The principal executive offices of the Depositor are
located at 301 South College Street, Charlotte, North Carolina 28202-6001.
S-66
<PAGE>
The Depositor will convey the Initial Mortgage Loans to the
Issuer. The Issuer then will pledge the Mortgage Loans, without recourse, to the
Indenture Trustee pursuant to the Indenture as security for the Bonds.
THE OWNER TRUSTEE
Wilmington Trust Company is the Owner Trustee under the Trust
Agreement. The Owner Trustee is a Delaware banking corporation and its principal
offices are located in Wilmington, Delaware.
Neither the Owner Trustee nor any director, officer or
employee of the Owner Trustee will be under any liability to the Issuer or the
Bondholders under the Trust Agreement under any circumstances, except for the
Owner Trustee's own willful misconduct, gross negligence, bad faith or grossly
negligent failure to act or in the case of the inaccuracy of certain
representations made by the Owner Trustee in the Trust Agreement. All persons
into which the Owner Trustee may be merged or with which it may be consolidated
or any person resulting from such merger or consolidation shall be the successor
of the Owner Trustee, provided such person meets the eligibility standards under
the Trust Agreement.
THE INDENTURE TRUSTEE
The Chase Manhattan Bank, a New York banking corporation, will
act as Indenture Trustee. A copy of the Indenture will be provided by the Issuer
without charge upon written request. Requests should be addressed to the
Indenture Trustee at The Chase Manhattan Bank, 450 West 33rd Street, 14th Floor,
New York New York 10001, Attention: NovaStar Mortgage Funding Trust, Series
1999-1. Chase will act as initial paying agent.
THE BOND ADMINISTRATOR
First Union National Bank, a national banking association,
will act as Bond Administrator (the "Bond Administrator"). In its capacity as
Bond Administrator, First Union shall perform certain administrative functions
on behalf of the Indenture Trustee and shall act as the initial certificate
registrar and custodian.
THE BOND INSURER
The information set forth in this section has been provided by
Financial Security Assurance Inc. (hereinafter in this section, "Financial
Security" or the "Bond Insurer"). No representation is made by the Underwriter,
the Seller, the Servicer, the Depositor, the Issuer, the Owner Trustee or any of
their affiliates as to the accuracy or completeness of such information or any
information related to the Bond Insurer incorporated by reference herein.
GENERAL
Financial Security is a monoline insurance company
incorporated in 1984 under the laws of the State of New York. Financial Security
is licensed to engage in the financial guaranty insurance business in all 50
states, the District of Columbia and Puerto Rico.
S-67
<PAGE>
Financial Security and its subsidiaries are engaged in the
business of writing financial guaranty insurance, principally in respect of
securities offered in domestic and foreign markets. In general, financial
guaranty insurance consists of the issuance of a guaranty of scheduled payments
of an issuer's securities -- thereby enhancing the credit rating of those
securities -- in consideration for the payment of a premium to the insurer.
Financial Security and its subsidiaries principally insure asset-backed,
collateralized and municipal securities. Asset-backed securities are generally
supported by residential mortgage loans, consumer or trade receivables,
securities or other assets having an ascertainable cash flow or market value.
Collateralized securities include public utility first mortgage bonds and
sale/leaseback obligation bonds. Municipal securities consist largely of general
obligation bonds, special revenue bonds and other special obligations of state
and local governments. Financial Security insures both newly issued securities
sold in the primary market and outstanding securities sold in the secondary
market that satisfy Financial Security's underwriting criteria.
Financial Security is a wholly owned subsidiary of Financial
Security Assurance Holdings Ltd. ("Holdings"), a New York Stock Exchange listed
company. Major shareholders of Holdings include Fund American Enterprises
Holdings, Inc., MediaOne Capital Corporation, The Tokio Marine and Fire
Insurance Co., Ltd. and EXEL Limited. No shareholder of Holdings is obligated to
pay any debt of Financial Security or any claim under any insurance policy
issued by Financial Security or to make any additional contribution to the
capital of Financial Security.
The principal executive offices of Financial Security are
located at 350 Park Avenue, New York, New York 10022, and its telephone number
at that location is (212) 826-0100.
REINSURANCE
Pursuant to an intercompany agreement, liabilities on
financial guaranty insurance written or reinsured from third parties by
Financial Security or its domestic or Bermuda operating insurance company
subsidiaries are generally reinsured among such companies on an agreed-upon
percentage substantially proportional to their respective capital, surplus and
reserves, subject to applicable statutory risk limitations. In addition,
Financial Security reinsures a portion of its liabilities under certain of its
financial guaranty insurance policies with other reinsurers under various
treaties and on a transaction-by-transaction basis. Such reinsurance is utilized
by Financial Security as a risk management device and to comply with statutory
and rating agency requirements; it does not alter or limit Financial Security's
obligations under any financial guaranty insurance policy.
RATINGS
Financial Security's insurance financial strength is rated
"Aaa" by Moody's; Financial Security's insurer financial strength is rated "AAA"
by Standard & Poor's and Standard & Poor's (Australia) Pty. Ltd.; and Financial
Security's claims paying ability is rated "AAA" by Fitch IBCA, Inc. and Japan
Rating and Investment Information, Inc. Such ratings reflect only the views of
the respective rating agencies, are not recommendations to buy, sell or hold
securities and are subject to revision or withdrawal at any time by such rating
agencies. See "Ratings" herein.
CAPITALIZATION
The following table sets forth the capitalization of Financial
Security and its wholly owned subsidiaries on the basis of generally accepted
accounting principles as of September 30, 1998, as
S-68
<PAGE>
well as such capitalization as adjusted to give effect to certain transactions
entered into during November 1998:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
-----------------------------------------------------
(UNAUDITED IN THOUSANDS)
ACTUAL AS ADJUSTED (1)
------------------------- ------------------------
<S> <C> <C> <C>
Deferred Premium Revenue
(net of prepaid reinsurance premiums) $ 480,089 $ 480,089
Surplus Notes 50,000 130,000
Minority Interests -- 20,000
Shareholder's Equity:
Common Stock 15,000 15,000
Additional Paid-In Capital 614,787 684,787
Accumulated Other Comprehensive Income
(net of deferred income taxes) 41,923 41,923
Accumulated Earnings 326,145 326,145
Total Shareholder's Equity 997,855 1,067,855
------------------------- ------------------------
Total Deferred Premium Revenue, Surplus Notes, Minority
Interests and Shareholder's Equity $ 1,527,944 $ 1,697,944
========================= ========================
</TABLE>
- -------------------
(1) Adjusted to give effect to the November 1998 (a) purchase by Holdings
of $80 million of surplus notes from Financial Security in connection
with the formation of a new indirect Bermuda subsidiary of Financial
Security, initially capitalized with $100 million, including a $20
million minority interest owned by EXEL Limited, and (b) contribution
by Holdings to the capital of the Bond Insurer of approximately $70
million, representing a portion of the proceeds from the sale by
Holdings of $100 million of 6.950% Senior Quarterly Income Debt
Securities due 2098.
For further information concerning Financial Security, see the
Consolidated Financial Statements of Financial Security Assurance Inc. and
Subsidiaries, and the notes thereto, incorporated by reference herein. Financial
Security's financial statements are included as exhibits to the Annual Reports
on Form 10-K and Quarterly Reports on Form 10-Q filed with the Securities and
Exchange Commission by Holdings and may be reviewed at the EDGAR website
maintained by the Securities and Exchange Commission and at Holding's website,
http://www.FSA.com. Copies of the statutory quarterly and annual statements
filed with the State of New York Insurance Department by Financial Security are
available upon request to the State of New York Insurance Department.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
In addition to the documents described under "Incorporation of
Certain Documents by Reference" in the Prospectus, the consolidated financial
statements of Financial Security included in, or as exhibits to, the following
documents, which have been filed with the Securities and Exchange Commission by
Holdings are hereby incorporated by reference in this Prospectus Supplement:
(a) Annual Report on Form 10-K of Holdings for the year ended
December 31, 1997, which Report included as an exhibit Financial Security's
audited consolidated financial statements for the year ended December 31, 1997.
S-69
<PAGE>
(b) Quarterly Report on Form 10-Q for the period ended
September 30, 1998, which report includes as an exhibit Financial Security's
unaudited financial statements for the nine month period ended September 30,
1998.
All financial statements of Financial Security included in
documents filed by Holdings pursuant to Section 13(a), 13(c), 14 or 15(d) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), subsequent to
the date of this Prospectus Supplement and prior to the termination of the
offering of the Certificates shall be deemed to be incorporated by reference
into this Prospectus Supplement and to be a part hereof from the respective
dates of filing such documents.
The Bond Insurer will provide without charge to any person to
whom this Prospectus Supplement is delivered, upon oral or written request of
such person, a copy of any or all of the foregoing financial statements
incorporated by reference. Requests for such copies should be directed to the
Financial Security Assurance Inc., 350 Park Avenue, New York, NY 10022.
The Depositor on behalf of the Issuer hereby undertakes that
for purposes of determining any liability under the Securities Act of 1933, each
filing of the financial statements of Financial Security included in or as an
exhibit to the annual report of Holdings filed pursuant to section 13(a) or
section 15(d) of the Exchange Act that is incorporated by reference in the
Registration Statement (as defined in the accompanying Prospectus) shall be
deemed to be a new registration statement relating to the Bonds offered hereby,
and the offering of such Bonds at that time shall be deemed to be the initial
bona fide offering thereof.
INSURANCE REGULATION
Financial Security is licensed and subject to regulation as a
financial guaranty insurance corporation under the laws of the State of New
York, its state of domicile. In addition, Financial Security and its insurance
subsidiaries are subject to regulation by insurance laws of the various other
jurisdictions in which they are licensed to do business. As a financial guaranty
insurance corporation licensed to do business in the State of New York,
Financial Security is subject to Article 69 of the New York Insurance Law which,
among other things, limits the business of each such insurer to financial
guaranty insurance and related lines, requires that each such insurer maintain a
minimum surplus to policyholders, establishes contingency, loss and unearned
premium reserve requirements for each such insurer, and limits the size of
individual transactions ("single risks") and the volume of transactions
("aggregate risks") that may be underwritten by each such insurer. Other
provisions of the New York Insurance Law, applicable to non-life insurance
companies such as Financial Security, regulate, among other things, permitted
investments, payment of dividends, transactions with affiliates, mergers,
consolidations, acquisitions or sales of assets and incurrence of liability for
borrowings.
DESCRIPTION OF THE BONDS
GENERAL
The Issuer will issue four classes of NovaStar Home Equity
Loan Asset-Backed Bonds (the "Bonds"), the Class A-1 Bonds (the "Class A-1
Bonds") in an aggregate principal amount of $75,000,000, the Class A-2 Bonds
(the "Class A-2 Bonds") in an aggregate principal amount of $20,000,000, the
Class A-3 Bonds (the "Class A-3 Bonds") in an aggregate principal amount of
$45,000,000, and the Class A-4 Bonds (the "Class A-4 Bonds") in an aggregate
principal amount of
S-70
<PAGE>
$20,000,000. The Bonds will be issued pursuant to an Indenture, dated as of
January 1, 1999 (the "Indenture"), among the Issuer, the Bond Administrator and
the Indenture Trustee. The Issuer will also issue one or more classes of
subordinated bonds (the "Subordinated Bonds"), which are subordinated in right
of payment to the Bonds and a residual class in each REMIC (the "Residual
Certificates") which are not being offered hereby. The Subordinated Bonds and
the Residual Certificates will initially be retained by the Transferor or its
affiliates. The following summaries describe certain provisions of the Bonds,
the Indenture, the Trust Agreement and the Servicing Agreement. The summaries do
not purport to be complete and are subject to, and qualified in their entirety
by reference to, the provisions of the applicable agreement. Only the Bonds are
offered hereby.
The Bonds will be secured by the pledge by the Issuer of its
assets to the Indenture Trustee pursuant to the Indenture, which assets will
consist of the following (such assets, collectively, the "Trust Estate"): (i)
the Mortgage Loans; (ii) collections in respect of principal and interest of the
Mortgage Loans received after the Cut-off Date or Subsequent Cut-off Date, as
applicable (other than payments due on or before the Cut-off Date or the
Subsequent Cut-off Date, as applicable); (iii) the amounts on deposit in any
Collection Account (as defined in the Prospectus), including the account in
which amounts are deposited prior to payment to the Bondholders (the "Payment
Account"), including net earnings thereon; (iv) MI Policies and certain other
insurance policies maintained by the Mortgagors or by or on behalf of the
Servicer or any related subservicer in respect of the Mortgage Loans; (v) an
assignment of the Transferor's rights under the Purchase Agreement; (vi) an
assignment of the Issuer's rights under the Servicing Agreement and any
Subservicing Agreement; (vii) amounts on deposit in the Interest Coverage
Account and the Pre-Funding Account; (viii) an assignment of the Issuer's rights
under the Converted Loan Purchase Agreement; and (ix) proceeds of the foregoing.
The Bonds will be issued in denominations of $25,000 and
integral multiples of $1,000 in excess thereof.
BOOK-ENTRY BONDS
The Bonds will be book-entry Bonds ("Book-Entry Bonds").
Persons acquiring beneficial ownership interests in the Bonds ("Bond Owners")
may elect to hold their Bonds through the Depository Trust Company ("DTC") in
the United States, or CEDEL or Euroclear (in Europe) if they are participants of
such systems, or indirectly through organizations which are participants in such
systems. Each Class of Book-Entry Bonds will be issued in one or more
certificates which equal the aggregate principal amount of the Bonds of each
Class and will initially be registered in the name of Cede & Co., the nominee of
DTC. CEDEL and Euroclear will hold omnibus positions on behalf of their
participants through customers' securities accounts in CEDEL's and Euroclear's
names on the books of their respective depositaries which in turn will hold such
positions in customers' securities accounts in the depositaries' names on the
books of DTC. Citibank, N.A., will act as depositary for CEDEL and The Chase
Manhattan Bank will act as depositary for Euroclear (in such capacities,
individually the "Relevant Depositary" and collectively the "European
Depositaries"). Investors may hold such beneficial interests in the Book-Entry
Bonds in minimum denominations representing Bond Principal Balances of $25,000
and in multiples of $1,000 in excess thereof. Except as described below, no
person acquiring a Book-Entry Bond (each, a "beneficial owner") will be entitled
to receive a physical certificate representing such Bond (a "Definitive Bond").
Unless and until Definitive Bonds are issued, it is anticipated that the only
"Bondholders" of the Bonds will be Cede & Co., as nominee of DTC. Bond Owners
will not be Bondholders as that term is used in the Indenture. Bond Owners are
only permitted to exercise their rights indirectly through the
S-71
<PAGE>
participating organizations that utilize the services of DTC, including
securities brokers and dealers, banks and trust companies and clearing
corporations and certain other organizations ("Participants") and DTC.
A Bond Owner's ownership of a Book-Entry Bond will be recorded
on the records of the brokerage firm, bank, thrift institution or other
financial intermediary (each, a "Financial Intermediary") that maintains the
beneficial owner's account for such purpose. In turn, the Financial
Intermediary's ownership of such Book-Entry Bond will be recorded on the records
of DTC (or of a participating firm that acts as agent for the Financial
Intermediary, whose interests will in turn be recorded on the records of DTC, if
the beneficial owner's Financial Intermediary is not a DTC participant, and on
the records of CEDEL or Euroclear, as appropriate). Bond Owners will receive all
payments of principal of, and interest on, the Bonds from the Indenture Trustee
through DTC and DTC participants. While the Bonds are outstanding (except under
the circumstances described below), under the rules, regulations and procedures
creating and affecting DTC and its operations (the "Rules"), DTC is required to
make book-entry transfers among Participants on whose behalf it acts with
respect to the Bonds and is required to receive and transmit payments of
principal of, and interest on, the Bonds. Participants and indirect participants
which have indirect access to the DTC system, such as banks, brokers, dealers
and trust companies that clear through or maintain a custodial relationship with
a Participant, either directly or indirectly ("Indirect Participants"), with
whom Bond Owners have accounts with respect to Bonds are similarly required to
make book-entry transfers and receive and transmit such payments on behalf of
their respective Bond Owners. Accordingly, although Bond Owners will not possess
certificates, the Rules provide a mechanism by which Bond Owners will receive
payments and will be able to transfer their interest.
Bond Owners will not receive or be entitled to receive
certificates representing their respective interests in the Bonds, except under
the limited circumstances described below. Unless and until Definitive Bonds are
issued, Bond Owners who are not Participants may transfer ownership of Bonds
only through Participants and Indirect Participants by instructing such
Participants and Indirect Participants to transfer Bonds, by book-entry
transfer, through DTC for the account of the purchasers of such Bonds, which
account is maintained with their respective Participants. Under the Rules and in
accordance with DTC's normal procedures, transfers of ownership of Bonds will be
executed through DTC and the accounts of the respective Participants at DTC will
be debited and credited. Similarly, the Participants and Indirect Participants
will make debits or credits, as the case may be, on their records on behalf of
the selling and purchasing Bond Owners.
Because of time zone differences, credits of securities
received in CEDEL or Euroclear as a result of a transaction with a Participant
will be made during subsequent securities settlement processing and dated the
business day following the DTC settlement date. Such credits or any transactions
in such securities settled during such processing will be reported to the
relevant Euroclear or CEDEL Participants on such business day. Cash received in
CEDEL or Euroclear as a result of sales of securities by or through a CEDEL
Participant (as defined herein) or Euroclear Participant (as defined herein) to
a DTC Participant will be received with value on the DTC settlement date but
will be available in the relevant CEDEL or Euroclear cash account only as of the
business day following settlement in DTC. For information relating to tax
documentation procedures relating to the Bonds, see "Material Federal Income Tax
Consequences--Foreign Investors" in the Prospectus and "Global Clearance,
Settlement and Tax
S-72
<PAGE>
Documentation Procedures--Certain U.S. Federal Income Tax Documentation
Requirements" in Annex I hereto.
Transfers between Participants will occur in accordance with
DTC Rules. Transfers between CEDEL Participants and Euroclear Participants will
occur in accordance with their respective rules and operating procedures.
Cross-market transfers between persons holding directly or
indirectly through DTC, on the one hand, and directly or indirectly through
CEDEL Participants or Euroclear Participants, on the other, will be effected in
DTC in accordance with DTC rules on behalf of the relevant European
international clearing system by the Relevant 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 fund 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, some of which (and/or their
representatives) own DTC. In accordance with its normal procedures, DTC is
expected to record the positions held by each DTC participant in the Book-Entry
Bonds, whether held for its own account or as nominee for another person. In
general, beneficial ownership of Book-Entry Bonds will be subject to the rules,
regulation and procedures governing DTC and DTC participants as in effect from
time to time.
CEDEL is incorporated under the laws of Luxembourg as a
professional depository. CEDEL holds securities for its participating
organizations ("CEDEL Participants") and facilitates the clearance and
settlement of securities transactions between CEDEL Participants through
electronic book-entry changes in accounts of CEDEL Participants, thereby
eliminating the need for physical movement of certificates. Transactions may be
settled in CEDEL in any of 28 currencies, including United States dollars. CEDEL
provides to its CEDEL Participants, among other things, services for
safekeeping, administration, clearance and settlement of internationally traded
securities and securities lending and borrowing. CEDEL interfaces with domestic
markets in several countries. As a professional depository, CEDEL is subject to
regulation by the Luxembourg Monetary Institute. CEDEL participants are
recognized financial institutions around the world, including underwriters,
securities brokers and dealers, banks, trust companies, clearing corporations
and certain other organizations. Indirect access to CEDEL is also available to
others, such as banks, brokers, dealers and trust companies that clear through
or maintain a custodial relationship with a CEDEL Participant, either directly
or indirectly.
Euroclear was created in 1968 to hold securities for its
participants ("Euroclear Participants") and to clear and settle transactions
between Euroclear Participants through simultaneous electronic book-entry
delivery against payment, thereby eliminating the need for physical movement of
certificates and any risk from lack of simultaneous transfers of securities and
cash. Transactions may be settled in any of 32 currencies, including United
States dollars. Euroclear includes various other services, including securities
lending and borrowing and interfaces with domestic markets in several countries
generally similar to the arrangements for cross-market transfers with DTC
described above. Euroclear is operated by the Brussels, Belgium office of Morgan
Guaranty Trust Company of New York ("Morgan"
S-73
<PAGE>
and in such capacity, the "Euroclear Operator"), under contract with Euroclear
Clearance Systems S.C., a Belgian cooperative corporation (the "Cooperative").
All operations are conducted by Morgan, and all Euroclear securities clearance
accounts and Euroclear cash accounts are accounts with the Euroclear Operator,
not the Belgian Cooperative. The Belgian Cooperative establishes policy for
Euroclear on behalf of Euroclear Participants. Euroclear Participants include
banks (including central banks), securities brokers and dealers and other
professional financial intermediaries. Indirect access to Euroclear is also
available to other firms that clear through or maintain a custodial relationship
with a Euroclear Participant, either directly or indirectly.
