PROSPECTUS SUPPLEMENT
(To prospectus dated September 9, 1999)
- ------------------
HOME LOAN TRUST 2000-1
ISSUER
HOME LOAN AND INVESTMENT BANK, F.S.B. $55,274,000
ORIGINATOR AND MASTER SERVICER
RESIDENTIAL ASSET FUNDING CORPORATION MORTGAGE PASS-THROUGH CERTIFICATES,
DEPOSITOR SERIES 2000-1
- ------------------
CONSIDER CAREFULLY THE RISK FACTORS STARTING ON PAGE S-4 OF THIS PROSPECTUS
SUPPLEMENT AND PAGE 3 OF THE PROSPECTUS BEFORE MAKING A DECISION TO INVEST IN
THE CLASS A CERTIFICATES.
THE CLASS A CERTIFICATES AND THE CLASS R CERTIFICATES WILL EVIDENCE IN THE
AGGREGATE THE ENTIRE BENEFICIAL OWNERSHIP INTEREST IN A TRUST FUND CONSISTING
PRIMARILY OF A POOL OF RESIDENTIAL MORTGAGE LOANS. THE CLASS A CERTIFICATES
ARE NOT INTERESTS IN OR OBLIGATIONS OF ANY OTHER PERSON.
NO GOVERNMENTAL AGENCY OR INSTRUMENTALITY HAS INSURED OR GUARANTEED THE
CERTIFICATES OR THE UNDERLYING MORTGAGE LOANS.
The certificates will consist of two classes of senior
certificates, the class A-1 certificates and the class A-2
certificates, and one class of subordinated class R
certificates. Only the class A certificates are being offered
hereby.
Interest and principal on each class of certificates is
scheduled to be paid monthly on the 15th day of the month or,
if such day is not a business day, the next succeeding
business day. The first scheduled payment date is April 17,
2000.
The property of the trust consists of two separate groups of
residential mortgage loans. One group consists entirely of
fixed rate loans and the other group consists entirely of
adjustable rate loans.
Excess interest from either group of mortgage loans may be
utilized to cover credit losses and certain interest
shortfalls on the classes of certificates relating to such
group of mortgage loans. To the extent such excess cashflow
for a group is not needed to make required payments on the
related class of certificates, it may be used to make payments
on the other class of certificates.
The certificateholders will also have the benefit of a spread
account. Funds on deposit in the spread account will be
available to make required payments on the class A
certificates.
Home Loan Bank will cause Financial Security Assurance Inc. to
issue a certificate guaranty insurance policy for the benefit
of the class A holders pursuant to which it will guarantee
payments to the class A holders as described herein.
[FSA LOGO APPEARS HERE]
Combined proceeds from the sale of the class A-1 and class A-2 certificates are
expected to be $55,273,914.72, excluding accrued interest on the class A-1
certificates, underwriting fees of approximately $260,000 and other fees and
expenses estimated to be approximately $210,000.
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.
FIRST UNION SECURITIES, INC.
The date of this prospectus supplement is March 10, 2000
<PAGE>
IMPORTANT NOTICE ABOUT THE INFORMATION PRESENTED IN THIS PROSPECTUS SUPPLEMENT
AND THE ACCOMPANYING PROSPECTUS
We provide information to you about these securities in two
separate documents that progressively provide more detail: (1) the accompanying
prospectus, which provides general information, some of which may not apply to
this series of securities; and (2) this prospectus supplement, which describes
the specific terms of this series of securities.
This prospectus supplement does not contain complete
information about the offering of these securities. We suggest that you read
both this prospectus supplement and the prospectus in full. We cannot sell these
securities to you unless you have received both this prospectus supplement and
the prospectus.
TABLE OF CONTENTS
Summary...................................................S-1
Risk Factors..............................................S-4
The Mortgage Pool.........................................S-6
Fixed Rate Group.......................................S-7
ARM Group..............................................S-15
Prepayment and Yield Considerations.......................S-24
Payment Delay..........................................S-30
Home Loan and Investment Bank, F.S.B......................S-30
Loan Origination History...............................S-31
Underwriting Criteria..................................S-31
Quality Control Procedures Highlights..................S-33
Collection Procedures..................................S-33
Delinquency and Loss Experience........................S-35
Description of the Certificates...........................S-36
Spread Account.........................................S-36
Simple Interest Excess Sub-Account.....................S-37
Pass-Through Rates.....................................S-37
Calculation of One-Month LIBOR.........................S-38
Flow of Funds..........................................S-39
Certain Defined Terms Used in "Flow of Funds"..........S-39
Insured Payments.......................................S-40
Remittance Reports.....................................S-40
Book-Entry Registration................................S-41
Definitive Certificates................................S-44
The Agreements............................................S-45
Assignment of Mortgage Loans...........................S-45
Representations and Warranties of Home Loan Bank.......S-47
Payments on the Mortgage Loans;
Distributions on the Certificates....................S-48
Servicing..............................................S-50
Servicing and Other Compensation and51
Payment of Expenses..................................S-51
Hazard Insurance.......................................S-51
Enforcement of Due-on-Sale Clauses.....................S-52
Realization upon Defaulted Mortgage Loans..............S-53
Servicer Reports.......................................S-53
Removal and Resignation of the Master Servicer.........S-53
Optional Redemption....................................S-55
Optional Purchase of Defaulted Mortgage Loans..........S-55
Termination............................................S-55
Amendment..............................................S-56
The Trustee...............................................S-56
The Certificate Insurer and the Certificate
Insurance Policy.......................................S-57
The Certificate Insurer................................S-57
The Certificate Insurance Policy.......................S-59
Incorporation of Certain Documents by Reference...........S-62
Material Federal Income Tax Considerations................S-62
ERISA Considerations......................................S-63
Legal Investment..........................................S-63
Plan of Distribution......................................S-64
Ratings...................................................S-64
Experts...................................................S-64
Legal Matters.............................................S-65
Annex I...................................................I-1
Certain U.S. Federal Income Tax
Documentation Requirements...........................I-3
<PAGE>
SUMMARY
This summary highlights selected information from this prospectus supplement and
does not contain all of the information that you need to consider in making your
investment decision. To understand all of the terms of the offering of the class
A certificates, carefully read this entire prospectus supplement and the
accompanying prospectus.
This summary provides an overview of structural provisions, calculations, cash
flows and other information to aid your understanding and is qualified by the
full description of the structural provisions, calculations, cash flows and
other information in this prospectus supplement and the accompanying prospectus.
ISSUER
Home Loan Trust 2000-1.
TITLE OF SECURITIES
Home Loan Trust, Mortgage Pass-Through Certificates, Series 2000-1.
DEPOSITOR
Residential Asset Funding Corporation.
ORIGINATOR AND MASTER SERVICER
Home Loan and Investment Bank, F.S.B.
SUB-SERVICER
Home Loan Investment Corporation.
TRUSTEE
Bankers Trust Company of California, N.A., a national banking association with
its principal place of business in California.
CERTIFICATE INSURER
Financial Security Assurance Inc. will issue a financial guaranty insurance
policy, guaranteeing payment of minimum required monthly amounts due to the
holders of the class A certificates.
CLASS A CERTIFICATES OFFERED
The certificates will consist of two classes of senior certificates, to be
issued in the following classes with the original certificate balances and
pass-through rates as set forth below:
Original
Certificate Pass-Through
Class Balance Rate
----- ------- ----
A-1 $40,610,000 7.949%
A-2 $14,664,000 LIBOR + 0.30%
The pass-through rates will increase by 0.50% on the class A-1 certificates and
0.30% on the class A-2 certificates if the purchase option described in
"Optional Termination" in this summary is not exercised.
The rate of interest on the class A-2 certificates is also subject to an
available funds cap rate. If the rate of interest described above for the class
A-2 certificates 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,
then the pass-through rate will be accordingly reduced.
If, on any payment date, the available funds cap rate limits the interest rate
on the class A-2 certificates, then the amount of the resulting interest
shortfall will be paid from excess interest to the extent available, and
otherwise will be carried forward and be due and payable on the following
payment date and shall accrue interest at the applicable pass-through rate
(without giving effect to the available funds cap rate) until paid. The
certificate insurance policy does not guarantee payment of this interest
shortfall.
The amount of interest payable on the class A certificates is subject to
reduction to the extent the
S-1
<PAGE>
trust realizes any interest shortfalls caused by prepayments and application of
the Civil Relief Act, as further described herein.
The class A certificates initially will be issued in book-entry form, through
DTC, Clearstream Banking, societe anonyme or Euroclear.
CUT-OFF DATE
February 29, 2000 (close of business).
CLOSING DATE
On or about March 14, 2000.
PAYMENT DATE
Distributions on the certificates will be made on the 15th day of each month
(or, if the 15th day is not a business day, on the next succeeding business
day). The first payment date will be April 17, 2000.
RECORD DATE
The record date for the class A-1 certificates is the last day of the calendar
month preceding a payment date. The record date for the class A-2 certificates
is the last business day prior to a payment date. For all classes of
certificates, the record date for the first payment date shall be the closing
date.
THE MORTGAGE POOL
The mortgage loans owned by the trust will consist of a pool of residential
mortgage loans and will be segregated into two groups. One group will consist of
fixed-rate mortgage loans and the other group will consist of adjustable rate
mortgage loans. See "The Mortgage Pool" for statistical information about the
mortgage loans.
PRINCIPAL
Holders of the class A certificates will be entitled to receive on each payment
date distributions in respect of principal in the amounts described herein.
INTEREST
Holders of the class A certificates will be entitled to receive on each payment
date distributions in respect of interest in the amounts described herein. On
each payment date, holders of the class A-1 certificates will be entitled to 30
days' interest (calculated on the basis of a 360-day year consisting of twelve
30-day months) and the holders of the class A-2 certificates will be entitled to
interest accrued during the period from the preceding payment date to but not
including such payment date (calculated on the basis of a 360-day year on the
actual number of days in the accrual period).
SPREAD ACCOUNT
The trustee shall deposit on each payment date any funds in excess of the trust
expenses and required distributions to the class A certificateholders into a
spread account established with the trustee, up to a required amount.
Amounts, if any, on deposit in the spread account will be available to fund
certain shortfalls to the class A certificateholders on any payment date, to be
applied pro rata between the class A-1 certificates and the class A-2
certificates.
OPTIONAL TERMINATION
The master servicer may, at its option, terminate the trust and cause the class
A certificates to be paid in full on any date on which the aggregate principal
balance of the mortgage loans is less than 5% of the aggregate principal balance
of the mortgage loans as of the cut-off date by purchasing from the trust fund,
on the next succeeding payment date, all of the mortgage loans and REO
properties.
FEDERAL INCOME TAX STATUS
An election will be made to treat the trust fund (other than the spread account)
as a REMIC for federal income tax purposes. The class A certificates will be
designated as the REGULAR INTERESTS in the REMIC and will be treated as debt
instruments for federal income tax purposes.
S-2
<PAGE>
ERISA CONSIDERATIONS
Subject to the important conditions and considerations described in this
prospectus supplement and in the accompanying prospectus, the class A
certificates may be purchased by pension, profit-sharing and other employee
benefit plans, as well as individual retirement arrangements.
LEGAL INVESTMENT
The class A certificates will not constitute MORTGAGE RELATED SECURITIES for
purposes of the Secondary Mortgage Market Enhancement Act of 1984. Some
potential investors may be limited in their legal investment authority only to
first-lien mortgages or MORTGAGE RELATED SECURITIES and will not be able to
invest in the class A certificates.
RATINGS
The class A certificates will be rated AAA by Standard & Poor's, a division of
The McGraw-Hill Companies and Aaa by Moody's Investors Service, Inc. 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.
S-3
<PAGE>
RISK FACTORS
The class A certificates are not suitable investments for all
investors. In particular, you should not purchase the class A certificates
unless you understand the prepayment, credit liquidity and market risks
associated with the class A certificates.
The class A certificates are complex securities. You should possess,
either alone or together with an investment advisor, the expertise necessary to
evaluate the information contained in this prospectus supplement and the
accompanying prospectus in the context of your financial situation and tolerance
for risk.
You should carefully consider the following risk factors prior to any
decision to invest in the class A certificates. The following discussion
supplements, and does not replace or supersede, the discussion under "Risk
Factors" in the prospectus.
JUNIOR LIENS MAY NOT PROVIDE ADEQUATE SECURITY TO AVOID LOSSES
Approximately 28.08% of the mortgage loans in the fixed rate group and
approximately 22.37% of the mortgage loans in the ARM group (measured as a
percentage of the original aggregate principal balance) are secured by second
liens and the related first liens are not included in the mortgage pool.
The primary risk to holders of mortgage loans secured by junior liens
is the possibility that adequate funds will not be received in connection with a
foreclosure of the senior liens to satisfy fully both the senior liens and the
mortgage loan. In the event of foreclosure on a mortgaged property, the proceeds
of the foreclosure sale will be applied first to the payment of court costs and
fees in connection with the foreclosure, to real estate taxes, and in
satisfaction of all principal, interest, prepayment or acceleration penalties,
if any, and any other sums due and owing to the holders of the senior liens. The
claims of the holders of the senior liens will be satisfied in full out of
proceeds of the liquidation of the related mortgaged property, if the proceeds
are sufficient, before the trust fund receives any payments in respect of the
related mortgaged property.
If the master servicer were to foreclose on any mortgage loan, it would
do so subject to any related senior liens. In order for the debt related to the
mortgage loan to be paid in full at the sale, a bidder at the foreclosure sale
of the related mortgaged property would have to bid an amount sufficient to pay
off all sums due under both the mortgage loan and the senior liens or purchase
the mortgaged property subject to the senior liens.
RECHARACTERIZATION OF THE SALE OF THE MORTGAGE LOANS BY HOME LOAN BANK COULD
CAUSE LOSSES TO THE HOLDERS.
Home Loan Bank believes that the sale of the mortgage loans to the
depositor will constitute an absolute and unconditional sale of the mortgage
loans. However, in the event of a conservatorship or receivership of Home Loan
Bank at a time when it holds a substantial portion of the class R certificates,
the Federal Deposit Insurance Corporation (the "FDIC"), as its conservator or
receiver for purposes of a conservatorship or receivership, could attempt to
recharacterize the sale of the mortgage loans as a borrowing by Home Loan Bank
with the result that holders are deemed to be creditors of Home Loan Bank,
secured by a pledge of the mortgage loans. If an attempt were successful, the
FDIC could elect to accelerate payment of the class A certificates and liquidate
the mortgage loans with the class A holders entitled to the then-outstanding
principal amount thereof together with accrued interest. Thus, the holders of
class A certificates could lose the right to future payments of interest, and
might suffer reinvestment loss in a lower interest rate environment. The FDIC as
receiver or conservator may enforce contracts notwithstanding any provision of
the contract providing for a default upon insolvency or the appointment of a
conservator or receiver. As a result, the FDIC as receiver or conservator of
Home Loan Bank may resist the transfer of the servicing of the mortgage loans in
accordance with the provisions of the pooling and servicing agreement. In
addition, if a conservator or receiver were appointed for Home Loan Bank, the
conservator or receiver might be able to transfer the assets and liabilities
(including the servicing of the mortgage
S-4
<PAGE>
loans) to another institution without any approval, assignment or consent of the
trustee, the holders or Financial Security. In addition, if Home Loan Bank is
placed in conservatorship or receivership it may be unable to repurchase
mortgage loans as to which a breach of a representation has occurred and has not
been cured.
PAYMENTS ON THE MORTGAGE LOANS
When a principal prepayment in full is made on a mortgage loan, the
mortgagor is charged interest only up to the date of prepayment, instead of for
a full month.
In addition, all of the mortgage loans are simple interest mortgage
loans pursuant to which interest is computed and charged to the mortgagor on the
outstanding principal balance of the related mortgage note based on the number
of days elapsed between the date through which interest was last paid on the
mortgage loan through receipt of the mortgagor's most current payment, and the
portions of each monthly payment that are allocated to interest and principal
are adjusted based on the actual amount of interest charged on this basis.
Consequently, if less than a full month has elapsed between the interest paid to
date and the next payment on a mortgage loan, the amount of interest actually
paid by the mortgagor will be less than a full month's interest on the principal
balance of the mortgage loan. Conversely, if more than a full month has elapsed
between payment on a mortgage loan, the amount of interest actually paid by the
mortgagor will be greater than a full month's interest on the principal balance
of the mortgage loan. To the extent that the aggregate of these shortfalls
exceeds the aggregate of the excesses, a "net simple interest shortfall" will
result. The trustee shall establish and maintain a sub-account of the
certificate account and deposit and accumulate therein all net simple interest
excess. Funds on deposit therein will be withdrawn by the trustee on each
payment date to the extent of net simple interest shortfalls.
Any shortfall in interest collections on any mortgage loan resulting
from the application of the Civil Relief Act will result in a reduction of the
amounts distributable to the class A holders, and would not be covered by
monthly advances, the certificate insurance policy or the spread account. The
master servicer is not obligated to offset any of the servicing fee against, or
to provide any other funds to cover, any Civil Relief Act interest shortfall.
The master servicer is obligated to pay as COMPENSATING INTEREST,
without any right of reimbursement, those shortfalls in interest collections
payable on the class A certificates that are attributable to prepayment interest
shortfalls and net simple interest shortfalls, but only to the extent of the
servicing fee for the related due period. Prepayment interest shortfalls and
Civil Relief Act interest shortfalls will not be covered by payments from the
spread account or under the certificate insurance policy, although net simple
interest shortfalls will be so covered. To the extent that prepayment interest
shortfalls with respect to any payment date exceed the servicing fee for the
related due period, the amount of interest that is available for distribution to
class A holders on that payment date will be reduced.
Prepayment interest shortfalls that are not covered by application of
the servicing fee, together with Civil Relief Act interest shortfalls, with
respect to each group, will be allocated among the holders of the related class
A certificates to reduce the interest otherwise payable on such class of class A
certificates.
RATINGS ON CLASS A CERTIFICATES ARE DEPENDENT UPON THE CREDITWORTHINESS OF
FINANCIAL SECURITY ASSURANCE INC.
The ratings assigned to the class A certificates by the rating agencies
will be based on the credit characteristics of the mortgage loans and on ratings
assigned to the financial strength of the certificate insurer. Any reduction in
the ratings assigned to the certificate insurer by the rating agencies could
result in the reduction of the ratings assigned to the class A certificates.
This reduction in ratings could adversely affect the liquidity and market value
of the class A certificates.
S-5
<PAGE>
RISK OF MORTGAGE LOAN YIELD REDUCING THE INTEREST RATE ON THE CLASS A-2
CERTIFICATES
The class A-2 pass-through rate is based upon the value of an index
(LIBOR) which is different from the value of the index applicable to the related
mortgage loans (prime rate). The mortgage rate on each adjustable rate mortgage
loan adjusts annually, whereas the class A-2 pass-through rate adjusts monthly
based upon LIBOR. In addition, 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 LIBOR may rise during periods in
which the prime rate is stable or falling or that, even if both LIBOR and the
prime rate rise during the same period, LIBOR may rise much more rapidly than
the prime rate. The pass-through rate for the class A-2 certificates is limited
by an available funds cap rate. While any interest shortfalls arising from the
class A-2 pass-through rate 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.
LACK OF SECONDARY MARKET OR SMMEA ELIGIBILITY COULD AFFECT THE LIQUIDITY OF THE
CLASS A CERTIFICATES
The underwriter of the class A certificates intends to make a secondary
market in the class A certificates, but will have no obligation to do so. There
can be no assurance that a secondary market for any class of class A
certificates will develop, or if one does develop, that it will continue or
provide sufficient liquidity of investment or that it will remain for the term
of the related class of class A certificates. The class A certificates will not
constitute "mortgage related securities" for purposes of SMMEA. Accordingly,
many institutions with legal authority to invest only in SMMEA securities will
not be able to invest in the class A certificates, thereby limiting the market
for the class A certificates. In light of the foregoing, investors should
consult their own counsel as to whether they have the legal authority to invest
in non-SMMEA securities such as the class A certificates.
THE MORTGAGE POOL
The statistical information presented in this prospectus supplement is
based on the characteristics of each mortgage loan as of the cut-off date. Each
mortgage loan in the trust will be assigned to either the fixed rate group or
the adjustable rate mortgage ("ARM") group. Each of the mortgage loans in the
fixed rate group has a fixed coupon rate secured by either a first or junior
lien on the mortgaged property. Each mortgage loan contained in the ARM group
has an adjustable coupon rate secured by a first or second lien on the mortgaged
property. The class A-1 certificates represent undivided ownership interests in
all mortgage loans contained in the fixed rate group, and the class A-2
certificates represent undivided ownership interests in all mortgage loans
contained in the ARM group.
The mortgage loans will be evidenced by notes secured primarily by
first or second liens on the mortgaged properties. All of the mortgage loans
were originated or acquired by Home Loan Bank and are underwritten by Home Loan
Bank. The mortgage loans will be sold by Home Loan Bank to the depositor on or
before the date of initial issuance of the certificates. All of the mortgage
loans will be serviced by the sub-servicer on behalf of the master servicer.
All of the mortgage loans will be conventional in that they will not be
insured or guaranteed by any governmental agency or instrumentality or any other
person.
Unless otherwise set forth herein, all percentages set forth with
respect to the mortgage loans are measured by the respective aggregate principal
balances thereof as of the cut-off date.
S-6
<PAGE>
FIXED RATE GROUP
71.92% of the aggregate principal balance of mortgage loans in the
fixed rate group are secured by first liens, and 28.08% by second liens. 91.39%
of the aggregate principal balance of the mortgage loans in the fixed rate group
as of the cut-off date require monthly payments of principal that will fully
amortize the mortgage loans by their respective maturity dates, and 8.61% of the
aggregate principal balance of the mortgage loans in the fixed rate group as of
the cut-off date are "balloon" loans which are loans originated with a stated
maturity date earlier than the stated maturity date of a fully amortizing loan
with the same terms except for the maturity and the amount of the final
scheduled payment. For non-balloon loans, the stated maturity date is the last
payment date and for balloon loans the stated maturity date is the balloon
payment date.
In the following tables, the sum of the columns may not equal the
totals indicated due to rounding.
GEOGRAPHIC DISTRIBUTION
FIXED RATE GROUP
<TABLE>
<CAPTION>
Cut-Off Date % of Cut-Off
Number of Aggregate Date Aggregate
State Mortgage Loans Principal Balance Principal Balance
- ----- -------------- ----------------- -----------------
<S> <C> <C> <C>
Arizona 18 $ 781,207.69 1.92%
California 7 408,126.89 1.00
Colorado 7 356,754.47 0.88
Connecticut 24 1,488,125.52 3.66
Delaware 1 55,000.00 0.14
Florida 7 345,385.76 0.85
Georgia 19 1,033,992.76 2.55
Illinois 63 2,365,164.90 5.82
Indiana 11 572,623.78 1.41
Maine 35 1,606,950.36 3.96
Maryland 4 166,120.51 0.41
Massachusetts 68 3,467,447.05 8.54
Michigan 125 5,158,042.37 12.70
Nevada 1 69,541.92 0.17
New Hampshire 33 1,718,174.69 4.23
New Jersey 68 4,695,822.00 11.56
New Mexico 4 144,342.50 0.36
New York 140 7,717,398.38 19.00
Ohio 9 466,898.16 1.15
Oregon 8 344,672.26 0.85
Pennsylvania 75 2,803,357.27 6.90
Rhode Island 27 1,247,947.55 3.07
Texas 63 2,506,611.51 6.17
Virginia 10 418,844.80 1.03
Washington 3 224,929.50 0.55
Wisconsin 8 447,250.79 1.10
--------------------- ----------------------- ------------------------
TOTAL 838 $40,610,733.39 100.00%
===================== ======================= ========================
</TABLE>
S-7
<PAGE>
LOAN-TO-VALUE RATIO
FIXED RATE GROUP
<TABLE>
<CAPTION>
Cut-Off Date % of Cut-Off
Loan-to-Value Number of Aggregate Date Aggregate
Ratios at Origination Mortgage Loans Principal Balance Principal Balance
- --------------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
0.01 to 5.00%............... 3 $ 45,212.56 0.11%
5.01 to 10.00............... 28 484,303.62 1.19
10.01 to 15.00.............. 84 2,118,158.64 5.22
15.01 to 20.00.............. 109 3,114,301.11 7.67
20.01 to 25.00.............. 57 1,992,059.67 4.91
25.01 to 30.00.............. 45 1,632,031.29 4.02
30.01 to 35.00.............. 32 1,189,937.97 2.93
35.01 to 40.00.............. 20 811,193.02 2.00
40.01 to 45.00.............. 23 859,827.86 2.12
45.01 to 50.00.............. 26 1,224,365.33 3.01
50.01 to 55.00.............. 23 1,370,700.17 3.38
55.01 to 60.00.............. 16 633,785.34 1.56
60.01 to 65.00.............. 40 2,005,511.94 4.94
65.01 to 70.00.............. 60 2,884,789.53 7.10
70.01 to 75.00.............. 61 4,542,859.90 11.19
75.01 to 80.00.............. 124 8,753,935.41 21.56
80.01 to 85.00.............. 79 6,257,401.37 15.41
85.01 to 90.00.............. 8 690,358.66 1.70
------------- ----------------- -----------
TOTAL 838 $40,610,733.39 100.00%
============= ================= ===========
</TABLE>
Minimum LTV: 5.00%
Maximum LTV: 90.00%
Weighted average LTV: 59.41%
S-8
<PAGE>
COMBINED LOAN-TO-VALUE RATIO
FIXED RATE GROUP
<TABLE>
<CAPTION>
Cut-Off Date % of Cut-Off
Number of Aggregate Date Aggregate
Combined Loan-to-Value Ratio Mortgage Loans Principal Balance Principal Balance
---------------------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
5.01 to 10.00%.................... 1 $ 26,925.35 0.07%
10.01 to 15.00.................... 2 119,989.35 0.30
15.01 to 20.00.................... 6 112,108.63 0.28
20.01 to 25.00.................... 5 132,492.40 0.33
25.01 to 30.00.................... 8 284,205.82 0.70
30.01 to 35.00.................... 8 223,335.50 0.55
35.01 to 40.00.................... 14 487,186.17 1.20
40.01 to 45.00.................... 21 613,195.26 1.51
45.01 to 50.00.................... 26 879,231.33 2.17
50.01 to 55.00.................... 30 1,419,741.35 3.50
55.01 to 60.00.................... 30 1,129,732.81 2.78
60.01 to 65.00.................... 49 2,452,786.00 6.04
65.01 to 70.00.................... 96 3,991,526.89 9.83
70.01 to 75.00.................... 104 6,000,507.22 14.78
75.01 to 80.00.................... 220 11,622,755.83 28.62
80.01 to 85.00.................... 196 9,942,689.14 24.48
85.01 to 90.00.................... 21 1,150,799.89 2.83
95.01 to 100.00................... 1 21,524.45 0.05
TOTAL -------------------- ----------------------- ---------------------
838 $40,610,733.39 100.00%
==================== ======================= =====================
</TABLE>
Minimum CLTV: 8.00%
Maximum CLTV: 100.00%
Weighted average CLTV: 73.94%
The original combined loan-to-value ratios shown above are equal, with
respect to each mortgage loan, to (i) the sum of (a) the original principal
balance of the mortgage loan at the date of origination plus (b) the remaining
balance of the senior liens, if any, at the date of origination of the mortgage
loan divided by (ii) the lesser of (a) the value of the related mortgaged
property, based upon the appraisal made at the time of origination of the
mortgage loan or (b) the purchase price of the mortgaged property if the
mortgage loan proceeds from the mortgage loan are used to purchase the mortgaged
property. No assurance can be given that the values of the mortgaged properties
have remained or will remain at their levels as of 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 together with the outstanding balances of the
related first liens become equal to or greater than the value of the related
mortgaged properties, the actual losses could be higher than those now generally
experienced in the mortgage lending industry.
S-9
<PAGE>
MORTGAGE INTEREST RATES
FIXED RATE GROUP
<TABLE>
<CAPTION>
Cut-Off Date % of Cut-Off
Mortgage Number of Aggregate Date Aggregate
Interest Rates Mortgage Loans Principal Balance Principal Balance
-------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
8.001 to 8.500% ................. 1 $ 193,996.13 0.48%
8.501 to 9.000 .................. 10 709,230.80 1.75
9.001 to 9.500 .................. 28 1,697,080.69 4.18
9.501 to 10.000 ................. 149 9,203,443.06 22.66
10.001 to 10.500 ................ 161 8,021,218.99 19.75
10.501 to 11.000 ................ 121 5,786,513.71 14.25
11.001 to 11.500 ................ 126 4,978,679.03 12.26
11.501 to 12.000 ................ 111 5,134,350.30 12.64
12.001 to 12.500 ................ 51 2,206,515.01 5.43
12.501 to 13.000 ................ 27 890,018.95 2.19
13.001 to 13.500 ................ 22 622,594.05 1.53
13.501 to 14.000 ................ 8 521,398.63 1.28
14.001 to 14.500 ................ 9 297,265.40 0.73
14.501 to 15.000 ................ 8 204,725.19 0.50
15.001 to 15.500 ................ 5 122,572.45 0.30
15.501 to 16.000 ................ 1 21,131.00 0.05
---------------- ------------------ ----------
TOTAL 838 $40,610,733.39 100.00%
================ ================== ==========
</TABLE>
Minimum mortgage interest rate: 8.420%
Maximum mortgage interest rate: 15.980%
Weighted average mortgage interest rate: 10.811%
S-10
<PAGE>
REMAINING MONTHS TO STATED MATURITY
FIXED RATE GROUP
<TABLE>
<CAPTION>
Cut-Off Date % of Cut-Off
Remaining Months Number of Aggregate Date Aggregate
to Stated Maturity Mortgage Loans Principal Balance Principal Balance
------------------ -------------- ----------------- -----------------
<S> <C> <C> <C>
51 to 55 ......................... 2 $ 92,576.72 0.23%
56 to 60 ......................... 4 107,147.65 0.26
76 to 80 ......................... 1 31,472.08 0.08
81 to 85 ......................... 1 12,000.00 0.03
106 to 110 ....................... 1 16,498.47 0.04
111 to 115 ....................... 18 449,559.41 1.11
116 to 120 ....................... 62 1,655,544.74 4.08
166 to 170 ....................... 5 202,770.34 0.50
171 to 175 ....................... 64 1,980,210.34 4.88
176 to 180 ....................... 197 8,108,383.66 19.97
226 to 230 ....................... 6 295,861.07 0.73
231 to 235 ....................... 75 3,256,321.24 8.02
236 to 240 ....................... 185 7,812,439.33 19.24
346 to 350 ....................... 2 174,192.41 0.43
351 to 355 ....................... 81 6,064,627.54 14.93
356 .............................. 40 3,158,155.03 7.78
357 .............................. 39 2,856,760.47 7.03
358 .............................. 28 1,929,163.13 4.75
359 .............................. 16 1,651,646.76 4.07
360 .............................. 11 755,403.00 1.86
------------ ----------------- ----------
TOTAL 838 $40,610,733.39 100.00%
============ ================= ==========
</TABLE>
Minimum remaining months to stated maturity: 55 months
Maximum remaining months to stated maturity: 360 months
Weighted average remaining months to stated maturity: 263.08 months
S-11
<PAGE>
CUT-OFF DATE PRINCIPAL BALANCES
FIXED RATE GROUP
<TABLE>
<CAPTION>
Cut-Off Date % of Cut-Off
Cut-Off Date Number of Aggregate Date Aggregate
Principal Balance Mortgage Loans Principal Balance Principal Balance
----------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
Less than $15,000.00 58 $ 748,281.26 1.84%
$15,000.01 to 25,000.00 160 3,288,059.50 8.10
$25,000.01 to 50,000.00 333 11,958,658.26 29.45
$50,000.01 to 75,000.00 162 9,774,032.37 24.07
$75,000.01 to 100,000.00 65 5,687,523.06 14.00
$100,000.01 to 125,000.00 18 2,046,662.30 5.04
$125,000.01 to 150,000.00 22 2,995,493.02 7.38
$150,000.01 to 175,000.00 7 1,099,223.71 2.71
$175,000.01 to 200,000.00 4 765,480.87 1.88
$200,000.01 to 225,000.00 2 420,500.68 1.04
$225,000.01 to 250,000.00 4 941,872.82 2.32
$250,000.01 to 275,000.00 1 251,816.61 0.62
$275,000.01 to 300,000.00 1 295,349.88 0.73
$325,000.01 to 350,000.00 1 337,779.05 0.83
----------- ------------------- -------------
TOTAL 838 $40,610,733.39 100.00%
=========== =================== =============
</TABLE>
Minimum principal balance: $ 9,677.64
Maximum principal balance: $ 337,779.05
Weighted average principal balance: $ 48,461.50
S-12
<PAGE>
PROPERTY TYPE
FIXED RATE GROUP
<TABLE>
<CAPTION>
Cut-Off Date % of Cut-Off
Number of Aggregate Date Aggregate
Property Type Mortgage Loans Principal Balance Principal Balance
- ------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
Condo 12 $ 533,200.56 1.31%
Manufactured Home 5 211,003.81 0.52
Multi Family 77 4,996,962.78 12.30
PUD 18 913,877.63 2.25
Single Family Home 723 33,876,150.61 83.42
Townhome 3 79,538.00 0.20
------------ ------------------- ------------
TOTAL 838 $40,610,733.39 100.00%
============ =================== ============
</TABLE>
OCCUPANCY STATUS
FIXED RATE GROUP
<TABLE>
<CAPTION>
% of Cut-Off
Number of Mortgage Cut-Off Date Aggregate Date Aggregate
Type Loans Principal Balance Principal Balance
- ---- ------------------ ----------------- -----------------
<S> <C> <C> <C>
Investment 28 $ 1,274,622.26 3.14%
Owner Occupied 810 39,336,111.13 96.86
---------- --------------------- ----------
TOTAL 838 $40,610,733.39 100.00%
========== ===================== ==========
</TABLE>
LIEN STATUS
FIXED RATE GROUP
<TABLE>
<CAPTION>
% of Cut-Off
Number of Mortgage Cut-Off Date Aggregate Date Aggregate
Lien Status Loans Principal Balance Principal Balance
- ----------- ------------------ ----------------- -----------------
<S> <C> <C> <C>
First Lien 476 $ 29,209,182.85 71.92%
Second Lien 362 11,401,550.54 28.08
---------- ------------------ ------------
TOTAL 838 $40,610,733.39 100.00%
========== ================== ============
</TABLE>
S-13
<PAGE>
SEASONING
FIXED RATE GROUP
<TABLE>
<CAPTION>
Cut-Off Date % of Cut-Off
Number of Mortgage Aggregate Date Aggregate
Months Loans Principal Balance Principal Balance
------ ------------------ ----------------- -----------------
<S> <C> <C> <C>
0...................... 88 $ 3,980,405.55 9.80%
1...................... 106 4,947,993.71 12.18
2...................... 164 7,259,249.03 17.88
3...................... 123 6,187,330.00 15.24
4...................... 102 5,671,665.48 13.97
5...................... 110 5,381,655.56 13.25
6...................... 83 3,985,834.71 9.81
7...................... 19 974,182.66 2.40
8...................... 16 897,760.33 2.21
9...................... 13 635,334.07 1.56
10..................... 8 428,195.58 1.05
11..................... 4 158,228.81 0.39
12..................... 2 102,837.90 0.25
TOTAL 838 $40,610,733.39 100.00%
--- -------------- ------
=== ============== ======
</TABLE>
Minimum seasoning: 0 months
Maximum seasoning: 12 months
Weighted average seasoning: 3.41 months
S-14
<PAGE>
ARM GROUP
77.63% of the mortgage loans in the ARM group are secured by first
liens, and 22.37% by second liens. 100% of the aggregate principal balance of
the mortgage loans in the ARM group as of the cut-off date require monthly
payments of principal that will fully amortize the mortgage loans by their
respective maturity dates, and none of the mortgage loans in the ARM group as of
the cut-off date are "balloon" loans.