The Euroclear Operator is the Belgian branch of a New York
banking corporation which is a member bank of the Federal Reserve System. As
such, it is regulated and examined by the Board of Governors of the Federal
Reserve System and the New York State Banking Department, as well as the Belgian
Banking Commission.
Securities clearance accounts and cash accounts with Morgan
are governed by the Terms and Conditions Governing Use of Euroclear and the
related Operating Procedures of the Euroclear System and applicable Belgian law
(collectively, the "Terms and Conditions"). The Terms and Conditions govern
transfers of securities and cash within Euroclear, withdrawals of securities and
cash from Euroclear, and receipts of payments with respect to securities in
Euroclear. All securities in Euroclear are held on a fungible basis without
attribution of specific certificates to specific securities clearance accounts.
The Euroclear Operator acts under the Terms and Conditions only on behalf of
Euroclear Participants, and has no record of or relationship with persons
holding through Euroclear Participants.
Payments on the Book-Entry Bonds will be made on each Payment
Date by the Indenture Trustee to DTC. DTC will be responsible for crediting the
amount of such payments to the accounts of the applicable DTC participants in
accordance with DTC's normal procedures. Each DTC participant will be
responsible for disbursing such payments to the beneficial owners of the
Book-Entry Bonds that it represents and to each Financial Intermediary for which
it acts as agent. Each such Financial Intermediary will be responsible for
disbursing funds to the beneficial owners of the Book-Entry Bonds that it
represents.
Under a book-entry format, beneficiary owners of the
Book-Entry Bonds may experience some delay in their receipt of payments, since
such payments will be forwarded by the Indenture Trustee to Cede & Co., as
nominee of DTC. Payments with respect to Bonds held through CEDEL or Euroclear
will be credited to the cash accounts of CEDEL Participants or Euroclear
Participants in accordance with the relevant system's rules and procedures, to
the extent received by the Relevant Depositary. Such payments will be subject to
tax reporting in accordance with relevant United States tax laws and
regulations. See "Material Federal Income Tax Consequences--Foreign Investors"
and "--Backup Withholding" in the Prospectus. Because DTC can only act on behalf
of Financial Intermediaries, the ability of a beneficial owner to pledge
Book-Entry Bonds to persons or entities that do not participate in the
depository system, or otherwise take actions in respect of such Book-Entry Bond,
may be limited due to the lack of physical certificates for such Book-Entry
Bonds. In addition, issuance of the Book-Entry Bonds in book-entry form may
reduce the liquidity of such Bonds in the secondary market since certain
potential investors may be unwilling to purchase Bonds for which they cannot
obtain physical certificates.
Monthly and annual reports on the Issuer will be provided to
Cede & Co., as nominee of DTC, and may be made available by Cede & Co., to
beneficial owners upon request, in accordance with
S-74
<PAGE>
the rules, regulations and procedures creating and affecting DTC or the Relevant
Depositary, and to the Financial Intermediaries to whose DTC accounts the
Book-Entry Bonds of such beneficial owners are credited.
DTC has advised the Issuer and the Indenture Trustee that,
unless and until Definitive Bonds are issued, DTC will take any action permitted
to be taken by the holders of the Book-Entry Bonds under the Indenture only at
the direction of one or more Financial Intermediaries to whose DTC accounts the
Book-Entry Bonds are credited, to the extent that such actions are taken on
behalf of Financial Intermediaries whose holdings include such Book-Entry Bonds.
CEDEL or the Euroclear Operator, as the case may be, will take any other action
permitted to be taken by a Bondholder under the Indenture on behalf of a CEDEL
Participant or Euroclear Participant only in accordance with its relevant rules
and procedures and subject to the ability of the Relevant 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 Bonds which conflict with
actions taken with respect to other Bonds.
Definitive Bonds will be issued to beneficial owners of the
Book-Entry Bonds, or their nominees rather than to DTC, only if (a) DTC or the
Issuer advises the Indenture Trustee in writing that DTC is no longer willing,
qualified or able to discharge properly its responsibilities as nominee and
depositary with respect to the Book-Entry Bonds and the Issuer or the Indenture
Trustee is unable to locate a qualified successor or (b) the Issuer, at its sole
option, elects to terminate a book-entry system through DTC.
Upon the occurrence of any of the events described in the
immediately preceding paragraph, the Bond Administrator, on behalf of the
Indenture Trustee, will be required to notify all beneficial owners of the
occurrence of such event and the availability through DTC of the Definitive
Bonds. Upon surrender by DTC of the global note or notes representing the
Book-Entry Bonds and instructions for re-registration, the Bond Administrator,
as registrar, will issue Definitive Bonds, and thereafter the Indenture Trustee
and the Bond Administrator will recognize the holders of such Definitive Bonds
as Bondholders under the Indenture.
Although DTC, CEDEL and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of Bonds among participants of DTC,
CEDEL and Euroclear, they are under no obligation to perform or continue to
perform such procedures and such procedures may be discontinued at any time.
None of the Transferor, the Depositor, the Servicer, the Bond
Insurer, the Owner Trustee, the Issuer, the Bond Administrator or the Indenture
Trustee will have any responsibility for any aspect of the records relating to
or payments made on account of beneficial ownership interests of the Book-Entry
Bonds held by Cede & Co., as nominee of DTC, or for maintaining, supervising or
reviewing any records relating to such beneficial ownership interests.
For additional information regarding DTC and the Book-Entry
Bonds, see Annex I hereto and "The Agreements--Form of the Securities" in the
Prospectus.
ASSIGNMENT OF MORTGAGE LOANS
On the Closing Date, the Seller will convey the Initial
Mortgage Loans to the Transferor, the Transferor will convey the Initial
Mortgage Loans to the Depositor, and the Depositor will convey the
S-75
<PAGE>
Initial Mortgage Loans to the Issuer. The Issuer will pledge the Initial
Mortgage Loans to the Indenture Trustee as security for the Bonds.
At the time of issuance of the Bonds, pursuant to the
Indenture the Issuer will pledge all of its right, title and interest in and to
the Mortgage Loans, including all principal and interest due on each such
Mortgage Loan after the applicable Cut-Off Date, together with its right, title
and interest in and to the proceeds of any related insurance policies received
after the applicable Cut-Off Date, to the Indenture Trustee as security for the
Bonds; provided, however, that the Seller will reserve and retain all its right,
title and interest in and to principal and interest due on such Mortgage Loan on
or prior to the applicable Cut-Off Date (whether or not received on or prior to
such Cut-Off Date), and to prepayments and prepayment charges received on or
prior to the applicable Cut-Off Date. The Bond Administrator on behalf of the
Indenture Trustee, concurrently with the pledge of the Initial Mortgage Loans to
the Indenture Trustee as security for the Bonds, will authenticate and deliver
the Bonds at the direction of the Issuer in exchange for, among other things,
the Initial Mortgage Loans.
The Indenture will require the Issuer to deliver to the Bond
Administrator on behalf of the Indenture Trustee the Mortgage Loans, the related
mortgage notes endorsed by the Seller, or the last holder of record, without
recourse to the Indenture Trustee, the related mortgages or deeds of trust with
evidence of recording thereon, all intervening mortgage assignments, if any, and
certain other documents relating to the Mortgage Loans (the "Mortgage Files").
The Seller will be required to cause to be prepared and recorded, at its expense
and within the time period specified in the Purchase Agreement, assignments of
the mortgages from the Seller, or the last holder of record, to the Indenture
Trustee.
The Bond Administrator, on behalf of the Indenture Trustee,
will review the Mortgage Files delivered to it on the Closing Date or the date
of each subsequent transfer within 45 days after the Closing Date, and if any
document required to be included in any Mortgage File is found to be missing or
to be defective in any material respect and such defect is not cured within 45
days following notification thereof to the Issuer, the Bond Administrator will
require either that the related Mortgage Loan be removed from the Mortgage Pool
or that a Mortgage Loan conforming to the requirements of the Indenture (a
"Qualified Replacement Mortgage Loan") be substituted for the related Mortgage
Loan within 90 days after the Closing Date in the manner described below.
In connection with the transfer of the Mortgage Loans pursuant
to the Purchase Agreement, the Seller will make certain representations and
warranties as to the accuracy in all material respects of the information set
forth on a schedule identifying and describing each Mortgage Loan. In addition,
the Seller will make certain other representations and warranties regarding the
Mortgage Loans, including, for instance, that each Mortgage Loan, at its
origination, complied in all material respects with applicable state and federal
laws, that each mortgage is a valid first priority lien, that, as of the
applicable Cut-Off Date, no Mortgage Loan included in the Mortgage Pool as of
the Closing Date was more than 89 days past due, that each Mortgaged Property
consists of a one- to four-family residential property or unit in a condominium
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 Transferor to enforce remedies for
breaches of such representations and warranties in the Purchase Agreement
against the Seller will be assigned to the Indenture Trustee pursuant to the
Indenture.
If with respect to any Mortgage Loan (1) a defect in any
document constituting a part of the related Mortgage File remains uncured within
the period specified above and materially and adversely affects the value of any
such Mortgage Loan or materially and adversely affects the interest of the
S-76
<PAGE>
Indenture Trustee, the Bondholders or the Bond Insurer or (2) a breach of any
representation or warranty made by the Seller relating to such Mortgage Loan
occurs and such breach materially and adversely affects the value of any such
Mortgage Loan or materially and adversely affects the interests of the Indenture
Trustee, the Bondholders or the Bond Insurer therein, then the Bond
Administrator on behalf of the Indenture Trustee will enforce the remedies for
such defects or breaches against the Seller by requiring the Seller to remove
the related Mortgage Loan (any such Mortgage Loan, a "Defective Mortgage Loan")
from the Trust by remitting to the Collection Account an amount equal to the
Principal Balance of such Defective Mortgage Loan (plus certain Realized Losses)
together with interest accruing at the Mortgage Rate (net of the applicable
Servicing Fee Rate) on such Defective Mortgage Loan from the date interest was
last paid by the related mortgagor to the end of the Due Period preceding the
month in which such Payment Date occurs, less any payments received during the
related Collection Period in respect of such Defective Mortgage Loan (the
"Repurchase Price"). The Seller will also have the option, but not the
obligation, to substitute for such Defective Mortgage Loan a Qualified
Replacement Mortgage Loan, but only if such substitution is made within two
years after the Closing Date. Upon delivery of a Qualified Replacement Mortgage
Loan and deposit of certain amounts in the Collection Account as set forth in
the Indenture, or deposit of the Repurchase Price in the Collection Account and
receipt by the Bond Administrator, the Indenture Trustee and the Bond Insurer of
written notification of any such substitution or removal, as the case may be,
the Bond Administrator on behalf of the Indenture Trustee shall cause to be
executed and delivered an instrument of transfer or assignment necessary to vest
legal and beneficial ownership of such Defective Mortgage Loan (including any
property acquired in respect thereof or proceeds of any insurance policy with
respect thereto) in the Seller and release such Defective Mortgage Loan from the
lien of the Indenture.
The obligation of the Seller to cure, remove or substitute any
Mortgage Loan as described above will constitute the sole remedy available to
Bondholders, the Bond Insurer or the Indenture Trustee for a Defective Mortgage
Loan.
PAYMENTS
Payments on the Bonds will be made by the Paying Agent on the
25th day of each month or, if such day is not a Business Day, then the next
succeeding Business Day, commencing on February 25, 1999 (each, a "Payment
Date"). Payments on the Bonds will be made to the persons in whose names such
Bonds are registered on the Record Date. The "Record Date" for the Class A-1 and
Class A-2 Bonds is the Business Day prior to the related Payment Date, and for
the Class A-3 and Class A-4 Bonds is the last day of the calendar month prior to
the related Payment Date. In each case, the Record Date for the initial Payment
Date is the Closing Date. Payments will be made by check or money order mailed
(or upon the request, at least five Business Days prior to the related Record
Date, of a Holder owning a class of Bonds having denominations aggregating at
least $5,000,000, by wire transfer or otherwise) to the address of the person
entitled thereto (which, in the case of Book-Entry Bonds, will be DTC or its
nominee) as it appears on the Bond Register on the related Record Date. However,
the final payment in respect of the Bonds will be made only upon presentation
and surrender thereof at the office or the agency of the Indenture Trustee
specified in the notice to Holders of such final payment. A "Business Day" is
any day other than (i) a Saturday or Sunday or (ii) a day on which banking
institutions in New York, California, Kansas or Delaware or in the city in which
the corporate trust office of the Indenture Trustee or the principal office of
the Bond Insurer are located, is required or authorized by law to be closed.
S-77
<PAGE>
AVAILABLE FUNDS
The "Available Funds" for each Class of Bonds on any Payment
Date will equal the amount received by the Indenture Trustee and available in
the Payment Account on each Payment Date for such Class. The Available Funds
will generally be equal to the sum of, net of amounts reimbursable therefrom to
the Servicer and any subservicer and Administrative Fees for such Class (i) the
aggregate amount of scheduled payments on the related Mortgage Loans due on the
related Due Date and received on or prior to the related Determination Date,
(ii) any amounts representing interest on amounts in the Payment Account and
miscellaneous fees and collections, including assumption fees and prepayment
penalties with respect to the Mortgage Loans in the related Group (but excluding
late fees), (iii) any unscheduled payments and receipts, including Mortgagor
prepayments on the related Mortgage Loans, received during the related
Prepayment Period (as defined herein) and proceeds of repurchases, and
adjustments in the case of substitutions and terminations, Net Liquidation
Proceeds, Insurance Proceeds, proceeds from any MI Policy ("MI Insurance
Proceeds") and proceeds from the sale of Converted Mortgage Loans from the
related Group, and (iv) all Advances made for such Payment Date in respect of
the related Mortgage Loans. In addition, on the Payment Date relating to the Due
Period in which the termination of the Funding Period occurred, Available Funds
will include the amount on deposit in the Pre-Funding Account with respect to
such Class at such time, plus on each Payment Date on or prior to the Payment
Date in April 1999, Available Funds will include the amount, if any, withdrawn
from the Interest Coverage Account for such Class. With respect to any Payment
Date, (i) the "Due Date" is the first day of the month in which such Payment
Date occurs, and (ii) the "Determination Date" is the 15th day of the month in
which such Payment Date occurs, or if such day is not a Business Day, the
immediately preceding Business Day.
INTEREST PAYMENTS ON THE BONDS
On each Payment Date, holders of each Class of Bonds will be
entitled to receive an amount (the related "Interest Payment Amount") equal to
interest accrued on the related Bond Principal Balance immediately prior to such
Payment Date at the related Bond Interest Rate (as defined below) for the
related Interest Period.
S-78
<PAGE>
The Bonds will bear interest at the following rates:
On or Prior to the Rate Step Up Date
------------------------------------
Class Rate
----- ----
A-1 One-Month LIBOR plus 0.43%
A-2 One-Month LIBOR plus 0.52%
A-3 6.285%
A-4 6.386%
After the Rate Step Up Date
---------------------------
Class Rate
----- ----
A-1 One-Month LIBOR plus 0.86%
A-2 One-Month LIBOR plus 1.04%
A-3 6.785%
A-4 6.886%
The "Bond Interest Rate" for each Class of Bonds is equal to
the lesser of (i) the rate stated above (the "Stated Rate") and (ii) the
Available Funds Cap Rate.
The "Available Funds Cap Rate" with respect to each class of
Bonds for any Payment Date is a rate per annum equal to the fraction, expressed
as a percentage, the numerator and denominator of which are as follows:
(i) the numerator of which is an amount equal to the product
of (x) the weighted average Mortgage Rate on the Mortgage Loans in the related
Group and (y) 1/12 of the aggregate Principal Balance of the Mortgage Loans in
the related Group less the related Administrative Fee for the related Group; and
(ii) the denominator of which is an amount equal to the
product of the related Bond Principal Balance and the number of days elapsed in
the related Interest Period divided by 360;
less, in the case of the Class A-1 and Class A-2 Bonds, 0.50%.
The "Rate Step Up Date" is the Payment Date on which the
aggregate Principal Balance of the Mortgage Loans is reduced to equal to or less
than 10% of the sum of the Principal Balance of the Initial Mortgage Loans as of
the Cut-off Date and the original Pre-Funded Amount.
With respect to the Class A-1 Bonds and the Class A-2 Bonds
and any Payment Date, to the extent that the related Interest Payment Amount is
reduced because the Stated Rate exceeds the related Available Funds Cap Rate
(such excess amount, the related "Carry-Forward Amount"), such amount will be
carried forward and distributed to the holders of such Class, together with
interest thereon at the related Bond Interest Rate applicable from time to time,
after certain payments to the holders of the Bonds and the Bond Insurer, to the
extent of related Available Funds. There is no carry-forward feature with
respect to the Class A-3 and Class A-4 Bonds.
Interest on the Bonds will accrue during the "Interest
Period." The Interest Period for the Class A-1 and Class A-2 Bonds is the period
from the prior Payment Date through and including the day preceding the related
Payment Date. Interest will accrue on the Class A-1 and Class A-2 Bonds on the
S-79
<PAGE>
basis of the actual number of days in the Interest Period and a 360 day year.
The Interest Period for the Class A-3 and Class A-4 Bonds is the calendar month
preceding the related Payment Date. In the case of the first Payment Date,
interest begins to accrue on the Class A-1 and Class A-2 Bonds on the Closing
Date. Interest will accrue on the Class A-3 and Class A-4 Bonds on the basis of
twelve 30-day months and a 360 day year.
CERTAIN ADMINISTRATIVE FEES OF THE ISSUER
With respect to each Payment Date and each Group of Mortgage
Loans, the Bond Administrator will be entitled to a fee (the "Bond Administrator
Fee") equal to 1/12 of 0.0125% per annum (the "Bond Administrator Fee Rate")
times the sum of the Principal Balance of the Mortgage Loans in the related
Group and the Pre-Funded Amount with respect to such Group as of such date. With
respect to each Payment Date and Group of Mortgage Loans, the Servicer is
entitled to retain out of collections its servicing fee (the "Servicing Fee"),
which is equal to 1/12 of 0.55% per annum (the "Servicing Fee Rate") times the
Principal Balance of the Mortgage Loans as of such date. The Bond Administrator
will be responsible for paying the fee due to the Indenture Trustee (the
"Indenture Trustee Fee"). For any Payment Date, the "Owner Trustee Fee" is
$1,000 per annum for each Group and the related Class (payable on the Payment
Date in January of each year) and the "Bond Insurance Premium" is equal to 1/12
of the per annum rate specified in the Insurance Agreement times the aggregate
Bond Principal Balance (the Bond Insurance Premium collectively with the MI
premiums, the Servicing Fee and the Bond Administrator Fee with respect to a
Group, the "Administrative Fee" for such Group and the related Class).
The Bond Insurance Policy does not cover any shortfall in any
Interest Payment Amount caused by any Prepayment Interest Shortfalls, and any
Relief Act Shortfalls (each as defined herein) or the Carry-Forward Amount, nor
do the ratings assigned to the Bonds address the payment of any Prepayment
Interest Shortfalls, any Relief Act Shortfalls or any Carry-Forward Amount.
The "Bond Principal Balance" on any date of determination for
any Class of Bonds is the initial principal balance of such Class of Bonds as of
the Closing Date, reduced by all payments of principal thereon prior to such
date of determination.
The "Principal Balance" of any Mortgage Loan is, at any given
time, the Principal Balance as of the Cut-off Date or Subsequent Cut-off Date,
as applicable, of such Mortgage Loan, minus (a) the sum of all amounts paid or
advanced with respect to such Mortgage Loan with respect to principal and (b)
the principal portion of any losses with respect thereto for any previous
Payment Date.
CALCULATION OF ONE-MONTH LIBOR
The Bond Administrator will determine the London interbank
offered rate for one-month United States dollar deposits ("One-Month LIBOR") for
each Interest Period for the Bonds on the second London Business Day preceding
such Interest Period (each such date, an "Interest Determination Date") on the
basis of the offered rates of the Reference Banks for one-month United States
dollar deposits, as such rates appear on the Telerate Page 3750, as of 11:00
a.m. (London time) on such Interest Determination Date. If such rate does not
appear on Telerate Page 3750, the rate for that day will be determined on the
basis of the rates at which deposits in United States dollars are offered by the
Reference Banks at approximately 11:00 a.m., London time, on that day to prime
banks in the London interbank market for a period equal to the relevant Interest
Period (commencing on the first day of such Interest Period). The Bond
Administrator will request the principal London office of each of the
S-80
<PAGE>
Reference Banks to provide a quotation of its rate. If at least two such
quotations are provided, the rate for that day will be the arithmetic mean of
the quotations. If fewer than two quotations are provided as requested, the rate
for that day will be the arithmetic mean of the rates quoted by major banks in
New York City, selected by the Bond Administrator , at approximately 11:00 a.m.,
New York City time, on that day for loans in United States dollars to leading
European banks for a period equal to the relevant Interest Period (commencing on
the first day of such Interest Period).