PRIME RATE OF INTEREST
The index applicable to the determination of the mortgage rate on the
mortgage loans in the ARM group will be the lowest reported prime rate published
daily in The Wall Street Journal.
All of the mortgage loans in the ARM group have mortgage rates which
adjust annually.
In the following tables, the sum of the columns may not equal the
totals indicated due to rounding.
GEOGRAPHIC DISTRIBUTION
ARM GROUP
<TABLE>
<CAPTION>
Cut-Off Date % of Cut-Off
Number of Aggregate Date Aggregate
State Mortgage Loans Principal Balance Principal Balance
- ------ -------------- ----------------- -----------------
<S> <C> <C> <C>
California 2 $ 455,841.45 3.11%
Connecticut 3 207,907.32 1.42
Delaware 3 315,948.73 2.15
Florida 2 69,653.65 0.47
Georgia 5 310,414.94 2.12
Illinois 8 256,362.26 1.75
Indiana 5 221,599.53 1.51
Maine 9 523,476.73 3.57
Maryland 2 91,167.86 0.62
Massachusetts 19 795,243.75 5.42
Michigan 50 3,035,294.52 20.70
New Hampshire 11 603,124.44 4.11
New Jersey 23 1,866,831.28 12.73
New York 48 2,744,686.76 18.72
Ohio 5 195,167.09 1.33
Oregon 3 159,088.30 1.08
Pennsylvania 39 1,810,041.01 12.34
Rhode Island 11 621,587.06 4.24
Virginia 5 381,206.99 2.60
---------------- ----------------- -----------------
TOTAL 253 $14,664,643.67 100.00%
================ ================== ================
</TABLE>
S-15
<PAGE>
LOAN-TO-VALUE RATIO
ARM GROUP
<TABLE>
<CAPTION>
Cut-Off Date % of Cut-Off
Range of Loan-to-Value Number of Aggregate Date Aggregate
Ratios at Origination Mortgage Loans Principal Balance Principal Balance
--------------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
0.01 to 5.00%............... 1 $ 19,446.11 0.13%
5.01 to 10.00............... 11 210,154.69 1.43
10.01 to 15.00.............. 16 426,537.08 2.91
15.01 to 20.00.............. 18 686,248.45 4.68
20.01 to 25.00.............. 12 412,730.29 2.81
25.01 to 30.00.............. 12 599,398.42 4.09
30.01 to 35.00.............. 11 678,013.69 4.62
35.01 to 40.00.............. 7 360,144.29 2.46
40.01 to 45.00.............. 10 565,415.24 3.86
45.01 to 50.00.............. 11 497,424.39 3.39
50.01 to 55.00.............. 7 517,923.18 3.53
55.01 to 60.00.............. 14 921,650.74 6.28
60.01 to 65.00.............. 18 984,590.96 6.71
65.01 to 70.00.............. 29 2,032,082.05 13.86
70.01 to 75.00.............. 34 2,473,025.10 16.86
75.01 to 80.00.............. 41 3,188,087.99 21.74
85.01 to 90.00.............. 1 91,771.00 0.63
---------------- ----------------- -----------------
TOTAL 253 $14,664,643.67 100.00%
================ ================== =================
</TABLE>
Minimum LTV: 4.00%
Maximum LTV: 90.00%
Weighted average LTV: 58.39%
S-16
<PAGE>
COMBINED LOAN-TO-VALUE RATIO
ARM GROUP
<TABLE>
<CAPTION>
% of Cut-Off
Number of Cut-Off Date Aggregate Date Aggregate
Combined Loan-to-Value Ratio Mortgage Loans Principal Balance Principal Balance
---------------------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
5.01 to 10.00%.................... 1 $ 10,957.14 0.07%
10.01 to 15.00.................... 1 32,869.12 0.22
15.01 to 20.00.................... 4 139,700.24 0.95
20.01 to 25.00.................... 3 64,578.50 0.44
25.01 to 30.00.................... 2 61,831.12 0.42
30.01 to 35.00.................... 8 285,942.69 1.95
35.01 to 40.00.................... 6 335,034.03 2.28
40.01 to 45.00.................... 8 392,539.62 2.68
45.01 to 50.00.................... 13 542,005.45 3.70
50.01 to 55.00.................... 8 654,450.50 4.46
55.01 to 60.00.................... 15 903,962.65 6.16
60.01 to 65.00.................... 27 1,275,771.65 8.70
65.01 to 70.00.................... 44 2,575,097.29 17.56
70.01 to 75.00.................... 53 3,341,985.88 22.79
75.01 to 80.00.................... 59 3,956,146.79 26.98
85.01 to 90.00.................... 1 91,771.00 0.63
--- -------------- ------
TOTAL 253 $14,664,643.67 100.00%
=== ============== ======
</TABLE>
Minimum CLTV: 10.00%
Maximum CLTV: 90.00%
Weighted average CLTV: 67.26%
The original combined loan-to-value ratios shown above are equal, with
respect to each mortgage loan, to (i) the sum of (a) the original principal
balance of the mortgage loan at the date of origination plus (b) the remaining
balance of the senior liens, if any, at the date of origination of the mortgage
loan divided by (ii) the lesser of (a) the value of the related mortgaged
property, based upon the appraisal made at the time of origination of the
mortgage loan or (b) the purchase price of the mortgaged property if the
mortgage loan proceeds from the mortgage loan are used to purchase the mortgaged
property. No assurance can be given that the values of the mortgaged properties
have remained or will remain at their levels as of 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 together with the outstanding balances of the
related first liens become equal to or greater than the value of the related
mortgaged properties, the actual losses could be higher than those now generally
experienced in the mortgage lending industry.
S-17
<PAGE>
CURRENT MORTGAGE INTEREST RATES
ARM GROUP
<TABLE>
<CAPTION>
% of Cut-Off
Current Mortgage Number of Mortgage Cut-Off Date Aggregate Date Aggregate
Interest Rates Loans Principal Balance Principal Balance
---------------- ------------------ ---------------------- ------------------
<S> <C> <C> <C>
5.901 to 6.000%.................... 1 $ 141,343.85 0.96%
7.501 to 8.000..................... 14 1,007,207.10 6.87
8.001 to 8.500..................... 99 5,659,918.11 38.60
8.501 to 9.000..................... 76 4,528,621.73 30.88
9.001 to 9.500..................... 16 1,070,746.95 7.30
9.501 to 10.000.................... 26 1,203,055.93 8.20
10.001 to 10.500................... 7 404,227.49 2.76
10.501 to 11.000................... 5 159,576.97 1.09
11.001 to 11.500................... 2 108,537.01 0.74
11.501 to 12.000................... 3 103,954.43 0.71
12.001 to 12.500................... 3 185,683.10 1.27
14.501 to 15.000................... 1 91,771.00 0.63
------------------ --------------------- ------------------
TOTAL 253 $14,664,643.67 100.00%
================== ===================== ==================
</TABLE>
Minimum mortgage interest rate: 5.990%
Maximum mortgage interest rate: 14.990%
Weighted average mortgage interest rate: 8.879%
S-18
<PAGE>
REMAINING MONTHS TO STATED MATURITY
ARM GROUP
<TABLE>
<CAPTION>
Cut-Off Date % of Cut-Off
Remaining Months Number of Aggregate Date Aggregate
to Stated Maturity Mortgage Loans Principal Balance Principal Balance
------------------ -------------- ----------------- -----------------
<S> <C> <C> <C>
56 to 60 ......................... 2 $ 41,557.88 0.28%
111 to 115 ....................... 12 339,919.08 2.32
116 to 120 ....................... 12 625,448.13 4.27
171 to 175 ....................... 24 870,862.93 5.94
176 to 180 ....................... 33 1,174,486.11 8.01
231 to 235 ....................... 25 1,320,147.83 9.00
236 to 240 ....................... 49 2,537,937.89 17.31
351 to 355 ....................... 38 2,504,455.71 17.08
356 .............................. 15 1,355,239.65 9.24
357 .............................. 18 1,644,689.75 11.22
358 .............................. 12 943,176.88 6.43
359 .............................. 9 943,891.79 6.44
360 .............................. 4 362,830.04 2.47
--------------- ---------------- ----------------
TOTAL 253 $14,664,643.67 100.00%
=============== ================ ================
</TABLE>
Minimum remaining months to stated maturity: 58 months
Maximum remaining months to stated maturity: 360 months
Weighted average remaining months to stated maturity: 283.05 months
S-19
<PAGE>
CUT-OFF DATE PRINCIPAL BALANCES
ARM GROUP
<TABLE>
<CAPTION>
Cut-Off Date % of Cut-Off
Cut-Off Date Number of Aggregate Date Aggregate
Principal Balance Mortgage Loans Principal Balance Principal Balance
----------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
$10,000.01 to $15,000.00............ 9 $ 116,685.28 0.80%
$15,000.01 to $25,000.00............ 29 599,285.05 4.09
$25,000.01 to $50,000.00............ 94 3,449,876.13 23.53
$50,000.01 to $75,000.00............ 63 3,812,621.26 26.00
$75,000.01 to $100,000.00........... 34 2,898,340.27 19.76
$100,000.01 to $125,000.00.......... 10 1,129,037.49 7.70
$125,000.01 to $150,000.00.......... 4 537,371.68 3.66
$150,000.01 to $175,000.00.......... 2 333,728.11 2.28
$175,000.01 to $200,000.00.......... 4 722,692.92 4.93
$225,000.01 to $250,000.00.......... 1 227,113.68 1.55
$250,000.01 to $275,000.00.......... 1 256,458.92 1.75
$275,000.01 to $300,000.00.......... 1 278,710.12 1.90
$300,000.01 to $325,000.00.......... 1 302,722.76 2.06
-------------- ----------------- ----------------
TOTAL 253 $14,664,643.67 100.00%
============== ================= ================
</TABLE>
Minimum principal balance: $ 10,935.37
Maximum principal balance: $ 302,722.76
Weighted average principal balance: $ 57,963.02
PROPERTY TYPE
ARM GROUP
<TABLE>
<CAPTION>
Cut-Off Date % of Cut-Off
Number of Aggregate Date Aggregate
Property Type Mortgage Loans Principal Balance Principal Balance
------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
Condo ............................. 2 $ 73,680.58 0.50%
Manufactured Home ................. 3 120,459.09 0.82
Multi Family ...................... 20 1,268,032.50 8.65
PUD ............................... 1 17,000.00 0.12
Single Family Home ................ 225 13,087,112.15 89.24
Townhome .......................... 2 98,359.35 0.67
-------------- ----------------- -----------------
TOTAL 253 $14,664,643.67 100.00%
============== ================= =================
</TABLE>
S-20
<PAGE>
MARGIN
ARM GROUP
<TABLE>
<CAPTION>
% of Cut-Off
Number of Cut-Off Date Aggregate Date Aggregate
Margin Mortgage Loans Principal Balance Principal Balance
------ -------------- ---------------------- -----------------
<S> <C> <C> <C>
0.501 to 1.000%................... 1 $ 141,343.85 0.96%
1.001 to 1.500.................... 21 1,281,478.85 8.74
1.501 to 2.000.................... 119 7,433,717.26 50.69
2.001 to 2.500.................... 54 3,066,413.24 20.91
2.501 to 3.000.................... 15 682,160.68 4.65
3.001 to 3.500.................... 30 1,472,395.23 10.04
3.501 to 4.000.................... 1 17,000.00 0.12
4.001 to 4.500.................... 7 288,927.45 1.97
4.501 to 5.000.................... 3 122,398.88 0.83
5.501 to 6.000.................... 1 67,037.23 0.46
7.001 to 7.500.................... 1 91,771.00 0.63
--------------- ---------------------- ------------------
TOTAL 253 $14,664,643.67 100.00%
=============== ====================== ==================
</TABLE>
Minimum margin: 1.000%
Maximum margin: 7.500%
Weighted average margin: 2.343%
S-21
<PAGE>
LIFETIME INTEREST RATE CAP
ARM GROUP
<TABLE>
<CAPTION>
Cut-Off Date % of Cut-Off
Lifetime Interest Number of Aggregate Date Aggregate
Rate Cap Mortgage Loans Principal Balance Principal Balance
----------------- -------------- ----------------- ------------------
<S> <C> <C> <C> <C>
11.501 to 12.000%................. 1 $ 141,343.85 0.96%
13.501 to 14.000.................. 14 1,007,207.10 6.87
14.001 to 14.500.................. 98 5,627,065.65 38.37
14.501 to 15.000.................. 75 4,503,715.97 30.71
15.001 to 15.500.................. 16 1,070,746.95 7.30
15.501 to 16.000.................. 4 161,835.34 1.10
16.001 to 16.500.................. 2 97,852.46 0.67
16.501 to 17.000.................. 3 138,078.39 0.94
17.501 to 18.000.................. 22 1,041,220.59 7.10
18.001 to 18.500.................. 7 406,264.72 2.77
18.501 to 19.000.................. 3 46,404.34 0.32
19.001 to 19.500.................. 2 108,537.01 0.74
19.501 to 20.000.................. 3 103,954.43 0.71
20.001 to 20.500.................. 2 118,645.87 0.81
22.501 to 23.000.................. 1 91,771.00 0.63
------------- ----------------- -----------------
TOTAL 253 $14,664,643.67 100.00%
============= ================= =================
</TABLE>
Minimum lifetime cap: 11.990%
Maximum lifetime cap: 22.990%
Weighted average lifetime cap: 15.138%
PERIODIC INTEREST RATE ADJUSTMENT CAP
ARM GROUP
<TABLE>
<CAPTION>
% of Cut-Off
Periodic Interest Rate Number of Cut-Off Date Aggregate Date Aggregate
Adjustment Cap Mortgage Loans Principal Balance Principal Balance
-------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
2.000%............................ 214 $12,814,882.94 87.39%
3.000%........................... 39 1,849,760.73 12.61
-------------- ----------------- ----------------
TOTAL 253 $14,664,643.67 100.00%
============== ================= ================
</TABLE>
Minimum periodic cap: 2.000%
Maximum periodic cap: 3.000%
Weighted average periodic cap: 2.126%
S-22
<PAGE>
NEXT INTEREST ADJUSTMENT DATE
ARM GROUP
<TABLE>
<CAPTION>
Cut-Off Date % of Cut-Off
Next Interest Number of Aggregate Date Aggregate
Adjustment Date Mortgage Loans Principal Balance Principal Balance
--------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
July 2000 20 $ 964,710.13 6.58%
August 2000 38 1,915,638.01 13.06
September 2000 41 2,155,037.41 14.70
October 2000 47 2,750,250.83 18.75
November 2000 41 2,514,268.24 17.15
December 2000 28 1,636,542.16 11.16
January 2001 32 2,268,677.33 15.47
February 2001 6 459,519.56 3.13
------------ ----------------- ----------------
TOTAL 253 $14,664,643.67 100.00%
============ ================= ================
</TABLE>
Weighted average months to next interest adjustment date: 8.379
LIEN STATUS
ARM GROUP
<TABLE>
<CAPTION>
Cut-Off Date % of Cut-Off
Number of Mortgage Aggregate Date Aggregate
Lien Status Loans Principal Balance Principal Balance
----------- ------------------ ----------------- -----------------
<S> <C> <C> <C>
First Lien 175 $11,383,430.37 77.63%
Second Lien 78 3,281,213.30 22.37
----------------- ---------------- -----------------
TOTAL 253 $14,664,643.67 100.00%
================= ================ =================
</TABLE>
S-23
<PAGE>
SEASONING
ARM GROUP
<TABLE>
<CAPTION>
% of Aggregate
Months Elapsed Number of Mortgage Cut-Off Date Aggregate Cut-Off Date
Since Origination Loans Principal Balance Principal Balance
- ----------------- ------------------ ----------------------- -----------------
<S> <C> <C> <C>
0............................... 6 $ 459,519.56 3.13%
1............................... 32 2,268,677.33 15.47
2............................... 28 1,636,542.16 11.16
3............................... 41 2,514,268.24 17.15
4............................... 47 2,750,250.83 18.75
5............................... 41 2,155,037.41 14.70
6............................... 38 1,915,638.01 13.06
7............................... 20 964,710.13 6.58
------------------ ----------------------- ----------------
TOTAL 253 $14,664,643.67 100.00%
================== ======================= ================
</TABLE>
Minimum seasoning: 0 months
Maximum seasoning: 7 months
Weighted average seasoning: 3.62 months
PREPAYMENT AND YIELD CONSIDERATIONS
The weighted average life of, and, if purchased at other than par
(disregarding, for purposes of this discussion, the effects on an investor's
yield resulting from the time of the settlement date and those considerations
discussed below under "Payment Delay"), the yield to maturity on, a class A
certificate will be directly related to the rate of payment of principal of the
mortgage loans, including for this purpose voluntary payment in full of mortgage
loans prior to stated maturity, liquidations due to defaults, casualties and
condemnations, and repurchases of or substitutions for mortgage loans by Home
Loan Bank or an affiliate of Home Loan Bank or the master servicer as required
or permitted under the pooling and servicing agreement or the mortgage purchase
agreement.
The actual rate of principal prepayments on pools of mortgage loans is
influenced by a variety of economic, tax, geographic, demographic, social, legal
and other factors and has fluctuated considerably in recent years. In addition,
the rate of principal prepayments may differ among pools of mortgage loans at
any time because of specific factors relating to the mortgage loans in the
particular pool, including, among other things, the age of the mortgage loans,
the geographic locations of the properties securing the loans and the extent of
the mortgagors' equity in the properties, and changes in the mortgagors' housing
needs, job transfers and unemployment.
All of the mortgage loans are prepayable by the related mortgagors on
the mortgage notes without penalty.
The rate of prepayments with respect to conventional mortgage loans has
fluctuated significantly in recent years. In general, if prevailing interest
rates fall significantly below the interest rates at the time of origination,
mortgage loans may be subject to higher prepayment rates than if prevailing
rates remain at or above those at the time the mortgage loans were originated.
Conversely, if prevailing interest rates rise appreciably above the
S-24
<PAGE>
interest rates at the time of origination, mortgage loans may experience a lower
prepayment rate than if prevailing rates remain at or below those at the time
the mortgage loans were originated. However, there can be no assurance that the
mortgage loans will conform to the prepayment experience of conventional
mortgage loans or to any past prepayment experience or any published prepayment
forecast. No assurance can be given as to the level of prepayments on mortgage
loans that the trust fund will experience.
As indicated above, if purchased at other than par, the yield to
maturity on a class A certificate will be affected by the rate of the payment of
principal on the mortgage loans. If the actual rate of payments on the mortgage
loans is slower than the rate anticipated by an investor who purchases a class A
certificate at a discount, the actual yield to the investor will be lower than
the investor's anticipated yield. If the actual rate of payments on the mortgage
loans is faster than the rate anticipated by an investor who purchases a class A
certificate at a premium, the actual yield to the investor will be lower than
the investor's anticipated yield.
The final scheduled payment date for each class of class A certificates
will be no later than April 15, 2031. The final payment date is expected to be
March 15, 2030 for each class of class A certificates. Such date is the date on
which the related certificate principal balance would be reduced to zero,
assuming, among other things, that (i) no prepayments are received on any of the
mortgage loans, (ii) distributions of principal and interest on each of the
mortgage loans is timely received and (iii) the mortgage loans have the
applicable characteristics set forth herein. The weighted average life of the
class A certificates is likely to be shorter than would be the case if payments
actually made on the mortgage loans conformed to the foregoing assumption, and
the final payment date with respect to the class A certificates could occur
significantly earlier than the final scheduled payment date because (i)
prepayments (including, for this purpose, prepayments attributable to
foreclosure, liquidation, repurchase and the like) on mortgage loans are likely
to occur and (ii) the master servicer may cause a liquidation of the trust fund
when the aggregate outstanding principal amount of the mortgage loans is less
than 5% of the aggregate principal balance of the mortgage loans as of the
cut-off date.
"Weighted average life" refers to the average amount of time that will
elapse from the date of issuance of a security until each dollar of principal of
the security is scheduled to be repaid to an investor. The weighted average life
of the class A certificates will be influenced by the rate at which principal of
the mortgage loans is paid, which may be in the form of scheduled amortization
or prepayments (for this purpose, the term "prepayment" includes liquidations
due to default). Prepayments on mortgage loans are commonly measured relative to
a prepayment standard or model. The model used in this prospectus supplement is
the prepayment assumption (the "Prepayment Assumption"), which represents an
assumed rate of prepayment each month relative to the then outstanding principal
balance of a pool of mortgage loans for the life of such mortgage loans. With
respect to the fixed rate mortgage loans, the "100% Prepayment Assumption"
assumes a constant prepayment rate ("CPR") of 2.4% per annum of the outstanding
principal balance of such mortgage loans in the first month of the life of the
mortgage loans and an additional 2.4% each month thereafter until the tenth
month. Beginning in the tenth month and in each month thereafter during the life
of the respective mortgage loans, the "100% Prepayment Assumption" with respect
to the fixed rate loans assumes a CPR of 24% per annum. With respect to the
adjustable rate loans, the "100% Prepayment Assumption" assumes a CPR of 28% per
annum of the then outstanding principal balance of the adjustable rate loans
each month. As used in the table below, 0% Prepayment Assumption assumes
prepayment rates equal to 0% of the Prepayment Assumption, i.e., no prepayments
on the mortgage loans having the characteristics described below.
Correspondingly, 100% Prepayment Assumption assumes prepayment rates equal to
100% of the related Prepayment Assumption, 125% Prepayment Assumption assumes
125% of each of the rates described above; and so forth. The Prepayment
Assumption does not purport to be a historical description of prepayment
experience or a prediction of the anticipated rate of prepayment of any pool,
including the related mortgage loans.
S-25
<PAGE>
The following tables have been prepared assuming:
(i) all scheduled monthly payments on the mortgage loans are
received on the first day of the month, commencing in March
2000;
(ii) all prepayments represent prepayments in full of individual
mortgage loans and are received on the last day of each month
commencing in March 2000 and include 30 days' interest
thereon;
(iii) distributions on the class A certificates are made on the 15th
day of each month, commencing in April 2000;
(iv) the class A certificates are purchased on March 14, 2000;
(v) no defaults or delinquencies in the payment by mortgagors of
principal and interest on the mortgage loans are experienced;
(vi) the initial principal balance of the class A certificates is
as set forth on the cover hereof;
(vii) the mortgage loans prepay at the specified percentages of the
Prepayment Assumption; and
(viii) the trust fund consists of mortgage loans having the following
characteristics:
S-26
<PAGE>
ASSUMED MORTGAGE LOAN CHARACTERISTICS
FIXED RATE GROUP
<TABLE>
<CAPTION>
Remaining Original
Aggregate Term to Original Term to
Principal Gross Loan Maturity Amortization Maturity
Pool Balance ($) Rate (%) (months) Term (months) (months)
<S> <C> <C> <C> <C> <C> <C>
1 2,364,799.07 10.8712 112 115 115
2 6,795,116.82 10.8536 177 180 180
3 11,364,621.64 10.8393 237 240 240
4 16,589,948.34 10.8330 356 360 360
5 3,496,247.52 10.4956 178 360 180
</TABLE>
ARM GROUP
<TABLE>
<CAPTION>
Remaining Original
Aggregate Term to Original Term to Minimum
Principal Gross Loan Maturity Amortization Maturity Loan Periodic Rate Maximum Loan
Pool Balance ($) Rate (%) (months) Term (months) (months) Rate (%) Adjustment (%) Rate (%)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 963,448.60 8.6965 114 117 117 8.6965 2.0000 14.7482
2 43,476.49 11.1689 117 120 120 11.1689 3.0000 19.1689
3 1,864,551.77 8.5974 176 180 180 8.5974 2.0000 14.6326
4 180,797.27 10.6267 177 180 180 10.6267 3.0000 18.6267
5 3,181,176.78 8.6742 236 240 240 8.6742 2.0000 14.6742
6 676,908.94 10.2381 237 240 240 10.2381 3.0000 18.2381
7 6,805,705.79 8.5945 356 360 360 8.5945 2.0000 14.5926
8 948,578.03 10.9360 356 360 360 10.9360 3.0000 18.9360
</TABLE>
<TABLE>
<CAPTION>
Number of
Months Until
Next Frequency
Interest of Rate
Gross Rate Adjustment
Pool Margin (%) Adjustment (months)
<S> <C> <C> <C> <C>
1 2.1236 9 12
2 4.1708 9 12
3 2.0826 8 12
4 3.7717 9 12
5 2.1482 8 12
6 3.6675 9 12
7 2.1051 8 12
8 4.1348 8 12
</TABLE>
S-27
<PAGE>
Based upon the foregoing assumptions, certain of which may not reflect actual
experience, the following tables indicate the projected outstanding certificate
balance on future payment dates of the class A certificates expressed as a
percentage of the original certificate balance, as well as the weighted average
life of, the class A certificates at various percentages of the Prepayment
Assumption.
<TABLE>
<CAPTION>
CLASS A-1 CERTIFICATES
Payment Date Prepayments (% of Prepayment Assumption)
------------ -------------- --------------- -------------- -------------- --------------- --------------
0 50 75 100 125 150
-------------- --------------- -------------- -------------- --------------- --------------
<S> <C> <C> <C> <C> <C> <C>
3/14/00 100 100 100 100 100 100
3/15/01 98 88 83 78 73 68
3/15/02 97 77 67 59 50 43
3/15/03 95 66 54 44 35 27
3/15/04 93 57 43 32 24 17
3/15/05 90 49 35 24 16 11
3/15/06 88 42 28 18 11 7
3/15/07 85 35 22 13 7 4
3/15/08 81 30 17 10 5 2
3/15/09 78 25 13 7 3 2
3/15/10 74 21 11 5 2 1
3/15/11 71 18 8 4 1 1
3/15/12 67 15 6 3 1 0
3/15/13 63 12 5 2 1 0
3/15/14 58 10 4 1 0 0
3/15/15 47 7 2 1 0 0
3/15/16 43 6 2 1 0 0
3/15/17 40 5 1 0 0 0
3/15/18 36 4 1 0 0 0
3/15/19 32 3 1 0 0 0
3/15/20 28 2 1 0 0 0
3/15/21 26 2 0 0 0 0
3/15/22 24 1 0 0 0 0
3/15/23 22 1 0 0 0 0
3/15/24 19 1 0 0 0 0
3/15/25 17 1 0 0 0 0
3/15/26 14 1 0 0 0 0
3/15/27 11 0 0 0 0 0
3/15/28 7 0 0 0 0 0
3/15/29 3 0 0 0 0 0
11/15/29 0 0 0 0 0 0
Average Life (Yrs)(1) 15.6 6.3 4.6 3.5 2.8 2.4
Average Life (Yrs)(2) 15.6 6.1 4.4 3.4 2.7 2.2
</TABLE>
S-28
<PAGE>
<TABLE>
<CAPTION>
CLASS A-2 CERTIFICATES
Payment Date Prepayments (% of Prepayment Assumption)
------------ -------------- --------------- -------------- -------------- --------------- --------------
0 50 75 100 125 150
-------------- --------------- -------------- -------------- --------------- --------------
<S> <C> <C> <C> <C> <C> <C>
3/14/00 100 100 100 100 100 100
3/15/01 98 84 78 71 64 57
3/15/02 97 71 60 50 41 32
3/15/03 95 60 47 35 26 18
3/15/04 93 51 36 25 17 10
3/15/05 90 43 28 17 10 6
3/15/06 88 36 21 12 7 3
3/15/07 85 30 16 9 4 2
3/15/08 82 24 12 6 3 1
3/15/09 78 20 9 4 2 1
3/15/10 75 17 7 3 1 0
3/15/11 72 14 5 2 1 0
3/15/12 68 11 4 1 0 0
3/15/13 65 9 3 1 0 0
3/15/14 60 7 2 1 0 0
3/15/15 56 6 2 0 0 0
3/15/16 53 5 1 0 0 0
3/15/17 49 4 1 0 0 0
3/15/18 45 3 1 0 0 0
3/15/19 40 2 0 0 0 0
3/15/20 36 2 0 0 0 0
3/15/21 34 1 0 0 0 0
3/15/22 31 1 0 0 0 0
3/15/23 29 1 0 0 0 0
3/15/24 26 1 0 0 0 0
3/15/25 22 1 0 0 0 0
3/15/26 18 0 0 0 0 0
3/15/27 14 0 0 0 0 0
3/15/28 9 0 0 0 0 0
3/15/29 4 0 0 0 0 0
11/15/29 0 0 0 0 0 0
Average Life(Yrs)(1) 16.6 5.6 3.9 2.9 2.3 1.8
Average Life(Yrs)(2) 16.6 5.4 3.8 2.8 2.2 1.8
- ----------------------
</TABLE>
(1) The weighted average life of a class of certificates is determined by
(i) multiplying the amount of each principal payment by the number of
years from the closing date to the related payment date; (ii) adding
the results; and (iii) dividing the sum by the certificate balance of
that class as of the closing date.
(2) Determined assuming early retirement of the class A certificates upon
termination of the trust fund on the payment date following the date on
which the aggregate unpaid principal balance of the mortgage loans
declines to a level less than 5% of the aggregate principal balance of
the mortgage loans as of the cut-off date.
S-29
<PAGE>
There is no assurance that prepayments will occur or, if they do occur,
that they will occur at any constant percentage of the Prepayment Assumption.
None of Financial Security, the trust fund, the trustee, Home Loan
Bank, the depositor or the master servicer will be liable to any holder for any
loss or damage incurred by the holder as a result of any difference in the rate
of return received by the holder as compared to the class A-1 Pass-Through Rate
(with respect to any holder of class A-1 certificates) or the class A-2
Pass-Through Rate (with respect to any holder of class A-2 certificates) upon
reinvestments of the funds received in connection with any premature repayment
of principal on the certificates, including any repayment resulting from any
prepayment by the mortgagor, any liquidation of the mortgage loan, or any
repurchase of or substitution for any mortgage loan by Home Loan Bank or the
master servicer.
PAYMENT DELAY
Payments of principal and interest on the mortgage loans in respect of
any due period generally will not be passed through to the class A-1
certificates until the payment date in the following calendar month. As a
result, the monthly distributions with respect to the class A-1 certificates
generally will reflect mortgagor payments during the prior calendar month. Each
payment date will be on the 15th day of each month (or the next succeeding
business day), and the first payment date will not occur until April 17, 2000.
Thus, the effective yield on the class A-1 certificates will be below that
otherwise produced by the related Pass-Through Rate because distributions on the
class A-1 certificates in respect of any given month will not be made until on
or about the 15th day of the following month and will not bear interest during
the delay.
HOME LOAN AND INVESTMENT BANK, F.S.B.
The information set forth below concerning Home Loan and Investment
Bank, F.S.B. ("Home Loan Bank") and Home Loan Investment Corporation ("Home
Investment") has been provided by Home Loan Bank. The depositor does not make
any representation as to the accuracy or completeness of this information.
Home Loan Bank was granted a federal charter on December 30, 1994 and
merged with and became successor to Home Loan & Investment Association, which
was organized in 1958 as a loan and investment company under the laws of the
State of Rhode Island. All references to "Home Loan Bank" in respect of events
occurring or facts existing prior to December 30, 1994 shall mean Home Loan &
Investment Association and all references to "Home Loan Bank" in respect of
events occurring or facts existing after that date shall mean Home Loan and
Investment Bank, F.S.B.
In October 1999, Home Loan Bank formed its wholly-owned subsidiary,
Home Loan Investment Corporation, a Rhode Island corporation. Home Loan Bank
transferred as a capital contribution substantially all of its financial assets,
including all primary servicing rights, servicing personnel and the mortgage
loans to Home Investment. Immediately prior to the sale of the mortgage loans by
Home Loan Bank to the depositor, Home Loan Bank will acquire the mortgage loans
from Home Investment.
As of December 31, 1999, Home Loan Bank and Home Investment employed
272 persons at its Warwick, Rhode Island headquarters and an additional 14
employees in branch offices located in Warwick and Providence, Rhode Island. As
of fiscal year end December 31, 1999 and as of December 31, 1998, the combined
net worth of Home Loan Bank and Home Investment was $56,821,642 and $62,368,838,
respectively. Copies of the audited financial statements of Home Loan Bank for
the past three fiscal years, prepared on the basis of generally accepted
accounting principles, may be obtained when available upon written request from
Edwin Furtado, Executive Vice President, Secretary and Chief Financial Officer
at One
S-30
<PAGE>
Home Loan Plaza, Warwick, Rhode Island 02886. Home Loan Bank's and Home
Investment's combined net income for the fiscal years ended December 31, 1999,
1998 and 1997 was $5,126,094, $14,057,849 and $13,321,538, respectively.
LOAN ORIGINATION HISTORY
Home Loan Bank originates and purchases mortgage loans on residential
dwellings, assembles and sells pools of mortgages to major commercial banks and
other financial institutions, and, in some cases, services mortgage portfolios
placed with these investors. All loans are originated or acquired by Home Loan
Bank and are underwritten by Home Loan Bank. On December 31, 1999, Home Loan
Bank or its affiliates conducted loan originations and purchased loans in a
number of states including New York, New Jersey, Pennsylvania, Massachusetts,
New Hampshire, Maine, Rhode Island, Connecticut, Vermont, Georgia, Illinois,
Virginia, Delaware, Nevada, Arizona, Colorado, California, Washington, Utah,
Oregon, Florida, Indiana, Wisconsin, Texas, Michigan, New Mexico, Maryland,
Tennessee and Ohio.
Approximately 47.95% (by aggregate principal balance as of the cut-off
date) of the mortgage loans were underwritten using another lender's
underwriting guidelines. Such guidelines generally permit mortgagors having
lower credit standing and loans having higher CLTVs than Home Loan Bank's
guidelines. Consequently, Home Loan Bank anticipates that delinquencies and
losses on such mortgage loans will be higher, and delinquencies and losses could
be substantially higher, than those on mortgage loans underwritten using Home
Loan Bank's guidelines.
The dollar amount of first and second mortgage loans originated or
acquired during the fiscal years ended December 31, 1999, 1998 and 1997 was
$284,163,107.15, $376,851,540.55 and $365,206,086, respectively.
UNDERWRITING CRITERIA
Home Loan Bank endeavors to originate and acquire first and second
mortgage loans using standard underwriting criteria based upon the applicant's
general creditworthiness and the real estate equity used as collateral security.
Mortgage loan applications are underwritten, and collateral properties
appraised prior to closing. Underwriting, and the determination whether to make
specific loan originations, is centralized at Home Loan Bank's headquarters in
Warwick, Rhode Island. All loans are required to be reviewed and approved by an
underwriter, each of whom is granted specific credit limits based on experience
and seniority. Only three senior officers of Home Loan Bank can approve loans
over $150,000, and all loans over $200,000 require written approval of the
President of Home Loan Bank.
Home Loan Bank lends primarily on single family homes in suburban and
urban metropolitan areas.
Home Loan Bank does not originate or acquire mortgage loans which
result in a position more subordinate than a third lien position on real estate.
Home Loan Bank will consider making a junior mortgage loan in a subordinate
position to a privately held first mortgage loan provided a copy of the recorded
security instrument and note are reviewed prior to credit approval. Junior
mortgage loans will also be made behind adjustable or variable rate first
mortgage loans provided the payment used when calculating the debt ratio is
either: (a) in the case of loans which adjust annually or will adjust within one
year of the date of application, based on the maximum rate provided in the note
on the next adjustment date, or (b) in the case of loans which adjust less
frequently than annually and do not have an adjustment date within one year of
the date of application, based on the current interest rate.
S-31
<PAGE>
Loan applications are considered through a combination of reviews of
credit bureau reports and/or individual certifications. Except in the case of
non-income verified loans, income is verified through various means, including
applicant interviews, written verification, review of pay stubs and tax returns,
among other items, and the borrower's demonstration of sufficient levels of
disposable income to satisfy debt repayment requirements. The applicant's
employer is usually contacted to verify employment and employee compensation. A
Verification of Employment form (VOE) is usually presented to the applicant's
employer in addition to telephonic verification and receipt of W-2s or the last
two check stubs, among other items.
SELF-EMPLOYED APPLICANT'S COMMISSIONS/BONUSES TAX RETURNS: A tax return
for the most recent year or years signed by the borrower is required from
self-employed applicants and applicants who derive 25% of their income from
commissions and/or bonuses. Consistency in commission and/or bonus income must
be established. Checking account statements are used solely as additional
verification of income.
RENTAL INCOME: Rental income must be documented by lease, notarized
rental receipts, or two (2) years' tax returns. Home Loan Bank calculates 75% of
total rents received, which amount is subtracted from total mortgage payments on
rental property to derive a cash flow, if any, which amount is then treated as
additional income in the credit review process. If the subtraction of rental
income from the mortgage payment results in a negative cash flow, this amount is
subtracted from the applicant's monthly income.
SOCIAL SECURITY--VETERANS ADMINISTRATION: Social Security and VA
compensation must be supported by an awards letter from the appropriate agency.
If a letter is unavailable, six months of checking account statements indicating
equal deposit amounts are required.
Retirement income must be supported by an annuity letter or similar
awards document outlining all details of income. If unavailable either (i)
copies of recent checking account statements verifying direct deposit, or (ii)
the copies of most recent year's tax return or (iii) copies of the most recent
year's W-2P forms are required.
CHILD AND/OR SPOUSAL SUPPORT: The applicant must provide Home Loan Bank
with evidence that any alimony or child support is expected to continue for at
least two (2) years after the date of the loan. A copy of the final decree of
divorce or separation agreement specifically setting the amount and term, if
any, of support is acceptable.
APPRAISALS: All properties are appraised by independent fee appraisers
approved by Home Loan Bank in advance of funding. Appraisers are selected based
upon a review of sample appraisals, professional experience, education, and
professional organizations to which they belong and typical or specific
properties appraised. All appraisers must be approved by the Vice President of
Underwriting and must be independent from borrowers. Management reviews
references, credentials, and examples of prior appraisals before engaging an
appraiser. Appraisals are performed after analysis of other sales of properties
in the area in which the related mortgaged property is located, and a full
interior inspection appraisal is performed using forms acceptable to either
Fannie Mae or Freddie Mac in connection with each mortgaged property. If an
appraisal with respect to a mortgaged property appears to be inconsistent with
appraisals previously conducted on comparable properties by the same or other
appraisers, Home Loan Bank will engage a review appraiser to conduct a drive-by
appraisal of the property as part of its quality control procedures.
TITLE COMPANIES AND CLOSING AGENTS: Loans are closed through approved
attorneys, title insurers, or agents of title insurers, and are insured by title
companies which are licensed in the state in which the related properties are
located.
S-32
<PAGE>
VARIATIONS FROM UNDERWRITING CRITERIA: As described above, Home Loan
Bank uses the foregoing criteria as guidelines only. On a case-by-case basis,
Home Loan Bank may determine that the prospective mortgagor warrants a debt
service-to-income ratio exception, a loan-to-value exception or a pricing
exception. An exception may be allowed if the application reflects certain
compensating factors, including, among others: low loan-to-value ratio; pride of
ownership; stable employment of five or more years at the applicant's current
place of employment; and residence of five or more years at the applicant's
current residence. 6.44% and 3.37% (by aggregate cut-off date principal balance)
of the mortgage loans in the fixed rate group and the ARM group, respectively,
represent such exceptions.
QUALITY CONTROL PROCEDURES HIGHLIGHTS
Each month, Home Loan Bank's quality control department conducts a
review and verification of approximately 10% of the loans originated and
purchased during the previous month with specific attention to the following
areas:
LEGAL DOCUMENTATION: Note, mortgage, deed of trust, truth-in-lending
disclosure, title policy, and all other applicable origination documents are
reviewed for existence, accuracy, and proper signatures.
CREDIT DOCUMENTATION: All credit verifications, credit applications,
and credit reports are reviewed for existence, accuracy, and proper signatures.
All results are reported to management on a monthly basis. Management
meets with the department supervisors in both underwriting and quality control
to review results. Quality control functions are performed separately from loan
originating and underwriting.
QUALITY CONTROL APPRAISALS: Each appraisal is reviewed with emphasis
on the following areas: verification of occupancy, valuation method, and review
of comparable sales.
In addition to the review discussed above, re-inspections are performed
on one-half of the reviewed loans, i.e., approximately 5% of originations. If a
pattern of questionable values or methodology becomes apparent for an appraiser,
a meeting is arranged to discuss these problems, and the appraisal firm may be
replaced.
COLLECTION PROCEDURES
As of December 31, 1999, Home Loan Bank and Home Investment serviced a
portfolio of mortgage loans originated or purchased by Home Loan Bank with an
aggregate unpaid principal balance of approximately $571,805,858 for itself and
its investor group which primarily consists of commercial banks, savings and
loan associations, Fannie Mae and Freddie Mac.
Collections are conducted by Home Investment's service center at its
corporate headquarters in Warwick, Rhode Island.
If foreclosure is necessary, Home Investment's workout department
supervises and monitors all related procedures (including bankruptcy
proceedings) conducted by the foreclosing attorneys. If title passes to the
mortgagee, this department insures that secured property is preserved and
protected. After review and analysis, a disposition strategy is developed and
the property is marketed.
The collection department is structured so that the most senior
(experienced) collectors are responsible for the accounts which are most
delinquent; i.e., 10-29 day accounts are contacted by junior personnel, 30-59
day accounts by the next most senior employees, etc. Senior collection officers
are responsible for all accounts which are sixty (60) or more days delinquent.
Workout officers are responsible for all accounts which are
S-33
<PAGE>
ninety (90) or more days delinquent. Their duties include maintaining contact
with attorneys currently handling litigation against the borrower as well as
marketing of any property acquired through foreclosure.
PROCEDURE ON 10-29 DAY DELINQUENTS: Home Investment's servicing
computer system automatically queues a delinquent account when a borrower is ten
(10) days delinquent. Immediately, a phone call is initiated to the borrower
regarding the delinquent payment. Each account is assigned to a computer
"tickler" file for all promises of payment. The delinquent account is
electronically filed by the appropriate promised date within the tickler file.
Any account who has broken two (2) promises shall be referred to a more senior
collector for further collection.
PROCEDURE ON 30-59 DAY DELINQUENTS: As soon as an account reaches
thirty (30) days delinquent, a serious delinquency notice is sent followed by a
phone call by a collector. Between thirty (30) and forty-five (45) days
delinquent, the collector analyzes the situation of the borrower and makes a
determination for further action. These accounts are reviewed every two (2) days
with the collection supervisor as to what further action should be taken. After
all the information is compiled and analyzed a determination is made as to the
borrower's ability to repay the debt. The collection supervisor and the
servicing manager review all accounts received; if agreed, the account is
referred to an attorney for collection and possible foreclosure proceedings.
PROCEDURE OVER 60 DAYS DELINQUENT: When an account is sixty (60) days
delinquent, it is monitored by a senior collection officer. The senior
collection officer updates information regarding the principal balance of any
senior liens, and taxes owed, and maintains contact with the borrower to monitor
their situation. The servicing manager will determine whether a visit to the
property is warranted. After all collection procedures have been exhausted and
the account becomes one hundred twenty (120) days delinquent, an attorney is
usually instructed to begin foreclosure proceedings. Workout officers handle all
accounts over ninety (90) days delinquent and keep in constant contact with the
borrower and the attorney. Any account which is in excess of one hundred twenty
(120) days delinquent is generally visited for reappraisal by an approved
appraiser or a senior collection officer of Home Investment to determine the
condition of the collateral property and the strength of the equity position of
Home Investment.
S-34
<PAGE>
DELINQUENCY AND LOSS EXPERIENCE
The following table sets forth Home Loan Bank's and Home Investment's
delinquency and loss experience at the date indicated, on the portfolio of
conventional mortgage loans originated or purchased by Home Loan Bank and
serviced by Home Loan Bank and/or Home Investment at the date indicated. There
can be no assurance that the delinquency and loss experience on the mortgage
loans (most of which have been originated during the past year) will be
consistent with the historical information provided below. Such losses and
delinquencies on the mortgage loans may be higher than the historical
information presented below.
<TABLE>
<CAPTION>
Year Ended December 31,
1999 1998 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Total Outstanding Principal Balance............ $571,805,958 $558,933,483 $591,471,875 $551,490,099
DELINQUENCY
Period of Delinquency:
30-59 Days Principal Balance................... 4,721,159 6,495,665 6,101,440 7,620,937
Percent of Delinquency by Principal Balance.... 0.83% 1.16% 1.03% 1.38%
Period of Delinquency:
60-89 Days Principal Balance................... $2,084,522 $2,353,796 $1,658,910 $2,027,057
Percent of Delinquency by Principal Balance.... 0.36% 0.42% 0.28% 0.37%
Period of Delinquency:
90 Days or More Principal Balance.............. $11,182,667 $10,572,869 $10,376,744 $10,625,157
Percent of Delinquency by Principal Balance.... 1.96% 1.91% 1.76% 1.93%
Total Delinquencies:
Principal Balance.............................. $17,988,348 $19,422,330 $18,137,094 $20,273,151
Percent of Delinquency by Principal Balance.... 3.15% 3.47% 3.07% 3.68%
REO............................................ $2,084,138 $2,128,113 $1,987,724 $2,756,730
Net Gains/(Losses) on liquidated loans......... (1,862,708) (2,077,078) (2,463,111) (1,704,472)
Net Gains/(Losses) on liquidated loans on a
Percent of Total Outstanding Principal Balance. (0.3258)% (0.3716)% (0.4164)% (0.309)%
</TABLE>
- --------------------
The above delinquency and loss experience percentages are calculated on
the basis of the total conventional mortgage loans originated or purchased by
Home Loan Bank and serviced by Home Loan Bank and/or Home Investment at the
dates indicated. There is no guarantee that the delinquency and loss experience
on the fixed rate group and the ARM group will resemble the historical
performance of the total servicing portfolio, as set forth above.
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DESCRIPTION OF THE CERTIFICATES
Each class A certificate represents a certain fractional undivided
ownership interest in the trust fund. The trust fund consists of
o the mortgage loans, together with the mortgage files relating thereto
and all collections thereon and proceeds thereof (other than payments
of interest that accrued on each mortgage loan up to and including the
due date occurring on or immediately preceding the cut-off date and
principal (including prepayments) received on or prior to the cut-off
date),
o assets that from time to time are identified as REO property and
collections thereon and proceeds thereof,
o assets that are deposited in the certificate account, including
amounts on deposit in the certificate account (including the simple
interest excess sub-account) and invested in permitted investments,
o the trustee's rights with respect to the mortgage loans under all
insurance policies required to be maintained and any insurance
proceeds,
o liquidation proceeds,
o released mortgaged property proceeds and
o the spread account.
In addition, Financial Security will issue the certificate insurance
policy under which it will guarantee payments to the class A holders as
described herein.
In addition to the class A-1 certificates and the class A-2
certificates, the trust will also issue the class R certificates. The class R
certificates are not being offered hereby.
Distributions of principal and interest to holders of record of class A
certificates as of each record date will be made on each related payment date in
an amount equal to their respective percentage interests multiplied by the
amount to be distributed to the class A holders described under "--Flow of
Funds".
SPREAD ACCOUNT
The trustee shall establish and maintain a spread account and deposit
on each payment date into the spread account a percentage of the excess
cashflow. This percentage is initially 100% and may be reduced by Financial
Security as described below. The spread account will not be part of the REMIC.
The spread account (including any investment earnings thereon) will be owned by
the class R holders for federal income tax purposes and amounts transferred from
the REMIC to the spread account will be treated as amounts distributed by the
REMIC to the class R holders for federal income tax purposes and will be taxable
to them.
The aggregate amount required to be on deposit at any time in the
spread account is specified in the pooling and servicing agreement. Any decline
or increase in the required amount will be dependent on delinquency and loss
performance of the mortgage pool. The spread account may be terminated and other
assets substituted therefor upon the prior written approval of Financial
Security and confirmation by S&P and Moody's. Amounts, if any, on deposit in the
spread account will be available to fund any shortfall in either group between
the Group Available Funds (calculated without regard to amounts from the Spread
Account) and the related Interest Distribution Amount and Principal Distribution
Amount. If on any payment date, the total amount available to be transferred
from the spread account is less than the full amount of the shortfall, the
trustee shall apply the amount withdrawn from the spread account pro rata with
respect to each group.
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<PAGE>
No initial deposit will be made to the spread account on the closing
date.
Amounts in the spread account in excess of the amount then required to
be on deposit therein will be distributed to the holders of the class R
certificates (after application for certain required payments and
distributions). The holders of the class R certificates will not be required to
refund any amounts previously distributed to them in accordance with the pooling
and servicing agreement, regardless of whether there are sufficient funds on a
subsequent payment date to make a full distribution to holders of the class A
certificates on a payment date.
All funds in the spread account may be invested in permitted
investments. Any investment earnings on funds held in the spread account shall
remain in the spread account.
SIMPLE INTEREST EXCESS SUB-ACCOUNT
The trustee will establish and maintain the simple interest excess
sub-account of the certificate account. On each payment date, the trustee will
transfer to the simple interest excess sub-account all NET SIMPLE INTEREST
EXCESS, which is any excess of the aggregate amount of simple interest excess
over the aggregate amount of simple interest shortfall. SIMPLE INTEREST
SHORTFALL is, for a payment date and each mortgage loan, any excess of (i) 30
days' interest (calculated on the basis of a 360-day year consisting of twelve
30-day months) on the principal balance of the mortgage loan at the related
interest rate, over (ii) the amount of interest actually paid on the mortgage
loan. SIMPLE INTEREST EXCESS is, for any payment date and each mortgage loan,
any excess of (i) the amount of interest actually paid on the mortgage loan for
the related due period, over (ii) 30 days' interest (calculated on the basis of
a 360-day year consisting of twelve 30-day months) on the principal balance of
the mortgage loan at the related mortgage interest rate.
The trustee will withdraw amounts on deposit in the simple interest
excess sub-account for deposit in the certificate account on the third business
day prior to each payment date to pay net simple interest shortfalls with
respect to each group. If the total shortfall with respect to both groups is
greater than the amount available from the sub-account, then such amount
available shall be applied to each group pro rata in relation to the amount of
the shortfall.
All funds in the simple interest excess sub-account may be invested in
permitted investments. So long as no event of default shall have occurred and be
continuing, any investment earnings on funds held in the simple interest excess
sub-account are for the account of the master servicer and otherwise shall be
deposited in the spread account. The trustee shall notify the master servicer of
any loss resulting from these investments. Upon receipt of notification, the
master servicer shall promptly remit the amount of the loss from its own funds
to the trustee for deposit in the simple interest excess sub-account.
PASS-THROUGH RATES
The "PASS-THROUGH RATE" for the class A-1 certificates is 7.949% per
annum.
The "PASS-THROUGH RATE" for the class A-2 certificate is one-month
LIBOR plus 0.30% per annum.
If, however, on the first date on which the then-outstanding aggregate
principal balance of the mortgage loans has declined to 5% or less of the
aggregate principal balance of the mortgage loans as of the cut-off date, the
master servicer has not exercised its purchase option described in "The
Agreements - Optional Redemption", then the Pass-Through Rate for each class on
each payment date after that date, will increase by 0.50% per annum, in the case
of the class A-1 certificates, and 0.30% per annum, in the case of the class A-2
certificates.
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<PAGE>
The rate of interest on the class A-2 certificates is also subject to
an available funds cap rate. If the rate of interest described above for the
class A-2 certificates would exceed the Class A-2 Available Funds Cap Rate, then
the pass-through rate will be accordingly reduced.
The "CLASS A-2 AVAILABLE FUNDS CAP RATE" is, with respect to the class
A-2 certificates for any payment date, a rate per annum equal to the fraction,
expressed as a percentage,
(i) the numerator of which is an amount equal to the product of (x)
1/12 of the weighted average mortgage rate on the mortgage loans
in the ARM group minus the related servicing fee, trustee fee,
premium and fifteen (15) basis points for the first twelve months
and sixty-five (65) basis points thereafter and (y) the aggregate
principal balance of the mortgage loans in the ARM group; and
(ii) the denominator of which is an amount equal to the product of the
class A-2 certificate balance and the number of days elapsed in
the related due period divided by 360.
If, on any payment date, the Class A-2 Available Funds Cap Rate limits
the interest rate on the class A-2 certificates, then the amount of the
resulting interest shortfall will be paid from excess interest to the extent
available, and otherwise will be carried forward and be due and payable on the
following payment date and shall accrue interest at the applicable pass-through
rate until paid. The certificate insurance policy does not guarantee payment of
this interest shortfall.
CALCULATION OF ONE-MONTH LIBOR
The trustee will determine the London interbank offered rate for
one-month United States dollar deposits for each accrual period for the class
A-2 certificates 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 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 accrual period). The trustee will request the principal
London office of each of the reference banks to provide a quotation of its rate.
If at least two such quotations are provided, the rate for that day will be the
arithmetic mean of the quotations. If fewer than two quotations are provided as
requested, the rate for that day will be the arithmetic mean of the rates quoted
by major banks in New York City, selected by the trustee, at approximately 11:00
a.m., New York City time, on that day for loans in United States dollars to
leading European banks for a period equal to the relevant accrual period
(commencing on the first day of such accrual period).
"Telerate Page 3750" means the display page currently so designated on
the Bridge Telerate Service (or such other page as may replace that page on that
service for the purpose of displaying comparable rates or prices) and "reference
banks" means leading banks selected by the 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 trustee and the trustee's calculation of the rate of interest
applicable to the class A-2 certificates for the related accrual period shall
(in the absence of manifest error) be final and binding.
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<PAGE>
FLOW OF FUNDS
On each payment date the trustee shall apply the Group Available Funds
applicable to each group and make distributions thereof in the following order
of priority:
o to the payment of the Interest Distribution Amount for the related
class of certificates;
o to the payment of the unpaid Interest Distribution Amount relating to
the other group, to the extent the Group Available Funds for the other
group are insufficient to pay that amount in full;
o to the payment of the Principal Distribution Amount in reduction of
the certificate balance of the related class of certificates;
o to the payment of the unpaid Principal Distribution Amount relating
to the other group, to the extent the Group Available Funds for the
other group are insufficient to pay that amount in full;
o to reimburse the certificate insurer for amounts owed to it for that
group;
o to reimburse the certificate insurer for amounts owed to it for the
other group, to the extent the Group Available Funds for the other
group are insufficient to pay that amount in full;
o to the spread account until the spread account requirement is
satisfied;
o to reimburse the master servicer for any reimbursable advances and
expenses not previously reimbursed;
o to the class A-2 holders, the Class A-2 Available Funds Cap Carryover
Amount; and
o to the owner of the residual certificates.
CERTAIN DEFINED TERMS USED IN "FLOW OF FUNDS"
"CLASS A-2 AVAILABLE FUNDS CAP CARRYOVER AMOUNT" means, with respect to
the class A-2 certificates and a payment date, the sum of (A) the excess of (i)
the amount of interest the class A-2 certificates would otherwise be entitled to
receive on such payment date had the related Pass-Through Rate not been capped
at the Class A-2 Available Funds Cap Rate, over (ii) the amount of interest
payable on the class A-2 certificates at the Class A-2 Available Funds Cap Rate
for such payment date, (B) the Class A-2 Available Funds Cap Carryover Amount,
together with accrued interest thereon, for all previous payment dates not
previously paid, and (C) one month's interest on the amount calculated in (B) at
the related Pass-Through Rate for such payment date (without giving effect to
the Class A-2 Available Funds Cap Rate).
"GROUP AVAILABLE FUNDS" means the amount for each group available to
the trustee for distribution to the holders on a payment date, including amounts
in the spread account, after deducting the servicing fees, trustee's fees,
certain other amounts reimbursable to the servicer and the premiums due to
Financial Security on that payment date.
"INTEREST CARRY-FORWARD" means, as of any payment date and with respect
to the class A certificates, the sum of: (i) the amount, if any, by which (A)
the related Interest Distribution Amount as of the preceding payment date
exceeded (B) the amount of the actual distribution made to the related
certificate holders thereon; and (ii) (a) for class A-1, 30 days' interest on
the amount of such shortfall (calculated on the basis of a 360-day year
consisting of twelve 30 day months) and (b) for class A-2, interest accruing
during the period from the preceding payment date to but not including such
payment date, in each case at an interest rate equal to the related Pass-Through
Rate.
S-39
<PAGE>
"INTEREST DISTRIBUTION AMOUNT" means, for each payment date, for class
A-1, an amount equal to 30 days' interest (calculated on the basis of a 360-day
year consisting of twelve 30-day months) and for class A-2, interest accrued
during the period from the preceding payment date to but not including such
payment date (calculated on the basis of a 360-day year and the actual number of
days in the accrual period), at the related Pass-Through Rate on the related
certificate balance immediately prior to the related payment date, reduced by
its allocable share of any prepayment interest shortfall and Civil Relief Act
shortfall for the payment date, to the extent not covered by payments by the
master servicer of compensating interest as provided herein plus any Interest
Carry-Forwards relating to that class.
"PRINCIPAL DISTRIBUTION AMOUNT" means, as of any payment date for each
group, the sum of:
(i) each payment of principal on a mortgage loan received by the
master servicer (exclusive of amounts described in clauses (ii) and
(iii) below) in the related due period,
(ii) all curtailments and all principal prepayments received with
respect to the mortgage loans during the related due period,
(iii) the principal portion of all insurance proceeds, released
mortgaged property proceeds and net liquidation proceeds received with
respect to the mortgage loans during the related due period,
(iv) an amount equal to the excess, if any, of the principal
balance of mortgage loans liquidated during the related due period over
the principal portion of net liquidation proceeds which will be
distributed to class A holders, and
(v) (a) that portion of the purchase price paid by Home Loan Bank
for any deleted mortgage loans which represents principal and (b) any
substitution adjustments required to be deposited in the certificate
account as of the related determination date.
INSURED PAYMENTS
The trustee shall receive as attorney-in-fact of each holder of class A
certificates any insured payment from Financial Security and disburse the same
pursuant to the pooling and servicing agreement. To the extent Financial
Security makes insured payments, either directly or indirectly, to the holders
of the class A certificates, Financial Security will be subrogated to the rights
of the holders of class A certificates with respect to the insured payments,
shall be deemed to the extent of the payments so made to be a registered holder
of the class A certificates and shall receive reimbursement for the insured
payments as provided in the pooling and servicing agreement, but only from the
sources and in the manner provided in the pooling and servicing agreement.
REMITTANCE REPORTS
Not later than noon California time on each payment date, the trustee
will deliver to the master servicer, Financial Security and the depositor, by
telecopy or electronic format, a statement containing information relating to
the succeeding payment date including, without limitation, the deposits to and
withdrawals from each of the accounts for each category of deposits and
withdrawals specified in the pooling and servicing agreement, the aggregate
unpaid principal balances of the mortgage loans, the balances in each of the
accounts and the other information as required by the pooling and servicing
agreement. The trustee will also forward the report to the holders on each
payment date.
S-40
<PAGE>
BOOK-ENTRY REGISTRATION
The class A certificates will be issued only in book-entry form, in
denominations of $25,000 initial principal balance and integral multiples of
$1,000 in excess thereof, except that one class A certificate may be issued in a
different amount.
The beneficial certificate owners may elect to hold their class A
certificates through the Depository Trust Company ("DTC") in the United States,
or Clearstream societe anonyme ("Clearstream") or the Euroclear System
("Euroclear") in Europe, if they are participants of these systems, or
indirectly through organizations which are participants in these systems. The
book-entry certificates will be issued in one or more certificates per class of
class A certificates which in the aggregate equal the principal balance of the
class A certificates and will initially be registered in the name of Cede & Co.,
the nominee of DTC. Clearstream and Euroclear will hold omnibus positions on
behalf of their participants through customers' securities accounts in
Clearstream's and Euroclear's names on the books of their respective
depositaries which in turn will hold these positions in customers' securities
accounts in the depositaries' names on the books of DTC. Citibank will act as
depository for Clearstream and Morgan Guaranty Trust Company of New York
("Morgan") will act as depository for Euroclear. Investors may hold beneficial
interests in the book-entry certificates in minimum denominations representing
principal amounts of $25,000. Except as described below, no beneficial
certificate owner will be entitled to receive a definitive physical certificate
representing the certificate. Unless and until definitive certificates are
issued, it is anticipated that the only "owner" of the class A certificates will
be Cede, as nominee of DTC. Beneficial certificate owners will not be owners as
that term is used in the pooling and servicing agreement. Beneficial certificate
owners are only permitted to exercise their rights indirectly through
participants and DTC.
The beneficial certificate owner's ownership of a book-entry
certificate will be recorded on the records of the financial intermediary that
maintains the beneficial certificate owner's account for this purpose. In turn,
the financial intermediary's ownership of the book-entry certificate will be
recorded on the records of DTC (or of a participating firm that acts as agent
for the financial intermediary, whose interest will in turn be recorded on the
records of DTC, if the beneficial certificate owner's financial intermediary is
not a DTC participant and on the records of Clearstream or Euroclear, as
appropriate).
DTC is a limited purpose trust company organized under the laws of the
State of New York, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the New York UCC and a "clearing agency"
registered pursuant to Section 17A of the Securities Exchange Act of 1934, as
amended. DTC was created to hold securities for its participating organizations
and to facilitate the clearance and settlement of securities transactions
between participants through electronic book-entries, thereby eliminating the
need for physical movement of certificates. Participants include securities
brokers and dealers (including the underwriter), banks, trust companies and
clearing corporations. Indirect access to the DTC system also is available to
others such as banks, brokers, dealers and trust companies that clear through or
maintain a custodial relationship with a participant, either directly or
indirectly.
Under the rules, regulations and procedures creating and affecting DTC
and its operations, DTC is required to make book-entry transfers of book-entry
certificates, such as the class A certificates, among participants on whose
behalf it acts with respect to the book-entry certificates and to receive and
transmit distributions of principal of and interest on the book-entry
certificates. Participants and indirect participants with which beneficial
certificate owners have accounts with respect to the book-entry certificates
similarly are required to make book-entry transfers and receive and transmit
these payments on behalf of their respective beneficial certificate owners.
S-41
<PAGE>
Beneficial certificate owners that are not participants or indirect
participants but desire to purchase, sell or otherwise transfer ownership of, or
other interests in, book-entry certificates may do so only through participants
and indirect participants. In addition, beneficial certificate owners will
receive all distributions of principal and interest from the trustee, or a
paying agent on behalf of the trustee, through DTC participants. DTC will
forward these distributions to its participants, which thereafter will forward
them to indirect participants or beneficial certificate owners. Beneficial
certificate owners will not be recognized by the trustee, the master servicer or
any paying agent as holders, as this term is used in the pooling and servicing
agreement, and beneficial certificate owners will be permitted to exercise the
rights of holders only indirectly through DTC and its participants.
Because of time zone differences, credits of securities received in
Clearstream or Euroclear as a result of a transaction with a participant will be
made during subsequent securities settlement processing and dated the business
day following the DTC settlement date. Such credits or any transactions in the
securities settled during the processing will be reported to the relevant
Euroclear or Clearstream participants on the following business day. Cash
received in Clearstream or Euroclear as a result of sales of securities by or
through a Clearstream participant or Euroclear participant to a DTC participant
will be received with value on the DTC settlement date but will be available in
the relevant Clearstream or Euroclear cash account only as of the business day
following settlements in DTC. For information with respect to tax documentation
procedures relating to the certificates, see "Material Federal Income Tax
Consequences--Foreign Investors" and "-- Backup Withholding" in the prospectus
and "Global Clearance, Settlement and Tax Documentation Procedures--Certain U.S.
Federal Income Tax Documentation Requirements" in Annex I hereto.
Transfers between participants will occur in accordance with DTC rules.
Transfers between Clearstream participants and Euroclear participants will occur
in accordance with their respective rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through Clearstream
participants or Euroclear participants, on the other, will be effected in DTC in
accordance with DTC rules on behalf of the relevant European international
clearing system by the relevant depository; however, cross-market transactions
will require delivery of instructions to the relevant European international
clearing system by the counterparty in the system in accordance with its rules
and procedures and within its established deadlines (European time). The
relevant European international clearing system will, if the transaction meets
its settlement requirements, deliver instructions to the Relevant Depository to
take action to effect final settlement on its behalf by delivering or receiving
securities in DTC, and making or receiving payment in accordance with normal
procedures for same day funds settlement applicable to DTC. Clearstream
participants and Euroclear participants may not deliver instructions directly to
the European Depositaries.
Clearstream is incorporated under the laws of Luxembourg as a
professional depository. Clearstream holds securities for its participant
organizations and facilitates the clearance and settlement of securities
transactions between Clearstream participants through electronic book-entry
changes in accounts of Clearstream participants, thereby eliminating the need
for physical movement of certificates. Transactions may be settled in
Clearstream in any of 28 currencies, including United States dollars.
Clearstream provides to its Clearstream participants, among other things,
services for safekeeping, administration, clearance and settlement of
internationally traded securities and securities lending and borrowing.
Clearstream interfaces with domestic markets in several countries. As a
professional depository, Clearstream is subject to regulation by the Luxembourg
Monetary Institute. Clearstream participants are recognized financial
institutions around the world, including underwriters, securities brokers and
dealers, banks, trust companies, clearing corporations
S-42
<PAGE>
and certain other organizations. Indirect access to Clearstream is also
available to others, such as banks, brokers, dealers and trust companies that
clear through or maintain a custodial relationship with a Clearstream
participant, either directly or indirectly.
Euroclear was created in 1968 to hold securities for participants of
Euroclear and to clear and settle transactions between Euroclear participants
through simultaneous electronic book-entry delivery against payment, thereby
eliminating the need for physical movement of certificates and any risk from
lack of simultaneous transfers of securities and cash. Transactions may now be
settled in any of 31 currencies, including United States dollars. Euroclear
includes various other services, including securities lending and borrowing and
interfaces with domestic markets in several countries generally similar to the
arrangements for cross-market transfers with DTC described above. Euroclear is
operated by the Brussels, Belgium office of Morgan Guaranty Trust Company of New
York, under contract with Euroclear Clearance Systems S.C., a Belgian
cooperative corporation. All operations are conducted by the Euroclear operator,
and all Euroclear Securities clearance accounts and Euroclear cash accounts are
accounts with the Euroclear operator, not the cooperative. The cooperative
establishes policy for Euroclear on behalf of Euroclear participants. Euroclear
participants include banks (including central banks), securities brokers and
dealers and other professional financial intermediaries. Indirect access to
Euroclear is also available to other firms that clear through or maintain a
custodial relationship with a Euroclear participant, either directly or
indirectly.
The Euroclear operator is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. It is
regulated and examined by the Board of Governors of the Federal Reserve System
and the New York State Banking Department, as well as the Belgian Banking
Commission.
Securities clearance accounts and cash accounts with the Euroclear
operator are governed by the Terms and Conditions Governing Use of Euroclear and
the related Operating Procedures of the Euroclear System and applicable Belgian
law. 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.
Distributions on the book-entry certificates will be made on each
payment date by the trustee to Cede, as nominee of DTC. DTC will be responsible
for crediting the amount of the payments to the accounts of the applicable DTC
participants in accordance with DTC's normal procedures. Each DTC participant
will be responsible for disbursing the payment to the beneficial certificate
owners of the book-entry certificates that it represents and to each financial
intermediary for which it acts as agent. Each financial intermediary will be
responsible for disbursing funds to the beneficial certificate owners of the
book-entry certificates that it represents.
Under a book-entry format, beneficial certificate owners of the
book-entry certificates may experience some delay in their receipt of payments,
since the payments will be forwarded by the trustee to Cede, as nominee of DTC.
Distributions with respect to class A certificates held through Clearstream or
Euroclear will be credited to the cash accounts of Clearstream participants or
Euroclear participants in accordance with the relevant system's rules and
procedures, to the extent received by the Relevant Depository. Such
distributions will be subject to tax reporting in accordance with relevant
United States tax laws and regulations. Because DTC can only act on behalf of
financial intermediaries, the ability of a beneficial certificate owner to
pledge book-entry certificates, to persons or entities that do not participate
in the depository system, or otherwise take actions in respect of the book-entry
certificates, may be limited due to the lack of physical certificates for the
S-43
<PAGE>
book-entry certificates. In addition, issuance of the book-entry certificates in
book-entry form may reduce the liquidity of the certificates in the secondary
market since certain potential investors may be unwilling to purchase
certificates for which they cannot obtain physical certificates.
Monthly and annual reports on the trust fund provided by the trustee to
Cede, as nominee of DTC, may be made available to beneficial certificate owners
upon request, in accordance with the rules, regulations and procedures creating
and affecting the depository, and to the financial intermediaries to whose DTC
accounts the book-entry certificates of the beneficial certificate owners are
credited.