"Telerate Page 3750" means the display page currently so
designated on the Dow Jones Telerate Service (or such other page as may replace
that page on that service for the purpose of displaying comparable rates or
prices) and "Reference Banks" means leading banks selected by the Bond
Administrator and engaged in transactions in European deposits in the
international Eurocurrency market.
The establishment of One-Month LIBOR on each Interest
Determination Date by the Bond Administrator and the Bond Administrator's
calculation of the rate of interest applicable to the Bonds for the related
Interest Period shall (in the absence of manifest error) be final and binding.
PRINCIPAL PAYMENTS ON THE BONDS
Principal payments will be payable on each Class of Bonds on
each Payment Date in an aggregate amount equal to the related Principal Payment
Amount for such Payment Date. The "Principal Payment Amount" for a Class of
Bonds (a) on any Payment Date, other than the Final Scheduled Payment Date and
the first Payment Date following any acceleration of the Bonds following an
Event of Default (as defined herein), will be equal to the lesser of (x) the sum
of the related Available Funds remaining after distributions pursuant to clause
(i) of "--Priority of Payment" below, and any portion of any Insured Payment (as
defined herein) for such Payment Date representing a Subordination Deficit
allocated to such Class and (y) the sum of:
(i) the principal portion of all scheduled monthly payments on
the Mortgage Loans in the related Group received or Advanced (as defined herein)
on the Mortgage Loans with respect to the related Due Date (and with respect to
the first Payment Date, received after the Cut-Off Date);
(ii) the principal portion of all proceeds of the repurchase
of a Mortgage Loan in the related Group (or, in the case of a substitution,
certain amounts representing a principal adjustment) pursuant to the Servicing
Agreement or the Purchase Agreement during the preceding calendar month (and
with respect to the first Payment Date, received after the Cut-Off Date);
(iii) the principal portion of all other unscheduled
collections with respect to Mortgage Loans in the related Group received during
the related Prepayment Period (or deemed to be received during the related
Prepayment Period) (and with respect to the first Payment Date, received after
the Cut-Off Date) (including, without limitation, full and partial Principal
Prepayments made by the respective Mortgagors, net liquidation proceeds and
insurance proceeds and termination proceeds (excluding proceeds paid in respect
of the Bond Insurance Policy)), to the extent not distributed in the preceding
month;
(iv) any Insured Payment made with respect to any
Subordination Deficit allocated to such Class; and
(v) with respect to the Payment Date immediately following the
end of the Funding Period, any amounts in the Pre-Funding Account and the
Interest Coverage Account relating to the Group securing such Class after giving
effect to any purchase of Subsequent Mortgage Loans;
S-81
<PAGE>
minus
(vi) the amount of any Subordination Reduction Amount with
respect to such Class for such Payment Date;
and (b) with respect to the Final Scheduled Payment Date and
the first Payment Date following any acceleration of the Bonds following an
Event of Default, the amount necessary to reduce the Principal Balance of such
Class of Bonds to zero.
In addition to the Principal Payment Amount, the holders of
each Class of Bonds on each Payment Date may receive an additional payment of
principal as a Subordination Increase Amount or otherwise through the
cross-collateralization feature described below. In no event will any Principal
Payment Amount with respect to any Payment Date be (x) less than zero or (y)
greater than the then outstanding Principal Balance of the related Class of
Bonds.
PRIORITY OF PAYMENT
On each Payment Date, Available Funds (and any Insured Payment
which may only be used to pay items (i) and (ii) below) with respect to a Class
of Bonds will be distributed in the following order of priority, in each case to
the extent of Available Funds remaining:
(i) to the holders of such Class of Bonds, the related
Interest Payment Amount with respect to such Payment Date;
(ii) to the holders of such Class of Bonds, the related
Principal Payment Amount with respect to such Payment Date;
(iii) to the holders of each other Class of Bonds, the related
cross-collateralization amount in respect of interest shortfalls with respect to
such Payment Date;
(iv) to the holders of each other Class of Bonds, the related
cross-collateralization amount in respect of principal shortfalls with respect
to such Payment Date;
(v) to the Bond Insurer, the sum of (a) all amounts previously
paid by the Bond Insurer under the Bond Insurance Policy with respect to such
Class which have not previously been reimbursed, (b) any other amounts due to
the Bond Insurer with respect to such Class pursuant to the agreement pursuant
to which the Bond Insurance Policy is issued (the "Insurance Agreement") and (c)
interest on the foregoing as set forth in the Insurance Agreement from the date
such amounts became due until paid in full (collectively, the related
"Reimbursement Amount");
(vi) to the Bond Insurer, the related cross-collateralization
amount for Bond Insurer reimbursement for other Classes of Bonds with respect to
such Payment Date;
(vii) to the holders of such Class of Bonds, an amount equal
to the difference, if any, between the related Required Subordination Amount and
the related Subordinated Amount, in reduction of the related Bond Principal
Balance, until such Bond Principal Balance has been reduced to zero;
(viii) to the holders of each other Class of Bonds, the
related cross-collateralization amount in respect of any remaining deficiency in
the Required Subordinated Amount with respect to such Payment Date;
(ix) to the holders of the Class A-1 and Class A-2 Bonds, any
related Carry-Forward Amount for such Payment Date;
S-82
<PAGE>
(x) to the holders of the Class A-1 and Class A-2 Bonds, the
related cross-collateralization amount in respect of any remaining carry-forward
amounts with respect to such Payment Date;
(xi) to the Indenture Trustee and the Bond Administrator, an
amount (prorated according to amounts available therefor from each Class) for
any indemnity amounts owing to the Trust Administrator or the Bond Administrator
under the Indenture;
(xii) to the Servicer, any amounts (prorated according to
amounts available therefor from each Class) owing to the Servicer pursuant to
the Servicing Agreement in connection with the indemnity by the Issuer
thereunder, and in the event there is a successor servicer, additional
compensation, if necessary; and
(xiii) any remaining amounts to the holders of the
Subordinated Bonds.
OVERCOLLATERALIZATION PROVISIONS
OVERCOLLATERALIZATION RESULTING FROM CASH FLOW STRUCTURE. With
respect to any Payment Date and a Class of Bonds, the excess, if any, of (x) the
sum of the aggregate Principal Balances of the Mortgage Loans in the related
Group as of the close of business on the last day of the period commencing on
the second day of the month preceding the month of such Payment Date (or, with
respect to the first Payment Date, the day following the Cut-Off Date) and
ending on the related Due Date (such period, the "Due Period") and the amount of
funds in the Pre-Funding Account as of such Payment Date held with respect to
the related Group over (y) the Bond Principal Balance of the Bonds of such Class
as of such Payment Date (and following the making of all payments made on such
Payment Date) is the related "Subordination Amount" as of such Payment Date. The
Indenture requires that, on each Payment Date, the related Net Monthly Excess
Cashflow, if any, be applied on such Payment Date as an accelerated payment of
principal on such Class of Bonds, but only to the limited extent hereafter
described. The Net Monthly Excess Cashflow for a Class of Bonds may also be used
to make accelerated payments of principal on the other Classes of Bonds as
described above under "--Priority of Payment" and below under
"--Cross-Collateralization." The "Net Monthly Excess Cashflow" for each Class of
Bonds and any Payment Date is equal to the amount of the related Available Funds
remaining after application to items (i) through (vi) under "--Priority of
Payment" herein. This application has the effect of accelerating the
amortization of each Class of Bonds relative to the amortization of the Mortgage
Loans in the related Group. Such an accelerated payment of principal on each
Class of Bonds is required until the related Subordination Amount has increased
to the level equal to the Required Subordination Amount for such Class of Bonds
and Payment Date.
Any amount actually applied as an accelerated payment of
principal on a Class of Bonds is a "Subordination Increase Amount" with respect
to such Class. The required level of the Subordination Amount with respect to
each Class and a Payment Date is the related "Required Subordination Amount."
The Indenture generally provides that the Required Subordination Amount with
respect to each Class may, over time, decrease, or increase, subject to certain
floors, caps and triggers.
Initially, the sum of the aggregate Principal Balance of the
Initial Mortgage Loans in each Group as of the Cut-off Date and the Original
Pre-Funded Amount allocated to such Group will exceed the Bond Principal Balance
of the related Class of Bonds as of the Closing Date. This excess is known as
the "Target Subordination Amount" for such Class of Bonds and is equal to 3.25%,
3.25%, 2.25% and
S-83
<PAGE>
2.25% of the sum of the aggregate Principal Balance of the Initial Mortgage
Loans in the related Group as of the Cut-off Date and the portion of the
Original Pre-Funded Amount allocated to such Group for Class A-1, Class A-2,
Class A-3 and Class A-4, respectively. The Bond Insurer may adjust the Target
Subordination Amount for each Class of Bonds.
In the event that the Required Subordination Amount for a
Class of Bonds is permitted to decrease or "step down" on a Payment Date in the
future, a portion of the principal payment which would otherwise be distributed
to the Holders of such Class of Bonds on such Payment Date shall be distributed
to the Holders of the Subordinated Bonds on such Payment Date. This has the
effect of decelerating the amortization of a Class of Bonds relative to the
amortization of the Mortgage Loans in the related Group and of reducing the
related Subordination Amount. With respect to any Class of Bonds and any Payment
Date, the difference, if any, between (a) the related Subordination Amount that
would result on such Payment Date after taking into account all payments to be
made on such Payment Date (exclusive of any reductions thereto attributable to
the related Subordination Reduction Amounts (as described below) on such Payment
Date) and (b) the Required Subordination Amount for such Class of Bonds and for
such Payment Date is the related "Excess Subordination Amount" with respect to
such Payment Date. With respect to any Class of Bonds and any Payment Date, an
amount equal to the lesser of (a) the related Excess Subordination Amount and
(b) the principal collections on the Mortgage Loans in the related Group
received by the Servicer with respect to the related Due Period is the
"Subordination Reduction Amount" for such Class of Bonds. In addition, a
Subordination Reduction Amount may result even prior to the occurrence of any
decrease or "step down" in the Required Subordination Amount for a Class of
Bonds. This is because the Holders of the Class of Bonds will generally be
entitled to receive 100% of collected principal, even though the Bond Principal
Balance of the Class of Bonds may represent less than 100% of the aggregate
Principal Balance of the Mortgage Loans in the related Group. In the absence of
the provisions relating to a Subordination Reduction Amount, the foregoing may
otherwise increase the Subordination Amount for a Class of Bonds above the
Required Subordination Amount for such Class of Bonds even without the
application of any related Net Monthly Excess Cashflow.
The Indenture provides that, on any Payment Date, all
unscheduled collections on account of principal (other than any such amount
applied to the payment of a Subordination Reduction Amount) with respect to
Mortgage Loans in a Group during the calendar month preceding the calendar month
in which such Payment Date occurs (the "Prepayment Period") will be distributed
to the Holders of the related Class of Bonds on such Payment Date. If any
Mortgage Loan in a Group became a Liquidated Mortgage Loan (as defined below)
during such Prepayment Period, the net liquidation proceeds related thereto and
allocated to principal may be less than the Principal Balance of the related
Mortgage Loan; the amount of any such insufficiency is generally defined as a
"Realized Loss." A "Liquidated Mortgage Loan" is, in general, a defaulted
Mortgage Loan as to which the Servicer has determined that all amounts that it
expects to recover on such Mortgage Loan have been recovered (exclusive of any
possibility of a deficiency judgment). The principal balance of any Mortgage
Loan after it becomes a Liquidated Mortgage Loan shall equal zero. The Indenture
does not contain any provision which requires that the amount of any Realized
Loss should be distributed to the Holders of the related Class of Bonds on the
Payment Date which immediately follows the event of loss (i.e., the Indenture
does not require the current recovery of losses). However, the occurrence of a
Realized Loss will reduce the related Subordination Amount, which, to the extent
that such reduction causes such Subordination Amount to be less than the
Required Subordination Amount for the Class of Bonds applicable to the related
Payment Date, will require the payment of a Subordination Increase Amount for
the Class of Bonds on such Payment Date
S-84
<PAGE>
(or, if insufficient funds are available on such Payment Date, on subsequent
Payment Dates, until such Subordination Amount equals the Required Subordination
Amount for the Class of Bonds).
OVERCOLLATERALIZATION AND THE BOND INSURANCE POLICY. The
Indenture defines a "Subordination Deficit" with respect to the Bonds and a
Payment Date to be the amount, if any, by which (x) the aggregate Bond Principal
Balance of all of the Bonds as of such Payment Date, and following the making of
all payments to be made on such Payment Date (except for any payment to be made
as to principal from proceeds of the Bond Insurance Policy), exceeds (y) the sum
of the aggregate Principal Balances of the Mortgage Loans as of the close of
business on the Due Date preceding such Payment Date and the amount of funds in
the Pre-Funding Account on such Payment Date. The Indenture requires the Bond
Administrator to make a claim for an Insured Payment under the Bond Insurance
Policy for the benefit of the Indenture Trustee not later than the second
Business Day prior to any Payment Date as to which the Bond Administrator has
determined that a Subordination Deficit will occur for the purpose of applying
the proceeds of such Insured Payment as a payment of principal to the Holders of
the Bonds on such Payment Date. Investors in the Bonds should realize that,
under extreme loss or delinquency scenarios, they may temporarily receive no
payments of principal.
CROSS-COLLATERALIZATION
The cash flow provisions of the Issuer provide for limited
"cross-collateralization," in which excess amounts with respect to one or more
Classes is used to make payments with respect to one or more other Classes. At
each point in the waterfall (described above under "- Priority of Payment")
providing for the application of cash flows as cross-collateralization, the Bond
Administrator will determine whether with respect to each Class, there is either
(x) cash available for application to the other Classes or (y) cash required
from the other Classes. If the aggregate amount required is greater than the
aggregate amount available, the Indenture Trustee will apply such amount
available to each Class that requires cash pro rata in accordance with the
amount required by each Class. Alternatively, if the aggregate amount available
is greater than the aggregate amount required, the Indenture Trustee will take
the required amount pro rata in accordance with the excess amount available in
each Class.
BOND INSURANCE POLICY
The following information has been supplied by the Bond
Insurer for inclusion in this Prospectus Supplement.
Simultaneously with the issuance of the Bonds, the Bond
Insurer will issue the Bond Insurance Policy to the Indenture Trustee on behalf
of and for the benefit of the Bondholders pursuant to which it will irrevocably
and unconditionally guaranty payment on each Payment Date to the Indenture
Trustee on behalf of and for the benefit of the Bondholders of an amount equal
to the Interest Payment Amount for each Class of Bonds plus any Subordination
Deficit for such Payment Date calculated in accordance with the original terms
of the Bonds when issued and without regard to any amendment or modification of
the Bonds or the Indenture except amendments or modifications to which the Bond
Insurer has given its prior written consent. The amount of the "Insured
Payment", if any, made by the Bond Insurer to the Bondholders under the Bond
Insurance Policy on each Payment Date is the sum (without duplication) of (i)
any shortfall in the amount required to pay the Subordination Deficit for such
Payment Date from a source other than the Bond Insurance Policy, (ii) any
shortfall in the amount required to pay the Interest Payment Amount (less any
Prepayment Interest Shortfalls and Relief Act Shortfalls) for each Class of
Bonds on such Payment Date from a source other than the Bond Insurance
S-85
<PAGE>
Policy, and (iii) on the Final Scheduled Payment Date, the outstanding Bond
Principal Balance on all Classes of Bonds. Payments which become due on an
accelerated basis as a result of (a) a default by the Issuer, (b) an election by
the Issuer to pay principal on an accelerated basis or (c) any other cause do
not constitute "Insured Payments," unless the Bond Insurer elects, in its sole
discretion, to pay such principal due upon acceleration, together with any
accrued interest to the date of acceleration. The effect of the Bond Insurance
Policy is to guaranty the timely payment of interest on, and the ultimate
principal amount of the Bonds. Notwithstanding the foregoing, the Bond Insurer
is permitted at its sole option, but is not required, to pay any losses in
connection with the liquidation of a Mortgage Loan in accordance with the Bond
Insurance Policy.
The Bond Insurance Policy does not cover, and Insured Payments
do not include, any Prepayment Interest Shortfalls, any Relief Act Shortfalls or
any Carry-Forward Amounts.
"Preference Amount" means any amount previously distributed to
an Owner on the Bonds that is recoverable and sought to be recovered as a
voidable preference by a trustee in bankruptcy pursuant to the United States
Bankruptcy Code (11 U.S.C.), as amended from time to time in accordance with a
final nonappealable order of a court having competent jurisdiction.
"Relief Act Shortfalls" means for any Payment Date any
shortfalls relating to the Soldiers' and Sailors' Civil Relief Act of 1940, as
amended, or similar legislation or regulations.
Payment of claims under the Bond Insurance Policy will be made
by the Bond Insurer following Receipt by the Bond Insurer of the appropriate
notice for payment on the later to occur of (a) 12:00 noon, New York City time,
on the second Business Day following Receipt of such notice for payment, and (b)
12:00 noon, New York City time, on the relevant Payment Date.
If any payment of an amount guaranteed by the Bond Insurer
pursuant to the Bond Insurance Policy is avoided as a preference payment under
applicable bankruptcy, insolvency, receivership or similar law the Bond Insurer
will pay such amount out of the funds of the Bond Insurer on the later of (a)
the date when due to be paid pursuant to the Order referred to below or (b) the
first to occur of (i) the fourth Business Day following Receipt by the Bond
Insurer from the Bond Administrator of (A) a certified copy of the order (the
"Order") of the court or other governmental body which exercised jurisdiction to
the effect that a Bondholder is required to return principal or interest
distributed with respect to a Bond during the term of the Bond Insurance Policy
because such distributions were avoidable preferences under applicable
bankruptcy law, (B) a certificate of the Bondholder that the Order has been
entered and is not subject to any stay, and (C) an assignment duly executed and
delivered by the Bondholder, in such form as is reasonably required by the Bond
Insurer and provided to the Bondholder by the Bond Insurer, irrevocably
assigning to the Bond Insurer all rights and claims of the Bondholder relating
to or arising under the Bonds against the debtor which made such preference
payment or otherwise with respect to such preference payment, or (ii) the date
of Receipt by the Bond Insurer from the Bond Administrator of the items referred
to in clauses (A), (B) and (C) above if, at least four Business Days prior to
such date of Receipt, the Bond Insurer shall have Received written notice from
the Bond Administrator that such items were to be delivered on such date and
such date was specified in such notice. Such payment shall be disbursed to the
receiver, conservator, debtor-in-possession or trustee in bankruptcy named in
the Order and not to the Bond Administrator or any Bondholder directly (unless a
Bondholder has previously paid such amount to the receiver, conservator,
debtor-in-possession or trustee in bankruptcy named in the Order, in which case
such payment shall be disbursed to the Indenture Trustee
S-86
<PAGE>
for distribution to such Bondholder upon proof of such payment reasonably
satisfactory to the Bond Insurer).
The terms "Receipt" and "Received," with respect to the Bond
Insurance Policy, means actual delivery to the Bond Insurer and to its fiscal
agent appointed by the Bond Insurer at its option, if any, prior to 12:00 p.m.,
New York City time, on a Business Day; delivery either on a day that is not a
Business Day or after 12:00 p.m., New York City time, shall be deemed to be
Receipt on the next succeeding Business Day. If any notice or certificate given
under the Bond Insurance Policy by the Bond Administrator is not in proper form
or is not properly completed, executed or delivered, it shall be deemed not to
have been Received, and the Bond Insurer or the fiscal agent shall promptly so
advise the Bond Administrator and the Bond Administrator may submit an amended
notice.
The Bond Insurer's obligations under the Bond Insurance Policy
in respect of Insured Payments shall be discharged to the extent funds are
transferred to the Indenture Trustee as provided in the Bond Insurance Policy,
whether or not such funds are properly applied by the Bond Administrator.
The Bond Insurer shall be subrogated to the rights of each
Bondholder to receive payments of principal and interest, as applicable, with
respect to distributions on the Bonds to the extent of any payment by the Bond
Insurer under the Bond Insurance Policy. To the extent the Bond Insurer makes
Insured Payments, either directly or indirectly (as by paying through the Paying
Agent), to the Bondholders, the Bond Insurer will be subrogated to the rights of
the Bondholders, as applicable, with respect to such Insured Payment, shall be
deemed to the extent of the payments so made to be a registered Bondholder for
purposes of payment and shall receive all future payments of principal and
interest, as applicable, until all such Insured Payments by the Bond Insurer
have been fully reimbursed, provided that the Bondholders have received the full
amount of the payments of principal and interest, as applicable.
Claims under the Bond Insurance Policy will rank equally with
any other unsecured and unsubordinated obligations of the Bond Insurer except
for certain obligations in respect of tax and other payments to which preference
is or may become afforded by statute. The terms of the Bond Insurance Policy
cannot be modified, altered or affected by any other agreement or instrument, or
by the merger, consolidation or dissolution of the Master Servicer. The Bond
Insurance Policy by its terms may not be canceled or revoked. The Bond Insurance
Policy is governed by the laws of the State of New York.