DTC has advised the depositor and the master servicer that it will take
any action permitted to be taken by a holder under the pooling and servicing
agreement only at the direction of one or more participants to whose accounts
with DTC the book-entry certificates are credited. Additionally, DTC has advised
the depositor that it will take the actions with respect to specified
percentages of voting rights only at the direction of and on behalf of
participants whose holdings of book-entry certificates evidence the specified
percentages of voting rights. DTC may take conflicting actions with respect to
percentages of voting rights to the extent that participants whose holdings of
book-entry certificates evidence the percentages of voting rights authorize
divergent action.
Neither the depositor, the master servicer nor the trustee will have
any responsibility for any aspect of the records relating to or payments made on
account of beneficial ownership interests of the book-entry certificates held by
Cede, as nominee for DTC, or for maintaining, supervising or reviewing any
records relating to the beneficial ownership interests.
Although DTC, Clearstream and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of certificates among participants
of DTC, Clearstream and Euroclear, they are under no obligation to perform or
continue to perform these procedures and these procedures may be discontinued at
any time.
DEFINITIVE CERTIFICATES
The class A certificates, which will be issued initially as book-entry
certificates, will be converted to definitive certificates and reissued to
beneficial certificate owners or their nominees, rather than to DTC or its
nominee, only if (i) the depository or the master servicer advises the trustee
in writing that DTC is no longer willing or able to discharge properly its
responsibilities as depository with respect to the book-entry certificates and
the depository or the master servicer is unable to locate a qualified successor
or (ii) the trustee, at its option, elects to terminate the book-entry system
through DTC.
Upon the occurrence of any event described in the immediately preceding
paragraph, DTC will be required to notify all participants of the availability
through DTC of definitive certificates. Upon delivery of definitive
certificates, the trustee will reissue the book-entry certificates as definitive
certificates to beneficial certificate owners. Distributions of principal of,
and interest on, the book-entry certificates will thereafter be made by the
trustee, or a paying agent on behalf of the trustee, directly to holders of
Definitive certificates in accordance with the procedures set forth in the
pooling and servicing agreement.
Definitive certificates will be transferable and exchangeable at the
offices of the trustee or the certificate registrar. No service charge will be
imposed for any registration of transfer or exchange, but the trustee may
require payment of a sum sufficient to cover any tax or other governmental
charge imposed in connection therewith.
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THE AGREEMENTS
ASSIGNMENT OF MORTGAGE LOANS
On the closing date, Home Loan Bank will sell the mortgage loans to the
depositor under a mortgage loan sale agreement. The depositor will then sell the
mortgage loans to the trustee under the pooling and servicing agreement. Each
transfer will convey principal received and interest accruing on each mortgage
loan after the cut-off date. Home Loan Bank will retain all right to principal
received on each mortgage loan on or prior to the cut-off date, and interest
accrued on each mortgage loan on or prior to the due date immediately preceding
the cut-off date.
In connection with the sale, Home Loan Bank will cause to be delivered
to the trustee on the closing date the following documents with respect to each
mortgage loan:
o the original mortgage note, with all prior and intervening
endorsements showing a complete chain of endorsements from the
originator of the mortgage loan to the person so endorsing the
mortgage loan to the trustee;
o an original mortgage, and any related power of attorney, with
evidence of recording, or a certified copy of the mortgage and any
related power of attorney;
o the original assignment of mortgage, in recordable form, from Home
Loan Bank to the trustee;
o the original lender's policy of title insurance or a true or
certified copy, or if the lender's title insurance policy has not
been issued, a marked up commitment to issue the policy;
o any intervening assignments showing a complete chain of
assignments from the originator to Home Loan Bank; and
o originals of all assumption, written assurance, substitution and
modification agreements, if any.
The trustee will execute and deliver on the closing date an
acknowledgment of receipt for each mortgage loan, the items listed above, except
for the final item and with any exceptions noted. The trustee will review, or
cause to be reviewed, each mortgage file within 15 days after the closing date
(or, with respect to any qualified substitute mortgage loan, within 15 days
after the receipt by the trustee thereof) and deliver a certification generally
to the effect that, as to each mortgage loan listed in the mortgage loan
schedule,
o all documents required to be delivered to it pursuant to the
pooling and servicing agreement are in its possession,
o each document has been reviewed by it and has not been mutilated,
damaged, torn or otherwise physically altered, appears regular on
its face and relates to the mortgage loan, and
o based on its examination and only as to the foregoing documents,
certain information set forth on the mortgage loan schedule
accurately reflects the information set forth in the trustee's
mortgage file delivered on that date.
If the trustee or Financial Security during the process of reviewing
the mortgage files finds any document constituting a part of a trustee's
mortgage file which is not executed, has not been received or is unrelated to
the mortgage loans, or that any mortgage loan does not conform to the above
requirements or to the description in the mortgage loan schedule, such person
shall promptly so notify the trustee, the master servicer and Financial
Security. Home Loan Bank will use reasonable efforts to cause to be remedied a
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material defect in a document constituting part of a trustee's mortgage file of
which it is so notified by the trustee.
If, however, within 90 days after the trustee's notice to it respecting
the defect Home Loan Bank has not remedied the defect and it materially and
adversely affects the interests of the holders or Financial Security in the
mortgage loan, Home Loan Bank will either
o substitute a qualified mortgage loan and, if the outstanding
principal balance of the substitute mortgage loan is less than the
principal balance of the mortgage loan as of the date of substitution
plus accrued and unpaid interest thereon, deliver to the master
servicer as part of the related monthly remittance remitted by the
master servicer the amount of any shortfall or
o purchase the mortgage loan at a price equal to the outstanding
principal balance of the mortgage loan as of the date of purchase, plus
the greater of (i) all accrued and unpaid interest thereon and (ii) 30
days' interest (calculated on the basis of a 360-day year consisting of
twelve 30-day months) thereon, computed at the related mortgage
interest rate, net of the servicing fee if Home Loan Bank is the master
servicer, plus the amount of any unreimbursed servicing advances made
by the master servicer.
If Home Loan Bank purchases any mortgage loan from the trust other than
a mortgage loan that is in default or as to which default is imminent, Home Loan
Bank must deliver to the trustee an opinion of counsel knowledgeable in federal
income tax matters which states that the purchase would not result in the
imposition of a prohibited transaction tax for purposes of the REMIC provisions
of the Code or cause the trust to fail to qualify as a REMIC at any time any
certificates are outstanding.
A qualified substitute mortgage loan is one or more mortgage loans
substituted for a deleted mortgage loan that:
o with respect to the fixed rate loans, have a fixed mortgage interest
rate or rates of not less than (and not more than one percentage point
more than) the mortgage interest rate for the deleted mortgage loan,
o with respect to the adjustable rate loans, have:
1) an adjustable rate of interest;
2) a gross margin not less than the gross margin of the deleted
mortgage loan;
3) a maximum rate not less than the maximum mortgage interest rate
for the deleted mortgage loan; and
4) a minimum rate not less than the minimum mortgage interest rate
for the deleted mortgage loan,
o with respect to the adjustable rate loans, have a period of months
until the next rate adjustment date of not less than (and not more than
six months more than) the deleted mortgage loan,
o have the same or a better lien priority as the deleted mortgage loan,
o have a remaining term to maturity not more than six months earlier
and not later than the remaining term to maturity of the deleted
mortgage loan,
o have combined loan-to-value ratios at the time of substitution no
higher than the combined loan-to-value ratio of the deleted mortgage
loan,
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o have principal balances (after application of all payments received
on or prior to the date of substitution) not substantially less and not
more than the principal balance of the deleted mortgage loan as of the
date,
o satisfy the criteria set forth from time to time in the definition of
"qualified replacement mortgage" at Section 860G(a)(4) of the Code, and
o comply as of the date of substitution with each representation and
warranty set forth in the mortgage purchase agreement.
REPRESENTATIONS AND WARRANTIES OF HOME LOAN BANK
Home Loan Bank will represent, among other things, with respect to each
mortgage loan, as of the closing date, the following:
1. the information set forth in the mortgage loan schedule is true
and correct;
2. all of the original or certified documentation constituting the
trustee's mortgage files has been or will be delivered to the trustee
on the closing date or as otherwise provided in the mortgage purchase
agreement;
3. each mortgaged property is improved by a one- to four-family
residential dwelling, condo, townhome, manufactured home, multi-family
dwelling, PUD or single family home, which, to the best of Home Loan
Bank's knowledge, does not include cooperatives or mobile homes other
than permanently affixed, manufactured housing units which constitute
real property under state law;
4. each mortgage note provides for a schedule of monthly payments
which are, if timely paid, sufficient to fully amortize the principal
balance of the mortgage note on or before its maturity date and to pay
interest at the applicable mortgage interest rate, except that a
limited number of "balloon" loans may be permitted by Financial
Security;
5. each mortgage is a valid and subsisting first or second lien of
record on the mortgaged property subject, in the case of any second
mortgage loan, only to a first lien on the mortgaged property and
subject in all cases to the exceptions to title set forth in the title
insurance policy or the other evidence of title enumerated in the
mortgage purchase agreement; any security agreement, chattel mortgage
or equivalent document related to the mortgage and delivered to the
trustee establishes in Home Loan Bank a valid and subsisting lien on
the property described therein, and Home Loan Bank has full right to
sell and assign the same to the depositor or its assignee;
6. immediately prior to sale to the depositor, Home Loan Bank was
the sole owner and holder of each mortgage loan subject to no liens,
charges or mortgages; Home Loan Bank has full right and authority to
sell the same to the depositor; and immediately upon the sale to the
depositor, the depositor will be the sole owner of each mortgage loan;
7. no mortgage loan was 30 days or more delinquent as of the
cut-off date, and no mortgage loan has been 30 or more days delinquent
more than twice during the twelve months prior to the cut-off date;
8. no mortgage loan was originated under a buydown plan;
9. the related first lien, if any, requires equal monthly
payments, unless the first lien is a graduated payment mortgage loan,
or if it bears an adjustable interest rate, the monthly payments for
the related first lien may adjust, but no more frequently than monthly;
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10. no mortgage loan provides for negative amortization or
deferred interest; and
11. each mortgage loan conforms, and all the mortgage loans in the
aggregate conform, to the descriptions in this prospectus supplement.
Upon the discovery by any of the holders, Home Loan Bank, the master
servicer, the sub-servicer, Financial Security, or the trustee that any of the
representations and warranties contained in the mortgage purchase agreement have
been breached in any material respect as of the closing date, with the result
that the interests of the holders in the related mortgage loan or the interests
of Financial Security were materially and adversely affected (notwithstanding
that the representation and warranty was made to Home Loan Bank's best
knowledge), the party discovering the breach is required to give prompt written
notice to the other parties. Subject to certain provisions of the mortgage
purchase agreement, within 90 days of the earlier to occur of Home Loan Bank's
discovery or its receipt of notice of any breach, Home Loan Bank will
o promptly cure the breach in all material respects,
o remove each mortgage loan which has given rise to the requirement for
action by Home Loan Bank, substitute one or more qualified substitute
mortgage loans and, if the outstanding principal amount of the
qualified substitute mortgage loans as of the date of substitution is
less than the outstanding principal balance, plus accrued and unpaid
interest thereon of the replaced mortgage loans as of the date of
substitution, deliver to the trust fund as part of the amounts remitted
by the master servicer on the payment date the amount of the shortfall,
or
o purchase the mortgage loan.
Any substitution of one or more qualified substitute mortgage loans
must be effected not later than two years after the closing date unless the
trustee and Financial Security receive an opinion of counsel that the
substitution would not result in a prohibited transaction tax for purposes of
the REMIC provisions of the Code. Home Loan Bank may not purchase the mortgage
loan that is not in default or as to which no default is imminent unless Home
Loan Bank has delivered to the trustee and Financial Security an opinion of
counsel knowledgeable in federal income tax matters in form and substance
satisfactory to the trustee to the effect that the purchase would not result in
a prohibited transaction tax for purposes of the REMIC provisions of the Code or
cause the trust to fail to qualify as a REMIC at any time any certificates are
outstanding. The obligation of Home Loan Bank to cure the breach or to
substitute or purchase any mortgage loan constitutes the sole remedy respecting
a material breach of any representation or warranty to the holders, the trustee
and Financial Security.
PAYMENTS ON THE MORTGAGE LOANS; DISTRIBUTIONS ON THE CERTIFICATES
The trustee will cause the certificate account to be established and
maintained as an eligible account.
ELIGIBLE ACCOUNTS may be either
(1) an account or accounts maintained with an institution whose
deposits are insured by the FDIC, the unsecured and
uncollateralized debt obligations of which institution shall
be rated AA or better by Standard & Poor's and Aa2 or better
by Moody's and in the highest short term rating category by
Standard & Poor's and Moody's, and which is
o a federal savings and loan association duly organized,
validly existing and in good standing under the
federal banking laws,
o an institution duly organized, validly existing and in
good standing under the applicable banking laws of any
state,
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o a national banking association duly organized, validly
existing and in good standing under the federal
banking laws,
o a principal subsidiary of a bank holding company, or
o approved in writing by Financial Security, Standard &
Poor's and Moody's or
(2) a trust account or accounts maintained with the trust
department of a federal or state chartered depository
institution or trust company, having capital and surplus of
not less than $50,000,000, acting in its fiduciary capacity.
All funds in the certificate account shall be invested by the trustee
pursuant to the master servicer's instructions in permitted investments. So long
as no event of default shall have occurred and be continuing, any investment
earnings on funds held in the certificate account are for the account of the
master servicer and otherwise shall be deposited in the spread account. The
master servicer shall deposit in the certificate account the amount of any loss
resulting from these investments from its own funds.
The master servicer will use its best efforts to deposit into the
certificate account within one business day and in any event to deposit within
two business days of receipt all payments received after the cut-off date on
account of principal and interest on the mortgage loans and all principal
prepayments in full and curtailments (i.e. partial prepayments) collected after
the cut-off date (but net of the servicing fee with respect to each mortgage
loan and other servicing compensation payable to the master servicer as
permitted by the pooling and servicing agreement and other than payments on
account of interest that accrued on each mortgage loan up to and including the
due date immediately preceding the cut-off date), all liquidation proceeds,
insurance proceeds, released mortgaged property proceeds, any amounts payable in
connection with the repurchase of any mortgage loan, the amount of any
substitution adjustment required to be made, the amount of any losses incurred
in connection with investments in permitted investments, certain amounts
relating to insufficient insurance policies and REO property, all monthly
advances and all payments of compensating interest.
The trustee shall make withdrawals from the certificate account only
for the following purposes, although no insured payments or amounts transferred
from the spread account will be used to make payments other than to the class A
certificateholders:
o to effect distributions to holders as described under "-- Flow of
Funds";
o to reimburse the master servicer for any accrued unpaid servicing
fees and for unreimbursed monthly advances and servicing advances. The
master servicer's right to reimbursement for unpaid servicing fees and
unreimbursed servicing advances is limited to late collections on the
related mortgage loan. The master servicer's right to reimbursement for
unreimbursed monthly advances is limited to late collections of
interest on any mortgage loan and to liquidation proceeds and insurance
proceeds on related mortgage loans. The master servicer's rights to the
reimbursements shall be prior to the rights of holders unless Home Loan
Bank, or an affiliate of Home Loan Bank, is the master servicer and
Home Loan Bank is required to repurchase or substitute a mortgage loan
pursuant to the mortgage purchase agreement or the pooling and
servicing agreement, in which case the master servicer's right to the
reimbursement shall be subsequent to the payment to the holders of the
purchase price or substitution adjustment;
o to withdraw any amount received from a mortgagor that is recoverable
and sought to be recovered as a voidable preference by a trustee in
bankruptcy pursuant to the United States Bankruptcy Code in accordance
with a final, nonappealable order of a court having competent
jurisdiction;
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o to make investments in permitted investments and, subject to the
pooling and servicing agreement, to pay to the spread account or the
master servicer, as applicable, interest earned in respect of permitted
investments or on funds deposited in the certificate account;
o to withdraw any funds deposited in the certificate account that were
not required to be deposited therein or were deposited therein in error
and to pay the funds to the appropriate person;
o to pay the master servicer the servicing fee and any other permitted
servicing compensation to the extent not previously retained or paid;
o to withdraw funds necessary for the conservation and disposition of
REO property;
o to reimburse the master servicer for nonrecoverable advances that are
not, with respect to aggregate servicing advances on any single
mortgage loan or REO property, in excess of the principal balance
thereof;
o to pay premiums on the certificate insurance policy to Financial
Security;
o to pay Home Loan Bank collections received in respect of accrued
interest on the mortgage loans through the due date on or preceding the
cut-off date; and
o to clear and terminate the certificate account upon the termination
of the pooling and servicing agreement and to pay any amounts remaining
therein to the class R holders.
SERVICING
The master servicer will service the mortgage loans with the same care
as it customarily employs in servicing and administering mortgage loans for its
own account, in accordance with accepted second mortgage servicing practices of
prudent lending institutions and giving due consideration to Financial
Security's and the holders' reliance on it.
The master servicer is required to make reasonable efforts to collect
all payments called for under the terms and provisions of the mortgage loans.
Consistent with the foregoing, the master servicer may at its own discretion
waive any late payment charge, assumption fee or any penalty interest in
connection with the prepayment of a mortgage loan or any other fee or charge
which the master servicer would be entitled to retain as servicing compensation
and may waive, vary or modify any term of any mortgage loan or consent to the
postponement of strict compliance with any term or in any matter grant
indulgence to any mortgagor, subject to the limitations set forth in the pooling
and servicing agreement. In the event the master servicer consents to the
deferment of the due dates for payments due on a mortgage note, the master
servicer shall nonetheless make payment of any required monthly advances with
respect to the payments so extended to the same extent as if the installment
were due, owing and delinquent and had not been deferred.
SUB-SERVICING ARRANGEMENTS. Home Loan Investment Corporation shall act
as the initial sub-servicer. The master servicer is permitted, with the prior
consent of Financial Security to enter into other sub-servicing agreements for
any servicing and administration of mortgage loans with any institution which is
in compliance with the laws of each state necessary to enable it to perform its
obligations under the sub-servicing agreement and is a Freddie Mac or Fannie Mae
approved seller-servicer for first and second mortgage loans, is an affiliate of
the master servicer or is otherwise approved by a majority of the holders.
Notwithstanding any sub-servicing agreement, the master servicer shall
not be relieved of its obligations under the pooling and servicing agreement and
the master servicer shall be obligated to the same extent and under the same
terms and conditions as if it alone were servicing and administering the
mortgage loans. The master servicer shall be entitled to enter into any
agreement with a sub-servicer for indemnification
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of the master servicer by the sub-servicer and nothing contained in the pooling
and servicing agreement shall be deemed to limit or modify the indemnification.
MONTHLY ADVANCES. Not later than the close of business on the third
business day prior to the related payment date, the master servicer shall remit
to the trustee for deposit in the certificate account as a MONTHLY ADVANCE an
amount, to be distributed on the related payment date, equal to the sum of the
interest accrued on each mortgage loan through the related due date but not
received by the master servicer as of the close of business on the last day of
the related due period (net of the servicing fee), plus, with respect to each
REO property which was acquired during or prior to the related due period and as
to which a disposition did not occur during the related due period, an amount
equal to the excess, if any, of interest on the principal balance of the REO
property for the most recently ended due period for the related mortgage loan at
the related mortgage interest rate (net of the servicing fee) over the net
income from the REO property transferred to the certificate account for the
payment date.
SERVICING ADVANCES. In the course of performing its servicing
obligations, the master servicer will pay as a servicing advance all reasonable
and customary out-of-pocket costs and expenses incurred in the performance of
its servicing obligations, including, but not limited to, the cost of the
preservation, restoration and protection of the mortgaged properties; any
enforcement or judicial proceedings, including foreclosures, and the management
and liquidation of mortgaged property acquired in satisfaction of the related
mortgage.
The master servicer may recover monthly advances and servicing advances
to the extent permitted by the mortgage loans or, if not recovered from the
mortgagor on whose behalf the servicing advance or monthly advance was made,
from late collections on the related mortgage loan, including liquidation
proceeds, released mortgaged property proceeds, insurance proceeds and other
amounts as may be collected by the master servicer from the mortgagor or
otherwise relating to the mortgage loan, or, in the case of monthly advances,
from late collections of interest on any mortgage loan.
The master servicer is not required to make any monthly advance or
servicing advance which it, in its business judgment, determines would be a
nonrecoverable monthly advance or nonrecoverable servicing advance.
COMPENSATING INTEREST. The master servicer is obligated to pay as
COMPENSATING INTEREST, those shortfalls in interest collections payable on the
class A certificates that are attributable to prepayment interest shortfalls and
net simple interest shortfalls, but only to the extent of the servicing fee for
the related due period. The master servicer is not entitled to reimbursement for
prepayment interest shortfalls, but may be reimbursed out of the simple interest
excess sub-account for payments of compensating interest made with respect to
net simple interest shortfalls.
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
In addition to the servicing fee, the master servicer is entitled to
retain additional servicing compensation in the form of assumption and other
administrative fees, release fees, bad check charges, any other
servicing-related fees and net liquidation proceeds not otherwise required to be
deposited in the certificate account.
HAZARD INSURANCE
The master servicer will cause to be maintained fire and hazard
insurance with extended coverage customary in the area where the mortgaged
property is located, in an amount which is at least equal to the least of
o the outstanding principal balance owing on the mortgage loan and any
related senior liens,
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o the full insurable value of the premises securing the mortgage loan,
and
o the minimum amount required to compensate for damage or loss on a
replacement cost basis; in each case in an amount not less than the
amount as is necessary to avoid the application of any co-insurance
clause contained in the related hazard insurance policy.
Generally, if the mortgaged property is in an area identified in the
Federal Register by the Flood Emergency Management Agency as FLOOD ZONE "A",
flood insurance has been made available and the master servicer determines that
the insurance is necessary in accordance with accepted second mortgage servicing
practices of prudent lending institutions, the master servicer will cause to be
purchased a flood insurance policy with a generally acceptable insurance
carrier, in an amount representing coverage not less than the least of
o the outstanding principal balance of the mortgage loan and the first
lien,
o the full insurable value of the mortgaged property, or
o the maximum amount of insurance available under the National Flood
Insurance Act of 1968, as amended.
The master servicer will also maintain on REO property, to the extent
the insurance is available, fire and hazard insurance in the applicable amounts
described above, liability insurance and, to the extent required and available
under the National Flood Insurance Act of 1968, and the master servicer
determines that the insurance is necessary in accordance with accepted second
mortgage servicing practices of prudent lending institutions, flood insurance in
an amount equal to that required above. Any amounts collected by the master
servicer under any of the policies (other than amounts to be applied to the
restoration or repair of the mortgaged property, or to be released to the
mortgagor in accordance with customary second mortgage servicing procedures)
will be deposited in the certificate account, subject to retention by the master
servicer to the extent the amounts constitute servicing compensation or to
withdrawal pursuant to the pooling and servicing agreement.
In the event that the master servicer obtains and maintains a blanket
policy insuring against fire and hazards of extended coverage on all of the
mortgage loans, then, to the extent the policy names the master servicer as loss
payee and provides coverage in an amount equal to the aggregate unpaid principal
balance of the mortgage loans without coinsurance, and otherwise complies with
the requirements of the first paragraph of this subsection, the master servicer
will be deemed conclusively to have satisfied its obligations with respect to
fire and hazard insurance coverage.
ENFORCEMENT OF DUE-ON-SALE CLAUSES
When a mortgaged property has been or is about to be conveyed by the
mortgagor, the master servicer, on behalf of the trustee, shall, to the extent
it has knowledge of the conveyance or prospective conveyance, enforce the rights
of the trustee as the mortgagee of record to accelerate the maturity of the
related mortgage loan under any "due-on-sale" clause contained in the related
mortgage or mortgage note; provided, however, that the master servicer shall not
exercise any such right if the "due-on-sale" clause, in the reasonable belief of
the master servicer, is not enforceable under applicable law. In this event, the
master servicer shall enter into an assumption and modification agreement with
the person to whom the property has been or is about to be conveyed, pursuant to
which the person becomes liable under the mortgage note and, unless prohibited
by applicable law or the mortgage or mortgage note, the mortgagor remains liable
thereon. The master servicer is also authorized, with the prior approval of
Financial Security except as provided in the pooling and servicing agreement, to
enter into a substitution of liability agreement with the person, pursuant to
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which the original mortgagor is released from liability and the person is
substituted as mortgagor and becomes liable under the mortgage note.
REALIZATION UPON DEFAULTED MORTGAGE LOANS
The master servicer is required to foreclose upon or otherwise
comparably effect the ownership in the name of the trustee on behalf of the
holders of mortgaged properties relating to defaulted mortgage loans as to which
no satisfactory arrangements can be made for collection of delinquent payments.
However, the master servicer is not required to foreclose in the event that it
determines that foreclosure would not be in the best interests of the holders or
Financial Security. In connection with the foreclosure or other conversion, the
master servicer shall exercise collection and foreclosure procedures with the
same degree of care and skill in its exercise or use, as it would exercise or
use under the circumstances in the conduct of its own affairs.
SERVICER REPORTS
The master servicer is required to deliver to Financial Security, the
trustee, and the rating agencies, not later than the last day of the fifth month
following the end of the master servicer's fiscal year an officers' certificate
stating that
o the master servicer has fully complied with the servicing provisions
of the pooling and servicing agreement,
o a review of the activities of the master servicer during the
preceding year and of performance under the pooling and servicing
agreement has been made under the officers' supervision, and
o to the best of the officers' knowledge, based on that review, the
master servicer has fulfilled all its obligations under the pooling and
servicing agreement for the year, or, if there has been a default in
the fulfillment of any the obligation, specifying each default known to
the officers and the nature and status thereof including the steps
being taken by the master servicer to remedy the default.
Not later than the last day of the fifth month following the end of the
master servicer's fiscal year, the master servicer is required to cause to be
delivered to Financial Security, the trustee and the rating agencies a letter or
letters of a firm of independent certified public accountants reasonably
acceptable to Financial Security and the trustee stating that the firm has, with
respect to the master servicer's overall servicing operations, examined the
operations in accordance with the requirements of the Uniform Single Attestation
Program for Mortgage Bankers, and stating the firm's conclusions relating
thereto.
REMOVAL AND RESIGNATION OF THE MASTER SERVICER
Financial Security may remove the master servicer upon the occurrence
and continuation beyond the applicable cure period of any of the following
events, other than an event described in clause (i)(A) below, and the trustee,
at the direction of the majority holders with the consent of Financial Security,
may remove the master servicer upon the occurrence and continuation beyond the
applicable cure period of an event described in clause (i)(B), (iii), (iv) or
(v) below:
(i)(A) the failure by the master servicer to make any required
monthly advance to the extent of the full amount of the Interest
Distribution Amount; or (B) any other failure by the master servicer to
remit to the trustee any payment required to be made by the master
servicer under the terms of the pooling and servicing agreement, which
failure continues unremedied for one (1) business day after the date
upon which written notice of the failure, requiring the same to be
remedied, shall have been given to the master servicer and Financial
Security by the trustee or to the master servicer and the
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trustee by Financial Security or holders of class A certificates
evidencing percentage interests of at least 25%; or
(ii) the failure by the master servicer to make any required
servicing advance, which failure continues unremedied for a period of
30 days, or the failure by the master servicer duly to observe or
perform, in any material respect, any other covenants, obligations or
agreements of the master servicer as set forth in the pooling and
servicing agreement, which failure continues unremedied for a period of
60 days after the date on which written notice of the failure,
requiring the same to be remedied, shall have been given to the master
servicer by the trustee or to the master servicer and the trustee by
any holder or Financial Security; or
(iii) a decree or order of a court or agency or supervisory
authority having jurisdiction in an involuntary case under any present
or future federal or state bankruptcy, insolvency or similar law or for
the appointment of a conservator or receiver or liquidator in any
insolvency, readjustment of debt, marshalling of assets and liabilities
or similar proceedings, or for the winding-up or liquidation of its
affairs, shall have been entered against the master servicer and the
decree or order shall have remained in force, undischarged or unstayed
for a period of 60 days; or
(iv) the master servicer shall consent to the appointment of a
conservator or receiver or liquidator in any insolvency, readjustment
of debt, marshalling of assets and liabilities or similar proceedings
of or relating to the master servicer or of or relating to all or
substantially all of the master servicer's property; or
(v) the master servicer shall admit in writing its inability
to pay its debts as they become due, file a petition to take advantage
of any applicable insolvency or reorganization statute, make an
assignment for the benefit of its creditors, or voluntarily suspend
payment of its obligations.
Upon the occurrence and continuation of the event described in clause
(i)(A), if the monthly advance is not made by 12:00 Noon New York time on the
second business day prior to the applicable payment date, the trustee or a
successor master servicer will immediately assume the duties of the master
servicer.
The master servicer may not assign its obligations under the pooling
and servicing agreement nor resign from the obligations and duties thereby
imposed on it except by mutual consent of Home Loan Bank (if Home Loan Bank is
not the master servicer), Financial Security and the trustee, or upon the
determination that the master servicer's duties thereunder are no longer
permissible under applicable law and the incapacity cannot be cured by the
master servicer. No resignation shall become effective until a successor has
assumed the master servicer's responsibilities and obligations in accordance
with the pooling and servicing agreement.
Upon removal or resignation of the master servicer, the trustee will be
the successor master servicer. The trustee, as successor master servicer, will
be obligated to make monthly advances and servicing advances and certain other
advances unless it determines in its business judgment that the advances would
not be recoverable. If, however, the trustee is unwilling or unable to act as
successor master servicer, or if the majority holders (with the consent of
Financial Security) or Financial Security so requests, the trustee may appoint,
or petition a court of competent jurisdiction to appoint, subject to the
approval of Financial Security, any established mortgage loan servicing
institution acceptable to Financial Security having a net worth of not less than
$15,000,000 as the successor master servicer in the assumption of all or any
part of the responsibilities, duties or liabilities of the master servicer.
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The trustee and any other successor master servicer in this capacity is
entitled to the same reimbursement for advances and no more than the same
servicing compensation as the master servicer. See " -- Servicing and Other
Compensation and Payment of Expenses".
The master servicer will agree to act as the master servicer for an
initial term from the closing date to June 30, 2000, which term will be
extendable by Financial Security by notice to the trustee for successive terms
of three calendar months each, until the termination of the trust fund. The
master servicer will, upon its receipt of each notice of extension become bound
for the duration of the term covered by the master servicer extension notice to
continue as the master servicer subject to and in accordance with the other
provisions of the pooling and servicing agreement. If as of the fifteenth day
prior to the last day of any term of the master servicer the trustee shall not
have received any master servicer extension notice from Financial Security, the
trustee will, within five days thereafter, give written notice of non-receipt to
Financial Security and the master servicer. Financial Security has agreed to
extend each 90-day term of the master servicer, in the absence of an event of
default under the Insurance and Indemnity Agreement, provided that certain
criteria regarding the delinquency and loss experience of the mortgage loans are
satisfied. Notwithstanding the proviso in the foregoing sentence, if the balance
on deposit in the spread account is equal to a specified amount, and in the
absence of an event of default, Financial Security is obligated to extend the
90-day term of the master servicer.
OPTIONAL REDEMPTION
The master servicer may, at its option, terminate the trust on any date
on which the aggregate principal balance of the mortgage loans is less than 5%
of the aggregate principal balance of the mortgage loans as of the cut-off date
by purchasing all of the outstanding mortgage loans and REO properties. This
purchase will result in the redemption of the class A certificates at a price
equal to the outstanding certificate balance of the class A certificates, plus
accrued interest.
OPTIONAL PURCHASE OF DEFAULTED MORTGAGE LOANS
Home Loan Bank and its affiliates have the option to purchase from the
trust fund any mortgage loan 90 days or more delinquent at a purchase price
equal to the outstanding principal balance of the mortgage loan as of the date
of purchase, plus the greater of (i) all accrued and unpaid interest on the
principal balance and (ii) 30 days' interest on the principal balance, computed
at the related mortgage interest rate, plus the amount of any unreimbursed
servicing advances made by the master servicer with respect to the mortgage
loan.
Notwithstanding the foregoing, unless Financial Security consents, Home
Loan Bank or any affiliate may only exercise its option with respect to the
mortgage loan or mortgage loans that have been delinquent for the longest period
at the time of repurchase and only so long as the total repurchase of delinquent
loans is less than 5% of the aggregate principal balance of the mortgage loans
on the cut-off date. If Financial Security fails to respond to the affiliate's
request for consent within 10 business days after receipt thereof, the affiliate
may repurchase the mortgage loan or mortgage loans proposed to be repurchased
without the consent of, or any further action by, Financial Security.
TERMINATION
The trust will terminate upon notice to the trustee of either: (a) the
later of the distribution to holders of the final payment or collection with
respect to the last mortgage loan (or monthly advances of same by the master
servicer), or the disposition of all funds with respect to the last mortgage
loan and the remittance of all funds due under the pooling and servicing
agreement and the payment of all amounts due and payable to Financial Security
and the trustee or (b) mutual consent of the master servicer, Financial Security
and all holders in writing. In no event, however, will the trust terminate later
than twenty-one years after the death of
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the last surviving lineal descendant of the person named in the pooling and
servicing agreement, alive as of the date of the pooling and servicing
agreement.
AMENDMENT
The pooling and servicing agreement may be amended from time to time by
the depositor, the master servicer and the trustee by written agreement, upon
the prior written consent of Financial Security, without notice to, or consent
of, the holders, to cure any ambiguity, to correct or supplement any provisions
therein, to comply with any changes in the Code, or to make any other provisions
with respect to matters or questions arising thereunder which shall not be
inconsistent with the provisions thereof. The amendment shall not, as evidenced
by an opinion of counsel delivered to the trustee, adversely affect in any
material respect the interests of any holder. The amendment shall be deemed to
not adversely affect in any material respect the interests of the holders and no
opinion shall be required if the person requesting the amendment obtains a
letter from each of the rating agencies stating that the amendment would not
result in the downgrading or withdrawal of the respective ratings then assigned
to the class A certificates. The amendment may not reduce in any manner the
amount of, or delay the timing of, payments received on the mortgage loans which
are required to be distributed on any certificate without the consent of the
holder of the certificate, or change the rights or obligations of any other
party to the pooling and servicing agreement without the consent of the party,
which consent will not be unreasonably withheld.
The pooling and servicing agreement may be amended from time to time by
the depositor, the master servicer and the trustee with the consent of Financial
Security, and the holders of the majority of the percentage interests in the
Class A and class R certificates for the purpose of adding any provisions to or
changing in any manner or eliminating any of the provisions of the pooling and
servicing agreement or of modifying in any manner the rights of the holders. The
amendment shall not be made unless the trustee receives an opinion of counsel
that the change will not adversely affect the status of the trust as a REMIC or
cause a tax to be imposed on the REMIC. The amendment shall not reduce in any
manner the amount of, or delay the timing of, payments received on mortgage
loans which are required to be distributed on any certificate without the
consent of the holder of the certificate or reduce the percentage for each class
the holders of which are required to consent to the amendment without the
consent of the holders of 100% of each class of certificates affected thereby.
The mortgage purchase agreement contains substantially similar
restrictions regarding amendment.
THE TRUSTEE
Bankers Trust Company of California, N.A., a national banking
association with its principal place of business in California, has been named
trustee. The trustee will serve initially as the custodian of the trustee's
mortgage files.
The trustee shall at all times be a banking association organized and
doing business under the laws of the United States of America or of any state,
authorized under these laws to exercise corporate trust powers, having a
combined capital and surplus of at least $50,000,000, whose long-term deposits,
if any, are rated at least BBB by Standard & Poor's and Baa3 by Moody's, or a
lower rating as may be approved in writing by Financial Security, Moody's and
Standard & Poor's, subject to supervision or examination by federal or state
authority and reasonably acceptable to Financial Security as evidenced in
writing. If at any time the trustee shall cease to be eligible in accordance
with the provisions described in this paragraph, it shall resign immediately in
the manner and with the effect specified in the pooling and servicing agreement.
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Any resignation or removal of the trustee and appointment of a
successor trustee shall become effective upon the acceptance of appointment by a
successor trustee.
The trustee, or any trustee or trustees hereafter appointed, may resign
at any time in the manner set forth in the pooling and servicing agreement. Upon
receiving notice of resignation, the master servicer shall promptly appoint a
successor trustee or trustees meeting the above eligibility requirements. The
master servicer will deliver a copy of the instrument used to appoint a
successor trustee to the holders, Financial Security and the depositor, and upon
acceptance of appointment by a successor trustee, the master servicer will give
notice thereof to the holders. If no successor trustee shall have been appointed
and have accepted appointment within 60 days after the giving of notice of
resignation, the resigning trustee may petition any court of competent
jurisdiction for the appointment of a successor trustee. The court may
thereupon, after the notice, if any, as it may deem proper and prescribe,
appoint a successor trustee.
If the trustee fails to perform in accordance with the terms of the
pooling and servicing agreement, Financial Security or the majority holders with
the consent of Financial Security, may remove the trustee and appoint a
successor trustee in the manner set forth in the pooling and servicing
agreement.
At any time, for the purpose of meeting any legal requirements of any
jurisdiction in which any part of the trust fund or property securing the same
may at the time be located, the master servicer and the trustee acting jointly
shall have the power and shall execute and deliver all instruments to appoint
one or more persons approved by the trustee to act as co-trustee or co-trustees,
jointly with the trustee, or separate trustee or separate trustees, of all or
any part of the trust fund, and to vest in the person or persons, in this
capacity, title to the trust fund, or any part thereof, and, subject to the
provisions of the pooling and servicing agreement, such powers, duties,
obligations, rights and trusts as the master servicer and the trustee may
consider necessary or desirable.
THE CERTIFICATE INSURER AND THE CERTIFICATE INSURANCE POLICY
THE CERTIFICATE INSURER
The following information has been obtained from Financial Security
Assurance Inc. and has not been verified by Home Loan Bank or the underwriter.
No representations or warranty is made by Home Loan Bank or the underwriter with
respect thereto.
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.
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
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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 White Mountains Insurance Group, Inc.,
MediaOne Capital Corporation, The Tokio Marine and Fire Insurance Co., Ltd. and
XL Capital Ltd. 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 quota share
treaties and on a transaction-by-transaction basis. Such reinsurance is utilized
by Financial Security as a risk management device and to comply with certain
statutory and rating agency requirements; it does not alter or limit Financial
Security's obligations under any financial guaranty insurance policy.
RATING
Financial Security's insurance financial strength is rated "Aaa" by
Moody's Investors Service, Inc. Financial Security's insurer financial strength
is rated "AAA" by Standard & Poor's Ratings Services and Standard & Poor's
(Australia) Pty. Ltd. 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" and "Risk Factors
- -- Ratings on class A certificates are dependent upon Financial Security's
creditworthiness".
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, 1999 (in thousands):
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<TABLE>
<CAPTION>
SEPTEMBER 30, 1999
(UNAUDITED)
<S> <C>
Deferred Premium Revenue (net of prepaid reinsurance premiums)..................... $ 550,165
-------
Surplus Notes...................................................................... 120,000
-------
Minority Interest.................................................................. 22,002
------
Shareholder's Equity:
Common Stock.................................................................... 15,000
Additional Paid-In Capital...................................................... 706,117
Accumulated Other Comprehensive Loss (net of deferred income taxes)............. (23,005)
Accumulated Earnings............................................................ 450,593
-------
Total Shareholder's Equity......................................................... 1,148,705
---------
Total Deferred Premium Revenue, Surplus Notes, Minority Interest and Shareholder's
Equity.......................................................................... $ 1,840,872
=========
</TABLE>
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 Report on
Form 10-K and Quarterly Reports on Form 10-Q filed with the Commission by
Holdings and may be reviewed at the EDGAR website maintained by the Commission
and at Holdings' 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.
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 liabilities
for borrowings.
THE CERTIFICATE INSURANCE POLICY
The following summary of the terms of the certificate insurance policy
does not purport to be complete and is qualified in its entirety by reference to
the certificate insurance policy.
Simultaneously with the issuance of the notes, Financial Security will
deliver the certificate insurance policy to the trustee for the benefit of each
holder. Under the certificate insurance policy, Financial Security will
unconditionally and irrevocably guarantee to the trustee, on each payment date,
for the benefit of each holder the full and complete payment of (i) Scheduled
Payments on the class A certificates and (ii) the amount of any Scheduled
Payment which subsequently is avoided in whole or in part as a preference
payment under applicable law.
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"SCHEDULED PAYMENTS" means payments which are required to be made on
the class A certificates during the term of the certificate insurance policy in
accordance with the original terms of the class A certificates when issued and
without regard to any subsequent amendment or modification of the class A
certificates that has not been consented to by Financial Security, which
payments, with respect to any payment date, are (i) the Interest Distribution
Amount for each class, with respect to the related payment date, (ii) the
Principal Distribution Amount with respect to the related payment date, and
(iii) with respect to the final scheduled distribution date for any class of
certificates, without duplication of clause (ii), the outstanding principal
amount of such class, after taking into account reductions on such date of such
outstanding principal amount from all sources other than the certificate
insurance policy. Scheduled Payments do not include 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,
unless Financial Security elects, in its sole discretion, to pay in whole or in
part such principal due upon acceleration, together with any accrued interest to
the date of acceleration. In the event Financial Security does not so elect, the
certificate insurance policy will continue to guarantee Scheduled Payments due
on the class A certificates in accordance with their original terms. Scheduled
Payments shall not include any portion of an Interest Distribution Amount due to
holders because the appropriate notice and certificate for payment in proper
form was not timely Received (as defined below) by Financial Security. Scheduled
Payments shall not include, nor shall coverage be provided under the certificate
insurance policy in respect of, any taxes, withholding or other charge imposed
with respect to any holder by any governmental authority due in connection with
the payment of any Scheduled Payment to a holder. Scheduled Payments do not
include prepayment interest shortfalls, Civil Relief Act Shortfalls, or any
reduction in class A-2 interest resulting from application of the Class A-2
Available Funds Cap Rate.
Payment of claims on the certificate insurance policy made in respect
of Scheduled Payments will be made by Financial Security following Receipt (as
defined below) by Financial Security of the appropriate notice for payment on
the later to occur of (i) 12:00 noon, New York City time, on the third Business
Day following Receipt of such notice for payment, and (ii) 12:00 noon, New York
City time, on the date on which such payment was due.
If payment of any amount avoided as a preference under applicable
bankruptcy, insolvency, receivership or similar law is required to be made under
the certificate insurance policy, Financial Security shall cause such payment to
be made on the later of (a) the date when due to be paid pursuant to the Order
referred to below or (b) the first to occur of (i) the fourth Business Day
following Receipt by Financial Security from the trustee of (A) a certified copy
of the order (the "ORDER") of the court or other governmental body that
exercised jurisdiction to the effect that the holder is required to return
Scheduled Payments made with respect to the notes during the term of the
certificate insurance policy because such payments were avoidable as preference
payments under applicable bankruptcy law, (B) a certificate of the holder that
the Order has been entered and is not subject to any stay and (C) an assignment
duly executed and delivered by the holder, in such form as is reasonably
required by Financial Security and provided to the holder by Financial Security,
irrevocably assigning to Financial Security all rights and claims of the holder
relating to or arising under the notes against the issuer or otherwise with
respect to such preference payment, or (ii) the date of Receipt by Financial
Security from the trust collateral agent of the items referred to in clauses
(A), (B) and (C) above if, at least four Business Days prior to such date of
Receipt, Financial Security shall have Received written notice from the trustee
that such items were to be delivered on such date and such date was specified in
such notice. Such payment shall be disbursed to the receiver, conservator,
debtor-in-possession or trustee in bankruptcy named in
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the Order and not to the trustee or any holder directly (unless a holder 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 trustee for distribution to such holder upon proof of such
payment reasonably satisfactory to Financial Security). In connection with the
foregoing, Financial Security shall have the rights provided pursuant to the
pooling and servicing agreement, including, without limitation, the right to
direct all matters relating to any preference claim and subrogation to the
rights of the trustee and each holder in the conduct of any proceeding with
respect to a preference claim.
The terms "RECEIPT" and "RECEIVED" with respect to the certificate
insurance policy shall mean actual delivery to Financial Security and to its
fiscal agent, if any, prior to 12:00 noon, New York City time, on a Business
Day; delivery either on a day that is not a Business Day or after 12:00 noon,
New York City time, shall be deemed to be Received on the next succeeding
Business Day. If any notice or certificate given under the certificate insurance
policy by the trustee is not in proper form or is not properly completed,
executed or delivered, it shall be deemed not to have been Received, and
Financial Security or its fiscal agent shall promptly so advise the trustee, and
the trustee may submit an amended notice.
Under the certificate insurance policy, "BUSINESS DAY" means any day
other than a Saturday, Sunday, legal holiday or other day on which commercial
banking institutions in New York, New York, the State of Rhode Island or the
State of California or any other location of any successor master servicer,
successor Trustee are authorized or obligated by law, executive order or
governmental decree to be closed.
Financial Security's obligations under the certificate insurance policy
in respect of Scheduled Payments shall be discharged to the extent funds are
transferred to the trustee as provided in the certificate insurance policy
whether or not such funds are properly applied by the trustee.
Financial Security shall be subrogated to the rights of each holder to
receive payments of principal and interest to the extent of any payment by
Financial Security under the certificate insurance policy.
Claims under the certificate insurance policy constitute direct,
unsecured and unsubordinated obligations of Financial Security ranking not less
than pari passu with other unsecured and unsubordinated indebtedness of
Financial Security for borrowed money. Claims against Financial Security under
the certificate insurance policy and each other financial guaranty insurance
policy issued thereby constitute pari passu claims against the general assets of
Financial Security. The terms of the certificate insurance policy cannot be
modified or altered by any other agreement or instrument, or by the merger,
consolidation or dissolution of the issuer. The certificate insurance policy may
not be canceled or revoked prior to distribution in full of all Scheduled
Payments. THE CERTIFICATE INSURANCE POLICY IS NOT COVERED BY THE
PROPERTY/CASUALTY INSURANCE SECURITY FUND SPECIFIED IN ARTICLE 76 OF THE NEW
YORK INSURANCE LAW. The certificate insurance policy is governed by the laws of
the State of New York.
INSURANCE AND INDEMNITY AGREEMENT
The master servicer, the depositor and Financial Security will enter
into an insurance and indemnity agreement, under to which the master servicer
will agree to reimburse, with interest, Financial Security for amounts paid
pursuant to claims under the policy. The master servicer will further agree to
pay Financial Security all reasonable charges and expenses which Financial
Security may pay or incur relative to any amounts paid under the policy or
otherwise in connection with the transaction and to indemnify Financial Security
against certain liabilities. Amounts owing by the master servicer under the
insurance agreement will be payable (with certain exceptions) solely from the
trust. An "event of default" under the insurance agreement will constitute an
event of default under the pooling and servicing agreement and will allow
Financial Security, among other things, to direct the trustee to remove the
master servicer. See "The Agreement -- Resignation and Removal of the Servicer."
An "event of default" under the insurance agreement includes (i) the
originator's or the master servicer's failure to pay when due any amount owed
under the
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insurance agreement, the pooling and servicing agreement or certain other
documents, unless such amounts are paid in full within the applicable cure
period, (ii) the depositor or the company has asserted that the pooling and
servicing agreement or certain other documents to which it is a party is not
valid and binding on the parties thereto, (iii) the depositor's or the master
servicer's failure to perform or to comply with any material covenant or
agreement in the insurance agreement, the pooling and servicing agreement or
certain other documents (in certain cases only if such failure remains
unremedied 30 days after notice thereof), and (iv) the originator's or the
master servicer's failure to pay its debts in general or the occurrence of
certain events of insolvency or bankruptcy with respect to the master servicer
or the originator and (v) any demand for payment shall be made under the policy.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
In addition to the documents described in the accompanying prospectus
under "Incorporation of Certain Documents by Reference," the 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
Financial Security Assurance Holdings Ltd. ("Holdings"), are hereby incorporated
by reference in the prospectus supplement:
(a) Annual Report on Form 10-K for the year ended December 31, 1998, as
amended, and
(b) Quarterly Report on Form 10-Q for the period ended September 30,
1999.
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 Exchange
Act subsequent to the date of this prospectus supplement and prior to the
termination of the offering of the Securities 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.
MATERIAL FEDERAL INCOME TAX CONSIDERATIONS
The following is a general discussion of the material anticipated
federal income tax consequences to beneficial owners of the purchase, ownership
and disposition of the class A certificates 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 should consult their own tax
advisors in determining the federal, state, local and any other tax consequences
to them of the purchase, ownership and disposition of the class A certificates.
An election will be made to treat the Trust as a REMIC for federal
income tax purposes. Dewey Ballantine LLP, special tax counsel to the Depositor,
will deliver its opinion that, assuming compliance with the pooling and
servicing agreement, the Trust will be treated as a REMIC for federal income tax
purposes, the class A certificates will be designated as "regular interests" in
the REMIC, and a separate class will be designated as the sole "residual
interest" in the REMIC.
The certificates possess certain special tax attributes by virtue of
the REMIC provisions of the Code. See "Material Federal Income Tax Consequences
- -- REMIC Securities" in the Prospectus.
The class A certificates generally will be treated as debt instruments
for federal income tax purposes. Beneficial owners (or registered holders, in
the case of definitive certificates) of the class A certificates will be
required to report income on such certificates in accordance with the accrual
method of accounting. It is not
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anticipated that the class A certificates will be issued with original issue
discount. See "Material Tax Consequences -- Discount and Premium" in the
Prospectus.
ERISA CONSIDERATIONS
The Department of Labor has issued to the underwriter an individual
prohibited transaction exemption, PTE 90-32, which, as described in the
prospectus under "ERISA Considerations - Certificates," generally exempts from
the application of the prohibited transaction rules of ERISA and the
corresponding provisions of the Internal Revenue 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 certain receivables,
loans and other secured obligations that meet the conditions and requirements of
the exemption. The obligations covered by the underwriter's exemption include
loans such as the mortgage loans owned by the trust.
As of the cut-off date, there is no single mortgage loan included in
the trust that constitutes more than five percent of the aggregate unamortized
principal balance of the assets of the trust. Furthermore, it is a condition of
the issuance of the class A certificates that they be rated AAA or its
equivalent by a nationally recognized rating agency. Before purchasing a class A
certificate based on the underwriter's exemption, a fiduciary of a plan should
itself confirm (1) that such certificate constitutes a "certificate" for
purposes of the exemption and (2) that the conditions and other requirements set
forth in the exemption would be satisfied.
Any plan fiduciary considering the purchase of class A certificates
should consult with its counsel as to the potential applicability of ERISA, the
Internal Revenue Code and the underwriter's exemption prior to making such an
investment. Moreover, each plan fiduciary should determine whether, under the
general fiduciary standards of investment prudence and diversification, an
investment in the class A certificates is appropriate for the plan, taking into
account the overall investment policy of the plan and the composition of the
plan's investment portfolio.
The sale of the class A certificates to a plan is not a representation
by the depositor or the underwriter that this investment meets all relevant
legal requirements for investments by plans generally or by any particular plan
or that this investment is appropriate for plans generally or any particular
plan.
LEGAL INVESTMENT
The class A certificates will not constitute "mortgage related
securities" for purposes of the Secondary Mortgage Market Enhancement Act of
1984, because the mortgage loan pool includes junior lien mortgages.
In addition, institutions subject to the jurisdiction of the Office of
the Comptroller of the Currency, the Board of Governors of the Federal Reserve
System, the Federal Deposit Insurance Corporation, the Office of Thrift
Supervision, the National Credit Union Administration or state banking or
insurance authorities should review applicable rules, supervisory policies and
guidelines of these agencies before purchasing any of the class A certificates,
since the class A certificates may be deemed to be unsuitable investments under
one or more of these rules, policies and guidelines and certain restrictions may
apply to these investments. It should also be noted that certain states have
enacted legislation limiting to varying extents the ability of certain entities
(in particular, insurance companies) to invest in mortgage related securities.
Investors should consult with their own legal advisors in determining whether
and to what extent the class A certificates constitute legal investments for
them.
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PLAN OF DISTRIBUTION
Subject to the terms and conditions of the underwriting agreement dated
as of March 10, 2000 between the depositor and First Union Securities, Inc., the
depositor has agreed to sell to the underwriter and the underwriter has agreed
to purchase from the depositor the class A certificates.
The depositor is obligated to sell, and the underwriter is obligated to
purchase, all of the class A certificates offered hereby if any are purchased.
The underwriter has advised the depositor that it proposes to offer the
class A certificates purchased by the underwriter for sale from time to time in
one or more negotiated transactions or otherwise, at market prices prevailing at
the time of sale, at prices related to the market prices or at negotiated
prices. The underwriter may effect these transactions by selling these
certificates to or through dealers, and dealers may receive compensation in the
form of underwriting discounts, concessions or commissions from the underwriter
or purchasers of the class A certificates for whom they may act as agent. Any
dealers that participate with the underwriter in the distribution of the class A
certificates purchased by the underwriter may be deemed to be underwriters, and
any discounts or commissions received by them or the underwriter and any profit
on the resale of class A certificates by them or the underwriter may be deemed
to be underwriting discounts or commissions under the Securities Act.
For further information regarding any offer or sale of the class A
certificates pursuant to this prospectus supplement and the prospectus, see
"Plan of Distribution" in the prospectus.
The underwriting agreement provides that the depositor will indemnify
the underwriter or contribute to losses arising out of certain liabilities,
including liabilities under the Act.
First Union Securities, Inc. is an affiliate of the depositor.
RATINGS
It is a condition to the original issuance of the class A certificates
that they each receive ratings of AAA by Standard & Poor's and Aaa by Moody's.
The ratings assigned to the class A certificates will be based on the
claims-paying ability of Financial Security. Explanations of the significance of
these ratings may be obtained from Moody's Investors Services, Inc., 99 Church
Street, New York, New York 10007 and Standard & Poor's, a division of The
McGraw-Hill Companies, 25 Broadway, New York, New York 10004. Such ratings will
be the views only of the rating agencies. There is no assurance that any the
ratings will continue for any period of time or that the ratings will not be
revised or withdrawn. Any revision or withdrawal of the ratings may have an
adverse effect on the market price of the class A certificates.
EXPERTS
The consolidated balance sheets of Financial Security Assurance Inc.
and its Subsidiaries as of December 31, 1998 and 1997 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, 1998,
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.
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<PAGE>
LEGAL MATTERS
Certain legal matters in connection with the class A certificates will
be passed upon for Home Loan Bank by Thacher Proffitt & Wood, New York, New
York, and for the depositor and the underwriter by Dewey Ballantine LLP, New
York, New York.
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<PAGE>
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT
AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered class A
certificates will be available only in book-entry form. Investors in the global
securities may hold the global securities through any of DTC, Clearstream or
Euroclear. The global securities 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 through Clearstream and
Euroclear will be conducted in the ordinary way in accordance with the normal
rules and operating procedures of Clearstream and Euroclear and in accordance
with conventional eurobond practice (seven calendar day settlement).
Secondary market trading between investors through DTC will be
conducted according to DTC's rules and procedures applicable to U.S. corporate
debt obligations.
Secondary cross-market trading between Clearstream or Euroclear and DTC
participants holding certificates will be effected on a delivery-against-payment
basis through the respective Depositaries of Clearstream and Euroclear (in this
capacity) and as DTC participants.
Non-U.S. holders of global securities will be subject to U.S.
withholding taxes unless the holders meet certain requirements and deliver
appropriate U.S. tax documents to the securities clearing organizations or their
participants.
INITIAL SETTLEMENT
All global securities will be held in book-entry form by DTC in the
name of Cede as nominee of DTC. Investors' interests in the global securities
will be represented through financial institutions acting on their behalf as
direct and indirect participants in DTC. As a result, Clearstream and Euroclear
will hold positions on behalf of their participants through their relevant
depository which in turn will hold these positions in their accounts as DTC
participants.
Investors electing to hold their global securities through DTC will
follow DTC settlement practices. Investor securities custody accounts will be
credited with their holdings against payment in same-day funds on the settlement
date.
Investors electing to hold their global securities through Clearstream
or Euroclear accounts will follow the settlement procedures applicable to
conventional eurobonds, except that there will be no temporary global security
and no "lock-up" or restricted period. Global securities will be credited to the
securities custody accounts on the settlement date against payment in same-day
funds.
SECONDARY MARKET TRADING
Since the purchaser determines the place of delivery, it is important
to establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired value
date.
TRADING BETWEEN DTC PARTICIPANTS. Secondary market trading between DTC
participants will be settled using the procedures applicable to prior home
equity loan asset-backed certificates issues in same-day funds.
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TRADING BETWEEN CLEARSTREAM AND/OR EUROCLEAR PARTICIPANTS. Secondary
market trading between Clearstream participants or Euroclear participants will
be settled using the procedures applicable to conventional eurobonds in same-day
funds.
TRADING BETWEEN DTC SELLER AND CLEARSTREAM OR EUROCLEAR PARTICIPANTS.
When global securities are to be transferred from the account of a DTC
participant to the account of a Clearstream participant or a Euroclear
participant, the purchaser will send instructions to Clearstream or Euroclear
through a Clearstream participant or Euroclear participant at least one business
day prior to settlement. Clearstream or Euroclear will instruct the relevant
depository, as the case may be, to receive the global securities against
payment. Payment will include interest accrued on the global securities from and
including the last coupon payment date to and excluding the settlement date, on
the basis of the actual number of days in the accrual period and a year assumed
to consist of 360 days. For transactions settling on the 31st of the month,
payment will include interest accrued to and excluding the first day of the
following month. Payment will then be made by the relevant depository to the DTC
participant's account against delivery of the global securities. After
settlement has been completed, the global securities will be credited to the
respective clearing system and by the clearing system, in accordance with its
usual procedures, to the Clearstream participant's or Euroclear participant's
account. The securities credit will appear the next day (European time) and the
cash debt will be back-valued to, and the interest on the global securities will
accrue from, the value date (which would be the preceding day when settlement
occurred in New York). If settlement is not completed on the intended value date
(the trade fails), the Clearstream or Euroclear cash debt will be valued instead
as of the actual settlement date.
Clearstream participants and Euroclear participants will need to make
available to the respective clearing systems the funds necessary to process
same-day funds settlement. The most direct means of doing so is to preposition
funds for settlement, either from cash on hand or existing lines of credit, as
they would for any settlement occurring within Clearstream or Euroclear. Under
this approach, they may take on credit exposure to Clearstream or Euroclear
until the global securities are credited to their account one day later.
As an alternative, if Clearstream or Euroclear has extended a line of
credit to them, Clearstream participants or Euroclear participants can elect not
to preposition funds and allow that credit line to be drawn upon to finance
settlement. Under this procedure, Clearstream participants or Euroclear
participants purchasing global securities would incur overdraft charges for one
day, assuming they cleared the overdraft when the global securities were
credited to their accounts. However, interest on the global securities would
accrue from the value date. Therefore, in many cases the investment income on
the global securities earned during that one-day period may substantially reduce
or offset the amount of the overdraft charges, although the result will depend
on each Clearstream participant's or Euroclear participant's particular cost of
funds.
Since the settlement is taking place during New York business hours,
DTC participants can employ their usual procedures for crediting global
securities to the respective European depository for the benefit of Clearstream
participants or Euroclear participants. The sale proceeds will be available to
the DTC seller on the settlement date. Thus, to the DTC participants a
cross-market transaction will settle no differently than a trade between two DTC
participants.
TRADING BETWEEN CLEARSTREAM OR EUROCLEAR SELLER AND DTC PURCHASER. Due
to time zone differences in their favor, Clearstream participants and Euroclear
participants may employ their customary procedures for transactions in which
global securities are to be transferred by the respective clearing system,
through the respective depository, to a DTC participant. The seller will send
instructions to Clearstream or Euroclear through a Clearstream participant or
Euroclear participant at least one business day prior to settlement. In these
cases Clearstream or Euroclear will instruct the respective depository, as
appropriate, to credit the global securities to the DTC participant's account
against payment. Payment will include interest accrued on the
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global securities from and including the last coupon payment to and excluding
the settlement date on the basis of the actual number of days in the accrual
period and a year assumed to consist of 360 days. For transactions settling on
the 31st of the month, payment will include interest accrued to and excluding
the first day of the following month. The payment will then be reflected in the
account of the Clearstream participant or Euroclear participant the following
day, and receipt of the cash proceeds in the Clearstream participant's or
Euroclear participant's account would be back-valued to the value date (which
would be the preceding day, when settlement occurred in New York). In the event
that the Clearstream participant or Euroclear participant has a line of credit
with its respective clearing system and elects to be in debt in anticipation of
receipt of the sale proceeds in its account, the back-valuation will extinguish
any overdraft incurred over that one-day period. If settlement is not completed
on the intended value date (i.e., the trade fails), receipt of the cash proceeds
in the Clearstream participant's or Euroclear participant's account would
instead be valued as of the actual settlement date.
Finally, day traders that use Clearstream or Euroclear and that
purchase global securities from DTC participants for delivery to Clearstream
participants or Euroclear participants should note that these trades would
automatically fail on the sale side unless affirmative action is taken. At least
three techniques should be readily available to eliminate this potential
problem:
(a) borrowing through Clearstream or Euroclear for one day (until the
purchase side of the trade is reflected in their Clearstream or Euroclear
accounts) in accordance with the clearing system's customary procedures;
(b) borrowing the global securities in the U.S. from a DTC participant
no later than one day prior to settlement, which would give the global
securities sufficient time to be reflected in their Clearstream or Euroclear
account in order to settle the sale side of the trade; or
(c) staggering the value dates for the buy and sell sides of the trade
so that the value date for the purchase from the DTC participant is at least one
day prior to the value date for the sale to the Clearstream participant or
Euroclear participant.
CERTAIN U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A beneficial owner of global securities holding securities through
Clearstream or Euroclear (or through DTC if the holder has an address outside
the U.S.) will be subject to the 30 percent U.S. withholding tax that applies to
payments of interest (including original issue discount) on registered debt
issued by U.S. Persons (as defined below), unless (i) each clearing system, bank
or other financial institution that holds customers' securities in the ordinary
course of its trade or business in the chain of intermediaries between the
beneficial owner and the U.S. entity required to withhold tax complies with
applicable certification requirements and (ii) the beneficial owner takes one of
the steps described below to obtain an exemption or reduced tax rate.
The IRS issued new withholding regulations (the "withholding
regulations"), which make certain modifications to withholding, backup
withholding and information reporting rules. The withholding regulations attempt
to unify certification requirements and modify certain reliance standards. The
withholding regulations will generally be effective for payments made after
December 31, 2000, although taxpayers may begin compliance with the withholding
regulations immediately. This summary does not deal with all aspects of U.S.
federal income tax withholding that may be relevant to foreign holders of the
securities as well as the application of the withholding regulations.
Prospective investors are urged to consult their own tax advisors for specific
advice regarding their holding and disposing of the securities.
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<PAGE>
EXEMPTION FOR NON-U.S. PERSONS
Under the existing rules, beneficial certificate owners of global
securities that are Non-U.S. Persons (as defined below) can obtain a complete
exemption from the withholding tax by filing a signed Form W-8 (Certificate of
Foreign Status). Under the withholding regulations, a non-U.S. person may claim
beneficial owner status by filing Form W-8BEN, Certificate of Foreign Status of
Beneficial Owner for United States Tax Withholding. The old Form W-8 is valid
until the earlier of (i) three years beginning on the date that the form is
signed, or (ii) December 31, 2001. The new Form W-8BEN is valid for a period of
three years beginning on the date that the form is signed. If the information
shown on Form W-8 or Form W-8BEN changes, a new Form W-8 or Form W-8BEN must be
filed within 30 days of the change.
EXEMPTION FOR NON-U.S. PERSONS WITH EFFECTIVELY CONNECTED INCOME
Under the existing rules, a Non-U.S. Person (as defined below),
including a non-U.S. corporation or bank with a U.S. branch, for which the
interest income is effectively connected with its conduct of a trade or business
in the United States, can obtain an exemption from the withholding tax by filing
Form 4224 (Exemption from Withholding of Tax on Income Effectively Connected
with the Conduct of a Trade or Business in the United States). Under the
withholding regulations, a non-U.S. person may claim an exemption from U.S.
withholding on income effectively connected with the conduct of a trade or
business in the United States by filing Form W-8ECI, Certificate of Foreign
Person's Claim for Exemption From Withholding on Income Effectively Connected
With the Conduct of a Trade or Business in the United States. The old Form 4224
is valid until the earlier of (i) one year beginning on the date that the form
is signed, or (ii) December 31, 2001. The new Form W-8ECI is valid for a period
of three years beginning on the date that the form is signed.
EXEMPTION OR REDUCED RATE FOR NON-U.S. PERSONS RESIDENT IN TREATY
COUNTRIES
Under the existing rules, non-U.S. Persons residing in a country that
has a tax treaty with the United States can obtain an exemption or reduced tax
rate (depending on the treaty terms) by filing Form 1001 (Ownership, Exemption
or Reduced Rate Certificate). If the treaty provides only for a reduced rate,
withholding tax will be imposed at that rate unless the filer alternatively
files Form W-8. Under the withholding regulations, a non-U.S. person may claim
treaty benefits by filing Form W-8BEN, Certificate of Foreign Status of
Beneficial Owner for United States Tax Withholding. The old Form 1001 is valid
until the earlier of (i) three years beginning on the date that the form is
signed, or (ii) December 31, 2001. The new Form W-8BEN is valid for a period of
three years beginning on the date that the form is signed.
EXEMPTION FOR U.S. PERSONS
U.S. Persons can obtain a complete exemption from the withholding tax
by filing Form W-9 (Payer's Request for Taxpayer Identification Number and
Certification).
U.S. FEDERAL INCOME TAX REPORTING PROCEDURE
Under the existing rules, the beneficial owner of a global security or
his agent files by submitting the appropriate form to the person through whom it
holds (the clearing agency, in the case of persons holding directly on the books
of the clearing agency). The withholding regulations revise the procedures that
withholding agents and payees must follow to comply with, or to establish an
exemption from, withholding for payments made after December 31, 2001. Each
foreign holder of securities should consult its own tax advisor regarding
compliance with these procedures under the withholding regulations.
A "U.S. Person" is:
(i) a citizen or resident of the United States;
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<PAGE>
(ii) a corporation, partnership or other entity organized in or under
the laws of the United States or any political subdivision thereof;
(iii) an estate that is subject to U.S. federal income tax regardless
of the source of its income; or
(iv) a trust if a court within the United States can exercise primary
supervision over its administration and at least one United States person has
the authority to control all substantial decisions of the trust.
The term "Non-U.S. Person" means any person who is not a U.S. Person.
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PROSPECTUS
- --------------------------------------------------------------------------------
RESIDENTIAL ASSET FUNDING CORPORATION ASSET-BACKED SECURITIES
SPONSOR ISSUABLE IN SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- --------------------------------------------
<S> > <C>
YOU SHOULD READ THE SECTION ENTITLED THE SECURITIES
"RISK FACTORS" STARTING ON PAGE 3 OF
THIS PROSPECTUS AND CONSIDER THESE o will be issued from time to time in series,
FACTORS BEFORE MAKING A DECISION TO
INVEST IN THE SECURITIES. o will consist of either asset-backed
certificates or asset-backed notes,
o will be issued by a trust or other special
Retain this prospectus for future purpose entity established by the sponsor,
reference. This prospectus may not
be used to consummate sales of o will be backed by one or more pools of mortgage
securities unless accompanied by the loans or manufactured housing contracts held
prospectus supplement relating to by the issuer, and
the offering of the securities.
o may have one or more forms of credit
enhancement, such as insurance policies or
reserve funds.