The Bond Insurance Policy is not covered by the
Property/Casualty Insurance Security Fund specified in Article 76 of the New
York Insurance Law. The Bond Insurance Policy is not covered by the Florida
Insurance Guaranty Association created under Part II of Chapter 631 of the
Florida Insurance Code. In the event the Bond Insurer were to become insolvent,
any claims arising under the Bond Insurance Policy are excluded from coverage by
the California Insurance Guaranty Association, established pursuant to Article
14.2 of Chapter 1 of part 2 of Division 1 of the California Insurance Code.
Pursuant to the terms of the Indenture, unless a Bond Insurer
Default exists, the Bond Insurer shall be deemed to be the Bondholders for
certain purposes (other than with respect to payment on the Bonds), will be
entitled to exercise all rights of the Bondholders thereunder, without the
consent of such Bondholders and the Bondholders may exercise such rights only
with the prior written consent of the Bond Insurer. In addition, the Bond
Insurer will have certain additional rights as a third party beneficiary to the
Indenture.
The Bond Insurer does not accept any responsibility for the
accuracy of completeness of this Prospectus Supplement or any information or
disclosure contained herein, or omitted herefrom, other
S-87
<PAGE>
than with respect to the accuracy of the information regarding the Bond Insurer
set forth under the heading "The Bond Insurer" herein. Additionally, the Bond
Insurer makes no representation regarding the Bonds or the advisability of
investing in the Bonds.
Each rating of the Bond Insurer should be evaluated
independently. The ratings reflect the respective rating agency's current
assessment of the creditworthiness of the Bond Insurer and its ability to pay
claims on its policies of insurance. Any further explanation as to the
significance of the above ratings may be obtained only from the applicable
rating agency.
The above ratings are not recommendations to buy, sell or hold
the Bonds and such ratings may be subject to revision or withdrawal at any time
by the rating agencies. Any downward revision or withdrawal of any of the above
ratings may have an adverse effect on the market price of the Bonds. The Bond
Insurer does not guaranty the market price of the Bonds nor does it guaranty
that the ratings on the Bonds will not be revised or withdrawn.
BOND INSURANCE POLICY DOES NOT APPLY TO PREPAYMENT RISK
In general, the protection afforded by the Bond Insurance
Policy is protection for credit risk and not for prepayment risk. A claim may
not be made under the Bond Insurance Policy, in an attempt to guarantee or
insure that any particular rate of prepayment is experienced by the Trust
Estate.
ADVANCES
Prior to each Payment Date, the Servicer is required under the
Servicing Agreement to make "Advances" (out of its own funds, advances made by
any subservicer, or funds held in the Collection Account (as described below)
for future payment or withdrawal) with respect to any payments of principal and
interest (net of the Servicing Fee Rate) which were due on the Mortgage Loans on
the immediately preceding Due Date and which are delinquent on the business day
next preceding the related Determination Date.
Such Advances are required to be made only to the extent they
are deemed by the Servicer to be recoverable from related late collections,
Insurance Proceeds, or Liquidation Proceeds. The purpose of making such Advances
is to maintain a regular cash flow to the Bondholders, rather than to guarantee
or insure against losses. Any failure by the Servicer to make an Advance as
required under the Servicing Agreement will constitute an Event of Default
thereunder, in which case the successor Servicer will be obligated to make any
such Advance, in accordance with the terms of the Servicing Agreement.
Advances made from funds held in the Collection Account may be
made by the Servicer from subsequent collections of principal and interest
received on other Mortgage Loans and deposited into the Collection Account.
Advances made from the Collection Account are not limited to subsequent
collections of principal and interest received on the delinquent Mortgage Loan
with respect to which an Advance is made. If on the fourth business day prior to
any Payment Date funds in the Collection Account are less than the amount
required to be paid to the Bondholders on such Payment Date, then the Servicer
will deposit its own funds into the Payment Account in the amount of the lesser
of (i) any unreimbursed Advances previously made by the Servicer with funds held
in the Collection Account or (ii) the shortfall in the Collection Account;
provided, however, that in no event will the Servicer deposit into the
Collection Account an amount that is less than any shortfall in the Collection
Account attributable to delinquent payments on Mortgage Loans which the Servicer
deems to be recoverable and
S-88
<PAGE>
which has not been covered by an Advance from the Servicer's own corporate funds
or any subservicer's funds.
All Advances will be reimbursable to the Servicer on a first
priority basis from late collections, Insurance Proceeds or Liquidation Proceeds
from the Mortgage Loan as to which such unreimbursed Advance was made. In
addition, any Advances previously made which are deemed by the Servicer to be
nonrecoverable from related late collections, Insurance Proceeds and Liquidation
Proceeds may be reimbursed to the Servicer out of any funds in the Collection
Account prior to payments on the Bonds.
THE PAYING AGENT
The "Paying Agent" shall initially be the Indenture Trustee.
The Paying Agent shall have the revocable power to withdraw funds from the
Payment Account for the purpose of making payments to the Bondholders.
OPTIONAL TERMINATION
The Mortgage Loans may be purchased by the Servicer on any
Payment Date on or after the Payment Date on which the aggregate Principal
Balance of the Mortgage Loans is equal to or less than 10% of the sum of the
Principal Balance of the Initial Mortgage Loans as of the Cut-off Date and the
original Pre-Funded Amount. This will result in a redemption of the Bonds. The
purchase price for the Mortgage Loans will be an amount sufficient to pay 100%
of the aggregate outstanding Bond Principal Balance of each Class of Bonds and
accrued and unpaid interest thereon (including any Carry-Forward Amount) at the
related Bond Interest Rate through the date on which the Issuer is terminated
together with all amounts due and owing to the Bond Insurer, the Servicer, the
Bond Administrator and the Indenture Trustee. Such termination must constitute a
"qualified liquidation" (within the meaning of Section 860F of the Code) of the
REMIC established by the Issuer, including, without limitation, the requirement
that the qualified liquidation takes place over a period not to exceed 90 days.
MANDATORY PREPAYMENTS ON THE BONDS
Each Class of Bonds will be partially prepaid on the Payment
Date immediately following the end of the Funding Period to the extent that any
amount remains on deposit in the Pre-Funding Account for the related Group on
such Payment Date. Although no assurance can be given, it is anticipated that
the principal amount of Subsequent Mortgage Loans sold to the Issuer and
included in the Trust Estate will require the application of substantially all
of the Original Pre-Funded Amount and that there should be no material amount of
principal prepaid to the Bonds from the Pre-Funding Account. However, it is
unlikely that the Seller will be able to deliver Subsequent Mortgage Loans with
an aggregate principal balance identical to the Original Pre-Funded Amount for
each Class of Bonds.
INTEREST COVERAGE ACCOUNT
On the Closing Date, a portion of the sales proceeds of the
Bonds will be deposited in an account (the "Interest Coverage Account") for
application to cover shortfalls in the Interest Payment Amounts attributable to
the pre-funding feature during the Funding Period. Such shortfall initially will
exist during the Funding Period because the aggregate Principal Balance of the
Bonds, and interest accrued thereon, during the Funding Period will be greater
than the aggregate principal balance of the Mortgage Loans, and interest accrued
thereon, during such period. On the first Business Day following
S-89
<PAGE>
the termination of the Funding Period, funds on deposit in the Interest Coverage
Account will be deposited in the Payment Account.
CERTAIN YIELD AND PREPAYMENT CONSIDERATIONS
The yield to maturity of the Bonds will depend on the prices
paid by the holders of such Bonds, the Bond Interest Rate and the rate and
timing of principal payments (including payments in excess of required
installments, prepayments or terminations, liquidations and repurchases) on the
Mortgage Loans and the allocation thereof. Such yield may be adversely affected
by a higher or lower than anticipated rate of principal payments on the Mortgage
Loans and the amount, if any, distributed from the Pre-Funding Account at the
end of the Funding Period. The rate of principal payments on such Mortgage Loans
will in turn be affected by the amortization schedules of the Mortgage Loans,
the rate and timing of principal prepayments thereon by the Mortgagors and
liquidations of defaulted Mortgage Loans, and purchases of Mortgage Loans due to
certain breaches of representations and warranties and optional repurchases of
delinquent loans by the Servicer. The timing of changes in the rate of
prepayments, liquidations and repurchases of the Mortgage Loans may, and the
timing of losses will, significantly affect the yield to an investor, even if
the average rate of principal payments experienced over time is consistent with
an investor's expectation. Since the rate and timing of principal payments on
the Mortgage Loans will depend on future events and on a variety of factors (as
described more fully herein and in the Prospectus under "Yield Considerations"),
no assurance can be given as to such rate or the timing of principal payments on
the Bonds.
The Mortgage Loans generally may be prepaid in full or in part
at any time; however, prepayment may subject the mortgagor to a prepayment
charge. None of the Initial Mortgage Loans are secured by junior liens on the
related Mortgage Properties. Generally, mortgage loans secured by junior liens
are not viewed by Mortgagors as permanent financing. Accordingly, such Mortgage
Loans may experience a higher rate of prepayment than the first lien Mortgage
Loans. All of the Mortgage Loans are assumable under certain circumstances if,
in the sole judgment of the Servicer, the prospective purchaser of a Mortgaged
Property is creditworthy and the security for such Mortgage Loan is not impaired
by the assumption. All of the Mortgage Loans contain a customary "due on sale"
provision. The Servicer shall enforce any due-on-sale clause contained in any
mortgage note or mortgage, to the extent permitted under applicable law and
governmental regulation; provided, however, if the Servicer determines that it
is reasonably likely that any Mortgagor will bring, or if any Mortgagor does
bring, legal action to declare invalid or otherwise avoid enforcement of a
due-on-sale clause contained in any mortgage note or mortgage, the Servicer
shall not be required to enforce the due-on-sale clause or to contest such
action. The extent to which the Mortgage Loans are assumed by purchasers of the
Mortgaged Properties rather than prepaid by the related Mortgagors in connection
with the sales of the Mortgaged Properties will affect the weighted average life
of the Bonds and may result in a prepayment experience on the Mortgage Loans
that differs from that on other conventional Mortgage Loans. Prepayments,
liquidations and purchases of the Mortgage Loans will result in payments to
holders of the Bonds of principal amounts which would otherwise be distributed
over the remaining terms of the Mortgage Loans. Factors affecting prepayment
(including defaults and liquidations) of Mortgage Loans include changes in
mortgagors' housing needs, job transfers, unemployment, mortgagors' net equity
in the mortgaged properties, changes in the value of the mortgaged properties,
mortgage market interest rates and servicing decisions.
S-90
<PAGE>
The rate of defaults on the Mortgage Loans will also affect
the rate and timing of principal payments on the Mortgage Loans. In general,
defaults on Mortgage Loans are expected to occur with greater frequency in their
early years. Increases in the monthly payments of the Adjustable Rate Mortgage
Loans to an amount in excess of the monthly payment required at the time of
origination may result in a default rate higher than that on level payment
Mortgage Loans, particularly since the Mortgagor under each Adjustable Rate
Mortgage Loan was qualified on the basis of the Mortgage Rate in effect at
origination. The repayment of such Adjustable Rate Mortgage Loans will be
dependent on the ability of the Mortgagor to make larger monthly payments as the
Mortgage Rate increases. In addition, the rate of default on Mortgage Loans
which are refinance or limited documentation Mortgage Loans, and on Mortgage
Loans with high Loan-to-Value Ratios, may be higher than for other types of
Mortgage Loans. Furthermore, the rate and timing of prepayments, defaults and
liquidations on the Mortgage Loans will be affected by the general economic
condition of the region of the country in which the related Mortgaged Properties
are located. The risk of delinquencies and loss is greater and prepayments are
less likely in regions where a weak or deteriorating economy exists, as may be
evidenced by, among other factors, increasing unemployment or falling property
values.
To the extent that the Original Pre-Funded Amount has not been
fully applied to the purchase of Subsequent Mortgage Loans by the Issuer by the
end of the Funding Period, the Holders of each Class of Bonds will receive on
the first Payment Date following the termination of the Funding Period a
prepayment of principal in an amount equal to the lesser of (i) a portion of the
Pre-Funded Amount remaining in the Pre-Funding Account allocated to the related
Group and (ii) the outstanding Principal Balance of such Class of Bonds.
Although no assurance can be given, it is anticipated by the Depositor that the
principal amount of Subsequent Mortgage Loans sold to the Issuer for inclusion
in the Trust Estate will require the application of substantially all amounts on
deposit in the Pre-Funding Account and that there will be no material amount of
principal prepaid to such Bondholders. However, it is unlikely that the Seller
will be able to deliver Subsequent Mortgage Loans with an aggregate principal
balance identical to the Original Pre-Funded Amount.
In addition, the yield to maturity of the Bonds will depend
on, among other things, the price paid by the holders of the Bonds and the then
applicable Bond Interest Rate. The extent to which the yield to maturity of a
Bond is sensitive to prepayments will depend, in part, upon the degree to which
it is purchased at a discount or premium. In general, if a Bond is purchased at
a premium and principal payments thereon occur at a rate faster than anticipated
at the time of purchase, the investor's actual yield to maturity will be lower
than that assumed at the time of purchase. Conversely, if a Bond is purchased at
a discount and principal payments thereon occur at a rate slower than that
assumed at the time of purchase, the investor's actual yield to maturity will be
lower than that assumed at the time of purchase.
Furthermore, the yield to maturity on the Bonds may be
affected by shortfalls with respect to interest in the event that the interest
accrued on the Bonds at the Bond Interest Rate is greater than the amount of
interest accrued on the Mortgage Loans at the related Mortgage Rates less the
Administrative Fee Rate. In such event, the resulting shortfall will only be
payable to the holders of the Class A-1 and Class A-2 Bonds to the extent that
on any future Payment Date interest accrued on the Mortgage Loans at the related
Mortgage Rates less such rates is greater than the interest accrued on the
Bonds, and only to the extent of Available Funds following distributions to the
Bondholders pursuant to clauses (i) through (viii) under "Description of the
Bonds--Priority of Payment." There is no carry-forward feature with respect to
the Class A-3 and Class A-4 Bonds.
S-91
<PAGE>
The Class A-1 Bond Interest Rate and the Class A-2 Bond
Interest Rate are based upon, among other factors as described herein under
"Description of the Bonds--Interest Payments on the Bonds," the value of an
index (One-Month LIBOR (as defined herein) which is different from the value of
the indices (the "Indices") applicable to the Mortgage Loans, Six-Month LIBOR
and One-Year CMT). The Mortgage Rate for each Adjustable Rate Mortgage Loan in
Group I and Group II adjusts semi-annually or annually, commencing after the
Initial Period, based upon the related Index, whereas the Bond Interest Rate on
the Class A-1 and Class A-2 Bonds adjusts monthly based upon One-Month LIBOR
plus a spread as set forth herein. In addition, One-Month LIBOR and the Indices
on the Adjustable Rate Mortgage Loans may respond differently to economic and
market factors, and there is not necessarily any correlation between them.
Moreover, the Adjustable Rate Mortgage Loans are subject to Periodic Rate Caps,
Maximum Mortgage Rates and Minimum Mortgage Rates (each, as defined herein).
Thus, it is possible, for example, that One-Month LIBOR and the Indices rise
during the same period, One-Month LIBOR may rise much more rapidly than the
Indices.
Although the Mortgage Rates on the Adjustable Rate Mortgage
Loans will adjust semi-annually, such increases and decreases may be limited by
the Periodic Rate Cap, the Maximum Mortgage Rate and the Minimum Mortgage Rate,
if applicable, on each such Adjustable Rate Mortgage Loan, and will be based on
the applicable Index (which may not rise and fall consistently with prevailing
mortgage rates) plus the related Gross Margin (which may be different from the
prevailing margins on other Mortgage Loans). As a result, the Mortgage Rates on
the Adjustable Rate Mortgage Loans at any time may not equal the prevailing
rates for other adjustable-rate loans and accordingly, the rate of prepayment
may be lower or higher than would otherwise be anticipated. In addition, because
all of the Adjustable Rate Mortgage Loans have Maximum Mortgage Rates, if
prevailing mortgage rates were to increase above the Maximum Mortgage Rates, the
rate of prepayment on the Adjustable Rate Mortgage Loans may be slower than
would otherwise be the case. In general, if prevailing mortgage rates fall
significantly below the Mortgage Rates on the Adjustable Rate Mortgage Loans,
the rate of prepayments (including refinancings) will be expected to increase.
Conversely, if prevailing mortgage rates rise significantly above the Mortgage
Rates on the Adjustable Rate Mortgage Loans, the rate of prepayment on the
Adjustable Rate Mortgage Loans will be expected to decrease.
Weighted average life refers to the average amount of time
that will elapse from the date of issuance of a security to the date of payment
to the investor of each dollar distributed in reduction of principal of such
security (assuming no losses). The weighted average life of the Bonds will be
influenced by, among other things, the rate at which the principal of the
Mortgage Loans is paid, which may be in the form of scheduled amortization,
prepayments or liquidations. Because the amortization schedule of each
Adjustable Rate Mortgage Loan will be recalculated semi-annually or annually
after the initial Adjustment Date for such Adjustable Rate Mortgage Loan, any
partial prepayments thereof will not reduce the term to maturity of such
Adjustable Rate Mortgage Loan. In addition, an increase in the Mortgage Rate on
an Adjustable Rate Mortgage Loan will result in a larger monthly payment and in
a larger percentage of such monthly payment being allocated to interest and a
smaller percentage being allocated to principal, and conversely, a decrease in
the Mortgage Rate on the Adjustable Rate Mortgage Loan will result in a lower
monthly payment and in a larger percentage of each monthly payment being
allocated to principal and a smaller percentage being allocated to interest.
Prepayments on Mortgage Loans are commonly measured relative
to a prepayment standard or model. The model used in this Prospectus Supplement,
the Constant Prepayment Rate model
S-92
<PAGE>
("CPR"), assumes that the outstanding principal balance of a pool of Mortgage
Loans prepays each month at a specified annual rate or CPR. In generating
monthly cash flows, this annual rate is converted to an equivalent monthly rate.
With respect to the Adjustable Rate Mortgage Loans, the prepayment model assumes
a constant CPR of 30% (such model, a "Prepayment Assumption"). With respect to
the Fixed Rate Mortgage Loans, the prepayment model assumes a constant CPR of
2.4% in the first month of the life of the Fixed Rate Mortgage Loans and an
additional 2.4% per annum in each month thereafter until the tenth month;
beginning in the tenth month and in each month thereafter, the prepayment model
assumes a CPR of 24% (such model, also a "Prepayment Assumption"). The levels of
CPR used above in defining the Prepayment Assumptions represent 100% of the
related Prepayment Assumption. To assume a CPR percentage in either prepayment
model is to assume that the stated percentage of the outstanding principal
balance of the pool would be prepaid over the course of a year. No
representation is made that the Mortgage Loans will prepay at the percentages of
CPR specified in either prepayment model.