- --------------------------------------------
</TABLE>
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE
SECURITIES COMMISSION HAS APPROVED OF OR DISAPPROVED OF THESE
SECURITIES OR PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
FIRST UNION SECURITIES
The date of this prospectus is September 9, 1999
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
SUMMARY OF PROSPECTUS............................................................................................1
RISK FACTORS.....................................................................................................3
THE SPONSOR......................................................................................................6
USE OF PROCEEDS..................................................................................................6
DESCRIPTION OF THE SECURITIES....................................................................................6
PAYMENTS OF INTEREST..........................................................................................7
PAYMENTS OF PRINCIPAL.........................................................................................7
FINAL SCHEDULED DISTRIBUTION DATE.............................................................................7
OPTIONAL REDEMPTION, PURCHASE OR TERMINATION..................................................................8
MANDATORY TERMINATION; AUCTION SALE...........................................................................8
DEFEASANCE....................................................................................................8
WEIGHTED AVERAGE LIFE OF THE SECURITIES.......................................................................8
FORM OF SECURITIES............................................................................................9
THE TRUST FUNDS.................................................................................................11
THE MORTGAGE LOANS...........................................................................................12
THE CONTRACTS................................................................................................15
PRIVATE SECURITIES...........................................................................................16
ACCOUNTS.....................................................................................................18
COLLECTION AND DISTRIBUTION ACCOUNTS.........................................................................18
PRE-FUNDING ACCOUNT..........................................................................................18
CREDIT ENHANCEMENT..............................................................................................19
SUBORDINATE SECURITIES.......................................................................................19
INSURANCE....................................................................................................19
RESERVE FUNDS................................................................................................20
MINIMUM PRINCIPAL PAYMENT AGREEMENT..........................................................................20
DEPOSIT AGREEMENT............................................................................................21
DERIVATIVE CONTRACTS.........................................................................................21
SERVICING.......................................................................................................21
COLLECTION PROCEDURES; ESCROW ACCOUNTS.......................................................................21
DEPOSITS TO AND WITHDRAWALS FROM THE COLLECTION ACCOUNT......................................................21
ADVANCES AND LIMITATIONS THEREON.............................................................................23
MAINTENANCE OF INSURANCE POLICIES AND OTHER SERVICING PROCEDURES.............................................23
REALIZATION UPON DEFAULTED MORTGAGE LOANS....................................................................24
ENFORCEMENT OF DUE-ON-SALE CLAUSES...........................................................................25
SERVICING COMPENSATION AND PAYMENT OF EXPENSES...............................................................25
EVIDENCE AS TO COMPLIANCE....................................................................................26
MATTERS REGARDING THE SERVICER...............................................................................26
THE AGREEMENTS..................................................................................................27
ASSIGNMENT OF PRIMARY ASSETS.................................................................................27
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<PAGE>
REPORTS TO HOLDERS...........................................................................................29
EVENTS OF DEFAULT; RIGHTS UPON EVENT OF DEFAULT..............................................................30
THE TRUSTEE..................................................................................................31
DUTIES OF THE TRUSTEE........................................................................................32
RESIGNATION OF TRUSTEE.......................................................................................32
AMENDMENT OF AGREEMENT.......................................................................................32
VOTING RIGHTS................................................................................................33
LIST OF HOLDERS..............................................................................................33
REMIC ADMINISTRATOR..........................................................................................33
TERMINATION..................................................................................................33
LEGAL ASPECTS OF LOANS..........................................................................................33
MORTGAGE LOANS...............................................................................................33
CONTRACTS....................................................................................................40
SECURITY INTERESTS IN THE MANUFACTURED HOMES.................................................................40
ENFORCEMENT OF SECURITY INTERESTS IN MANUFACTURED HOMES......................................................42
CONSUMER PROTECTION LAWS.....................................................................................42
TRANSFERS OF MANUFACTURED HOMES; ENFORCEABILITY OF "DUE-ON-SALE" CLAUSES.....................................42
APPLICABILITY OF USURY LAWS..................................................................................43
FORMALDEHYDE LITIGATION WITH RESPECT TO CONTRACTS............................................................43
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT OF 1940..............................................................43
MATERIAL FEDERAL INCOME TAX CONSEQUENCES........................................................................44
GRANTOR TRUST SECURITIES.....................................................................................44
REMIC SECURITIES.............................................................................................46
DEBT SECURITIES..............................................................................................53
PARTNERSHIP INTERESTS........................................................................................53
FASIT SECURITIES.............................................................................................55
DISCOUNT AND PREMIUM.........................................................................................58
BACKUP WITHHOLDING...........................................................................................61
FOREIGN INVESTORS............................................................................................61
STATE TAX CONSIDERATIONS........................................................................................63
ERISA CONSIDERATIONS............................................................................................63
CERTIFICATES.................................................................................................64
NOTES........................................................................................................65
CONSULTATION WITH COUNSEL....................................................................................66
LEGAL INVESTMENT................................................................................................66
AVAILABLE INFORMATION...........................................................................................66
INCORPORATION OF DOCUMENTS BY REFERENCE.........................................................................67
PLAN OF DISTRIBUTION............................................................................................67
LEGAL MATTERS...................................................................................................67
FINANCIAL INFORMATION...........................................................................................67
</TABLE>
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<PAGE>
SUMMARY OF PROSPECTUS
This summary highlights selected information from this prospectus
and does not contain all of the information that you need to
consider in making your investment decision. To understand all of
the terms of the offering of your series of securities, read
carefully this entire prospectus and the accompanying prospectus
supplement.
<PAGE>
THE SPONSOR
Residential Asset Funding Corporation will act as the sponsor of the
issuers, meaning that it will establish the issuers and cause them to issue the
securities. The principal executive address of the sponsor are located at 301
South College Street, Charlotte, North Carolina 28202-6001, telephone no. (714)
373 -6611.
SECURITIES OFFERED
Each class of securities will consist of one or more classes of ownership
securities or debt securities. Ownership securities represent beneficial
ownership interests in the assets held by the issuer. Ownership securities will
be issued in the form of certificates. Debt securities represent indebtedness
secured by the assets of the issuer. Debt securities will be issued in the form
of notes.
Each series of securities will be issued in one or more classes, one or
more of which may be classes of:
o fixed-rate securities,
o adjustable-rate securities,
o compound-interest or accrual securities,
o planned-amortization-class securities,
o principal-only securities,
o interest-only securities,
o participating securities,
o senior securities, or
o subordinated securities.
The interest rate, principal balance, notional balance, minimum
denomination and form of each class of securities will be described in the
accompanying prospectus supplement. The securities will be available in either
fully registered or book-entry form, as described in the accompanying prospectus
supplement.
THE LOANS
Each issuer will hold one or more pools of loans, which may include:
o mortgage loans or manufactured housing contracts secured by one-to-four
family residential properties and/or manufactured homes,
o mortgage loans secured by security interests in shares issued by
private, non-profit cooperative housing corporations,
o mortgage loans secured by junior liens on the mortgaged properties,
o mortgage loans with loan-to-value ratios in excess of the appraised
value of the mortgaged property,
o home improvement retail installment contracts,
o revolving home equity lines of credit, and
o private securities backed by mortgage loans or contracts.
The sponsor will direct the issuer to acquire the loans from affiliated
originators, unaffiliated originators or warehouse trusts created by the sponsor
or an affiliate to finance the origination of loans.
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DISTRIBUTIONS ON THE SECURITIES
Owners of securities will be entitled to receive payments in the manner
described in the accompanying prospectus supplement, which will specify:
o whether distributions will be made monthly, quarterly, semi-annually or
at other intervals and dates,
o the amount allocable to payments of principal and interest on any
distribution date, and
o whether distributions will be made on a pro rata, random lot, or other
basis.
CREDIT ENHANCEMENT
A series of securities, or classes within a series, may have the benefit of
one or more types of credit enhancement, including:
o the use of excess interest to cover losses and to create
over-collateralization,
o the subordination of distributions on the lower classes to the
distributions on more senior classes,
o the allocation of losses on the underlying loans to the lower classes,
and
o the use of cross support, reserve funds, financial guarantee insurance
policies, guarantees and letters of credit.
The protection against losses afforded by any credit enhancement will be
limited in the manner described in the accompanying prospectus supplement.
REDEMPTION OR REPURCHASE OF SECURITIES
One or more classes of securities may be redeemed or repurchased in whole
or in part at the times described in the prospectus supplement and at a price at
least equal to the amount necessary to pay all principal and interest on the
redeemed classes.
LEGAL INVESTMENT
The accompanying prospectus supplement will state whether or not the
securities will constitute "mortgage related securities" under the Secondary
Mortgage Market Enhancement Act of 1984.
ERISA LIMITATIONS
Employee benefit plans should carefully review with their own legal
advisors whether the purchase or holding of the securities could give rise to a
transaction prohibited or otherwise impermissible under ERISA or the Internal
Revenue Code.
FEDERAL INCOME TAX CONSEQUENCES
Each class of securities offered by this prospectus and the accompanying
prospectus supplement will constitute one of the following for federal income
tax purposes:
o interests in a trust treated as a grantor trust,
o "regular interests" or "residual interests" in a trust treated as one
or more "real estate mortgage investment conduits",
o debt issued by the issuer,
o interests in an issuer which is treated as a partnership, or
o "regular interests", "high-yield interests" or "ownership interests" in
a trust treated as one or more "financial asset securitization
investment trusts".
RATINGS
The securities offered by this prospectus and the accompanying prospectus
supplement will be rated at the time of issuance in one of the four highest
rating categories by at least one statistical rating organization.
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<PAGE>
RISK FACTORS
You should consider the following risk factors prior to any purchase of
any class of securities. You should also consider the information under the
caption "Risk Factors" in the accompanying prospectus supplement.
YOUR INVESTMENT IN ANY SECURITY MAY BE AN ILLIQUID INVESTMENT; YOU SHOULD BE
PREPARED TO HOLD YOUR SECURITY TO MATURITY.
A secondary market for these securities is unlikely to develop. If it
does develop, it may not provide you with sufficient liquidity of
investment or continue for the life of these securities. The
underwriters may establish a secondary market in the securities,
although no underwriter will be obligated to do so. We neither expect
to list the securities on any securities exchange nor to have the
securities quoted in the automated quotation system of a registered
securities association.
Issuance of the securities in book-entry form may also reduce the
liquidity in the secondary trading market, since some investors may be
unwilling to purchase securities for which they cannot obtain
definitive physical securities.
THE ASSETS OF THE TRUST FUND WILL BE LIMITED AND, IF THE ASSETS BECOME
INSUFFICIENT TO SERVICE THE SECURITIES, LOSSES MAY RESULT.
The securities will be payable solely from the assets of the trust
fund. Neither the sponsor nor any other person will be obligated to
make payments to the security holders, except to the extent of any
credit enhancement as specifically provided in the prospectus
supplement. Consequently, security holders must rely solely upon
payments from the trust fund for the payment of principal and interest
on the securities.
AS A RESULT OF PREPAYMENT ON THE LOANS OR EARLY REDEMPTION OF THE SECURITIES,
YOU COULD BE FULLY PAID SIGNIFICANTLY EARLIER THAN WOULD OTHERWISE BE THE CASE,
WHICH MAY ADVERSELY AFFECT THE YIELD TO MATURITY ON YOUR SECURITIES.
The yield to maturity of the securities may be adversely affected by a
higher or lower than anticipated rate of prepayments on the loans. The
yield to maturity on interest-only securities purchased at premiums or
discounts to par will be extremely sensitive to the rate of prepayments
on the loans.
The underlying loans may be prepaid in full or in part at any time,
although prepayment may require the borrower to pay of a prepayment
penalty or premium. These penalties will generally not be property of
the issuer, and will not be available to fund distributions owing to
you. We cannot predict the rate of prepayments of the loans, which is
influenced by a wide variety of economic, social and other factors,
including prevailing mortgage market interest rates, the availability
of alternative financing, local and regional economic conditions and
homeowner mobility. Therefore, we can give no assurance as to the level
of prepayments that a trust fund will experience.
Prepayments may result from mandatory prepayments relating to unused
monies held in pre-funding accounts, voluntary early payments by
borrowers, including payments in connection with refinancings, sales of
mortgaged properties subject to "due-on-sale" provisions and
liquidations due to default, as well as the receipt of proceeds from
insurance policies. In addition, repurchases or purchases from the
issuer of loans or the payment of substitution adjustments will have
the same effect on the securities as a prepayment of the loans.
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One or more classes of securities of any series may be subject to
optional or mandatory redemption or auction sale in whole or in part,
on or after a specified date, or on or after the time when the
aggregate outstanding principal amount of the underlying loans or the
securities is less than a specified amount. You will bear the risk of
reinvesting unscheduled distributions resulting from redemption.
Any of the foregoing principal prepayments may adversely affect the
yield to maturity of the prepaid securities. Since prevailing interest
rates are subject to fluctuation, there can be no assurance that you
will be able to reinvest these prepayments at a yield equaling or
exceeding the yield on your securities.
CREDIT ENHANCEMENT, EVEN IF PROVIDED, WILL IN ANY EVENT BE LIMITED IN BOTH
AMOUNT AND SCOPE OF COVERAGE, AND MAY NOT BE SUFFICIENT TO COVER ALL LOSSES OR
RISKS ON YOUR INVESTMENT.
Credit enhancement may be provided in limited amounts to cover some,
but not all, types of losses on the underlying loans and, in most
cases, will reduce over time in accordance with a schedule or formula.
Furthermore, credit enhancement may provide only very limited coverage
as to some types of losses, and may provide no coverage as to other
types of losses. Generally, credit enhancement does not directly or
indirectly guarantee to the investors any specified rate of
prepayments, which is one of the principal risks of your investment.
The amount and types of coverage, the identification of any entity
providing the coverage, the terms of any subordination and any other
information will be described in the accompanying prospectus
supplement.
PROPERTY VALUES MAY DECLINE, LEADING TO HIGHER LOSSES ON THE LOANS.
An investment in the securities, which are backed by residential real
estate loans, may be affected by a decline in real estate values. A
decline could be caused by a general decline in the real estate market,
the borrower's failure to maintain the property or a natural disaster,
among other things. If property values were to decline, the rates of
delinquencies and foreclosures may rise, thereby increasing the
likelihood of loss. If these losses are not covered by any credit
enhancement, you will bear all risk of these losses and will have to
look primarily to the value of the mortgaged properties for recovery of
the outstanding principal and unpaid interest on the defaulted loans.
FORECLOSURE OF MORTGAGED PROPERTIES INVOLVES DELAYS AND EXPENSE AND COULD CAUSE
LOSSES ON THE LOANS.
Even if the mortgaged properties provide adequate security for the
loans, substantial delays could be encountered in connection with the
foreclosure of defaulted loans, and corresponding delays in the receipt
of the foreclosure proceeds could occur. Foreclosures are regulated by
state statutes, rules and judicial decisions and are subject to many of
the delays and expenses of other lawsuits, sometimes requiring several
years to complete. The servicer will be entitled to reimburse itself
for any expenses it has paid in attempting to recover amounts due on
the liquidated loans, including payments to prior lienholders, accrued
fees of the servicer, legal fees and costs of legal action, real estate
taxes, and maintenance and preservation expenses, which will reduce the
amount of the net recovery by the trust.
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ENVIRONMENTAL CONDITIONS ON THE MORTGAGED PROPERTY MAY GIVE RISE TO LIABILITY
FOR THE ISSUER.
Real property pledged as security to a lender may be subject to
environmental risks which could cause losses on your securities. Under
the laws of some states, contamination of a mortgaged property may give
rise to a lien on the mortgaged property to assure the costs of
clean-up. In several states, this type of lien has priority over the
lien of an existing mortgage or owner's interest against the property.
In addition, under the laws of some states and under CERCLA, a lender
may be liable, as an "owner" or "operator," for costs of addressing
releases or threatened releases of hazardous substances that require
remedy at a property, if agents or employees of the lender have become
sufficiently involved in the operations of the borrower, regardless of
whether or not the environmental damage or threat was caused by a prior
owner. A lender also will increase its risk of environmental liability
upon the foreclosure of the mortgaged property, since the lender may
then become the legal owner of the property.
STATE AND FEDERAL CREDIT PROTECTION LAWS MAY LIMIT COLLECTION OF PRINCIPAL AND
INTEREST ON THE LOANS.
Residential mortgage lending is highly regulated at both the federal
and state levels and violations of these laws, policies and principles
may limit the ability of the servicer to collect all or part of the
amounts due on the loans, may entitle the borrower to a refund of
amounts previously paid and, in addition, could subject the issuer, as
the owner of the loan, to damages and administrative enforcement. The
occurrence of any of the foregoing could cause losses on your
securities.
THE SOLDIERS' AND SAILORS' CIVIL RELIEF ACT MAY LIMIT THE ABILITY TO COLLECT ON
THE LOANS.
The terms of the Soldiers' and Sailors' Civil Relief Act of 1940, or
similar state legislation, benefit mortgagors who enter military
service after the origination of his or her loan, including a mortgagor
who is a member of the National Guard or is in reserve status at the
time of the origination of the loan and is later called to active duty.
These mortgagors may not be charged interest, including fees and
charges, above an annual rate of 6% during the period of the
mortgagor's active duty status, unless a court orders otherwise upon
application of the lender. The implementation of the Soldiers' and
Sailors' Civil Relief Act could have an adverse effect, for an
indeterminate period of time, on the ability of the servicer to collect
full amounts of interest on these loans.
In addition, the Soldiers' and Sailors' Civil Relief Act imposes
limitations that would impair the ability of the servicer to foreclose
on loans during the mortgagor's period of active duty status. Thus, in
the event that these loans go into default, there may be delays and
losses occasioned by the inability to realize upon the mortgaged
property in a timely fashion.
RATINGS ARE NOT RECOMMENDATIONS; THE RATINGS ASSIGNED TO YOUR SECURITIES MAY BE
LOWERED OR WITHDRAWN.
Each series of securities will be rated in one of the four highest
rating categories by the rating agency. Any rating would be based on,
among other things, the adequacy of the value of the assets and any
credit enhancement. A rating is not a recommendation to purchase, hold
or sell securities, because as it does not address market price or
suitability for a particular investor.
The ratings assigned to the securities will be based on, among other
things, the adequacy of the value of the trust fund and any credit
enhancement. Any rating which is assigned may not remain in effect for
any given period of time or may be lowered or withdrawn
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entirely by the rating agencies if, in their judgment, circumstances in
the future so warrant. Ratings may also be lowered or withdrawn
because of an adverse change in the financial or other condition of a
provider of credit enhancement or a change in the rating of a credit
enhancement provider's long term debt.
ERISA MAY RESTRICT THE ACQUISITION, OWNERSHIP AND DISPOSITION OF SECURITIES.
Generally, ERISA applies to investments made by benefit plans and
transactions involving the assets of benefit plans. Due to the
complexity of regulations that govern benefit plans, prospective
investors that are subject to ERISA are urged to consult their own
counsel regarding consequences under ERISA of acquisition, ownership
and disposition of securities.
THE SPONSOR
The sponsor, Residential Asset Funding Corporation, 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 sponsor'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.
USE OF PROCEEDS
The net proceeds from the sale of each series of securities will be
applied to one or more of the following purposes: to acquire the primary assets,
to repay indebtedness which has been incurred to obtain funds to acquire the
primary assets, to establish any reserve funds described in the prospectus
supplement and to pay costs of structuring and issuing the securities, including
the costs of obtaining credit enhancement, if any. The acquisition of the
primary assets for a series may be effected by an exchange of securities with
the seller of the primary assets. The seller may agree to reimburse the sponsor
for fees and expenses of the sponsor incurred in connection with the offering of
the securities.
DESCRIPTION OF THE SECURITIES
The sponsor may offer from time to time the securities, which may be
asset-backed notes or certificates, in one or more series.
The certificates of a series will evidence undivided interests in
assets deposited into a trust fund. The notes of a series will represent
indebtedness secured by the trust fund. A series may consist of both notes and
certificates.
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.
If a series includes multiple classes, the amount, percentage and
timing of distributions of principal, interest or both to each class may vary
and one or more classes' right to distributions of principal, interest or both
may be subordinated to other classes. The primary assets and other assets
comprising the trust fund may be divided into one or more groups and one or more
classes may evidence beneficial ownership of or be secured by the corresponding
group.
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The trustee, or a paying agent on its behalf, will make payments of
principal of and interest on the securities. Interest on and principal of the
securities of a series will be payable on each distribution date at the times,
at the rates, in the amounts and in the order of priority described in the
prospectus supplement. Payments will be made by check mailed to holders of
record at their addresses appearing on the security register. Payments may be
made, however, by wire transfer, at the expense of the holder requesting payment
by wire transfer, in circumstances described in the prospectus supplement. Final
payments of principal in retirement of each security will be made only upon
presentation and surrender of the security at the office of the trustee
specified in the prospectus supplement. The trustee will mail notice of the
final payment on a security to the holder of the security before the
distribution date on which the trustee expects to make the final principal
payment.
PAYMENTS OF INTEREST
The interest-bearing securities of each class will bear interest from
the date and at the rate per annum specified, or calculated in the method
described in, the prospectus supplement. The rate of interest on securities of a
series may be variable or may change with changes in the annual percentage rates
of the loans and/or as prepayments occur on the loans. Principal-only securities
may not be entitled to receive any interest distributions or may be entitled to
receive only nominal interest distributions.
Interest payable on the securities on a distribution date will include
all interest accrued during the period specified in the prospectus supplement.
In the event interest accrues during the calendar month preceding a distribution
date, the effective yield to holders will be reduced from the yield that would
otherwise be obtainable if interest payable on the securities were to accrue
through the day immediately preceding the distribution date.
PAYMENTS OF PRINCIPAL
On each distribution date for a series, principal payments will be made
to the holders of the securities of the series on which principal is then
payable, as described in the prospectus supplement. Principal payments will be
allocated among the classes of a series in the manner, at the times and in the
priority described in the prospectus supplement.
The rate of principal payments of each class may depend principally
upon the rate of payment, including prepayments, on the primary assets. A rate
of prepayment lower or higher than anticipated will affect the yield on the
securities of a series in the manner described under "--Weighted Average Life of
the Securities." Under limited circumstances, a series of securities may be
subject to termination or redemption. See " --Optional Redemption, Purchase or
Termination" below.
FINAL SCHEDULED DISTRIBUTION DATE
The final scheduled distribution date on each class of securities is
the date no later than which the principal balance is expected to be reduced to
zero, calculated on the basis of the assumptions described in the prospectus
supplement. The final scheduled distribution date will be specified in the
prospectus supplement. Since payments on the primary assets will be used to make
distributions in reduction of the outstanding principal amount of the
securities, it is likely that the actual final distribution date of any class
will occur earlier, and may occur substantially earlier, than its final
scheduled distribution date.
Furthermore, as a result of delinquencies, defaults and liquidations of
the primary assets in the trust fund, the actual final distribution date of any
certificate may occur later than its final scheduled distribution date. No
assurance can be given as to the actual prepayment experience of a series. See
"--Weighted Average Life of the Securities" below.
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OPTIONAL REDEMPTION, PURCHASE OR TERMINATION
One or more classes of securities of any series may be subject to
optional redemption or repurchase, in whole or in part, on any distribution date
by the seller, servicer or credit enhancer or an affiliate thereof. Redemption
or repurchase may occur on or after a specified date, or on or after the time as
the aggregate outstanding principal amount of the securities or primary assets,
is less than a percentage not to exceed 20% of the initial aggregate principal
balance of the securities or primary assets. The redemption, purchase or
repurchase price may not be less than an amount necessary to pay all principal
and interest on the securities outstanding. If we have made a REMIC election,
the trustee shall receive a satisfactory opinion of counsel that the optional
redemption, purchase or termination will be conducted so as to constitute a
"qualified liquidation" under section 860F of the Internal Revenue Code. The
risk of reinvesting unscheduled distributions resulting form prepayments of the
securities will be borne by the holders. Neither the trust nor the holders will
have any continuing liability under an optional redemption or repurchase.
MANDATORY TERMINATION; AUCTION SALE
The trustee, the servicer or the seller may be required to effect early
retirement of a series of securities by auction sale. Within a period following
the failure of the holder of the optional termination right to exercise its
right, the required party shall solicit bids for the purchase of all primary
assets remaining in the trust. In the event that satisfactory bids are received,
the net sale proceeds will be distributed to holders in the same order of
priority as collections on the loans. A satisfactory bid will not be less than
an amount necessary to pay all principal and interest on the notes. If
satisfactory bids are not received, the required party shall decline to sell the
loans and shall not be under any obligation to solicit any further bids or
otherwise negotiate any further sale of the loans. The sale and consequent
termination of the trust must constitute a "qualified liquidation" of each
REMIC.
DEFEASANCE
The indenture may provide that a trust fund may be discharged through
defeasance. In a defeasance, a party will deposit with the trustee money and/or
direct obligations of or obligations guaranteed by the United States of America
which will provide money in an amount sufficient to pay each installment of
interest and, on the final scheduled distribution date, principal on the notes.
In the event of any defeasance and discharge of notes, note holders would be
able to look only to the deposited money and/or direct obligations for payment
of principal and interest, if any, on their notes until maturity.
WEIGHTED AVERAGE LIFE OF THE SECURITIES
"Weighted average life" refers to the average amount of time that will
elapse from the date of issue of a security until each dollar of principal of
the security will be repaid to the investor. The weighted average life of the
securities of a class will be influenced by the rate at which the amount
financed under primary assets included in the trust fund for a series is paid.
Repayment may be in the form of scheduled amortization or prepayments.
Prepayments on loans and other receivables can be measured relative to
a prepayment standard or model. The prospectus supplement will describe the
prepayment standard or model, if any, used and may contain tables setting forth
the projected weighted average life of each class of securities and the
percentage of the original principal amount of each class of securities that
would be outstanding on specified distribution dates based on the assumptions
stated in the prospectus supplement, including assumptions that prepayments on
the mortgage loans or underlying loans relating to the private securities,
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as applicable, included in the trust fund are made at rates corresponding to
various percentages of the prepayment standard or model specified in the
prospectus supplement.
There is, however, no assurance that prepayment of the loans will
conform to any level of any prepayment standard or model specified in the
prospectus supplement. The rate of principal prepayments on pools of loans may
be influenced by a variety of factors, including job related factors such as
transfers, layoffs or promotions and personal factors such as divorce,
disability or prolonged illness. Economic conditions, either generally or within
a particular geographic area or industry, also may affect the rate of principal
prepayments. Demographic and social factors may influence the rate of principal
prepayments in that some borrowers have greater financial flexibility to move or
refinance than do other borrowers. The deductibility of mortgage interest
payments, servicing decisions and other factors also affect the rate of
principal prepayments. As a result, there can be no assurance as to the rate or
timing of principal prepayments of the mortgage loans or underlying loans either
from time to time or over the lives of the loans.
The rate of prepayments of conventional housing loans and other
receivables has fluctuated significantly in recent years. In general, however,
if prevailing interest rates fall significantly below the interest rates on the
loans, the loans are likely to prepay at rates higher than if prevailing
interest rates remain at or above the interest rates borne by the loans. In this
regard, it should be noted that the loans may have different interest rates. In
addition, the weighted average life of the securities may be affected by the
varying maturities of the loans. If any loans have actual terms-to-stated
maturity of less than those assumed in calculating the final scheduled
distribution date of the securities, one or more classes of the series may be
fully paid prior to their respective final scheduled distribution date, even in
the absence of prepayments.
FORM OF SECURITIES
The securities in each series will either be issued as physical
certificates or in book-entry form. Physical certificates in fully registered
form will be transferable and exchangeable at the corporate trust office of the
registrar of the securities named in the prospectus supplement. No service
charge will be made for any registration of exchange or transfer of securities,
but the trustee may require payment of a sum sufficient to cover any tax or
other government charge.
Securities issued in book-entry form will be registered in the name of
Cede & Co., the nominee of the Depository Trust Company. DTC is a limited
purpose trust company organized under the laws of the State of New York, a
member of the Federal Reserve System, a "clearing corporation" within the
meaning of the Uniform Commercial Code and a "clearing agency" registered under
the provisions of section 17A of the Securities Exchange Act of 1934. DTC was
created to hold securities for its participating organizations and facilitate
the clearance and settlement of securities transactions between participants
through electronic book-entry changes in their accounts, thereby eliminating the
need for physical movement of certificates. Participants include securities
brokers and dealers, banks, trust companies and clearing corporations. Indirect
access to the DTC system also is available to brokers, dealers, banks and trust
companies that clear through or maintain a custodial relationship with a
participant, either directly or indirectly.
Under a book-entry format, holders that are not participants or
indirect participants but desire to purchase, sell or otherwise transfer
ownership of the securities registered in the name of Cede & Co., as nominee of
DTC, may do so only through participants and indirect participants. In addition,
the holders will receive all distributions of principal of and interest on the
securities from the trustee through DTC and its participants. Under a book-entry
format, holders will receive payments after each distribution date because,
while payments are required to be forwarded to Cede & Co., as nominee for DTC,
on each
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distribution date, DTC will forward payments to its participants, which
thereafter will be required to forward payments to indirect participants or
holders. Unless and until physical securities are issued, it is anticipated that
the only holder will be Cede & Co., as nominee of DTC, and that the beneficial
holders of securities will not be recognized by the trustee as holders under the
agreements. The beneficial holders will only be permitted to exercise the rights
of holders under the agreements indirectly through DTC and its participants who
in turn will exercise their rights through DTC.
DTC is required to make book-entry transfers of securities among
participants and is required to receive and transmit payments of principal of
and interest on the securities. Participants and indirect participants with
which holders have securities accounts similarly are required to make book-entry
transfers and receive and transmit payments on behalf of their respective
holders. Accordingly, although holders will not process securities, the rules
provide a mechanism by which holders will receive distributions and will be able
to transfer their interests.
Unless and until physical certificates are issued, holders who are not
participants may transfer ownership of securities only through participants by
instructing participants to transfer securities, by book-entry transfer, through
DTC for the account of the purchasers of securities, which account is maintained
with their respective participants. In accordance with DTC's normal procedures,
transfers of ownership of securities will be executed through DTC and the
accounts of the respective participants at DTC will be debited and credited.
Similarly, the respective participants will make debits or credits, as the case
may be, on their records on behalf of the selling and purchasing holders.
Because DTC can only act on behalf of participants, who in turn act on
behalf of indirect participants and banks, the ability of a holder to pledge
securities to persons or entities that do not participate in the DTC system, or
otherwise act as the owner of the securities may be limited due to the lack of a
physical certificate.
DTC in general advises that it will take any action permitted to be
taken by a holder under an agreement only at the direction of one or more
participants to whose account with DTC the securities are credited.
Additionally, DTC in general advises that it will take actions on behalf of
specified percentages of the holders only at the direction of participants whose
holdings include current principal amounts of outstanding securities that
satisfy the specified percentages. DTC may take conflicting actions with respect
to other current principal amounts of outstanding securities to the extent that
actions are taken on behalf of participants whose holdings include current
principal amounts of outstanding securities.
Any securities initially registered as physical certificates in the
name of Cede & Co., as nominee of DTC, will be issued in fully registered,
certificated form to holders or their nominees, rather than to DTC or its
nominee only under the events specified in the agreements and described in the
prospectus supplement. Upon the occurrence of any of the events specified in the
agreements and the prospectus supplement, DTC will be required to notify all
participants of the availability through DTC of physical certificates. Upon
surrender by DTC of the securities representing the securities and instruction
for re-registration, the trustee will take the securities in the form of
physical certificates, and thereafter the trustee will recognize the holders of
physical certificates as holders. Thereafter, payments of principal of and
interest on the securities will be made by the trustee directly to holders. The
final distribution of any security, whether physical certificates or securities
registered in the name of Cede & Co., however, will be made only upon
presentation and surrender of the securities on the final distribution date at
the office or agency specified in the notice of final payment to holders.
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THE TRUST FUNDS
Each trust fund will include assets originated or acquired by the
seller or sellers specified in the prospectus supplement composed of:
o primary assets, which may include one or more pools of (1) mortgage
loans that are secured by mortgages or deeds of trust on residential
properties, (2) manufactured housing conditional sale contracts and
installment agreements that are secured by manufactured homes, and (3)
securities backed or secured by loans,
o all monies due on the loans net, if and as provided in the prospectus
supplement, of amounts payable to the servicer of the loans,
o funds on deposit in any pre-funding and capitalized interest accounts,
o reserve funds, letters of credit, surety bonds, insurance policies or
other forms of credit support,
o any mortgaged property acquired by foreclosure or deed in lieu of
foreclosure or repossession,
o any manufactured home acquired by repossession and
o any amount on deposit in the collection account or distribution
account.
The mortgage loans will be secured by mortgages and deeds of trust or
other similar security instruments creating a lien on a mortgaged property,
which may be subordinated to one or more senior liens on the mortgaged property.
The contracts will be secured by security interests taken in the manufactured
homes.
A maximum of 5%, by initial principal balance, of the aggregate primary
assets that are included in a trust fund at the closing date will deviate from
the characteristics that are described in the prospectus supplement.
The securities will be non-recourse obligations secured by the trust
fund. Holders of a series of notes may only proceed against the collateral
securing the notes in the case of a default and may not proceed against any
assets of the sponsor or the trust fund not pledged to secure the notes.
The primary assets for a series will be acquired by the trust fund from
the seller, or may be acquired in the open market or in privately negotiated
transactions. Loans relating to a series will be serviced by the servicer, which
may be the seller, specified in the prospectus supplement, under a servicing
agreement between the trust fund and servicer.
"Agreement" means, as to a series of certificates, the pooling and
servicing agreement or trust agreement, and as to a series of notes, the
indenture and the servicing agreement, as the context requires.
A trust fund relating to a series of securities may be a business trust
formed under the laws of the state specified in the prospectus supplement.
Prior to the initial offering of a series of securities, the trust fund
will have no assets or liabilities. We do not expect any trust fund to engage in
any activities other than acquiring, managing and holding the trust assets and
the proceeds thereof, issuing securities and making distributions thereon. No
trust fund will have any significant source of capital other than its assets and
any credit enhancement.
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Primary assets included in the trust fund for a series may consist of
any combination of mortgage loans, contracts and private securities. Some of the
loans may be delinquent, although the loans that are delinquent as of the
cut-off date will not exceed 10% of the initial aggregate principal balance of
the primary assets for that series. The following is a brief description of the
loans we expect to be include as trust property.
THE MORTGAGE LOANS
MORTGAGE LOANS. The primary assets for a series may consist, in whole
or in part, of mortgage loans secured by mortgages on one- to four-family
residential housing, including condominium units and cooperative dwellings which
may be subordinated to other mortgages on the same mortgaged property. The
mortgage loans may have fixed interest rates or adjustable interest rates and
may provide for other payment characteristics as described below and in the
prospectus supplement.
The mortgage loans may be either "closed-end" loans, which do not
permit the borrower to obtain the proceeds of future advances, or "open-end"
loans structured as lines of credit, which permit the 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. When a full
principal prepayment is paid on a mortgage loan during a month, the mortgagor is
generally charged interest only on the days of the month actually elapsed up to
the date of prepayment, at a daily interest rate that is applied to the
principal amount of the mortgage loan so prepaid.
PAYMENT TERMS. The payment terms of the mortgage loans to be included
in a trust for a series will be described in the prospectus supplement and may
include any of the following features of combinations thereof or other features
described in the prospectus supplement:
o Interest may be payable at a fixed rate, a rate adjustable from
time to time in relation to an index, a rate that is fixed for a
period of time or under specified circumstances and is followed by
an adjustable rate, a rate that otherwise varies from time to
time, or a rate that is convertible from and adjustable rate to a
fixed rate. Changes to an adjustable rate may be subject to
periodic limitations, maximum rates, minimum rates or a
combination of limitations. Accrued interest may be deferred and
added to the principal of a mortgage loan for periods and under
circumstances specified in the prospectus supplement. Mortgage
loans may provide for the payment of interest at a rate lower than
the specified 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.
o 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.
o 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
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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.
o Prepayments of principal may be subject to a prepayment fee, which
may be fixed for the life of the mortgage loan or may decline over
time, and may be prohibited for the life of the mortgage loan or
for specified periods. Some mortgage loans may permit prepayments
after expiration of the applicable lockout period and may require
the payment of a prepayment fee in connection with any subsequent
prepayment. Other mortgage loans may permit prepayments without
payment of a fee unless the prepayment occurs during specified
time periods. The mortgage loans may include "due on sale" clauses
which permit the mortgagee to demand payment of the entire
mortgage loan in connection with the sale or transfer of the
mortgaged property. Other mortgage loans may be assumable by
persons meeting the then applicable underwriting standards of the
seller.
AMORTIZATION OF THE MORTGAGE LOANS. The mortgage loans will provide for
payments that are allocated to principal and interest according to either the
actuarial method, the simple interest method or the "Rule of 78s" method. The
prospectus supplement will state whether any of the mortgage loans will provide
for deferred interest or negative amortization.
An actuarial mortgage loan provides for payments in level monthly
installments except, in the case of a balloon loan, the final payment,
consisting of interest equal to one-twelfth of the applicable loan rate times
the unpaid principal balance, with the remainder of the payment applied to
principal.
A simple interest mortgage loan provides for the amortization of the
amount financed under the mortgage loan over a series of equal monthly payments
except, in the case of a balloon loan, the final payment. Each monthly payment
consists of an installment of interest which is calculated on the basis of the
outstanding principal balance of the mortgage loan being multiplied by the
stated loan rate and further multiplied by a fraction, the numerator of which is
the number of days in the period elapsed since the preceding payment of interest
was made and the denominator of which is the number of days in the annual period
for which interest accrues on the mortgage loan. As payments are received under
a simple interest mortgage loan, the amount received is applied first to
interest accrued to the date of payment and the balance is applied to reduce the
unpaid principal balance. Accordingly, if a borrower pays a fixed monthly
installment on a simple interest mortgage loan before its scheduled due date,
the portion of the payment allocable to interest for the period since the
preceding payment was made will be less than it would have been had the payment
been made as scheduled, and the portion of the payment applied to reduce the
unpaid principal balance will be correspondingly greater. However, the next
succeeding payment will result in an allocation of a greater amount to interest
if the payment is made on its scheduled due date.
Conversely, if a borrower pays a fixed monthly installment after its
scheduled due date, the portion of the payment allocable to interest for the
period since the preceding payment was made will be greater than it would have
been had the payment been made as scheduled, and the remaining portion, if any,
of the payment applied to reduce the unpaid principal balance will be
correspondingly less. If each scheduled payment under a simple interest mortgage
loan is made on or prior to its scheduled due date, the principal balance of the
mortgage loan 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.
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Some mortgage loans may be insured under the Federal Housing Authority
Title I credit insurance program created under sections 1 and 2(a) of the
National Housing Act of 1934. Under the Title I program, the Federal Housing
Authority is authorized and empowered to insure qualified lending institutions
against losses on eligible loans. The Title I program operates as a coinsurance
program in which the Federal Housing Authority insures up to 90% of specified
losses incurred on an individual insured loan, including the unpaid principal
balance of the loan, but only to the extent of the insurance coverage available
in the lender's Federal Housing Authority insurance coverage reserve account.
The owner of the loan bears the uninsured loss on each loan.
The mortgaged properties will include single family property, which is
one-to four-family residential housing, including condominium units and
cooperative dwellings. The mortgaged properties may consist of detached
individual dwellings, individual condominiums, townhouses, duplexes, row houses,
individual units in planned unit developments and other attached dwelling units.
Each single family property will be located on land owned in fee simple by the
borrower or on land leased by the borrower for a term at least equal to the term
of the mortgage. Attached dwellings may include owner-occupied structures where
each borrower owns the land upon which the unit is built, with the remaining
adjacent land owned in common or dwelling units subject to a proprietary lease
or occupancy agreement in a cooperatively owned apartment building.
The prospectus supplement will specify whether or not mortgages on
cooperative dwellings consist of a lien on the shares issued by the cooperative
dwelling and the proprietary lease or occupancy agreement relating to the
cooperative dwelling.
The aggregate principal balance of mortgage loans secured by mortgaged
properties that are owner-occupied will be disclosed in the prospectus
supplement. The sole basis for a representation that a given percentage of the
mortgage loans are secured by single family property that is owner-occupied will
be either (1) the making of a representation by the mortgagor at origination of
the mortgage loan either that the underlying mortgaged property will be used by
the mortgagor for a period of at least six months every year or that the
mortgagor intends to use the mortgaged property as a primary residence, or (2) a
finding that the address of the underlying mortgaged property is the mortgagor's
mailing address as reflected in the servicer's records. To the extent specified
in the prospectus supplement, the mortgaged properties may include non-owner
occupied investment properties and vacation and second homes.
The initial combined loan-to-value ratio of a mortgage loan is computed
in the manner described in the prospectus supplement, taking into account the
amounts of any senior loans.
ADDITIONAL INFORMATION. The selection criteria for the mortgage loans,
including loan-to-value ratios, original terms to maturity and delinquency
information, will be specified in the prospectus supplement.
The trust fund may include mortgage loans that do not amortize their
entire principal balance by their stated maturity in accordance with their terms
and require a balloon payment of the remaining principal balance at maturity.
The trust fund may include mortgage loans that do not have a specified stated
maturity.
The prospectus supplement for a series for which the primary assets
include mortgage loans will specify, to the extent relevant and to the extent
the information is reasonably available to the sponsor and the sponsor
reasonably believes the information to be reliable:
o the aggregate unpaid principal balance;
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o the range and weighted average loan rate, and, in the case of
adjustable rate loans, the range and weighted average of the
current loan rates and the lifetime rate caps, if any;
o the range and average outstanding principal balance;
o the weighted average original and remaining term-to-stated
maturity and the range of original and remaining terms-to-stated
maturity, if applicable;
o the range and weighted average of combined loan-to-value ratios or
loan-to-value ratios;
o the percentage of mortgage loans that accrue interest at
adjustable or fixed interest rates;
o the geographic distribution of the mortgaged properties;
o the percentage of mortgage loans that are secured by single family
mortgaged properties, shares relating to cooperative dwellings,
condominium units, investment property and vacation or second
homes;
o the lien priority;
o year of origination; and
o the delinquency status, including the duration and history of
delinquencies and the percentage of delinquent mortgage loans.
The prospectus supplement will also specify any other limitations on
the types or characteristics of mortgage loans for a series.
THE CONTRACTS
CONTRACTS. Each pool of contracts in a trust fund will consist of
conventional manufactured housing installment sales contracts and installment
loan agreements originated by a manufactured housing dealer in the ordinary
course of business and purchased by the seller. Each contract will be secured by
manufactured homes, each of which will be located in any of the fifty states or
the District of Columbia. The contracts will be fully amortizing and will bear
interest at a fixed or adjustable annual percentage rate. The seller of the
contracts may retain a portion of the interest payments, called a "fixed
retained yield." If the seller retains a fixed retained yield, the trust will be
entitled to payments on the contracts after payment of the fixed retained yield.
Manufactured homes, unlike site-built homes, generally depreciate in
value. Consequently, at any time after origination it is possible, especially in
the case of contracts with high loan-to-value ratios at origination, that the
market value of a manufactured home may be lower than the principal amount
outstanding under the contract.
ADDITIONAL INFORMATION. The prospectus supplement for a series for
which the primary assets include contracts will specify, to the extent relevant
and to the extent the information is reasonably available to the sponsor and the
sponsor reasonably believes the information to be reliable:
o the initial aggregate principal balance;
o the range of original terms to maturity;
o the weighted average remaining term to stated maturity;
o the earliest and latest origination dates;
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o the range of contract rates and net contract rates;
o the weighted average net contract rate;
o the geographic distribution of manufactured homes;
o the percentage of any contracts which are secured by manufactured
homes which have become permanently affixed to real estate;
o the percentage of the contracts representing the refinancing of
existing indebtedness;
o the range of loan-to-value ratios and
o the highest outstanding principal balance at origination of any
contract.
The contracts in a trust fund will generally have monthly payments due
on the first of each month and will be fully-amortizing contracts. Contracts may
have due dates which occur on a date other than the first of each month. The
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 change
in the rate of amortization of the contract. Moreover, payment adjustments on
the contracts may be subject to limitations, as specified in the prospectus
supplement, which may also affect the rate of amortization on the contract. As a
result, the amount of interest accrued in any month may equal or exceed the
scheduled monthly payment on the contract. In any such month, no principal would
be payable on the contract, and if the accrued interest exceeded the scheduled
monthly payment, the excess interest due would become "deferred interest that is
added to the principal balance of the contract. Deferred interest will bear
interest at the contract rate until paid. If the limitations prevent the
payments from being sufficient to amortize fully the contract by its stated
maturity date, a lump sum payment equal to the remaining unpaid principal
balance will be due on the stated maturity date.
PRIVATE SECURITIES
Primary assets for a series may consist, in whole or in part, of
"private securities" which include pass-through certificates representing
beneficial interests in underlying loans of the type that would otherwise be
eligible to be loans or collateralized obligations secured by underlying loans.
Private securities may have previously been offered to the public and not
purchased as part of the original distribution or may be acquired in a private
transaction. Although individual underlying loans may be insured or guaranteed
by the United States or an agency or instrumentality thereof, they need not be,
and private securities themselves will not be so insured or guaranteed.
Private securities will have been issued under a pooling and servicing
agreement, a trust agreement or similar agreement. The seller/servicer of the
underlying loans will have entered into the underlying agreement with the
underlying trustee. The underlying trustee or its agent, or a custodian, will
possess the underlying loans. Underlying loans will be serviced by a servicer
directly or by one or more sub-servicers who may be subject to the supervision
of the underlying servicer.
The sponsor of the private securities will be a financial institution
or other entity engaged generally in the business of lending; a public agency or
instrumentality of a state, local or federal government; or a limited purpose
corporation organized for the purpose of, among other things, establishing
trusts and acquiring and selling loans to trusts, and selling beneficial
interests in trusts. The underlying sponsor may be an affiliate of the sponsor.
The obligations of the underlying sponsor will generally be limited to
representations and warranties as to the assets conveyed by it to the trust.
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Additionally, although the underlying loans may be guaranteed by an agency or
instrumentality of the United States, the private securities themselves will not
be so guaranteed.
Distributions of principal and interest will be made on the private
securities on the dates specified in the prospectus supplement. The private
securities may be entitled to receive nominal or no principal distributions or
nominal or no interest distributions. Principal and interest distributions will
be made on the private securities by the underlying trustee or the underlying
servicer. The underlying sponsor or the underlying servicer may have the right
to repurchase the underlying loans after a specified date or under other
circumstances specified in the prospectus supplement.
The underlying loans may be fixed rate, level payment, fully amortizing
loans or adjustable rate loans or loans having balloon or other irregular
payment features. Underlying loans will be secured by mortgages on mortgaged
properties.
CREDIT SUPPORT RELATING TO PRIVATE SECURITIES. Credit support in the
form of reserve funds, subordination of other private securities issued under
the underlying agreement, guarantees, letters of credit, cash collateral
accounts, insurance policies or other types of credit support may be provided
with respect to the underlying loans or with respect to the private securities
themselves. The type, characteristics and amount of credit support will be a
function of characteristics of the underlying loans and other factors and will
have been established for the private securities on the basis of requirements of
the rating agency that rated the private securities.
ADDITIONAL INFORMATION. The prospectus supplement for a series for
which the primary assets include private securities will specify, to the extent
relevant and to the extent the information is reasonably available to the
sponsor and the sponsor reasonably believes the information to be reliable:
o the aggregate approximate principal amount and type;
o the maximum original term-to-stated maturity;
o the weighted average term-to-stated maturity;
o the pass-through or certificate rate or ranges thereof;
o the underlying sponsor, the underlying servicer and the underlying
trustee;
o characteristics of credit support relating to the underlying loans
or to the private securities;
o 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;
o the terms on which underlying loans may be substituted for those
originally underlying the private securities;
and, as to the underlying loans, the following:
o the payment features, including whether the underlying loans are
fixed rate or adjustable rate and whether they provide for fixed
level payments or other payment features;
o the approximate aggregate principal balance, if known, of the
underlying loans insured or guaranteed by a governmental entity;
o the servicing fee or range of servicing fees;
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o the minimum and maximum stated maturities at origination;
o the lien priority; and
o the delinquency status and year of origination.
ACCOUNTS
Each trust fund will include one or more accounts. Each account will
either be an account maintained at a depository institution, the long-term
unsecured debt obligations of which are satisfactory to each rating agency or an
account the deposits in which are insured to the maximum extent available by the
Federal Deposit Insurance Corporation or which are secured in a manner meeting
requirements established by each rating agency.
The trustee may invest the funds in the accounts in eligible
investments maturing, with exceptions, not later than the day preceding the date
funds are due to be distributed. Eligible investments include, among other
investments, obligations of the United States and agencies thereof, federal
funds, certificates of deposit, commercial paper, demand and time deposits and
banker's acceptances, repurchase agreements of United States government
securities and guaranteed investment contracts, in each case, acceptable to the
rating agencies rating the securities.
COLLECTION AND DISTRIBUTION ACCOUNTS
A separate collection account will be established in the name of the
trustee for receipt of all amounts received from the primary assets. Amounts on
deposit in the collection account and amounts available from any credit
enhancement will be deposited in a distribution account, which will also be
established in the name of the trustee, for distribution to the holders.
PRE-FUNDING ACCOUNT
A trust fund may include a "pre-funding account." On the closing date,
the "pre-funded amount," which is a portion of the proceeds of the sale of the
securities of a series, will be deposited in the pre-funding account and may be
used to acquire additional primary assets during a specified "pre-funding
period." If any pre-funded amount remains on deposit in the pre-funding account
at the end of the pre-funding period, it will be applied in the manner specified
in the prospectus supplement to prepay the notes and/or the certificates of the
applicable series.
If a pre-funding account is established:
o the pre-funding period will not exceed 1 year from the closing
date,
o the additional primary assets to be acquired during the
pre-funding period will be subject to the same representations and
warranties and satisfy the same eligibility requirements as the
primary assets included in the trust fund on the closing date,
subject to the exceptions stated in the prospectus supplement,
o the pre-funding amount will not exceed 50% of the principal amount
of the securities issued and
o prior to the investment of the pre-funded amount in additional
primary assets, the pre-funded amount will be invested in one or
more eligible investments.
If a pre-funding account is established, a "capitalized interest
account" may be established and maintained with the trustee. On the closing
date, funds will be deposited in the capitalized interest
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account and used to fund any shortfall in the interest accrued on the securities
and fees or expenses during the pre-funding period. Any amounts on deposit in
the capitalized interest account at the end of the pre-funding period that are
not necessary to fund any shortfall will be distributed to the person specified
in the prospectus supplement.
If a trust fund includes a pre-funding account and the principal
balance of additional primary assets delivered to the trust fund during the
pre-funding period is less than the original pre-funded amount, the
securityholders will receive a prepayment of principal to the extent described
in the prospectus supplement. Any principal prepayment may adversely affect the
yield to maturity of the applicable securities. Since prevailing interest rates
are subject to fluctuation, there can be no assurance that investors will be
able to reinvest a prepayment at yields equaling or exceeding the yields on the
securities. It is possible that the yield on any reinvestment will be lower, and
may be significantly lower, than the yield on the securities.
CREDIT ENHANCEMENT
The sponsor may obtain credit enhancement, which may include an
irrevocable letter of credit, surety bond or insurance policy, issue subordinate
securities or obtain any other form of credit enhancement or combination thereof
in favor of the trustee on behalf of the holders of a series or designated
classes of a series from an institution or by other means. The credit
enhancement will support the payment of principal and interest on the
securities, and may be applied for other purposes to the extent and under the
conditions described in the prospectus supplement. Credit enhancement for a
series may include one or more of the following forms, or another form specified
in the prospectus supplement. Credit enhancement may be structured so as to
protect against losses relating to more than one trust fund.
SUBORDINATE SECURITIES
Credit enhancement for a series may consist of one or more classes of
subordinate securities. The rights of holders of subordinate securities to
receive distributions on any distribution date will be subordinate in right and
priority to the rights of holders of senior securities of the series.
INSURANCE
Credit enhancement for a series may consist of special hazard insurance
policies, bankruptcy bonds and other types of insurance relating to the primary
assets.
POOL INSURANCE POLICY. The pool insurance policy will cover, subject to
the limitations described in a prospectus supplement, losses resulting from
defaults, but will not cover the portion of the principal balance of any loan
that is required to be covered by any primary mortgage insurance policy.
SPECIAL HAZARD INSURANCE POLICY. A special hazard insurance policy
typically provides that, where there has been damage to mortgaged property
securing a defaulted or foreclosed mortgage loan or the manufactured home
underlying a contract, title to which has been acquired by the insured, and to
the extent the damage is not covered by the standard hazard insurance policy or
any flood insurance policy, or in connection with partial loss resulting from
the application of the coinsurance clause in a standard hazard insurance policy,
the special hazard insurer will pay the lesser of (1) the cost of repair or
replacement of the mortgaged property or manufactured home or (2) upon transfer
of the mortgaged property or manufactured home to the special hazard insurer,
the unpaid principal balance of the loan at the time of foreclosure, plus
accrued interest to the date of claim settlement and expenses incurred by the
servicer. If the unpaid principal balance plus accrued interest and expenses is
paid by the special hazard insurer, the amount of further coverage under the
special hazard insurance policy will be correspondingly
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reduced, less any net proceeds from the sale of the mortgaged property or
manufactured home. Any amount paid as the cost of repair of a mortgaged property
or manufactured home will reduce coverage by the amount paid. Special hazard
insurance policies typically do not cover losses occasioned by war, civil
insurrection, governmental actions, errors in design, faulty workmanship or
materials, except under specified circumstances, nuclear reaction, if the
mortgaged property is in a federally designated flood area, flood, chemical
contamination and related other risks.
Restoration of the mortgaged property or replacement of the
manufactured home with the proceeds described under (1) above is expected to
satisfy the condition under any pool insurance policy that the mortgaged
property be restored or manufactured home replaced before a claim under the pool
insurance policy may be validly presented with respect to the defaulted loan.
The payment described under (2) above will render unnecessary presentation of a
claim for the loan under any pool insurance policy. Therefore, so long as a pool
insurance policy remains in effect, the payment by the special hazard insurer of
the cost of repair or of the unpaid principal balance of the loan plus accrued
interest and expenses will not affect the total insurance proceeds paid to
security holders, but will affect the relative amounts of coverage remaining
under the special hazard insurance policy and pool insurance policy.
BANKRUPTCY BOND. In the event of a bankruptcy of a borrower, the
bankruptcy court may establish the value of the mortgaged property or
manufactured home at an amount less than the then-outstanding principal balance
of the loan. The amount of the secured debt could be reduced to the assigned
value, and the holder of the loan thus would become an unsecured creditor to the
extent the outstanding principal balance of the loan exceeds the assigned value.
In addition, other modifications of the terms of a loan can result from a
bankruptcy proceeding. See "Legal Aspects of the Loans." The sponsor may obtain
a bankruptcy bond or similar insurance contract covering losses resulting from
proceedings with respect to borrowers under the federal bankruptcy code. The
bankruptcy bond will cover losses resulting from a reduction by a bankruptcy
court of scheduled payments of principal and interest on a loan or a reduction
by a bankruptcy court of the principal amount of a loan and will cover unpaid
interest on the amount of the principal reduction from the date of the filing of
a bankruptcy petition.
RESERVE FUNDS
The sponsor may deposit into one or more funds to be established with
the trustee as part of the trust fund or for the benefit of any credit enhancer,
cash, a letter or letters of credit, cash collateral accounts, eligible
investments, or other instruments meeting the criteria of the rating agency
rating any series. In the alternative or in addition to an initial deposit, a
reserve fund may be funded over time through application of all or a portion of
the excess cash flow from the primary assets, to the extent described in the
prospectus supplement.
Amounts withdrawn from any reserve fund will be applied by the trustee
to make payments on the securities of a series, to pay expenses, to reimburse
any credit enhancer or for any other purpose.
The trustee will invest amounts deposited in a reserve fund in eligible
investments.
MINIMUM PRINCIPAL PAYMENT AGREEMENT
The sponsor may enter into a minimum principal payment agreement with
an entity specified in the prospectus supplement. The entity would provide
payments on the securities of a series in the event that aggregate scheduled
principal payments and/or prepayments on the primary assets are not sufficient
to make payments on the securities.
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DEPOSIT AGREEMENT
The sponsor and the trustee for a series may enter into a deposit
agreement with the entity specified in the prospectus supplement. The purpose of
a deposit agreement is to accumulate available cash for investment so that it,
together with income thereon, can be applied to future distributions on one or
more classes of securities.
DERIVATIVE CONTRACTS
A trust may hold an interest rate swap contract, an interest rate cap
agreement or similar contract providing limited protection against interest rate
risks. These derivative contracts may provide the trust with additional amounts
which will be available to pay interest on the securities, to build up
overcollateralization, or both.
SERVICING
The following summaries describe material provisions in the servicing
agreements common to each series of securities. The summaries do not purport to
be complete and are subject to and qualified by reference to the provisions of
the servicing agreements and the prospectus supplements. Where particular
provisions or terms used in the servicing agreements are referred to, the actual
provisions are incorporated by reference as part of the summaries.
COLLECTION PROCEDURES; ESCROW ACCOUNTS
The servicer will make reasonable efforts to collect all payments
required to be made under the loans and will, consistent with the terms of the
servicing agreement and any credit enhancement, follow the collection procedures
that it follows with respect to comparable loans held in its own portfolio. The
servicer may, in its discretion, waive any assumption fee, late payment charge,
or other charge on a loan and to the extent provided in the servicing agreement
arrange with an obligor a schedule for the liquidation of delinquencies by
extending the dates on which the scheduled payments are due on the loan.
The servicer, to the extent permitted by law and required by the
underlying loan documents, will establish and maintain escrow or impound
accounts with respect to loans in which payments by obligors to pay taxes,
assessments, mortgage and hazard insurance premiums, and other comparable items
will be deposited. Withdrawals from the escrow accounts are to be made to effect
timely payment of taxes, assessments and mortgage and hazard insurance, to
refund to obligors amounts determined to be overages, to pay interest to
obligors on balances in the escrow account to the extent required by law, to
repair or otherwise protect the mortgaged property or manufactured home and to
clear and terminate the escrow account. The servicer will be responsible for the
administration of the escrow accounts and generally will make advances to the
escrow accounts when a deficiency exists.
DEPOSITS TO AND WITHDRAWALS FROM THE COLLECTION ACCOUNT
The funds held in the collection account may be invested, pending
remittance to the trustee, in eligible investments. The servicer will be
entitled to receive as additional compensation any interest or other income
earned on funds in the collection account.
The servicer will deposit into the collection account on the business
day following the closing date any amounts representing scheduled payments due
after the cut-off date but received by the servicer on or before the closing
date. Thereafter, the servicer will, within two business days after receipt, the
deposit into the collection account the following:
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o All payments on account of principal, including prepayments, on
the primary assets;
o All payments on account of interest on the primary assets after
deducting, if permitted by the servicing agreement, the servicing
fee;
o All amounts received by the servicer in connection with the
liquidation of primary assets or property acquired in respect
thereof, whether through foreclosure sale, repossession or
otherwise, including payments in connection with the primary
assets received from the obligor, other than liquidation proceeds,
which are amounts required to be paid or refunded to the obligor
under the terms of the applicable loan documents or otherwise
under law, exclusive of, if permitted by the servicing agreement,
the servicing fee;
o All proceeds under any title insurance, hazard insurance or other
insurance policy covering any primary asset, other than proceeds
to be applied to the restoration or repair of the mortgaged
property or manufactured home or released to the obligor;
o All amounts from any reserve fund;
o All advances made by the servicer; and
o All repurchase prices of any primary assets repurchased by the
sponsor, the servicer or the seller.
The servicer may be permitted, from time to time, to make withdrawals
from the collection account for each series for the following purposes:
o to reimburse itself for advances made by it; the servicer's right
to reimburse itself is limited to amounts received from particular
loans, including, for this purpose, liquidation proceeds and
amounts representing proceeds of insurance policies covering the
mortgaged property or manufactured home, which represent late
recoveries of scheduled payments respecting which any advance was
made;
o to the extent provided in the servicing agreement, to reimburse
itself for any advances that the servicer determines in good faith
it will be unable to recover from late recoveries or proceeds from
the particular loan;
o 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 reimbursement exceed the outstanding
principal balance of the loan, together with accrued and unpaid
interest thereon to the due date for the loan next succeeding the
date of its receipt of liquidation proceeds, to pay to itself out
of the excess the amount of any unpaid servicing fee and any
assumption fees, late payment charges, or other charges on the
loan;
o in the event it has elected not to pay itself the servicing fee
out of the interest component of any scheduled payment, late
payment or other recovery with respect to a particular loan prior
to the deposit of the scheduled payment, late payment or recovery
into the collection account, to pay to itself the servicing fee,
as adjusted under the servicing agreement, from any scheduled
payment, late payment or other recovery, to the extent permitted
by the servicing agreement;
o to reimburse itself for expenses incurred by and recoverable by or
reimbursable to it;
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o to pay to the applicable person with respect to each "REO
property," a primary asset or mortgaged property acquired through
or in lieu of foreclosure acquired in respect thereof that has
been repurchased or removed from the trust fund by the sponsor,
the servicer or the seller, all amounts received thereon and not
distributed as of the date on which the repurchase price was
determined;
o to make payments to the trustee for deposit into the distribution
account, if any, or for remittance to the holders in the amounts
and in the manner provided for in the servicing agreement; and
o to clear and terminate the collection account.
In addition, the servicer may withdraw at any time from the collection
account any amount inadvertently deposited in the collection account.
ADVANCES AND LIMITATIONS THEREON
The prospectus supplement will describe the circumstances, if any,
under which the servicer will make advances with respect to delinquent payments
on loans. The servicer will be obligated to make advances, and the obligation
may be limited in amount, or may not be activated until a portion of a specified
reserve fund is depleted. Advances are intended to provide liquidity and, except
to the extent specified in the prospectus supplement, not to guarantee or insure
against losses. Accordingly, any funds advanced are recoverable by the servicer
out of amounts received on particular loans which represent late recoveries of
principal or interest, proceeds of insurance policies or liquidation proceeds
respecting which any advance was made. If an advance is made and subsequently
determined to be nonrecoverable from late collections, proceeds of insurance
policies, or liquidation proceeds from the loan, the servicer may be entitled to
reimbursement from other funds in the collection account or distribution
account, as the case may be, or from a specified reserve fund as applicable, to
the extent specified in the prospectus supplement.
MAINTENANCE OF INSURANCE POLICIES AND OTHER SERVICING PROCEDURES
STANDARD HAZARD INSURANCE; FLOOD INSURANCE. The prospectus supplement
will specify the extent to which the servicer will be required to maintain or to
cause the obligor on each loan to maintain a standard hazard insurance policy
providing coverage of the standard form of fire insurance with extended coverage
for other hazards as is customary in the state in which the mortgaged property
or manufactured home is located. The standard hazard insurance policies will
provide for coverage at least equal to the applicable state standard form of
fire insurance policy with extended coverage for property of the type securing
the loans. In general, the standard form of fire and extended coverage policy
will cover physical damage to or destruction of, the mortgaged property or
manufactured home caused by fire, lightning, explosion, smoke, windstorm, hail,
riot, strike and civil commotion, subject to the conditions and exclusions
particularized in each policy. Because the standard hazard insurance policies
relating to the loans will be underwritten by different hazard insurers and will
cover mortgaged properties and manufactured homes located in various states, the
policies will not contain identical terms and conditions. The basic terms,
however, generally will be determined by state law and generally will be
similar. Most policies typically will not cover any physical damage resulting
from war, revolution, governmental actions, floods and other water-related
causes, earth movement, including earthquakes, landslides and mudflows, nuclear
reaction, wet or dry rot, vermin, rodents, insects or domestic animals, theft
and, in some cases, vandalism. The foregoing list is merely indicative of common
kinds of uninsured risks and is not intended to be all-inclusive. Uninsured
risks not covered by a special hazard insurance policy or other form of credit
enhancement will adversely affect distributions to holders. When a mortgaged
property securing a mortgage loan is located in a flood area identified by the
Department of Housing and Urban
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Development under the Flood Disaster Protection Act of 1973, the servicer will
be required to cause flood insurance to be maintained with respect to the
mortgaged property, to the extent available.
The standard hazard insurance policies covering mortgaged properties
securing mortgage loans or manufactured home securing a contract typically will
contain a "coinsurance" clause which, in effect, will require the insured at all
times to carry hazard insurance of a specified percentage, generally 80% to 90%,
of the full replacement value of the mortgaged property or manufactured home,
including the improvements on any mortgaged property or manufactured home, in
order to recover the full amount of any partial loss. If the insured's coverage
falls below this specified percentage, the clause will provide that the hazard
insurer's liability in the event of partial loss will not exceed the greater of
(1) the actual cash value, which is the replacement cost less physical
depreciation, of the mortgaged property or manufactured home, including the
improvements, if any, damaged or destroyed or (2) the proportion of the loss,
without deduction for depreciation, as the amount of insurance carried bears to
the specified percentage of the full replacement cost of the mortgaged property
or manufactured home and improvements. Since the amount of hazard insurance to
be maintained on the improvements securing the mortgage loans and manufactured
homes declines as the principal balances owing thereon decrease, and since the
value of the mortgaged properties or manufactured home will fluctuate in value
over time, the effect of this requirement in the event of partial loss may be
that hazard insurance proceeds will be insufficient to restore fully the damage
to the affected mortgaged property or manufactured home.
Generally, coverage will be in an amount at least equal to the greater
of (1) the amount necessary to avoid the enforcement of any co-insurance clause
contained in the policy or (2) the outstanding principal balance of the loan.
The servicer may also maintain on REO property that secured a defaulted mortgage
loan and that has been acquired upon foreclosure, deed in lieu of foreclosure,
or repossession, a standard hazard insurance policy in an amount that is at
least equal to the maximum insurable value of the REO property. No earthquake or
other additional insurance will be required of any obligor or will be maintained
on REO property, other than under any applicable laws and regulations as shall
at any time be in force and shall require additional insurance.
In the event that the servicer obtains and maintains a blanket policy
insuring against hazard losses on all of the loans, written by an insurer then
acceptable to each rating agency which assigns a rating to the series, it will
conclusively be deemed to have satisfied its obligations to cause to be
maintained a standard hazard insurance policy for each loan or REO property.
This blanket policy may contain a deductible clause, in which case the servicer
will be required, in the event that there has been a loss that would have been
covered by the policy absent the deductible clause, to deposit in the collection
account the amount not otherwise payable under the blanket policy because of the
application of the deductible clause.
REALIZATION UPON DEFAULTED MORTGAGE LOANS
The servicer will use its reasonable best efforts to foreclose upon,
repossess or otherwise comparably convert the ownership of the mortgaged
properties or the manufactured homes as come into and continue in default and as
to which no satisfactory arrangements can be made for collection of delinquent
payments. In connection with a foreclosure, repossession or other conversion,
the servicer will follow the practices and procedures that it deems necessary or
advisable and as are normal and usual in its servicing activities with respect
to comparable loans serviced by it. However, the servicer will not be required
to expend its own funds in connection with any foreclosure or repossession or
towards the restoration of the mortgaged property or manufactured home unless it
determines that (1) the restoration, repossession or foreclosure will increase
the liquidation proceeds available to the holders after reimbursement to itself
for its expenses and (2) its expenses will be recoverable either through
liquidation proceeds or the proceeds of insurance. In the case of a trust fund
for which a REMIC election has been
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made, the servicer will be required to liquidate any mortgaged property acquired
through foreclosure within two years after the acquisition of the mortgaged
property. While the holder of a mortgaged property acquired through foreclosure
can often maximize its recovery by providing financing to a new purchaser, the
trust fund, if applicable, will have no ability to do so and neither the
servicer nor the sponsor will be required to do so.
The servicer may arrange with the obligor on a defaulted loan a
modification of the loan. Modifications may only be entered into if they meet
the underwriting policies and procedures employed by the servicer in servicing
receivables for its own account and meet the other conditions in the servicing
agreement.
ENFORCEMENT OF DUE-ON-SALE CLAUSES
When any mortgaged property is about to be conveyed by the obligor, the
servicer may, to the extent it has knowledge of the prospective conveyance and
prior to the time of the consummation of the conveyance, exercise its rights to
accelerate the maturity of the mortgage loan under the applicable "due-on-sale"
clause, if any, unless it reasonably believes that the clause is not enforceable
under applicable law or if the enforcement of the clause would result in loss of
coverage under any primary mortgage insurance policy. In that event, the
servicer is authorized to accept from or enter into an assumption agreement with
the person to whom the mortgaged property has been or is about to be conveyed,
under which the assuming person becomes liable under the mortgage loan and under
which the original obligor is released from liability and the assuming person is
substituted as the obligor and becomes liable under the mortgage loan. Any fee
collected in connection with an assumption will 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 servicing fee as servicing
compensation in an amount to be determined as specified in the prospectus
supplement. The servicing fee may be fixed or variable, as specified in the
prospectus supplement. In addition, the servicer 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 prospectus
supplement,.
The servicer may pay expenses incurred in connection with the servicing
of the mortgage loans, including, without limitation, the payment of the fees
and expenses of the trustee and independent accountants, payment of insurance
policy premiums and the cost of credit support, if any, and payment of expenses
incurred in preparation of reports to holders.
When an obligor makes a principal prepayment in full between due dates
on the loan, the obligor will generally be required to pay interest on the
amount prepaid only to the date of prepayment. If and to the extent provided in
the prospectus supplement in order that one or more classes of the holders of a
series will not be adversely affected by any resulting shortfall in interest,
the amount of the servicing fee may be reduced to the extent necessary to
include in the servicer's remittance to the trustee for deposit into the
distribution account an amount equal to one month's interest on the loan, less
the servicing fee. If the aggregate amount of shortfalls in a month exceeds the
servicing fee for a month, a shortfall to holders may occur.
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The servicer will be entitled to reimbursement for expenses incurred by
it in connection with the liquidation of defaulted loans. The holders will
suffer no loss by reason of reimbursement of expenses if expenses are covered
under insurance policies or from excess liquidation proceeds. If claims are
either not made or paid under the applicable insurance policies or if coverage
thereunder has been exhausted, the holders will suffer a loss to the extent that
liquidation proceeds, after reimbursement of the servicer's expenses, are less
than the outstanding principal balance of and unpaid interest on the loan which
would be distributable to holders. In addition, the servicer will be entitled to
reimbursement of expenditures incurred by it in connection with the restoration
of property securing a defaulted loan, prior to the rights of the holders to
receive any proceeds of insurance policies, liquidation proceeds or amounts
derived from other credit enhancement. The servicer is generally also entitled
to reimbursement from the collection account for advances.
The prospectus supplement will describe the priority of the servicer's
right, which is typically senior in priority, to receive funds from the
collection account for a series, whether as the servicing fee or other
compensation, or for the reimbursement of advances, expenses or otherwise, with
respect to the rights of the holders.
EVIDENCE AS TO COMPLIANCE
Each year, a firm of independent public accountants will furnish a
statement to the trustee to the effect that it has examined documents and
records relating to the servicing of the loans by the servicer and that, on the
basis of its examination, it is of the opinion that the servicing has been
conducted in compliance with the servicing agreement, except for any exceptions
that it believes to be immaterial and any other exceptions identified in the
statement.
The servicer for each series will also provide to the trustee an annual
statement to the effect that the servicer has fulfilled its obligations under
the servicing agreement throughout the preceding calendar year.
MATTERS REGARDING THE SERVICER
The servicer for each series will be identified in the prospectus
supplement. The servicer may be an affiliate of the sponsor and may have other
business relationships with the sponsor and its affiliates.
If an event of default occurs under a servicing agreement, the servicer
may be replaced by the trustee or a successor servicer. These events of default
and the rights of the trustee upon a default under the servicing agreement will
be substantially similar to those described under "The Agreements-- Events of
Default; Rights Upon Events of Default-- Servicing Agreement."