The tables set forth below have been prepared on the basis of
certain assumptions as described below regarding the weighted average
characteristics of the Mortgage Loans that are expected to be included in the
Trust Estate as described under "Description of the Mortgage Pool" herein and
the performance thereof. The tables assume, among other things, that: (i) the
Mortgage Pool consists of Mortgage Loans with the following characteristics:
GROUP I
<TABLE>
<CAPTION>
ORIGINAL REMAINING MONTHS TO
CURRENT TERM TO TERM TO NEXT RATE GROSS AXIMUM MINIMUM INITIAL PERIODIC
MORTGAGE MATURITY MATURITY ADJUSTMENT MARGIN MORTGAGE MORTGAGE PERIODIC RATE
PRINCIPAL BALANCE ($) RATE (%) (IN MONTHS) (IN MONTHS) DATE (%) M RATE (%) RATE (%) CAP (%) CAP (%)
- --------------------- -------- ----------- ----------- ---- --- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
SIX-MONTH LIBOR
INITIAL
1,237,098.53 9.284 360 356 2 5.427 16.284 9.284 1.000 1.000
58,344,100.30 10.142 360 357 21 5.790 17.141 10.143 3.000 1.000
4,197,903.26 10.307 360 356 32 5.688 17.307 10.307 3.000 1.000
SUBSEQUENT
192,060.47 9.284 360 356 1 5.427 16.284 9.284 1.000 1.000
9,057,965.08 10.142 360 357 20 5.790 17.141 10.143 3.000 1.000
651,727.61 10.307 360 356 31 5.688 17.307 10.307 3.000 1.000
ONE-YEAR CMT
INITIAL
62,127.53 9.875 180 171 3 5.672 15.875 9.875 2.000 2.000
3,260,549.05 9.782 360 341 6 5.399 15.887 9.488 2.000 2.000
SUBSEQUENT
9,645.35 9.875 180 171 2 5.672 15.875 9.875 2.000 2.000
506,202.67 9.782 360 341 5 5.399 15.887 9.488 2.000 2.000
</TABLE>
S-93
<PAGE>
GROUP II
<TABLE>
<CAPTION>
ORIGINAL REMAINING MONTHS TO
CURRENT TERM TO TERM TO NEXT RATE GROSS MAXIMUM MINIMUM INITIAL PERIODIC
MORTGAGE MATURITY MATURITY ADJUSTMENT MARGIN MORTGAGE MORTGAGE PERIODIC RATE
PRINCIPAL BALANCE($) RATE (%) (IN MONTHS) (IN MONTHS) DATE (%) RATE (%) RATE (%) CAP (%) CAP (%)
-------------------- -------- ----------- ----------- ---- --- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
SIX-MONTH LIBOR
INITIAL
13,113,174.93 10.314 360 356 20 5.780 17.291 10.314 3.000 1.000
1,350,677.39 9.376 360 358 34 5.102 16.376 9.376 3.000 1.000
SUBSEQUENT
3,537,569.19 10.314 360 356 19 5.780 17.291 10.314 3.000 1.000
364,375.12 9.376 360 358 33 5.102 16.376 9.376 3.000 1.000
ONE-YEAR CMT
INITIAL
1,230,072.95 9.799 360 345 7 5.446 16.469 9.689 2.000 2.000
586,030.85 8.175 360 346 22 4.246 14.175 8.175 3.000 2.000
SUBSEQUENT
331,839.40 9.799 360 345 6 5.446 16.469 9.689 2.000 2.000
158,094.79 8.175 360 346 21 4.246 14.175 8.175 3.000 2.000
</TABLE>
GROUP III
<TABLE>
<CAPTION>
REMAINING
ORIGINAL TERM REMAINING TERM AMORTIZATION
MORTGAGE RATE TO MATURITY TO MATURITY TERM
PRINCIPAL BALANCE ($) (%) (IN MONTHS) (IN MONTHS) (IN MONTHS) AMORTIZATION TYPE
--------------------- -------------- ------------- ------------- ------------ -----------------
<S> <C> <C> <C> <C> <C>
FIXED
INITIAL
190,630.37 8.790 120 116 116 Level Pay
5,958,336.24 9.428 180 177 177 Level Pay
530,930.24 9.935 240 236 236 Level Pay
12,383,170.02 10.337 360 357 357 Level Pay
20,379,073.44 10.129 180 177 357 Balloon
SUBSEQUENT
31,868.27 8.790 120 116 116 Level Pay
996,073.61 9.428 180 177 177 Level Pay
88,757.26 9.935 240 236 236 Level Pay
2,070,133.06 10.337 360 357 357 Level Pay
3,406,833.11 10.129 180 177 357 Balloon
</TABLE>
S-94
<PAGE>
GROUP IV
<TABLE>
<CAPTION>
REMAINING
ORIGINAL TERM REMAINING TERM AMORTIZATION
MORTGAGE RATE TO MATURITY TO MATURITY TERM
PRINCIPAL BALANCE ($) (%) (IN MONTHS) (IN MONTHS) (IN MONTHS) AMORTIZATION TYPE
--------------------- -------------- ------------- ------------- ------------ -----------------
<S> <C> <C> <C> <C> <C>
FIXED
INITIAL
937,953.47 10.392 180 177 177 Level Pay
116,604.05 11.250 240 237 237 Level Pay
357,543.45 7.875 300 296 296 Level Pay
5,357,526.63 10.091 360 357 357 Level Pay
9,279,641.69 10.089 180 177 357 Balloon
SUBSEQUENT
257,793.42 10.392 180 177 177 Level Pay
32,048.24 11.250 240 237 237 Level Pay
98,269.64 7.875 300 296 296 Level Pay
1,472,498.54 10.091 360 357 357 Level Pay
2,550,478.93 10.089 180 177 357 Balloon
</TABLE>
S-95
<PAGE>
(ii) One-Month LIBOR, Six-Month LIBOR and One-Year CMT remain
constant at 4.93969%, 4.96813% and 4.48%, respectively; (iii) payments on the
Bonds are received, in cash, on the 25th day of each month, commencing in
February 1999; (iv) there are no delinquencies or losses on the Mortgage Loans,
and scheduled payments on the Mortgage Loans are timely received on the first
day of each month commencing in February 1999; (v) there are no repurchases of
the Mortgage Loans; (vi) the scheduled monthly payment for each Mortgage Loan is
calculated based on its principal balance, Mortgage Rate and remaining
amortization term such that such Mortgage Loan will amortize in amounts
sufficient to repay the remaining principal balance of such Mortgage Loan by its
remaining amortization term; (vii) the Indices remain constant at the rates
listed above and the Mortgage Rate on each Adjustable Rate Mortgage Loan is
adjusted on the next Adjustment Date (and on subsequent Adjustment Dates, as
necessary) to equal the related Index plus the applicable Gross Margin, subject
to the Maximum Mortgage Rate and the related Periodic Rate Cap listed above;
(viii) with respect to each Mortgage Loan (other than the Fixed Rate Mortgage
Loans), the monthly payment on the Mortgage Loan is adjusted on the Due Date
immediately following the next related Adjustment Date (and on subsequent
Adjustment Dates, as necessary) to equal a fully amortizing payment as described
in clause (vi) above; (ix) payments on the Mortgage Loans earn no reinvestment
return; (x) the Bond Insurance Premium is the rate set forth in the Insurance
Agreement, the MI Premium is set forth in the MI Insurance Agreement, the Bond
Administrator Fee Rate is 0.0125% per annum, and the Servicing Fee Rate is 0.55%
per annum; (xi) there are no additional ongoing Trust Estate expenses payable
out of the Trust Estate; (xii) the Mortgage Loans experience no prepayment
charges; (xiii) no miscellaneous servicing fees are passed through to the
Bondholders; (xiv) the Subsequent Mortgage Loans are acquired on February 25,
1999 with the characteristics set forth in the previous tables, with their first
scheduled payment due on March 1, 1999, resulting in no mandatory prepayment of
the Bonds on the May 25, 1999 Payment Date; (xv) the Bonds will be purchased on
January 29, 1999; (xvi) prepayments on the Mortgage Loans represent prepayments
in full of individual mortgage loans and are received on the last day of each
month with 30 days' interest thereon beginning in January 1999 (February 1999
with respect to the Subsequent Mortgage Loans); and (xvii) the Required
Subordination Amounts are as set forth in the Insurance Agreement.
The actual characteristics and performance of the Mortgage
Loans will differ from the assumptions used in constructing the table set forth
below, which is hypothetical in nature and is provided only to give a general
sense of how the principal cash flows might behave under varying prepayment
scenarios. For example, it is very unlikely that the Mortgage Loans will prepay
at a constant level of CPR until maturity or that all of the Mortgage Loans will
prepay at the same level of CPR or Prepayment Assumption. Moreover, the diverse
remaining terms to stated maturity of the Mortgage Loans could produce slower or
faster principal payments than indicated in the table at the various constant
percentages of CPR specified, even if the weighted average remaining term to
stated maturity of the Mortgage Loans is as assumed. Any difference between such
assumptions and the actual characteristics and performance of the Mortgage
Loans, or actual prepayment experience, will affect the percentages of initial
Bond Principal Balance outstanding over time and the weighted average life of
the Bonds. Subject to the foregoing discussion and assumptions, the following
table indicates the weighted average life of the Bonds, and sets forth the
percentages of the initial Bond Principal Balance of the Bonds that would be
outstanding after each of the dates shown at various percentages of CPR.
S-96
<PAGE>
<TABLE>
<CAPTION>
PERCENT OF INITIAL CLASS A-1 BOND PRINCIPAL BALANCE OUTSTANDING (1)(4)
PREPAYMENT SCENARIO(2)
---------------------------------------------------------------
Payment Date 0% 50% 75% 100% 125% 150%
<S> <C> <C> <C> <C> <C> <C>
Initial Percentage 100 100 100 100 100 100
January 25, 2000 99 84 77 69 61 54
January 25, 2001 99 71 58 47 37 28
January 25, 2002 98 59 44 33 23 16
January 25, 2003 97 49 34 23 14 9
January 25, 2004 97 42 26 16 9 0
January 25, 2005 96 35 20 11 0 0
January 25, 2006 95 29 15 8 0 0
January 25, 2007 94 25 12 0 0 0
January 25, 2008 93 21 9 0 0 0
January 25, 2009 91 17 0 0 0 0
January 25, 2010 90 15 0 0 0 0
January 25, 2011 88 12 0 0 0 0
January 25, 2012 86 10 0 0 0 0
January 25, 2013 84 8 0 0 0 0
January 25, 2014 82 0 0 0 0 0
January 25, 2015 79 0 0 0 0 0
January 25, 2016 76 0 0 0 0 0
January 25, 2017 73 0 0 0 0 0
January 25, 2018 70 0 0 0 0 0
January 25, 2019 66 0 0 0 0 0
January 25, 2020 62 0 0 0 0 0
January 25, 2021 57 0 0 0 0 0
January 25, 2022 52 0 0 0 0 0
January 25, 2023 46 0 0 0 0 0
January 25, 2024 40 0 0 0 0 0
January 25, 2025 33 0 0 0 0 0
January 25, 2026 25 0 0 0 0 0
January 25, 2027 17 0 0 0 0 0
January 25, 2028 0 0 0 0 0 0
Weighted Average Life in Years(3)(4) 21.3 5.3 3.5 2.5 1.9 1.5
Weighted Average Life in Years(3)(5) 21.4 5.6 3.7 2.7 2.1 1.6
- ------------------------------
</TABLE>
(1) Rounded to the nearest whole percentage.
(2) As a percentage of the related Prepayment Assumption for each Group.
(3) The weighted average life of a Bond is determined by (i) multiplying the
amount of each distribution of principal on a Bond by the number of years
from the date of issuance of the Bond to the related Payment Date, (ii)
adding the results, and (iii) dividing the sum by the Initial Bond
Principal Balance of the Bond.
(4) Assumes the Servicer exercises its option to purchase the Mortgage Loans
when the Principal Balance of the Mortgage Loans is equal to or less than
10% of the sum of the Principal Balance of the Initial Mortgage Loans as
of the Cut-Off Date and the Original Pre-Funded Amount. See "Description
of the Bonds--Optional Termination" herein.
(5) Assumes that the Bonds remain outstanding until maturity.
S-97
<PAGE>
<TABLE>
<CAPTION>
PERCENT OF INITIAL CLASS A-2 BOND PRINCIPAL BALANCE OUTSTANDING (1)(4)
PREPAYMENT SCENARIO(2)
---------------------------------------------------------------
Payment Date 0% 50% 75% 100% 125% 150%
<S> <C> <C> <C> <C> <C> <C>
Initial Percentage 100 100 100 100 100 100
January 25, 2000 99 84 77 69 61 54
January 25, 2001 99 71 58 47 37 28
January 25, 2002 98 59 44 33 23 16
January 25, 2003 97 49 34 23 14 9
January 25, 2004 97 42 26 16 9 0
January 25, 2005 96 35 20 11 0 0
January 25, 2006 95 29 15 8 0 0
January 25, 2007 94 25 12 0 0 0
January 25, 2008 92 21 9 0 0 0
January 25, 2009 91 17 0 0 0 0
January 25, 2010 89 15 0 0 0 0
January 25, 2011 88 12 0 0 0 0
January 25, 2012 86 10 0 0 0 0
January 25, 2013 84 8 0 0 0 0
January 25, 2014 81 0 0 0 0 0
January 25, 2015 79 0 0 0 0 0
January 25, 2016 76 0 0 0 0 0
January 25, 2017 73 0 0 0 0 0
January 25, 2018 69 0 0 0 0 0
January 25, 2019 65 0 0 0 0 0
January 25, 2020 61 0 0 0 0 0
January 25, 2021 56 0 0 0 0 0
January 25, 2022 51 0 0 0 0 0
January 25, 2023 45 0 0 0 0 0
January 25, 2024 39 0 0 0 0 0
January 25, 2025 32 0 0 0 0 0
January 25, 2026 24 0 0 0 0 0
January 25, 2027 16 0 0 0 0 0
January 25, 2028 0 0 0 0 0 0
Weighted Average Life in Years(3)(4) 21.2 5.3 3.5 2.5 1.9 1.5
Weighted Average Life in Years(3)(5) 21.3 5.6 3.7 2.7 2.1 1.6
- ---------------------------
</TABLE>
(1) Rounded to the nearest whole percentage.
(2) As a percentage of the related Prepayment Assumption for each Group.
(3) The weighted average life of a Bond is determined by (i) multiplying the
amount of each distribution of principal on a Bond by the number of years
from the date of issuance of the Bond to the related Payment Date, (ii)
adding the results, and (iii) dividing the sum by the Initial Bond
Principal Balance of the Bond.
(4) Assumes the Servicer exercises its option to purchase the Mortgage Loans
when the Principal Balance of the Mortgage Loans is equal to or less than
10% of the sum of the Principal Balance of the Initial Mortgage Loans as
of the Cut-Off Date and the original Pre-Funded Amount. See "Description
of the Bonds--Optional Termination" herein.
(5) Assumes that the Bonds remain outstanding until maturity.
S-98
<PAGE>
<TABLE>
<CAPTION>
PERCENT OF INITIAL CLASS A-3 BOND PRINCIPAL BALANCE OUTSTANDING (1)(4)
PREPAYMENT SCENARIO(2)
---------------------------------------------------------------
Payment Date 0% 50% 75% 100% 125% 150%
<S> <C> <C> <C> <C> <C> <C>
Initial Percentage 100 100 100 100 100 100
January 25, 2000 99 89 84 79 74 69
January 25, 2001 98 77 68 59 50 43
January 25, 2002 97 67 54 44 35 27
January 25, 2003 95 58 44 33 24 17
January 25, 2004 94 50 35 25 17 0
January 25, 2005 92 43 28 18 0 0
January 25, 2006 90 37 23 14 0 0
January 25, 2007 88 32 18 0 0 0
January 25, 2008 86 27 15 0 0 0
January 25, 2009 83 23 0 0 0 0
January 25, 2010 81 20 0 0 0 0
January 25, 2011 78 17 0 0 0 0
January 25, 2012 75 14 0 0 0 0
January 25, 2013 71 12 0 0 0 0
January 25, 2014 25 0 0 0 0 0
January 25, 2015 25 0 0 0 0 0
January 25, 2016 24 0 0 0 0 0
January 25, 2017 23 0 0 0 0 0
January 25, 2018 22 0 0 0 0 0
January 25, 2019 20 0 0 0 0 0
January 25, 2020 19 0 0 0 0 0
January 25, 2021 18 0 0 0 0 0
January 25, 2022 16 0 0 0 0 0
January 25, 2023 14 0 0 0 0 0
January 25, 2024 12 0 0 0 0 0
January 25, 2025 10 0 0 0 0 0
January 25, 2026 8 0 0 0 0 0
January 25, 2027 5 0 0 0 0 0
January 25, 2028 0 0 0 0 0 0
Weighted Average Life in Years(3)(4) 15.3 6.1 4.2 3.2 2.5 2.1
Weighted Average Life in Years(3)(5) 15.3 6.4 4.6 3.6 2.8 2.3
- ---------------------------
</TABLE>
(1) Rounded to the nearest whole percentage.
(2) As a percentage of the related Prepayment Assumption for each Group.
(3) The weighted average life of a Bond is determined by (i) multiplying the
amount of each distribution of principal on a Bond by the number of years
from the date of issuance of the Bond to the related Payment Date, (ii)
adding the results, and (iii) dividing the sum by the Initial Bond
Principal Balance of the Bond.
(4) Assumes the Servicer exercises its option to purchase the Mortgage Loans
when the Principal Balance of the Mortgage Loans is equal to or less than
10% of the sum of the Principal Balance of the Initial Mortgage Loans as
of the Cut-Off Date and the original Pre-Funded Amount. See "Description
of the Bonds--Optional Termination" herein.
(5) Assumes that the Bonds remain outstanding until maturity.
S-99
<PAGE>
<TABLE>
<CAPTION>
PERCENT OF INITIAL CLASS A-4 BOND PRINCIPAL BALANCE OUTSTANDING (1)(4)
PREPAYMENT SCENARIO(2)
---------------------------------------------------------------
Payment Date 0% 50% 75% 100% 125% 150%
<S> <C> <C> <C> <C> <C> <C>
Initial Percentage 100 100 100 100 100 100
January 25, 2000 99 89 84 79 74 69
January 25, 2001 98 78 68 59 51 43
January 25, 2002 98 67 55 44 35 28
January 25, 2003 97 58 44 33 24 17
January 25, 2004 95 51 36 25 17 0
January 25, 2005 94 44 29 19 0 0
January 25, 2006 93 38 24 14 0 0
January 25, 2007 91 33 19 0 0 0
January 25, 2008 90 29 15 0 0 0
January 25, 2009 88 25 0 0 0 0
January 25, 2010 86 21 0 0 0 0
January 25, 2011 84 18 0 0 0 0
January 25, 2012 81 15 0 0 0 0
January 25, 2013 78 13 0 0 0 0
January 25, 2014 28 0 0 0 0 0
January 25, 2015 27 0 0 0 0 0
January 25, 2016 26 0 0 0 0 0
January 25, 2017 25 0 0 0 0 0
January 25, 2018 24 0 0 0 0 0
January 25, 2019 22 0 0 0 0 0
January 25, 2020 21 0 0 0 0 0
January 25, 2021 19 0 0 0 0 0
January 25, 2022 17 0 0 0 0 0
January 25, 2023 15 0 0 0 0 0
January 25, 2024 13 0 0 0 0 0
January 25, 2025 11 0 0 0 0 0
January 25, 2026 8 0 0 0 0 0
January 25, 2027 5 0 0 0 0 0
January 25, 2028 0 0 0 0 0 0
Weighted Average Life in Years(3)(4) 16.0 6.3 4.3 3.2 2.5 2.1
Weighted Average Life in Years(3)(5) 16.0 6.5 4.7 3.6 2.9 2.4
- -------------------------
</TABLE>
(1) Rounded to the nearest whole percentage.
(2) As a percentage of the related Prepayment Assumption for each Group.
(3) The weighted average life of a Bond is determined by (i) multiplying the
amount of each distribution of principal on a Bond by the number of years
from the date of issuance of the Bond to the related Payment Date, (ii)
adding the results, and (iii) dividing the sum by the Initial Bond
Principal Balance of the Bond.
(4) Assumes the Servicer exercises its option to purchase the Mortgage Loans
when the Principal Balance of the Mortgage Loans is equal to or less than
10% of the sum of the Principal Balance of the Initial Mortgage Loans as
of the Cut-Off Date and the original Pre-Funded Amount. See "Description
of the Bonds--Optional Termination" herein.
(5) Assumes that the Bonds remain outstanding until maturity.
S-100
<PAGE>
These tables have been prepared based on the assumptions
described in the second paragraph preceding these tables (including the
assumptions regarding the characteristics and performance of the Mortgage Loans
which differ from the actual characteristics and performance thereof) and should
be read in conjunction therewith.
DESCRIPTION OF THE SERVICING AGREEMENT
The following summary describes certain terms of the Servicing
Agreement, dated as of January 1, 1999 (the "Servicing Agreement"), among the
Issuer, the Bond Administrator, the Indenture Trustee, the Servicer and the
Back-up Servicer. The summary does not purport to be complete and is subject to,
and qualified in its entirety by reference to, the provisions of the Servicing
Agreement. Whenever particular sections or defined terms of the Servicing
Agreement are referred to, such sections or defined terms are thereby
incorporated herein by reference.
THE SERVICER
NovaStar Mortgage, Inc., will act as servicer (acting in such
capacity, the "Servicer") for the Mortgage Loans pursuant to the Servicing
Agreement. For a description of the Servicer's operations, see "The Seller"
herein. The Servicer's servicing portfolio currently includes only subprime
residential mortgage loans. The Servicer believes that its servicing and loan
origination software applications and the internal information systems are Year
2000 compliant. As a result, the Servicer does not currently anticipate any
material disruption in its operations as a result of any failure of the Servicer
to be in compliance.
FORECLOSURE AND DELINQUENCY EXPERIENCE WITH SUBPRIME MORTGAGE LOANS
The following table summarizes the delinquency and foreclosure
experience, respectively, as of the date indicated, of the Subprime Mortgage
Loans serviced by the Servicer. The information should not be considered as a
basis for assessing the likelihood, amount or severity of delinquencies or
foreclosures on the Mortgage Loans securing the Bonds.
S-101
<PAGE>
<TABLE>
<CAPTION>
DELINQUENCY AND FORECLOSURE
December 31, 1997 December 31, 1998
--------------------------- ----------------------------
Principal Principal
Balance(1) Ratio Balance(1) Ratio
------------- ------- ----------- --------
<S> <C> <C> <C> <C>
Subprime Mortgage Loan Portfolio $ 559,732 $ 1,179,966
Delinquency Percentage(2)
30-59 Days 6,668 1.19% 25,787 2.19%
60-89 Days 4,573 0.82% 13,149 1.11%
90+ Days 10,099 1.80% 39,481 3.35%
------------- ------- ----------- --------
Total $ 21,339 3.81% $ 78,417 6.65%
============= ======= =========== ========
Foreclosure Rate(3) $ 11,498 2.05% $ 26,542 2.25%
REO $ 270 0.05% $ 14,352 1.22%
Loss Rate(4) $ 95 0.02% $ 1,770 0.15%
</TABLE>
- --------------------
(1) Numbers in thousands.
(2) The period of delinquency is based on the number of days that payments are
contractually past due.
(3) "Foreclosure Rate" is the dollar amount of the mortgage loans in the process
of foreclosure as a percentage of the total principal balance of the mortgage
loans outstanding as of the date indicated.
(4) "Loss Rate" is the dollar amount of losses as a percentage of the total
principal balance of the mortgage loans outstanding as of the date indicated.
Losses are actual losses incurred on liquidated properties and shortfall payoffs
for each respective period. Losses on liquidated properties are calculated as
net sales proceeds less book value (exclusive of loan purchase premium or
discount). Shortfall payoffs are calculated as the difference between principal
payoff amount and unpaid principal at the time of payoff.
There can be no assurance that the delinquency experience of
the Mortgage Loans securing the Bonds will correspond to the delinquency and
foreclosure experience of the servicing portfolio of the Servicer set forth in
the foregoing table. The statistics shown above represent the respective
delinquency and foreclosure experiences only at the date presented, whereas the
aggregate delinquency and foreclosure experience on the Mortgage Loans securing
the Bonds will depend on the results obtained over the life of the Bonds. The
Servicer's servicing portfolio may include Subprime Mortgage Loans underwritten
pursuant to guidelines not necessarily representative of those applicable to the
Mortgage Loans securing the Bonds. It should be noted that if the residential
real estate market should experience an overall decline in property values, the
actual rates of delinquencies and foreclosures could be higher than those
previously experienced by the Servicer. In addition, adverse economic conditions
may affect the timely payment by mortgagors of scheduled payments of principal
and interest on Mortgage Loans and, accordingly, the actual rates of
delinquencies and foreclosures with respect to Mortgage Loans.
SERVICING AND OTHER COMPENSATION
With respect to each Mortgage Loan and each Payment Date, the
Servicer will be entitled to a fee (the "Servicing Fee") equal to 1/12 of the
Servicing Fee Rate times the Principal Balance of such Mortgage Loan as of such
date. The Servicing Fee for each Mortgage Loan is payable out of the interest
S-102
<PAGE>
payments on such Mortgage Loan. The Servicing Fee Rate in respect of each
Mortgage Loan will be equal to 0.55% per annum of the outstanding principal
balance of such Mortgage Loan. The Servicer will not be entitled to any
additional servicing compensation (other than late payment charges) such as
prepayment penalties and any such amount, to the extent received by the
Servicer, will be included in Available Funds.
With respect to any Payment Date, any Prepayment Interest
Shortfalls during the preceding calendar month will be covered by the Servicer,
but only to the extent such Prepayment Interest Shortfalls do not exceed an
amount equal to the total servicing fee payable to the Servicer and any
subservicer with respect to such Payment Date (any such payments, "Compensating
Interest"). The "Prepayment Interest Shortfall" for any Payment Date is equal to
the aggregate shortfall, if any, in collections of interest resulting from
Mortgagor prepayments in full or in part on the Mortgage Loans during the
preceding calendar month. Such shortfalls will result because interest on
prepayments in full is distributed only to the date of prepayment, and because
no interest is distributed on prepayments in part, as such prepayments in part
are applied to reduce the outstanding principal balance of the related Mortgage
Loans as of the Due Date in the month of prepayment. No assurance can be given
that Compensating Interest will be sufficient to cover Prepayment Interest
Shortfalls for any Payment Date.
THE BACK-UP SERVICER
Fairbanks Capital Corp., a Utah corporation (the "Back-up
Servicer"), will serve as the Back-up Servicer for the Mortgage Loans. The Bond
Insurer is a shareholder of the Back-up Servicer.
With respect to each Mortgage Loan and each Payment Date, the
Back-up Servicer will be entitled to a fee, payable by the Servicer (the
"Back-up Servicing Fee") equal to 1/12 of the Back-up Servicing Fee Rate times
the Principal Balance of such Mortgage Loan as of such date. The Back-up
Servicing Fee for each Mortgage Loan is payable by the Servicer out of the
Servicing Fee. The Back-up Servicing Fee Rate in respect of each Mortgage Loan
will be equal to 0.05% per annum of the outstanding principal balance of such
Mortgage Loan.
NINETY-DAY RENEWABLE TERMS
The Servicer shall be retained as servicer under the Servicing
Agreement is for a term of 90 days, commencing on the Closing Date, subject to
automatic renewal on an evergreen basis for successive 90-day renewal terms, so
long as there is no event of default under the Servicing Agreement and no event
of default under the Insurance Agreement. The failure of the Seller to
repurchase any Defective Mortgage Loan in accordance with the terms of the
Purchase Agreement and the failure of the Converted Loan Purchaser to purchase
any Converted Loan in accordance with the terms of the Converted Loan Purchase
Agreement are both events of default under the Insurance Agreement.
If the Servicing Agreement is terminated or not renewed by the
Bond Insurer or the Indenture Trustee, then the Back-up Servicer (or another
entity acceptable to the Bond Insurer) will become the servicer of the Mortgage
Loans, on the same terms and conditions, at a Servicing Fee of 0.75%, (or 0.50%
if such termination occurred as a result of a failure to satisfy certain
financial covenants), and the Back-up Servicing Fee will terminate. In addition,
the Back-up Servicer will assume all of the Converted Loan Purchaser's
obligations under the Converted Loan Purchase Agreement. In the event that the
Back-up Servicer is terminated, then First Union National Bank will act as
successor
S-103
<PAGE>
Servicer. However, in no event will First Union National Bank be obligated to
purchase Converted Mortgage Loans.
SALE OF CONVERTED MORTGAGE LOANS
The Initial Mortgage Loans in Groups I and II include loans
that are convertible, subject to certain conditions, from a variable-rate loan
to a fixed-rate loan at the option of the Mortgagor (the "Convertible Mortgage
Loans"). Approximately 96.21% and 92.01% of the Initial Mortgage Loans in Groups
I and II, respectively, are, and up to 100% of the Subsequent Mortgage Loans for
such Groups may be, Convertible Mortgage Loans. The Convertible Mortgage Loans
generally give the Mortgagor the option on an interest rate change date (which
is generally the anniversary of the loan), after an initial period (typically 2
or 3 years), to convert the loan from a variable-rate to a fixed-rate loan,
provided that the conditions set forth below are met. Conversion fees are
payable to and retained by the Servicer.
The following is a summary of the conversion features of the
initial Convertible Mortgage Loans. The 2/28 Six-Month LIBOR Mortgage Loans
permit the Mortgagor to convert on the first through sixth interest rate change
dates. The 3/27 Six-Month LIBOR Mortgage Loans permit the Mortgagor to convert
on the first through fourth interest rate change dates. The Six-Month LIBOR
Mortgage Loans permit the Mortgagor to convert on the fourth through tenth
interest rate change dates. The One-Year CMT Mortgage Loans permit the Mortgagor
to convert on the second through fifth interest rate change dates.
In order to convert a Convertible Mortgage Loan, the Mortgagor
must satisfy all of the following conditions: (a) the Mortgagor must give notice
of conversion to the Servicer during the period in which conversion is allowed,
(b) the Mortgagor must not be in default under the mortgage of the date of such
notice and must not have been delinquent by thirty days or more in making any
payment due during the twelve-month period immediately preceding such notice,
(c) the Mortgage must pay a conversion fee, (d) the Mortgagor must supply the
information and pay any fees required for the servicer to complete an updated
credit review, (e) the Mortgagor must occupy the Mortgaged Property, (f) if
requested by the Servicer, the Mortgagor must provide and pay for an updated
appraisal of the Mortgaged Property acceptable to the Servicer, (g) the
Mortgagor must complete, execute and deliver any and all documents required by
the Servicer to effect the conversion, (h) the value of the Mortgaged Property
must not have declined below a certain level since the date of the mortgage, and
(i) the Mortgagor must meet the Servicer's property value and credit
underwriting standards in effect at the time of conversion. Furthermore, with
respect to some of the Convertible Mortgage Loans, the Mortgagor may not be
allowed to convert the Mortgage Loan if the Servicer, in its sole discretion,
believes the interest rate on the converted mortgage loan will be below market
interest rates then in effect for similar loans. If all of the foregoing
conditions are met, the Servicer will convert a variable-rate Convertible
Mortgage Loan into a fixed-rate Converted Mortgage Loan.
NovaStar Capital, Inc., a Delaware corporation that is an
affiliate of the Servicer (the "Converted Loan Purchaser"), will enter into the
Converted Loan Purchase Agreement, dated as of January 1, 1999 (the "Converted
Loan Purchase Agreement"), among the Servicer, the Back-up Servicer, the Issuer,
the Bond Administrator, the Indenture Trustee, the Bond Insurer and the
Converted Loan Purchaser. Under the terms of the Converted Loan Purchase
Agreement, within 30 days after the
S-104
<PAGE>
conversion of a Convertible Mortgage Loan from a variable-rate to a fixed-rate
Mortgage Loan (a "Converted Mortgage Loan"), the Issuer is obligated to sell and
the Converted Loan Purchaser is obligated to purchase (and the Bond
Administrator on behalf of the Indenture Trustee shall cause to be released from
the lien of the Indenture) the Converted Mortgage, for a purchase price equal to
the then outstanding principal balance of the Converted Mortgage Loan, plus
accrued and unpaid interest. The cash proceeds of such sale must be deposited in
the Collection Account and used on the next Payment Date to pay principal and
interest due on the related class of Bonds. Mandatory sale of Converted Mortgage
Loans will have the same effect as prepayments of Mortgage Loans, and will
result in prepayments of principal of the related class of Bonds.
The obligations of the Converted Loan Purchaser under the
Converted Loan Purchase Agreement will be guaranteed by NovaStar Financial,
Inc., a Maryland corporation and an affiliate of the Servicer ("NFI"). The
Servicer, however, will not be obligated to purchase any Converted Mortgage
Loan. If the Back-up Servicer becomes the servicer, it will assume the Converted
Loan Purchaser's obligations to purchaser Converted Mortgage Loans.
In the event that a Converted Mortgage Loan is not purchased
by the party obligated to do so, the Bond Insurer may, at its option, purchase
such Converted Mortgage Loan.
PURCHASE OF DELINQUENT MORTGAGE LOANS
The Servicer has the right, but not the obligation, to
purchase Mortgage Loans from the Issuer which are 90 days or more delinquent at
a price equal to 100% of the outstanding Principal Balance thereof, plus accrued
interest. It may purchase no more than 3% of the sum of the aggregate Principal
Balance of the Initial Mortgage Loans and the Pre-Funded Amount, unless the Bond
Insurer consents to such greater purchase. In making any purchase, the Servicer
is required to purchase the most delinquent Mortgage Loans first.
THE INDENTURE
The following summary describes certain terms of the
Indenture. The summary does not purport to be complete and is subject to, and
qualified in its entirety by reference to, the provisions of the Trust Agreement
and Indenture. See "The Agreements" in the Prospectus.
CONTROL BY BOND INSURER
Pursuant to the Indenture, unless a Bond Insurer Default
exists (i) the Bond Insurer shall have the right to direct the time, method and
place of conducting any proceeding for any remedy available to the Indenture
Trustee or exercising any trust or power conferred on the Indenture Trustee,
subject to certain limitations, and (ii) the Indenture Trustee may take actions
which would otherwise be at its option or within its discretion, including the
actions referred to under "--Events of Default" and "--Rights Upon Event of
Default," only at the direction of the Bond Insurer and (iii) the Bond Insurer
shall be deemed to be the holder of the Bonds for certain purposes (other than
with respect to payment on the Bonds), and will be entitled to exercise all
rights of the Bondholders thereunder, without the consent of such Bondholders,
and the Bondholders may exercise such rights only with the prior written consent
of the Bond Insurer. A "Bond Insurer Default" means the existence and
continuation of (i) a failure of the Bond
S-105
<PAGE>
Insurer to make a payment under the Bond Insurance Policy in accordance with its
terms or (ii) certain bankruptcy or insolvency actions by or against the Bond
Insurer.
EVENTS OF DEFAULT
An "Event of Default" with respect to the Bonds is defined in
the Indenture as follows: (a) the failure of the Issuer to pay (i) the Interest
Payment Amount or the Principal Payment Amount for any Class of Bonds with
respect to a Payment Date on such Payment Date (provided that for purposes of
this clause, payment from proceeds of the Bond Insurance Policy shall not be
considered payment by the Issuer with respect to the Bonds), or (ii) any
Subordination Increase Amount or Carry-Forward Amount with respect to a class of
Bonds, but only to the extent funds are available to make such payment as
described under "Description of the Bonds--Priority of Payment" (provided that
for purposes of this clause, payment from proceeds of the Bond Insurance Policy
shall not be considered payment by the Issuer with respect to the Bonds); (b)
the failure by the Issuer on the Final Scheduled Payment Date to pay the
outstanding Principal Balance of each class of Bonds and Subordinated Bonds in
full; (c) a default in the observance or performance of any covenant or
agreement of the Issuer in the Indenture, and the continuation of any such
default for a period of thirty days after notice to the Issuer by the Indenture
Trustee or the Bond Administrator or to the Issuer, the Bond Administrator and
the Indenture Trustee by the Bond Insurer, or if a Bond Insurer Default exists,
by the Holders of at least 25% of the aggregate Bond Principal Balance of the
Bonds and the Subordinated Bonds; (d) any representation or warranty made by the
Issuer in the Indenture or in any certificate or other writing delivered
pursuant thereto having been incorrect in a material respect as of the time
made, and the circumstance in respect of which such representation or warranty
is incorrect not having been cured within thirty days after notice thereof is
given to the Issuer by the Indenture Trustee or the Bond Administrator or to the
Issuer, the Bond Administrator and the Indenture Trustee by the Bond Insurer,
or, if a Bond Insurer Default exists, by Bondholders representing at least 25%
of the aggregate Bond Principal Balance of the Bonds and the Subordinated Bonds;
or (e) certain events of bankruptcy, insolvency, receivership or reorganization
of the Issuer.
RIGHTS UPON EVENT OF DEFAULT
In case an Event of Default should occur and be continuing the
Indenture Trustee may (with the prior written consent of the Bond Insurer) and,
upon the written direction of the Bond Insurer or, if a Bond Insurer Default
exists, Bondholders representing more than 50% of the Bond Principal Balances of
the Bonds and the Subordinated Bonds shall, declare the principal of such Bonds
and Subordinated Bonds to be immediately due and payable. Such declaration may
under certain circumstances be rescinded by the Bond Insurer, or if a Bond
Insurer Default exists, Bondholders representing more than 50% of the Bond
Principal Balances of the Bonds and the Subordinated Bonds.
If, following an Event of Default, the Bonds have been
declared to be due and payable, the Indenture Trustee may (or, at the direction
of the Bond Insurer, shall), in its discretion (provided that the Bond Insurer
or Bondholders (with the consent of the Bond Insurer) representing 100% of the
Bond Principal Balances of the Bonds have not directed the Indenture Trustee to
sell the assets included in the Trust Estate), refrain from selling such assets
and continue to apply all amounts received on such assets to payments due on the
Bonds and Subordinated Bonds in accordance with their terms, notwithstanding the
S-106
<PAGE>
acceleration of the maturity of such Bonds and Subordinated Bonds. In addition,
upon an Event of Default the Indenture Trustee may, with the consent of the Bond
Insurer, sell all or part of the assets included in the Trust Estate, in which
event the collections on, or the proceeds from the sale of, such assets will be
applied as provided below; provided, however, that any proceeds of a claim under
the Bond Insurance Policy shall be used only to pay interest and principal on
the Bonds as provided in clauses (iii) and (iv): (i) to the payment of the fees
of the Indenture Trustee and the Bond Administrator which have not been
previously paid; (ii) to the Bond Insurer, any premium then due; (iii) to the
Bondholders, the amount of interest then due and unpaid on each class of Bonds
(but not including any Carry-Forward Amount), without preference or priority of
any kind; (iv) to the Bondholders, the amount of principal then due and unpaid
on each class of Bonds, without preference or priority of any kind; (v) to the
payment of the amounts due and owing to the Bond Insurer, to the extent not
previously reimbursed; (vi) to the holders of the Class A-1 and Class A-2 Bonds,
the amount of any Carry-Forward Amount not previously paid; and (vii) to the
holder of the Subordinated Bonds.
Subject to the provisions of the Indenture relating to the
duties of the Indenture Trustee, in case an Event of Default shall occur and be
continuing, the Indenture Trustee shall be under no obligation to exercise any
of the rights and powers under the Indenture at the request or direction of any
of the Bondholders, unless such Bondholders shall have offered to the Indenture
Trustee reasonable security or indemnity satisfactory to it against the costs,
expenses and liabilities which might be incurred by it in complying with such
request or direction. Subject to such provisions for indemnification and certain
limitations contained in the Indenture, the Bond Insurer, or if a Bond Insurer
Default exists, Bondholders representing more than 50% of the Bond Principal
Balances of the Bonds shall have the right to direct the time, method, and place
of conducting any proceeding or any remedy available to the Indenture Trustee or
exercising any trust or power conferred on the Indenture Trustee with respect to
the Bonds; and the Bond Insurer, or if a Bond Insurer Default exists,
Bondholders representing more than 50% of the Bond Principal Balances of the
Bonds and the Subordinated Bonds may, in certain cases, waive any default with
respect thereto, except a default in the payment of principal or interest or a
default in respect of a covenant or provision of the Indenture that cannot be
modified without the waiver or consent of the holder of each outstanding Bond
and the Subordinated Bonds affected thereby.
LIMITATION ON SUITS
No Bondholder will have any right to institute any proceedings
with respect to the Indenture unless (1) such Bondholder has previously given
written notice to the Indenture Trustee of a continuing Event of Default; (2)
Bondholders representing not less than 25% of the Bond Principal Balances of the
Bonds have made written request to the Indenture Trustee to institute
proceedings in respect of such Event of Default in its own name as the Indenture
Trustee; (3) such Bondholders have offered to the Indenture Trustee reasonable
indemnity satisfactory to it against the costs, expenses and liabilities to be
incurred in compliance with such request; (4) for 60 days after its receipt of
such notice of, request and offer of indemnity the Indenture Trustee have failed
to institute any such proceedings; (5) no direction inconsistent with such
written request has been given to the Indenture Trustee during such 60-day
period by the Bondholders representing more than 50% of the Bond Principal
Balances of the Bonds; and (6) such Bondholders have the consent of the Bond
Insurer, unless a Bond Insurer Default exists.
S-107
<PAGE>
THE BOND ADMINISTRATOR AND THE INDENTURE TRUSTEE
Each of the Bond Administrator and the Indenture Trustee may
resign at any time, in which event the Bond Insurer may appoint (and if the Bond
Insurer fails to do so with in 60 days, the Issuer will be obligated to appoint,
with the consent of the Bond Insurer), a successor Bond Administrator or
Indenture Trustee, as applicable. The Bond Administrator or the Indenture
Trustee also may be removed at any time by the Bond Insurer, or if a Bond
Insurer Default exists, then by Bondholders representing more than 50% of the
Bond Principal Balances of the Bonds and the Subordinated Bonds. The Issuer
shall, with the consent of the Bond Insurer, so long as no Bond Insurer Default
exists, remove the Bond Administrator or the Indenture Trustee if the Bond
Administrator or the Indenture Trustee ceases to be eligible to continue as such
under the Indenture or if the Bond Administrator or the Indenture Trustee
becomes incapable of acting, bankrupt, insolvent or if a receiver or public
officer takes charge of the Bond Administrator or the Indenture Trustee or its
property. Any resignation or removal of the Bond Administrator or the Indenture
Trustee and appointment of a successor Bond Administrator or the Indenture
Trustee, as applicable, will not become effective until acceptance of the
appointment by the successor Bond Administrator or Indenture Trustee. The
Indenture Trustee may terminate the Bond Administrator at any time for failure
to perform its obligations under the Indenture or related agreements provided it
or an acceptable successor Bond Administrator assumes the obligations of the
Bond Administrator.
FEDERAL INCOME TAX CONSEQUENCES
The following discussion of certain of the material
anticipated federal income tax consequences of the purchase, ownership and
disposition of the Bonds is to be considered only in connection with "Material
Federal Income Tax Consequences" in the Prospectus. The discussion herein and in
the Prospectus is based upon laws, regulations, rulings and decisions now in
effect, all of which are subject to change. The discussion below and in the
Prospectus does not purport to deal with all federal tax consequences applicable
to all categories of investors, some of which may be subject to special rules.
Investors should consult their own tax advisors in determining the federal,
state, local and any other tax consequences to them of the purchase, ownership
and disposition of the Class A Bonds.
REMIC ELECTIONS
The Owner Trustee, on behalf of the Issuer, will cause a REMIC
election to be made with respect to certain specified assets of the Issuer for
federal income tax purposes. Qualification as a REMIC requires ongoing
compliance with certain conditions. Dewey Ballantine LLP, special tax counsel,
will advise that, in its opinion, for federal income tax purposes, assuming the
REMIC elections are made and compliance with the Indenture and the Trust
Agreement, the Issuer will be treated as a REMIC for federal income tax
purposes. Each of the Bonds and the Subordinated Bonds will be a "regular
interest" in a REMIC, and the Residual Certificate will be a "residual interest"
in a REMIC.
For federal income tax purposes, regular interests in a REMIC
are treated as debt instruments issued by the REMIC on the date on which those
interests are created, and not as ownership interests in the REMIC or its
assets. Owners of the Bonds that otherwise report income under a cash method of
accounting will be required to report income with respect to the Bonds under an
accrual
S-108
<PAGE>
method. The Bonds may be issued with "original issue discount" for federal
income tax purposes. The prepayment assumption that will be used in determining
the rate of accrual of original issue discount on the Bonds is 100% of the
"Prepayment Assumption". No representation is made that any of the Mortgage
Loans will prepay at such rates or any other rate. See "Certain Yield and
Prepayment Considerations" herein and "Material Federal Income Tax Consequences
- -- Discount and Premium" in the Prospectus.
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in an
Underwriting Agreement, dated January 22, 1999 (the "Underwriting Agreement"),
between Wheat First Securities, Inc., acting through First Union Capital Markets
a division of Wheat First Securities, Inc. (the "Underwriter") and the
Depositor, the Underwriter has agreed to purchase and the Depositor has agreed
to sell to the Underwriter the Bonds. It is expected that delivery of the Bonds
will be made only in book-entry form through the Same Day Funds Settlement
System of DTC, CEDEL S.A. and the Euroclear System, on or about January 29,
1999, against payment therefor in immediately available funds.
The Bonds will be purchased from the Depositor by the
Underwriter and will be offered by the Underwriter from time to time to the
public in negotiated transactions or otherwise at varying prices to be
determined at the time of sale. The proceeds to the Company from the sale of the
Bonds are expected to be approximately $159,440,000, before the deduction of
expenses. The Underwriter may effect such transactions by selling the Bonds to
or through dealers, and such dealers may receive compensation in the form of
underwriting discounts, concessions or commissions from the Underwriter. In
connection with the sale of the Bonds, the Underwriter may be deemed to have
received compensation from the Depositor in the form of underwriting
compensation. The Underwriter and any dealers that participate with the
Underwriter in the distribution of the Bonds may be deemed to be underwriters
and any profit on the resale of the Bonds purchased by them may be deemed to be
underwriting discounts and commissions under the Securities Act of 1933.
The Underwriting Agreement provides that the Depositor will
indemnify the Underwriter, and that under limited circumstances, the Underwriter
will indemnify the Depositor, against certain civil liabilities under the
Securities Act of 1933, or contribute to payments required to be made in respect
thereof.
There can be no assurance that a secondary market for the
Bonds will develop or, if it does develop, that it will continue or provide the
Bondholders with sufficient liquidity of investment. The primary source of
information available to investors concerning the Bonds will be the monthly
statements discussed in the Prospectus under "Description of the Bonds--Reports
to Bondholders," which will include information as to the outstanding principal
balance of the Bonds. There can be no assurance that any additional information
regarding the Bonds will be available through any other source. In addition, the
Depositor is not aware of any source through which price information about the
Bonds will be generally available on an ongoing basis. The limited nature of
such information regarding the Bonds may adversely affect the liquidity of the
Bonds, even if a secondary market for the Bonds becomes available.
The Underwriter and the Depositor are affiliates of the Bond
Administrator.
S-109
<PAGE>
CERTAIN LEGAL MATTERS
Certain legal matters relating to the Bonds will be passed
upon for the Seller, the Servicer and the Transferor by Stinson, Mag & Fizzell,
P.C., Kansas City, Missouri, and for the Depositor and the Underwriter by Dewey
Ballantine LLP, New York, New York. Certain legal matters regarding the
enforceability of the Bond Insurance Policy will be passed upon for the Bond
Insurer by the internal general counsel of the Bond Insurer.
RATINGS
It is a condition of the issuance of the Bonds that they be
rated "AAA" by Standard & Poor's Ratings Services, a division of The McGraw-Hill
Companies, Inc. ("S&P") and "Aaa" by Moody's Investors Service, Inc.
("Moody's").
S&P's ratings on mortgage pass-through certificates address
the likelihood of the receipt by Bondholders of payments required under the
Indenture. S&P's ratings take into consideration the credit quality of the
mortgage pool, structural and legal aspects associated with the Bonds, and the
extent to which the payment stream in the mortgage pool is adequate to make
payments required under the Bonds. S&P's rating on the Bonds does not, however,
constitute a statement regarding frequency of prepayments on the mortgages. See
"Certain Yield and Prepayment Considerations" herein. The ratings issued by S&P
on payment of principal and interest do not cover the payment of any Prepayment
Interest Shortfalls, any Relief Act Shortfalls or the Carry-Forward Amount.
The rating process of Moody's addresses the structural and
legal aspects associated with the Bonds, including the nature of the underlying
Mortgage Loans. The ratings assigned to the Bonds do not represent any
assessment of the likelihood or rate of principal prepayments. The ratings do
not address the possibility that Bondholders might suffer a lower than
anticipated yield. The ratings do not address the likelihood that Bondholders
will be paid the Carry-Forward Amount.
The Depositor has not requested a rating on the Bonds by any
rating agency other than S&P and Moody's. However, there can be no assurance as
to whether any other rating agency will rate the Bonds, or, if it does, what
rating would be assigned by any such other rating agency. A rating on the Bonds
by another rating agency, if assigned at all, may be lower than the ratings
assigned to the Bonds by S&P and Moody's.
A security rating is not a recommendation to buy, sell or hold
securities and may be subject to revision or withdrawal at any time by the
assigning rating organization. Each security rating should be evaluated
independently of any other security rating. In the event that the ratings
initially assigned to the Bonds are subsequently lowered for any reason, no
person or entity is obligated to provide any additional support or credit
enhancement with respect to the Bonds.
LEGAL INVESTMENT
The Bonds will constitute "mortgage related securities" for
the purposes of the Secondary Mortgage Market Enhancement Act of 1984 ("SMMEA")
for so long as they are rated in at least the second highest rating category by
one or more nationally recognized statistical rating agencies, and, as
S-110
<PAGE>
such, are legal investments for certain entities to the extent provided in
SMMEA. SMMEA provides, however, that states could override its provision on
legal investment and restrict or condition investment in mortgage related
securities by taking statutory action on or prior to October 3, 1991.
The Depositor makes no representations as to the proper
characterization of the Bonds for legal investment or other purposes, or as to
the ability of particular investors to purchase the Bonds under applicable legal
investment restrictions. These uncertainties may adversely affect the liquidity
of the Bonds. Accordingly, all institutions whose investment activities are
subject to legal investment laws and regulations, regulatory capital
requirements or review by regulatory authorities should consult with their legal
advisors in determining whether and to what extent the Bonds constitute a legal
investment or are subject to investment, capital or other restrictions.
See "Legal Investment" in the Prospectus.
ERISA CONSIDERATIONS
Section 406 of the Employee Retirement Income Security Act of
1974, as amended ("ERISA") and Section 4975 of the Code prohibit a pension,
profit sharing or other employee benefit plan (a "Plan") and certain individual
retirement arrangements from engaging in certain transactions involving "plan
assets" with persons that are "parties in interest" under ERISA or "disqualified
persons" under the Code with respect to the Plan, unless a statutory or
administrative exemption applies to the transaction. ERISA and the Code also
prohibit generally certain actions involving conflicts of interest by persons
who are fiduciaries of such Plans or arrangements. A violation of these
"prohibited transaction" rules may generate excise tax and other liabilities
under ERISA and the Code for such persons. In addition, investments by Plans are
subject to ERISA's general fiduciary requirements, including the requirement of
investment prudence and diversification and the requirement that a Plan's
investments be made in accordance with the documents governing the Plan.
Employee benefit plans that are governmental plans (as defined in Section 3(32)
of ERISA) and certain church plans (as defined in Section 3(33) of ERISA) are
not subject to ERISA. Accordingly, assets of such plans may be invested in Bonds
without regard to the ERISA considerations discussed herein, subject to the
provisions of other applicable federal, state and local law.
The United States Department of Labor (the "DOL") has issued a
regulation (the "Plan Asset Regulation") describing what constitutes the assets
of a Plan when the Plan acquires an equity interest in another entity. The Plan
Asset Regulation states that, unless an exception described in the regulation is
applicable, the underlying assets of a corporation, partnership or trust in
which a Plan makes an equity investment will be considered, for purposes of
ERISA, to be assets of the investing Plan. Pursuant to the Plan Asset
Regulation, if the assets of the Issuer were deemed to be plan assets by reason
of a Plan's investment in the Bonds, such plan assets would include an undivided
interest in any assets included in the Trust Estate. Therefore, in the absence
of an exemption, the purchase, sale or holding of any Bond by a Plan (including
certain individual retirement arrangements) might result in prohibited
transactions and the imposition of excise taxes and civil penalties.
The DOL has issued to the Underwriter an individual prohibited
transaction exemption, Prohibited Transaction Exemption 96-22 (the "Exemption"),
which generally exempts from the
S-111
<PAGE>
application of the prohibited transaction provisions of Section 406(a), Section
406(b)(1), Section 406(b)(2) and Section 407(a) of ERISA, and the excise taxes
imposed pursuant to Sections 4975(a) and (b) of the Code, certain transactions
with respect to the initial purchase, the holding and the subsequent resale by
Plans of certificates denominated as debt instruments that (i) represent an
interest in a REMIC and (ii) are issued by and are obligations of a trust that
consists of certain receivables, loans and other obligations that meet the
conditions and requirements of the Exemption. The loans covered by the Exemption
include mortgage loans such as the Mortgage Loans.
Among the conditions that must be satisfied for the Exemption
to apply are the following:
(1) the acquisition of Bonds by a Plan is on terms (including
the price for the Bonds) that are at least as favorable to the Plan as they
would be in an arm's-length transaction with an unrelated party;
(2) the rights and interests evidenced by the Bonds acquired
by the Plan are not subordinated to the rights and interests evidenced by other
bonds or certificates issued by the Issuer;
(3) the Bonds acquired by the Plan have received a rating at
the time of such acquisition that is one of the three highest generic rating
categories from either S&P, Moody's, Fitch Investors Service, L.P. ("Fitch") or
Duff & Phelps Credit Rating Co. ("D&P");
(4) neither the Owner Trustee nor the Indenture Trustee is an
affiliate of any other member of the Restricted Group (as defined below);
(5) the sum of all payments made to and retained by the
Underwriter in connection with the distribution of the Bonds represents not more
than reasonable compensation for underwriting the Bonds; the sum of all payments
made to and retained by the Depositor pursuant to the assignment of the Mortgage
Loans to the Issuer represents not more than the fair market value of such
loans; the sum of all payments made to and retained by the Servicer represents
not more than reasonable compensation for such person's services under the
Servicing Agreement and reimbursement of such person's reasonable expenses in
connection therewith; and
(6) the Plan investing in the Bonds is an "accredited
investor" as defined in Rule 501(a)(1) of Regulation D of the Commission under
the Securities Act of 1933.
The Trust Estate must also meet the following
requirements:
(i) the corpus of the Trust Estate must consist solely of
assets of the type that have been included in other investment pools;
(ii) certificates in such other investment pools must have
been rated in one of the three highest rating categories of S&P, Moody's, Fitch
or D&P for at least one year prior to the Plan's acquisition of Bonds; and
(iii) certificates evidencing interests in such other
investment pools must have been purchased by investors other than Plans for at
least one year prior to the Plan's acquisition of Bonds.
Moreover, the Exemption provides relief from certain
self-dealing/conflict of interest prohibited transactions that may occur when a
fiduciary causes a Plan to acquire certificates in a trust in which the
fiduciary (or its affiliate) is an obligor on the receivables held in the trust;
provided that, among
S-112
<PAGE>
other requirements, (i) in the case of an acquisition in connection with the
initial issuance of certificates, at least fifty percent of each class of
certificates in which Plans have invested is acquired by persons independent of
the Restricted Group and at least fifty percent of the aggregate interest in the
trust is acquired by persons independent of the Restricted Group; (ii) such
fiduciary (or its affiliate) is an obligor with respect to five percent or less
of the fair market value of the obligations contained in the trust; (iii) the
Plan's investment in certificates of any class does not exceed twenty-five
percent of all of the certificates of that class outstanding at the time of the
acquisition; and (iv) immediately after the acquisition, no more than
twenty-five percent of the assets of the Plan with respect to which such person
is a fiduciary are invested in certificates representing an interest in one or
more trusts containing assets sold or serviced by the same entity. The Exemption
does not apply to Plans sponsored by the Underwriter, the Bond Insurer, the
Depositor, the Owner Trustee, Indenture Trustee, the Servicer, any sub-servicer,
any obligor with respect to Mortgage Loans included in the Trust Estate
constituting more than five percent of the aggregate unamortized principal
balance of the assets in the Trust Estate, or any affiliate of such parties (the
"Restricted Group").
On July 21, 1997, the DOL published in the Federal Register
amendments to the Exemption ("PTE 97-34"), which extend exemptive relief to
certain mortgage-backed securities transactions using pre-funding accounts for
trusts issuing REMIC certificates denominated as debt. With respect to the
Bonds, PTE 97-34 generally allows Mortgage Loans supporting payments to owners
of the Bonds, and having a value equal to no more than 25% of the total
principal amount of the bonds offered by the Issuer, to be transferred to the
Issuer within a funding period no longer than 90 days or three months following
the Closing Date instead of requiring that all such Mortgage Loans be either
identified or transferred on or before the Closing Date. The relief will apply
to the purchase, sale and holding of the Bonds, provided that the following
general conditions are met:
(1) the ratio of the amount allocated to the Pre-Funding
Account to the total principal amount of the bonds and certificates being
offered (the "Pre-Funding Limit") does not exceed 25%;
(2) all Subsequent Mortgage Loans meet the same terms and
conditions for eligibility as the Initial Mortgage Loans, which terms and
conditions have been approved by S&P or Moody's (the "Rating Agencies");
(3) the transfer of Subsequent Mortgage Loans to the Issuer
during the Funding Period does not result in the Bonds receiving a lower credit
rating from a Rating Agency upon termination of the Funding Period than the
rating that was obtained at the time of the initial issuance of the Bonds by the
Issuer;
(4) solely as a result of the use of pre-funding, the weighted
average annual percentage interest rate (the "Average Interest Rate") for all of
the Mortgage Loans in the Trust Estate at the end of the Funding Period is not
more than 100 basis points lower than the Average Interest Rate for the Initial
Mortgage Loans;
(5) either:
(i) the characteristics of the Subsequent Mortgage Loans
are monitored by an insurer or other credit support provider which is
independent of the Depositor; or
S-113
<PAGE>
(ii) an independent accountant retained by the Depositor
provides the Depositor with a letter (with copies provided to the Rating
Agencies, the Underwriter and the Indenture Trustee) stating whether or not the
characteristics of the Subsequent Mortgage Loans conform to the characteristics
described in the Prospectus Supplement and/or the Indenture. In preparing such
letter, the independent accountant must use the same type of procedures as were
applicable to the Initial Mortgage Loans;
(6) the Funding Period ends no later than three months or 90
days after the Closing Date or earlier in certain circumstances if the
Pre-Funding Account falls below the minimum level specified in the Indenture or
an event of default occurs;
(7) amounts transferred to the Pre-Funding Account and the
Interest Coverage Account may be invested only in investments which are
permitted by the Rating Agencies and:
(i) are direct obligations of, or obligations fully
guaranteed as to timely payment of principal and interest by, the United States
or any agency or instrumentality thereof (provided that such obligations are
backed by the full faith and credit of the United States); or
(ii) have been rated (or the obligor has been rated) in
one of the three highest generic rating categories by either S&P, Moody's, Fitch
or D&P;
(8) the Prospectus or Prospectus Supplement describes:
(i) the Pre-Funding Account and Interest Coverage Account;
(ii) the duration of the Funding Period;
(iii) the percentage and/or dollar amount of the
Pre-Funding Limit for the Pre-Funding Period that will be remitted to owners of
Bonds as repayments of principal; and
(iv) that the amounts remaining in the Pre-Funding Account
at the end of the Pre-Funding Period will be remitted to Owners of Offered
Certificates as repayments of principal; and
(9) the Indenture describes the permitted investments for the
Pre-Funding Account and Interest Coverage Account and, if not disclosed in the
Prospectus or Prospectus Supplement, the terms and conditions for the
eligibility of Subsequent Mortgage Loans.
Prospective Plan investors in the Bonds should consult with
their legal advisors concerning the impact of ERISA and the Code, the
applicability of the Exemption (as amended by PTE 97-34), and all of the
potential consequences in their specific circumstances prior to making an
investment in the Bonds. Each Plan fiduciary should determine whether under the
general fiduciary standards of investment prudence and diversification an
investment in the Bonds is appropriate for the Plan, taking into account the
overall investment policy of the Plan and the composition of the Plan's
investment portfolio. In particular, purchasers that are insurance companies
should consult with their counsel with respect to the United States Supreme
Court case interpreting the fiduciary responsibility rules of ERISA, John
Hancock Mutual Life Insurance Co. v. Harris Trust and Savings Bank, 510 U.S. 86
(1993). In John Hancock, the Supreme Court ruled that assets held in an
insurance company's general account may be deemed to be "plan assets" for ERISA
purposes under certain circumstances. Purchasers should analyze whether the
decision may have an impact with respect to purchases of the Bonds.
S-114
<PAGE>
The sale of Bonds to a Plan is in no respect a representation
by the Issuer or the Underwriter that this investment meets all relevant legal
requirements with respect to investments by Plans generally or by any particular
Plan or that this investment is appropriate for Plans generally or any
particular Plan.
EXPERTS
The consolidated balance sheets of Financial Security
Assurance Inc. 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 in this Prospectus Supplement, have been
incorporated herein in reliance on the report of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of that firm as experts in
accounting and auditing.
S-115
<PAGE>
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX
DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered
NovaStar Home Equity Loan Asset-Backed Bonds, Series 1999-1 (the "Global
Bonds"), will be available only in book-entry form. Investors in the Global
Bonds may hold such Global Bonds through any of The Depository Trust Company
("DTC"), CEDEL or Euroclear. The Global Bonds will be tradable as home market
instruments in both the European and U.S. domestic markets. Initial settlement
and all secondary trades will settle in same-day funds.
Secondary market trading between investors Global Bonds
through CEDEL and Euroclear will be conducted in the ordinary way in accordance
with their normal rules and operating procedures and in accordance with
conventional Eurobond practice (i.e., seven calendar day settlement).
Secondary market trading between investors holding Global
Bonds through DTC will be conducted according to the rules and procedures
applicable to U.S. corporate debt obligations and prior collateralized mortgage
bond issues.
Secondary cross-market trading between CEDEL or Euroclear and
DTC Participants holding Global Bonds will be effected on a
delivery-against-payment basis through the respective Depositories of CEDEL and
Euroclear (in such capacity) and as DTC Participants.
Non-U.S. holders (as described below) of Global Bonds will be
subject to U.S. withholding taxes unless such holders meet certain requirements
and deliver appropriate U.S. tax documents to the securities clearing
organizations or their participants.
INITIAL SETTLEMENT
All Global Bonds will be held in book-entry form by DTC in the
name of Cede & Co. as nominee of DTC. Investors' interests in the Global Bonds
will be represented through financial institutions acting on their behalf as
direct and indirect participants in DTC (each, a "DTC Participant"). As a
result, CEDEL and Euroclear will hold positions on behalf of their participants
through their respective Depositaries, which in turn will hold such positions in
accounts as DTC Participants.
Investors electing to hold their Global Bonds through DTC will
follow the settlement practices applicable to other collateralized mortgage bond
issues. Investor securities custody accounts will be credited with their
holdings against payment in same-day funds on the settlement date.
Investors electing to hold their Global Bonds through CEDEL or
Euroclear accounts will follow the settlement procedures applicable to
conventional Eurobonds, except that there will be no temporary global security
and no "lock-up" or restricted period. Global Bonds will be credited to the
securities custody accounts on the settlement date against payment in same-day
funds.
S-116
<PAGE>
SECONDARY MARKET TRADING
Since the purchaser determines the place of delivery, it is
important to establish at the time of the trade where both the purchaser's and
seller's accounts are located to ensure that settlement can be made on the
desired value date.
Trading Between DTC Participants. Secondary market trading
between DTC Participants will be settled using the procedures applicable to
prior collateralized mortgage bond issues in same-day funds.
Trading Between CEDEL and/or Euroclear Participants. Secondary
market trading between CEDEL Participants or Euroclear Participants will be
settled using the procedures applicable to conventional Eurobonds in same-day
funds.
Trading Between DTC Seller and CEDEL or Euroclear Purchaser.
When Global Bonds are to be transferred from the account of a DTC Participant to
the account of a CEDEL Participant or a Euroclear Participant, the purchaser
will send instructions to CEDEL or Euroclear through a CEDEL Participant or
Euroclear Participant at least one business day prior to settlement. CEDEL or
Euroclear will instruct the respective Depositary, as the case may be, to
receive the Global Bonds against payment. Payment will include interest accrued
on the Global Bonds from and including the last coupon payment date to and
excluding the settlement date, on the basis of the actual number of days in such
accrual period and a year is assumed to consist of 360 days. For transactions
settling on the 31st of the month, payment will include interest accrued to and
excluding the first day of the following month. Payment will then be made by the
respective Depositary of the DTC Participant's account against delivery of the
Global Bonds. After settlement has been completed, the Global Bonds will be
credited to the respective clearing system and by the clearing system, in
accordance with its usual procedures, to the CEDEL Participant's or Euroclear
Participant's account. The securities credit will appear the next day (European
time) and the cash debt will be back-valued to, and the interest on the Global
Bonds will accrue from, the value date (which would be the preceding day when
settlement occurred in New York). If settlement is not completed on the intended
value date (i.e., the trade fails), the CEDEL or Euroclear cash debt will be
valued instead as of the actual settlement date.
CEDEL Participants and Euroclear Participants will need to
make available to the respective clearing systems the funds necessary to process
same-day funds settlement. The most direct means of doing so is to preposition
funds for settlement, either from cash on hand or existing lines of credit, as
they would for any settlement occurring within CEDEL or Euroclear. Under this
approach, they may take on credit exposure to CEDEL or Euroclear until the
Global Bonds are credited to their accounts one day later.
As an alternative, if CEDEL or Euroclear has extended a line
of credit to them, CEDEL Participants or Euroclear Participants can elect not to
preposition funds and allow that credit line to be drawn upon the finance
settlement. Under this procedure, CEDEL Participants or Euroclear Participants
purchasing Global Bonds would incur overdraft charges for one day, assuming they
cleared the overdraft when the Global Bonds were credited to their accounts.
However, interest on the Global Bonds would accrue from the value date.
Therefore, in many cases the investment income on the Global Bonds earned during
that one-day period may substantially reduce or offset the amount of such
overdraft charges,
S-117
<PAGE>
although this result will depend on each CEDEL Participant's or Euroclear
Participant's particular cost of funds. Since the settlement is taking place
during New York business hours, DTC Participants can employ their usual
procedures for sending Global Bonds to the respective European Depository for
the benefit of CEDEL Participants or Euroclear Participants. The sale proceeds
will be available to the DTC seller on the settlement date. Thus, to the DTC
Participants a cross-market transaction will settle no differently than a trade
between two DTC Participants.
Trading between CEDEL or Euroclear Seller and DTC Purchaser.
Due to time zone differences in their favor, CEDEL Participants and Euroclear
Participants may employ their customary procedures for transactions in which
Global Bonds are to be transferred by the respective clearing system, through
the respective Depositary, to a DTC Participant. The seller will send
instructions to CEDEL or Euroclear through a CEDEL Participant or Euroclear
Participant at least one business day prior to settlement. In these cases CEDEL
or Euroclear will instruct the respective Depositary, as appropriate, to deliver
the Global Bonds to the DTC Participant's account against payment. Payment will
include interest accrued on the Global Bonds from and including the last coupon
payment to and excluding the settlement date on the basis of the actual number
of days in such accrual period and a year is assumed to consist of 360 days. For
transactions settling on the 31st of the month, payment will include interest
accrued to and excluding the first day of the following month. The payment will
then be reflected in the account of the CEDEL Participant or Euroclear
Participant the following day, and receipt of the cash proceeds in the CEDEL
Participant's or Euroclear Participant's account would be back-valued to the
value date (which would be the preceding day, when settlement occurred in New
York). Should the CEDEL Participant or Euroclear Participant have a line of
credit with its respective clearing system and elect to be in debt in
anticipation of receipt of the sale proceeds in its account, the back-valuation
will extinguish any overdraft incurred over that one-day period. If settlement
is not completed on the intended value date (i.e., the trade fails), receipt of
the cash proceeds in the CEDEL Participant's or Euroclear Participant's account
would instead be valued as of the actual settlement date.
Finally, day traders that use CEDEL or Euroclear and that
purchase Global Bonds from DTC Participants for delivery to CEDEL Participants
or Euroclear Participants should note that these trades would automatically fail
on the sale side unless affirmative action were taken. At least three techniques
should be readily available to eliminate this potential problem:
(a) borrowing through CEDEL or Euroclear for one day (until
the purchase side of the day trade is reflected in their CEDEL or Euroclear
accounts) in accordance with the clearing system's customary procedures;
(b) borrowing the Global Bonds in the U.S. from a DTC
Participant no later than one day prior to settlement, which would give the
Global Bonds sufficient time to be reflected in their CEDEL or Euroclear account
in order to settle the sale side of the trade; or
(c) staggering the value dates for the buy and sell sides of
the trade so that the value date for the purchase from the DTC Participant is at
least one day prior to the value date for the sale to the CEDEL Participant or
Euroclear Participant.
S-118
<PAGE>
CERTAIN U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A beneficial owner of the Global Bonds holding securities
through CEDEL or Euroclear (or through DTC if the holder has an address outside
the U.S.) will be subject to the 30% U.S. withholding tax that generally applies
to payments of interest (including original issue discount) on registered debt
issued by U.S. Persons, unless (i) each clearing system, bank or other financial
institution that holds customers' securities in the ordinary course of its trade
or business in the chain of intermediaries between such beneficial owner and the
U.S. entity required to withhold tax complies with applicable certification
requirements, and (ii) such beneficial owner takes one of the following steps to
obtain an exemption or reduced tax rate:
Exemption For Non-U.S. Persons (Form W-8). Beneficial owners
of the Global Bonds that are non-U.S. Persons can obtain a complete exemption
from the withholding tax by filing a signed Form W-8 (Certificate of Foreign
Status). If the information shown on Form W-8 changes, a new Form W-8 must be
filed within 30 days of such change.
Exemption For Non-U.S. Persons with Effectively Connected
Income (Form 4224). A non-U.S. Person, including a non-U.S. corporation or bank
with a U.S. branch, for which the interest income is effectively connected with
its conduct of a trade or business in the United States, can obtain an exemption
from the withholding tax by filing Form 4224 (Exemption from Withholding of Tax
on Income Effectively Connected with the Conduct of a Trade or Business in the
United States).
Exemption or Reduced Rate For Non-U.S. Persons Resident in
Treaty Countries (Form 1001). Non-U.S. Persons that are Bond Owners residing in
a country that has a tax treaty with the United States can obtain an exemption
or reduced tax rate (depending on the treaty terms) by filing Form 1001
(Ownership, Exemption or Reduced Rate Certificate). If the treaty provides only
for a reduced rate, withholding tax will be imposed at that rate unless the
filer alternatively files Form W-8. Form 1001 may be filed by the Bond Owner or
his agent.
Exemption For U.S. Persons (Form W-9). U.S. Persons can obtain
a complete exemption from the withholding tax by filing Form W-9 (Payer's
Request for Taxpayer Identification Number and Certification).
U.S. Federal Income Tax Reporting Procedure. The Bond Owner of
a Bond or, in the case of a Form 1001 or a Form 4224 filer, his agent, files by
submitting the appropriate form to the person through whom it holds (the
clearing agency, in the case of persons holding directly on the books of the
clearing agency). Form W-8 and Form 1001 are effective for three calendar years
and Form 4224 is effective for one calendar year.
The term "U.S. Person" means a citizen or resident of the
United States, a corporation, partnership or other entity created or organized
in or under the laws of the United States or any political subdivision thereof,
or an estate whose income is subject to U.S. federal income tax regardless of
its source of income, or a trust if a court within the United States is able to
exercise primary supervision of the administration of the trust and one or more
United States fiduciaries have the authority to control all substantial
decisions of the trust. This summary does not deal with all aspects of U.S.
federal income tax withholding that may be relevant to foreign holders of the
Global Bonds. Investors are advised to consult their own tax advisors for
specific tax advice concerning their holding and disposing of the Global Bonds.
S-119
<PAGE>
<TABLE>
<CAPTION>
INDEX OF PRINCIPAL TERMS
Page
----
<S> <C> <C>
Adjustable Rate Mortgage Loans...................................................................................16
Administrative Fee...............................................................................................80
Advances.........................................................................................................88
Available Funds..................................................................................................78
Back-up Servicer................................................................................................103
Back-up Servicing Fee...........................................................................................103
Balloon Loans....................................................................................................19
Beneficial Owner.................................................................................................71
Bond Administrator................................................................................................1
Bond Administrator Fee...........................................................................................80
Bond Insurance Policy.............................................................................................5
Bond Insurance Premium...........................................................................................80
Bond Insurer..................................................................................................1, 67
Bond Insurer Default............................................................................................105
Bond Interest Rate...............................................................................................79
Bond Owners......................................................................................................71
Bond Principal Balance...........................................................................................80
Bonds.........................................................................................................1, 70
Book-Entry Bonds.................................................................................................71
Business Day.....................................................................................................77
Carry-Forward Amount.............................................................................................79
CEDEL Participants...............................................................................................73
Class A Certificates..............................................................................................9
Class A-1 Bonds..................................................................................................70
Class A-2 Bonds..................................................................................................70
Class A-3 Bonds..................................................................................................70
Class A-4 Bonds..................................................................................................70
Code..........................................................................................................9, 89
Combined Loan-to-Value Ratio.....................................................................................61
Compensating Interest...........................................................................................103
Converted Loan Purchaser..........................................................................................1
Converted Mortgage Loan.........................................................................................105
Convertible Mortgage Loans......................................................................................104
Cooperative......................................................................................................74
Coverage Percentage..............................................................................................64
CPR..............................................................................................................93
Cut-Off Date.....................................................................................................16
Defective Mortgage Loan..........................................................................................77
Definitive Bond..................................................................................................71
Depositor.....................................................................................................1, 66
DOL.............................................................................................................111
DTC.........................................................................................................71, 116
DTC Participant.................................................................................................116
Due Date.........................................................................................................78
Due Period.......................................................................................................83
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
ERISA...........................................................................................................111
Euroclear Operator...............................................................................................74
Euroclear Participants...........................................................................................73
European Depositaries............................................................................................71
Event of Default................................................................................................106
Excess Subordination Amount......................................................................................84
Exemption.......................................................................................................111
FHLMC............................................................................................................11
Final Scheduled Payment Date......................................................................................2
Financial Intermediary...........................................................................................72
Financial Security...............................................................................................67
Fixed Rate Mortgage Loans........................................................................................16
FNMA.............................................................................................................11
Foreclosure Rate................................................................................................102
Funding Period...................................................................................................59
Global Bonds....................................................................................................116
Group............................................................................................................16
Group I..........................................................................................................17
Group II.........................................................................................................17
Group III........................................................................................................17
Group IV.........................................................................................................17
Holding..........................................................................................................65
Holdings.........................................................................................................68
Indenture........................................................................................................71
Indenture Trustee.................................................................................................1
Indices..........................................................................................................92
Indirect Participants............................................................................................72
Initial Mortgage Loans...........................................................................................16
Initial Period...................................................................................................18
Initial Periodic Rate Cap........................................................................................18
Insurance Agreement..............................................................................................82
Insured Payment..................................................................................................85
Interest Coverage Account........................................................................................89
Interest Determination Date......................................................................................80
Interest Payment Amount..........................................................................................78
Interest Period..................................................................................................79
Issuer........................................................................................................1, 65
Liquidated Mortgage Loan.........................................................................................84
Loss Amount......................................................................................................64
Maximum Mortgage Rates...........................................................................................18
MI Insurance Proceeds............................................................................................78
MI Insurer.......................................................................................................64
MI Policy........................................................................................................17
MI Premiums......................................................................................................64
Minimum Mortgage Rates...........................................................................................18
Moody's.........................................................................................................110
Morgan...........................................................................................................73
Mortgage Files...................................................................................................76
Mortgage Loans...................................................................................................16
Mortgaged Property...............................................................................................25
Net Monthly Excess Cashflow......................................................................................83
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
One-Month LIBOR..................................................................................................80
One-Year CMT.....................................................................................................18
Original Pre-Funded Amount.......................................................................................59
Owner Trustee.....................................................................................................1
Owner Trustee Fee................................................................................................80
Participants.....................................................................................................72
Paying Agent.....................................................................................................89
Payment Account..................................................................................................71
Payment Date..................................................................................................2, 77
Periodic Rate Cap................................................................................................18
Plan............................................................................................................111
Preference Amount................................................................................................86
Pre-Funded Amount................................................................................................59
Pre-Funding Account..............................................................................................59
Pre-Funding Limit...............................................................................................113
Prepayment Assumption............................................................................................93
Prepayment Interest Shortfall...................................................................................103
Prepayment Period................................................................................................84
Principal Balance................................................................................................80
Principal Payment Amount.........................................................................................81
PTE 97-34.......................................................................................................113
Purchase Agreement...............................................................................................17
Purchase Price...................................................................................................77
Qualified Replacement Mortgage Loan..............................................................................76
Rate Step Up Date................................................................................................79
Realized Loss....................................................................................................84
Receipt..........................................................................................................87
Received.........................................................................................................87
Record Date......................................................................................................77
Reimbursement Amount.............................................................................................82
Relief Act Shortfalls............................................................................................86
REMIC.............................................................................................................1
REMICs............................................................................................................9
Required Subordination Amount....................................................................................83
Residual Certificates............................................................................................71
Rules............................................................................................................72
S&P.............................................................................................................110
Seller................................................................................................1, 17, 65, 75
Servicer.................................................................................................1, 17, 101
Servicer Remittance Date.........................................................................................77
Servicing Agreement.............................................................................................101
Servicing Fee...............................................................................................80, 102
Six-Month LIBOR..................................................................................................18
SMMEA...........................................................................................................110
Stated Rate......................................................................................................79
Subordinated Bonds...............................................................................................71
Subordination Amount.............................................................................................83
Subordination Deficit............................................................................................85
Subordination Increase Amount....................................................................................83
Subordination Reduction Amount...................................................................................84
Subsequent Cut-off Date..........................................................................................59
</TABLE>
iii
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Subsequent Mortgage Loans........................................................................................16
Subsequent Transfer Dates........................................................................................59
Subsequent Transfer Instruments..................................................................................59
Target Subordination Amount......................................................................................83
Telerate Page 3750...............................................................................................81
Terms and Conditions.............................................................................................74
Transferor....................................................................................................1, 66
Trust.............................................................................................................1
Trust Agreement..................................................................................................65
Trust Estate.....................................................................................................71
U.S. Person.....................................................................................................119
Underwriter.....................................................................................................109
Underwriting Agreement..........................................................................................109
</TABLE>
iv
<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
8
<PAGE>
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
9
<PAGE>
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
10
<PAGE>
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
11
<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
12
<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
13
<PAGE>
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
14
<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
15
<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.
16
<PAGE>
RISK FACTORS
For a discussion of all material risk factors that could make the offering
of the Securities speculative or one of high risk, Investors should consider 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.
17
<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.
18
<PAGE>
As a Result of Optional Redemption or Repurchase or Auction Sale, Holders Could
Be Fully Paid Significantly Earlier than Would Otherwise Be the Case.
One or more Classes of Securities of any Series may be subject to optional
redemption or repurchase, in whole or in part, on or after 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
19
<PAGE>
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.
20
<PAGE>
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)
21
<PAGE>
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.
22
<PAGE>
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.
23
<PAGE>
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.
24
<PAGE>
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.
25
<PAGE>
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.
26
<PAGE>
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
27
<PAGE>
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
28
<PAGE>
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
29
<PAGE>
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
30
<PAGE>
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;
31
<PAGE>
(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
32
<PAGE>
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
33
<PAGE>
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.
34
<PAGE>
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.
35
<PAGE>
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
36
<PAGE>
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.
37
<PAGE>
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
38
<PAGE>
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,
39
<PAGE>
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)
40
<PAGE>
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
41
<PAGE>
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
42
<PAGE>
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;
43
<PAGE>
(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
44
<PAGE>
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
45
<PAGE>
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.
46
<PAGE>
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.
47
<PAGE>
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.
48
<PAGE>
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
49
<PAGE>
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.
50
<PAGE>
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
51
<PAGE>
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,
52
<PAGE>
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.
53
<PAGE>
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.
54
<PAGE>
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
55
<PAGE>
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.
56
<PAGE>
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
57
<PAGE>
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.
58
<PAGE>
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
59
<PAGE>
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.
60
<PAGE>
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
61
<PAGE>
(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
62
<PAGE>
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.
63
<PAGE>
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
64
<PAGE>
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
65
<PAGE>
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
66
<PAGE>
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
67
<PAGE>
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.
68
<PAGE>
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,
69
<PAGE>
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
70
<PAGE>
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
71
<PAGE>
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
72
<PAGE>
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.
73
<PAGE>
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
74
<PAGE>
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
75
<PAGE>
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
76
<PAGE>
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
77
<PAGE>
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
78
<PAGE>
(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
79
<PAGE>
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.
80
<PAGE>
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.
81
<PAGE>
"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.
82
<PAGE>
"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.
83
<PAGE>
"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.
84
<PAGE>
"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.
85
<PAGE>
"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.
86
<PAGE>
"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.
87
<PAGE>
TABLE OF CONTENTS
-----------------
Page
----
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
i
<PAGE>
INDEX OF PRINCIPAL TERMS
Unless the context indicates otherwise, the following terms shall have the
meanings set forth on the page indicated below:
Actuarial Mortgage Loan.....................................................27
Agreement....................................................................5
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
i
<PAGE>
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
ii
<PAGE>
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
iii
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT OR THAT WE
HAVE REFERRED YOU TO. WE HAVE NOT AUTHORIZED ANY PERSON TO PROVIDE YOU WITH
INFORMATION THAT IS DIFFERENT. THE INFORMATION IN THIS DOCUMENT SPEAKS ONLY AS
OF ITS DATE, AND MAY NOT BE ACCURATE AT ANY TIME AFTER ITS DATE. THIS DOCUMENT
IS NOT AN OFFER TO SELL THESE SECURITIES, AND IT IS NOT SOLICITING AN OFFER TO
BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
--------------------------------
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
<TABLE>
<S> <C>
Summary ............................................. S-1
Risk Factors ........................................ S-11
Use Of Proceeds ..................................... S-16
Description Of The Mortgage Pool .................... S-16
The Seller .......................................... S-65
The Issuer .......................................... S-65
The Converted Loan Purchaser ........................ S-66
NFI ................................................. S-66
The Transferor ...................................... S-66
The Depositor ....................................... S-66
The Owner Trustee ................................... S-67
The Indenture Trustee ............................... S-67
The Bond Administrator .............................. S-67
The Bond Insurer .................................... S-67
Description Of The Bonds ............................ S-70
Certain Yield And Prepayment Considerations ......... S-90
Description of the Servicing Agreement .............. S-101
The Indenture ....................................... S-105
Federal Income Tax Consequences ..................... S-108
Method of Distribution .............................. S-109
Certain Legal Matters ............................... S-110
Ratings ............................................. S-110
Legal Investment .................................... S-110
ERISA Considerations ................................ S-111
Experts ............................................. S-115
Annex I ............................................. S-116
Index Of Principal Terms ............................ i
PROSPECTUS
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 Home
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
</TABLE>
UNTIL 90 DAYS AFTER THE DATE OF THIS PROSPECTUS SUPPLEMENT, ALL DEALERS THAT
EFFECT TRANSACTIONS IN THESE SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS
OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS SUPPLEMENT AND THE PROSPECTUS
TO WHICH IT RELATES. THIS IS IN ADDITION TO THE DEALERS' OBLIGATION TO DELIVER
A PROSPECTUS SUPPLEMENT AND THE RELATED PROSPECTUS WHEN ACTING AS UNDERWRITERS
AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS
$160,000,000
NOVASTAR MORTGAGE
FUNDING TRUST,
SERIES 1999-1
ISSUER
NOVASTAR HOME EQUITY LOAN
ASSET-BACKED BONDS, SERIES 1999-1
$75,000,000 CLASS A-1 BONDS
$20,000,000 CLASS A-2 BONDS
$45,000,000 CLASS A-3 BONDS
$20,000,000 CLASS A-4 BONDS
NOVASTAR MORTGAGE, INC.
SELLER AND SERVICER
RESIDENTIAL ASSET FUNDING
CORPORATION
DEPOSITOR
PROSPECTUS SUPPLEMENT
FIRST UNION CAPITAL
MARKETS
JANUARY 22, 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