The servicing agreement will specify the circumstances under which the
servicer may assign its rights and delegate its duties and obligations
thereunder for each series, which generally will require that the successor
servicer accepting the assignment or delegation:
o services similar loans in the ordinary course of its business;
o is reasonably satisfactory to the trustee;
o has a net worth of not less than a minimum amount;
o would not cause the securities to be qualified, downgraded or
withdrawn and
o executes and delivers to the trustee an agreement under which it
assumes the obligations to act as servicer.
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No assignment will become effective until the trustee or a successor
servicer has assumed the servicer's obligations and duties under the servicing
agreement. To the extent that the servicer transfers its obligations to a
wholly-owned subsidiary or affiliate, the subsidiary or affiliate need not
satisfy the above criteria. However, the assigning servicer will remain liable
for the servicing obligations under the servicing agreement. Any entity into
which the servicer is merged or consolidated or any successor corporation
resulting from any merger, conversion or consolidation will succeed to the
servicer's obligations under the servicing agreement provided that the successor
or surviving entity meets the above requirements for a successor servicer.
The servicer, and its directors, officers, employees and agents, will
not be responsible for any action taken or for failing to take any action in
good faith under the servicing agreement, or for errors in judgment. However,
neither the servicer nor its directors, officers, employees and agents will be
protected against any breach of warranty or representations or the failure to
perform its obligations in compliance with the specified standard of care, or
liability which would otherwise be imposed by reason of willful misfeasance, bad
faith or negligence in the performance of their duties or by reason of reckless
disregard of their obligations and duties. Each servicing agreement will further
provide that the servicer and any director, officer, employee or agent of the
servicer is entitled to indemnification from the trust fund and will be held
harmless against any loss, liability or expense incurred in connection with any
legal action relating to the servicing agreement or the securities, other than
any loss, liability or expense incurred by reason of willful misfeasance, bad
faith or negligence in the performance of duties thereunder or by reason of
reckless disregard of obligations and duties thereunder. In addition, the
servicer is not under any obligation to appear in, prosecute or defend any legal
action which is not incidental to its servicing responsibilities under the
servicing agreement which, in its opinion, may involve it in any expense or
liability. The servicer may, in its discretion, undertake any action which it
may deem necessary or desirable with respect to the servicing agreement and the
rights and duties of the parties thereto and the interests of the holders
thereunder. In that event, the servicer may be entitled to be reimbursed for the
legal expenses and costs of the action out of the collection account.
THE AGREEMENTS
The following summaries describe the material provisions of the
agreements. The summaries do not purport to be complete and are subject to, and
qualified in their entirety by reference to, the provisions of the agreements.
Where particular provisions or terms used in the agreements are referred to, the
provisions or terms are as specified in the agreements.
ASSIGNMENT OF PRIMARY ASSETS
At the time of issuance of the securities of a series, the seller will
transfer, convey and assign to the trust fund all right, title and interest of
the seller in the primary assets and other property to be transferred to the
trust fund for a series. The assignment will include all principal and interest
due on or with respect to the primary assets after the cut-off date specified in
the prospectus supplement, except for any interests in the trust fund retained
by the seller, the sponsor or its affiliate. The trustee will, concurrently with
the assignment, execute and deliver the securities.
ASSIGNMENT OF MORTGAGE LOANS. The seller will, as to each mortgage
loan, deliver or cause to be delivered to the trustee, or, as specified in the
prospectus supplement a custodian on behalf of the trustee, the mortgage note
endorsed without recourse to the order of the trustee or in blank, the original
mortgage with evidence of recording indicated thereon, except for any mortgage
not returned from the public recording office, in which case a copy of the
mortgage will be delivered, together with a certificate that the original
mortgage was delivered to the recording office, and an assignment of the
mortgage in
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recordable form. The trustee or the custodian will hold these documents in trust
for the benefit of these holders.
The seller will cause assignments to the trustee of the mortgages to be
recorded in the appropriate public office for real property records, except in
states where, in the opinion of counsel acceptable to the trustee, recording is
not required. If the seller does not cause assignments to be recorded, the
agreement may require the seller to repurchase from the trustee the affected
mortgage loans, at the price described below with respect to repurchases by
reason of defective documentation. The enforcement of the repurchase obligation
constitutes the sole remedy available to the holders or the trustee for the
failure of a mortgage to be recorded.
ASSIGNMENT OF CONTRACTS. The seller will transfer physical possession
of the contracts to the trustee or a designated custodian or may retain
possession of the contracts as custodian for the trustee. In addition, the
seller will make an appropriate filing of a financing statement in the
appropriate states to give notice of the trustee's ownership of the contracts.
Unless otherwise specified in the prospectus supplement, the contracts will not
be stamped or marked otherwise to reflect their assignment from the 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 assignment, the trustee's interest in contracts could be defeated.
ASSIGNMENT OF PRIVATE SECURITIES. The sponsor will cause private
securities to be registered in the name of the trustee or its nominee or
correspondent. The trustee, or its nominee or correspondent, will have
possession of any certificated private securities. See "The Trust Funds--Private
Securities."
Each loan will be identified in a schedule appearing as an exhibit to
the agreements. The schedule will specify with respect to each loan: the
original principal amount and unpaid principal balance as of the cut-off date;
the current interest rate; the current scheduled payment of principal and
interest; the maturity date, if any; if the loan is an adjustable rate loan, the
lifetime rate cap, if any, and the current index.
REPURCHASE AND SUBSTITUTION OF NON-CONFORMING PRIMARY ASSETS. If any
document required to be in the file relating to the primary assets is found by
the trustee within a specified period to be defective in any material respect
and the seller does not cure the defect within a specified period, the seller
will repurchase the affected primary asset.
The seller may, rather than repurchase the primary asset as described
above, remove the primary asset from the trust fund and substitute in its place
one or more other qualifying substitute primary assets. However, (1) with
respect to a trust fund for which no REMIC election is made, the substitution
must be effected within 120 days of the date of initial issuance of the
securities and (2) with respect to a trust fund for which a REMIC election is
made, after a specified time period, the trustee must have received a
satisfactory opinion of counsel that the substitution will not cause the trust
fund to lose its status as a REMIC or otherwise subject the trust fund to a
prohibited transaction tax.
Any substitute primary asset will have, on the date of substitution,
(1) an outstanding principal balance, after deduction of all scheduled payments
due in the month of substitution, not in excess of the outstanding principal
balance of the deleted primary asset, (2) an interest rate not less than the
interest rate of the deleted primary asset, (3) a remaining term-to-stated
maturity not greater than that of the deleted primary asset, and will comply
with all of the representations and warranties in the applicable agreement as of
the date of substitution.
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The above-described cure, repurchase or substitution obligations
constitute the sole remedies available to the holders or the trustee for a
material defect in a document for a primary asset.
The seller will make representations and warranties with respect to
primary assets for a series. If the seller cannot cure a breach of the
representations and warranties in all material respects within the specified
time period after notification by the trustee of the breach, and if the breach
is of a nature that materially and adversely affects the value of the primary
asset, the seller is obligated to repurchase the affected primary asset or, if
provided in the prospectus supplement, provide a substitute primary asset,
subject to the same conditions and limitations on purchases and substitutions as
described above.
No security holder, solely by virtue of the holder's status as a
holder, will have any right under the applicable agreement for a series to
institute any proceeding with respect to that agreement, unless the holder
previously has given to the trustee for the series written notice of default and
unless the majority holders have made written request upon the trustee to
institute a proceeding and have offered to the trustee reasonable indemnity, and
the trustee has failed to do so within a specified period.
REPORTS TO HOLDERS
The trustee or other entity specified in the prospectus supplement will
prepare and forward to each holder on each distribution date, or as soon
thereafter as is practicable, a statement setting forth, to the extent
applicable to any series, among other things:
o the amount of principal distributed to the security holders and
the outstanding principal balance of the securities following the
distribution;
o the amount of interest distributed to the security holders and the
current interest on the securities;
o the amounts of (a) any overdue accrued interest included in the
distribution, (b) any remaining overdue accrued interest with
respect to the securities or (c) any current shortfall in amounts
to be distributed as accrued interest to security holders;
o the amounts of (a) any overdue payments of scheduled principal
included in the distribution, (b) any remaining overdue principal
amounts with respect to the securities, (c) any current shortfall
in receipt of scheduled principal payments on the primary assets
or (d) any realized losses or liquidation proceeds to be allocated
as reductions in the outstanding principal balances of the
securities;
o the amount received from credit enhancement, and the remaining
amount available under any credit enhancement;
o the amount of any payment delinquencies on the primary assets; and
o the book value of any primary assets or mortgaged properties
acquired through or in lieu of foreclosure acquired by the trust
fund.
In addition, within a reasonable period of time after the end of each
calendar year, the trustee will furnish to each holder of record at any time
during the calendar year the information specified in the agreements to enable
holders to prepare their tax returns. Information in the distribution date and
annual statements provided to the holders will not have been examined and
reported upon by an independent public accountant. However, the servicer will
provide to the trustee a report by independent public accountants with respect
to the servicing of the mortgage loans. See "Servicing --Evidence as to
Compliance."
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A series of securities or one or more classes of the series may be
issued in book-entry form. In that event, owners of beneficial interests in the
securities will not be considered holders and will not receive the reports
directly from the trustee. The trustee will forward reports only to the entity
or its nominee which is the registered holder of the global certificate which
evidences the book-entry securities. Beneficial owners will receive reports from
the participants and indirect participants of the applicable book-entry system
in accordance with their practices and procedures.
EVENTS OF DEFAULT; RIGHTS UPON EVENT OF DEFAULT
SERVICING AGREEMENT. Events of default under each servicing agreement
generally include:
o any failure by the servicer to deposit any required amounts in the
collection account, which failure continues unremedied for a
specified period after the giving of written notice of the failure
to the servicer,
o any failure by the servicer duly to observe or perform in any
material respect any other of its covenants or agreements in the
applicable servicing agreement which continues unremedied for the
number of days specified in the prospectus supplement after the
giving of written notice of the failure to the servicer by the
trustee, or to the servicer and the trustee by the holders of the
series evidencing not less than a specified percentage of the
aggregate voting rights of the securities for that series, and
o events of insolvency, readjustment of debt, marshalling of assets
and liabilities or similar proceedings and actions by the servicer
indicating its insolvency, reorganization or inability to pay its
obligations.
The servicing agreement will specify the circumstances under which the
trustee of the holders of securities may remove the servicer upon the occurrence
and continuance of an event of default thereunder relating to the servicing of
loans, other than its right to recovery of other expenses and amounts advanced
under the terms of the servicing agreement which rights the servicer will retain
under all circumstances, whereupon the trustee will succeed to all the
responsibilities, duties and liabilities of the servicer under the servicing
agreement and will be entitled to reasonable servicing compensation not to
exceed the applicable servicing fee, together with other servicing compensation
in the form of assumption fees, late payment charges or otherwise as provided in
the servicing agreement.
In the event that the trustee is unwilling or unable so to act, it may
select, or petition a court of competent jurisdiction to appoint, a finance
institution, bank or loan servicing institution with a net worth specified in
the prospectus supplement to act as successor servicer under the provisions of
the applicable servicing agreement. The successor servicer would be entitled to
reasonable servicing compensation in an amount not to exceed the servicing fee
and the other servicing compensation.
During the continuance of any event of default of a servicer, the
trustee will have the right to protect and enforce the rights of the holders,
and the majority holders may direct the time, method and place of conducting any
proceeding for exercising any trust power. However, the trustee will not be
under any obligation to pursue any remedy or to exercise any trusts or powers
unless the holders have offered the trustee reasonable security or indemnity
against the cost, expenses and liabilities which may be incurred by the trustee.
The trustee may decline to follow any direction if the trustee determines that
the action or proceeding so directed may not lawfully be taken or would involve
it in personal liability or be unjustly prejudicial to the nonassenting holders.
INDENTURE. Events of default under the indenture for each series of
notes may include:
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o a default in the payment of any principal or interest on any note,
which continues for a specified period of time;
o failure to perform any other covenant of the issuer in the
indenture which continues for a specified period of time after
notice is given;
o any representation or warranty made by the issuer in the indenture
having been incorrect in a material respect as of the time made,
and the breach is not cured within a specified period of time
after notice is given; or
o events of bankruptcy, insolvency, receivership or liquidation of
the issuer.
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 outstanding notes may declare the notes to be due and payable
immediately. The declaration may, under some circumstances, be rescinded and
annulled by the majority holders.
If, following an event of default with respect to any series of notes,
the notes have been declared due and payable, the trustee may, in its
discretion, notwithstanding the acceleration, elect to maintain possession of
the collateral and to continue to apply distributions as if there had been no
acceleration if the collateral continues to provide sufficient funds for the
payment of principal and interest on the notes as they would have otherwise
become due. In addition, the trustee may not sell or otherwise liquidate the
collateral following an event of default other than a default in the payment of
any principal or interest on any note of the series for a specified period,
unless the all of the holders consent to the sale, the proceeds of the sale are
sufficient to pay in full the principal and interest due on the notes or the
trustee determines that the collateral would not be sufficient on an ongoing
basis to make all payments on the notes as those payments would have become due,
and the trustee obtains the consent of the holders of a specified amount of the
notes.
In the event that the trustee liquidates the collateral in connection
with an event of default involving a payment default, the trustee will have a
prior lien on the proceeds of any liquidation for unpaid fees and expenses. As a
result, upon the occurrence of an event of default, the amount available for
distribution to the holders may be less than would otherwise be the case.
If the principal of the notes of a series is declared due and payable,
the holders of any 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 the discount which is unamortized.
If an event of default shall occur and be continuing, the trustee will
not be obligated to exercise any rights or powers under the indenture at the
request of the holders, unless the holders provide security satisfactory to the
trustee against the expenses and liabilities which might be incurred by it. The
majority holders shall have the right to direct the time, method and place of
conducting any proceeding for any remedy or exercising any power conferred on
the trustee with respect to the notes. The majority holders may waive the
default, except a default in the payment of principal or interest or a default
caused by a breach of a covenant or provision of the indenture that cannot be
modified without the waiver or consent of all the affected note holders.
THE TRUSTEE
The prospectus supplement will identify the trustee for the series. The
trustee may have normal banking relationships with the sponsor or the servicer.
In addition, for the purpose of meeting the legal requirements of local
jurisdictions, the trustee will have the power to appoint co-trustees or
separate trustees of all or any part of the trust fund relating to a series of
securities. In the event of an appointment,
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all rights, powers, duties and obligations conferred or imposed upon the trustee
will be conferred or imposed upon the trustee and each separate trustee or
co-trustee jointly, or, in any jurisdiction in which the trustee shall be
incompetent or unqualified to perform as trustee, singly upon the separate
trustee or co-trustee who will exercise and perform solely at the direction of
the trustee. The trustee may also appoint agents to perform any of the
responsibilities of the trustee, which agents will have any or all of the
rights, powers, duties and obligations of the trustee conferred on them by
appointment; although the trustee will continue to be responsible for its duties
and obligations under the agreement.
DUTIES OF THE TRUSTEE
The trustee will not make any representations as to the validity or
sufficiency of the agreements, the securities or of any primary asset or
documents. If no event of default as defined in the agreement has occurred, the
trustee is required to perform only those duties specifically required of it
under the agreement. Upon receipt of the various certificates, statements,
reports or other instruments furnished to it, the trustee is required to examine
them to determine whether they are in the form required by the agreements.
However, the trustee will not be responsible for the accuracy or content of any
of the documents furnished to it by the holders or the servicer under the
agreement.
The trustee may be held liable for its negligent action or failure to
act, or for its misconduct. The trustee will not be liable, however, with
respect to any action taken, suffered or omitted to be taken by it in good faith
in accordance with the direction of the holders in an event of default. The
trustee is not required to expend its own funds or incur any financial liability
in the performance of its duties, or in the exercise of any of its rights or
powers, if repayment of those funds or adequate indemnity against risk is not
reasonably assured to it.
RESIGNATION OF TRUSTEE
The trustee may, upon written notice to the sponsor, resign at any
time, in which event the sponsor will be obligated to use its best efforts to
appoint a successor trustee. If no successor trustee has been appointed and has
accepted the appointment within 30 days after the giving of a notice of
resignation, the resigning trustee may petition any court of competent
jurisdiction for appointment of a successor trustee. The trustee may also be
removed at any time (1) if the trustee ceases to be eligible to continue as a
trustee under the agreement, (2) if the trustee becomes insolvent or (3) by the
majority holders. Any resignation or removal of the trustee and appointment of a
successor trustee will not become effective until acceptance of the appointment
by the successor trustee.
AMENDMENT OF AGREEMENT
Each agreement may be amended by the parties to the agreement, without
notice to or consent of the holders, to correct any ambiguity or any defective
provisions, to supplement any provision, or to comply with any requirements
imposed by the Internal Revenue Code. Any amendment will not adversely affect in
any material respect the interests of any holders.
Each agreement may also be amended by the parties with the consent of a
specified percentage of the holders, for the purpose of adding, changing or
eliminating any provision of the agreement. No amendment may reduce or delay the
payments on any security without the consent of the holder of the security.
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VOTING RIGHTS
The prospectus supplement will state the method of determining
allocation of voting rights with respect to a series.
LIST OF HOLDERS
No agreement will provide for the holding of any annual or other
meeting of holders.
REMIC ADMINISTRATOR
For any series with respect to which a REMIC election is made,
preparation of reports and other administrative duties with respect to the trust
fund may be performed by a REMIC administrator, who may be an affiliate of the
sponsor.
TERMINATION
POOLING AND SERVICING AGREEMENT; TRUST AGREEMENT. The pooling and
servicing agreement or trust agreement for a series will terminate upon the
distribution to holders of all amounts payable to them after the final payment
or liquidation of the primary assets and the disposition of all foreclosure
property or the sale by the trustee of the primary assets. For a description of
the ways in which securities may be retired early, see "Description of the
Securities--Optional Redemption, Purchase or Termination" and "--Mandatory
Termination; Auction Sale."
For each series, the servicer or the trustee, as applicable, will give
written notice of termination of the agreement to each holder, and the final
distribution will be made only upon surrender and cancellation of the securities
at an office or agency specified in the notice of termination.
INDENTURE. The indenture will be discharged with respect to a series of
notes upon the delivery to the trustee for cancellation of all the notes or,
with limitations, upon deposit with the trustee of funds sufficient for the
payment in full of all of the notes of the series. See "Description of the
Securities--Defeasance."
LEGAL ASPECTS OF LOANS
The following discussion contains summaries of legal aspects of loans,
which are general in nature. Because these legal aspects are to a degree
governed by state law, the summaries do not purport to be complete, reflect the
laws of any particular state, nor encompass the laws of all states in which the
properties securing the mortgage loans are situated.
MORTGAGE LOANS
The mortgage loans will be represented by a note and an accompanying
mortgage. The borrower is personally liable to repay the indebtedness evidenced
by the mortgage loan under the note. The mortgage creates a lien on the related
mortgaged property to secure the indebtedness.
ENFORCEMENT OF THE NOTE. Under the note, the borrower is personally
liable to repay the indebtedness evidenced by the mortgage loan. In some states,
the lender on a note secured by a lien on real property has the option of
bringing a personal action against the borrower on the debt without first
exhausting the security; however, in some of these states the lender, following
judgment on a personal action, may be deemed to have elected a remedy and may be
precluded from exercising remedies with
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respect to the related property security. Consequently, the practical effect of
the election requirement, in those states permitting the election, is that
lenders will usually proceed against the property first rather than bringing a
personal action against the borrower on the note.
Some states have imposed statutory prohibitions that limit the remedies
of a beneficiary under a deed of trust or a mortgagee under a mortgage. In some
states, including California, statutes limit the right of the beneficiary or
mortgagee to obtain a deficiency judgment against the borrower following
foreclosure. A deficiency judgment is a personal judgment against the former
borrower equal in most cases to the difference between the amount due to the
lender and the net amount realized upon the public sales of the real property.
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 a 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 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 on a loan on a debtor's residence by paying arrearages within a
reasonable time period and reinstating the original loan payment schedule even
though the lender accelerated the loan and final judgment of foreclosure had
been entered in state court, provided no sale of the residence had yet occurred,
prior to the filing of the debtor's petition. Some courts with federal
bankruptcy jurisdiction have approved plans, based on the particular facts of
the reorganization case, that effected the curing of a loan default by paying
arrearages over a number of years.
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.
Some 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, courts have limited the right of the lender to foreclose if the
default under the loan is not monetary, such as the borrower failing to
adequately maintain the property or the borrower executing a second deed of
trust affecting the property.
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Tax liens arising under the Internal Revenue Code may provide priority
over the lien of a mortgage or deed of trust. In addition, substantive
requirements are imposed upon mortgage lenders in connection with the
origination and the servicing of loans by numerous federal and some state
consumer protection laws. These laws include, by example, the federal
Truth-in-Lending Act, Real Estate Settlement Procedures Act, Equal Credit
Opportunity Act, Fair Credit Billing Act, Fair Credit Reporting Act and related
statutes and state laws, such as the California Fair Debt Collection Practices
Act. These laws and regulations impose specific statutory liabilities upon
lenders who originate loans and fail to comply with the provisions of the law.
In some cases, this liability may affect assignees of the loans.
SECURITY INTERESTS -- REAL ESTATE MORTGAGES. The mortgage loans for a
series will be secured by either mortgages or deeds of trust or deeds to secure
debt depending upon the prevailing practice in the state in which the mortgaged
property subject to a mortgage loan is located. The filing of a mortgage, deed
of trust or deed to secure debt creates a lien or title interest upon the real
property covered by the instrument and represents the security for the repayment
of an obligation that is customarily evidenced by a promissory note. It is not
prior to the lien for real estate taxes and assessments or other charges imposed
under governmental police powers and may also be subject to other liens under
the laws of the jurisdiction in which the mortgaged property is located.
Priority with respect to the instruments depends on their terms, the knowledge
of the parties to the mortgage and generally on the order of recording with the
applicable state, county or municipal office. There are two parties to a
mortgage, the mortgagor, who is the borrower/property owner or the land trustee,
and the mortgagee, who is the lender. Under the mortgage instrument, the
mortgagor delivers to the mortgagee a note or bond and the mortgage. In the case
of a land trust, there are three parties because title to the mortgaged property
is held by a land trustee under a land trust agreement of which the
borrower/property owner is the beneficiary; at origination of a mortgage loan,
the borrower executes a separate undertaking to make payments on the mortgage
note. A deed of trust transaction normally has three parties: The trustor, who
is the borrower/property owner; the beneficiary, who is the lender; and the
trustee, a third-party grantee. Under a deed of trust, the trustor grants the
mortgaged property, irrevocably until the debt is paid, in trust, generally with
a power of sale, to the trustee to secure payment of the obligation. The
mortgagee's authority under a mortgage and the trustee's authority under a deed
of trust are governed by the law of the state in which the real property is
located, the express provisions of the mortgage or deed of trust, and, in some
cases, in deed of trust transactions, the directions of the beneficiary.
FORECLOSURE ON MORTGAGES. Foreclosure of a mortgage is generally
accomplished by judicial action. Generally, the action is initiated by the
service of legal pleadings upon all parties having an interest of record in the
real property. Delays in completion of the foreclosure occasionally may result
from difficulties in locating necessary parties defendant. When the mortgagee's
right to foreclosure is contested, the legal proceedings necessary to resolve
the issue can be time-consuming and expensive. After the completion of a
judicial foreclosure proceeding, the court may issue a judgment of foreclosure
and appoint a receiver or other officer to conduct the sale of the mortgaged
property. In some states, mortgages may also be foreclosed by advertisement,
under a power of sale provided in the mortgage. Foreclosure of a mortgage by
advertisement is essentially similar to foreclosure of a deed of trust by
nonjudicial power of sale.
Foreclosure of a deed of trust is generally accomplished by a
nonjudicial trustee's sale under a specific provision in the deed of trust which
authorizes the trustee to sell the mortgaged property upon any default by the
borrower under the terms of the note or deed of trust. In some states,
foreclosure also may be accomplished by judicial action in the manner provided
for foreclosure of mortgages. In some states, the trustee must record a notice
of default and send a copy to the borrower-trustor and to any person who has
recorded a request for a copy of a notice of default and notice of sale. In
addition, the trustee in some states must provide notice to any other individual
having an interest in the real property, including any junior lienholders. If
the deed of trust is not reinstated within any applicable cure period, a
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notice of sale must be posted in a public place and, in most states, published
for a specified period of time in one or more newspapers. In addition, some
state laws require that a copy of the notice of sale be posted on the mortgaged
property and sent to all parties having an interest of record in the mortgaged
property. The trustor, borrower, or any person having a junior encumbrance on
the real estate, may, during a reinstatement period, cure the default by paying
the entire amount in arrears plus the costs and expenses incurred in enforcing
the obligation. Generally, state law controls the amount of foreclosure expenses
and costs, including attorney's fees, which may be recovered by a lender. If the
deed of trust is not reinstated, a notice of sale must be posted in a public
place and, in most states, published for a specified period of time in one or
more newspapers. In addition, some state laws require that a copy of the notice
of sale be posted on the mortgaged property, recorded and sent to all parties
having an interest in the real property.
An action to foreclose a mortgage is an action to recover the mortgage
debt by enforcing the mortgagee's rights under the mortgage. It is regulated by
statutes and rules and subject throughout to the court's equitable powers.
Generally, a mortgagor is bound by the terms of the related mortgage note and
the mortgage as made and cannot be relieved from his default if the mortgagee
has exercised his rights in a commercially reasonable manner. However, since a
foreclosure action historically was equitable in nature, the court may exercise
equitable powers to relieve a mortgagor of a default and deny the mortgagee
foreclosure on proof that either the mortgagor's default was neither willful nor
in bad faith or the mortgagee's action established a waiver, fraud, bad faith,
or oppressive or unconscionable conduct warranting a court of equity to refuse
affirmative relief to the mortgagee. A court of equity may relieve the mortgagor
from an entirely technical default where that default was not willful.
A foreclosure action is subject to most of the delays and expenses of
other lawsuits if defenses or counterclaims are interposed, sometimes requiring
up to several years to complete. Moreover, a non-collusive, regularly conducted
foreclosure sale may be challenged as a fraudulent conveyance, regardless of the
parties' intent, if a court determines that the sale was for less than fair
consideration and the sale occurred while the mortgagor was insolvent and within
one year, or within the state statute of limitations if the trustee in
bankruptcy elects to proceed under state fraudulent conveyance law, of the
filing of bankruptcy. Similarly, a suit against the debtor on the related
mortgage note may take several years and, generally, is a remedy alternative to
foreclosure, the mortgagee being precluded from pursuing both at the same time.
In the case of foreclosure under either a mortgage or a deed of trust,
the sale by the referee or other designated officer or by the trustee is a
public sale. However, because of the difficulty third party purchasers have in
determining the exact status of title and because the physical condition of the
mortgaged property may have deteriorated during the foreclosure proceedings, it
is uncommon for a third party to purchase the mortgaged property at a
foreclosure sale. Rather, it is common for the lender to purchase the mortgaged
property from the trustee or referee for an amount which may be equal to the
unpaid principal amount of the mortgage note secured by the mortgage or deed of
trust plus accrued and unpaid interest and the expenses of foreclosure, in which
event the mortgagor's debt will be extinguished or the lender may purchase for a
lesser amount in order to preserve its right against a borrower to seek a
deficiency judgment in states where that judgment is available. Thereafter,
subject to the right of the borrower in some states to remain in possession
during the redemption period, the lender will assume the burdens of ownership,
including obtaining hazard insurance, paying taxes and making repairs at its own
expense as are necessary to render the mortgaged property suitable for sale. The
lender will commonly obtain the services of a real estate broker and pay the
broker's commission in connection with the sale of the mortgaged property.
Depending upon market conditions, the ultimate proceeds of the sale of the
mortgaged property may not equal the lender's investment in the mortgaged
property. Any loss may be reduced by the receipt of any mortgage guaranty
insurance proceeds.
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RIGHTS OF REDEMPTION. In some states, after sale under a deed of trust
or foreclosure of a mortgage, the trustor or mortgagor and foreclosed junior
lienors are given a statutory period in which to redeem the mortgaged property
from the foreclosure sale. The right of redemption should be distinguished from
the equity of redemption, which is a non-statutory right that must be exercised
prior to the foreclosure sale. In some states, redemption may occur only upon
payment of the entire principal balance of the loan, accrued interest and
expenses of foreclosure. In other states, redemption may be authorized if the
former borrower pays only a portion of the sums due. The effect of a statutory
right of redemption is to diminish the ability of the lender to sell the
foreclosed mortgaged property. The exercise of a right of redemption would
defeat the title of any purchaser at a foreclosure sale, or of any purchaser
from the lender subsequent to foreclosure or sale under a deed of trust.
Consequently the practical effect of a right of redemption is to force the
lender to retain the mortgaged property and pay the expenses of ownership until
the redemption period has run. In some states, there is no right to redeem
mortgaged property after a trustee's sale under a deed of trust.
JUNIOR MORTGAGES; RIGHTS OF SENIOR MORTGAGES. The mortgage loans
comprising or underlying the primary assets included in the trust fund for a
series will be secured by mortgages or deeds of trust which may be second or
more junior mortgages to other mortgages held by other lenders or institutional
investors. The rights of the trust 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 the
default and bring the senior loan current, in either event adding the amounts
expended to the balance due on the junior loan. In most states, absent a
provision in the mortgage or deed of trust, no notice of default is required to
be given to a junior mortgagee.
The standard form of the mortgage used by most institutional lenders
confers on the mortgagee the right both to receive all proceeds collected under
any hazard insurance policy and all awards made in connection with condemnation
proceedings, and to apply the proceeds and awards to any indebtedness secured by
the mortgage, in any order as the mortgagee may determine. Thus, in the event
improvements on the mortgaged property are damaged or destroyed by fire or other
casualty, or in the event the mortgaged property is taken by condemnation, the
mortgagee or beneficiary under underlying senior mortgages will have the prior
right to collect any insurance proceeds payable under a hazard insurance policy
and any award of damages in connection with the condemnation and to apply the
same to the indebtedness secured by the senior mortgages. Proceeds in excess of
the amount of senior mortgage indebtedness, in most cases, may be applied to the
indebtedness of a junior mortgage.
Another provision sometimes found in the form of the mortgage or deed
of trust used by institutional lenders obligates the mortgagor to pay before
delinquency all taxes and assessments on the mortgaged property and, when due,
all encumbrances, charges and liens on the mortgaged property which appear prior
to the mortgage or deed of trust, to provide and maintain fire insurance on the
mortgaged property, to maintain and repair the mortgaged property and not to
commit or permit any waste thereof, and to appear in and defend any action or
proceeding purporting to affect the mortgaged property or the rights of the
mortgagee under the mortgage. Upon a failure of the mortgagor to perform any of
these obligations, the mortgagee is sometimes given the right to perform the
obligation itself, at its election, with the mortgagor agreeing to reimburse the
mortgagee for any sums expended by the mortgagee on behalf of the mortgagor. All
sums so expended by the mortgagee become part of the indebtedness secured by the
mortgage.
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DUE-ON-SALE CLAUSES IN MORTGAGE LOANS. Due-on-sale clauses permit the
lender to accelerate the maturity of the loan if the borrower sells or
transfers, whether voluntarily or involuntarily, all or part of the real
mortgaged property securing the loan without the lender's prior written consent.
The enforceability of these clauses has been the subject of legislation or
litigation in many states, and in some cases, typically involving single family
residential mortgage transactions, their enforceability has been limited or
denied. In any event, the Garn-St. Germain Depository Institutions Act of 1982
preempts state law that prohibits the enforcement of due-on-sale clauses and
permits lenders to enforce these clauses in accordance with their terms, with
exceptions. As a result, due-on-sale clauses have become generally enforceable
except in those states whose legislatures exercised their authority to regulate
the enforceability of the clauses with respect to loans that were (1) originated
or assumed during the "window period" under the Garn-St. Germain Act which ended
in all cases not later than October 15, 1982, and (2) originated by lenders
other than national banks, federal savings institutions and federal credit
unions. The Federal Home Loan Mortgage Corporation 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 in 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 if resulting from the bankruptcy proceeding.
ENFORCEABILITY OF PREPAYMENT AND LATE PAYMENT FEES. Forms of notes,
mortgages and deeds of trust used by lenders may contain provisions obligating
the borrower to pay a late charge if payments are not timely made, and in some
circumstances may provide for prepayment fees or penalties if the obligation is
paid prior to maturity. In some states, there are or may be specific
limitations, upon the late charges which a lender may collect from a borrower
for delinquent payments. Some states also limit the amounts that a lender may
collect from a borrower as an additional charge if the loan is prepaid. Late
charges and prepayment fees are typically retained by servicers as additional
servicing compensation.
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 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
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mortgagee to whom a prepayment in full has been tendered may be compelled to
give either a release of the mortgage or an instrument assigning the existing
mortgage. The absence of a restraint on prepayment, particularly with respect to
loans having higher mortgage rates, may increase the likelihood of refinancing
or other early retirements of the loans.
APPLICABILITY OF USURY LAWS. Title V of the Depository Institutions
Deregulation and Monetary Control Act of 1980, enacted in March 1980, provides
that state usury limitations shall not apply to specified types of residential
first loans originated by specified lenders after March 31, 1980. Similar
federal statutes were in effect with respect to loans made during the first
three months of 1980. The Office of Thrift Supervision, as successor to the
Federal Home Loan Bank Board, is authorized to issue rules and regulations and
to publish interpretations governing implementation of Title V. Title V
authorizes any state to reimpose interest rate limits by adopting, before April
1, 1983, a state law, or by certifying that the voters of a state have voted in
favor of any provision, constitutional or otherwise, which expressly rejects an
application of the federal law. Fifteen states adopted such a law prior to the
April 1, 1983 deadline. In addition, even where Title V is not so rejected, any
state is authorized by the law to adopt a provision limiting discount points or
other charges on loans covered by Title V.
SECURITY INTERESTS IN PERSONAL PROPERTY AND FIXTURES. A portion of each
mortgaged property may consist of property which is "personal property" or a
"fixture" under local state law. This will most commonly occur when the proceeds
of the related mortgage loan were applied to property improvements, although any
mortgaged property may have some personal property components. A financing
statement generally is not required to be filed to perfect a purchase money
security interest in consumer goods. Those purchase money security interests are
assignable. In general, a purchase money security interest grants to the holder
a security interest that has priority over a conflicting security interest in
the same collateral and the proceeds of the collateral. However, to the extent
that the collateral subject to a purchase money security interest becomes a
fixture, in order for the related purchase money security interest to take
priority over a conflicting interest in the fixture, the holder's interest in
the personal property must generally be perfected by a timely fixture filing. In
general, a security interest does not exist in ordinary building material
incorporated into an improvement on land. Contracts that finance lumber, bricks,
other types of ordinary building material or other goods that are deemed to lose
their characterization, upon incorporation of the materials into the related
property, will not be secured by a purchase money security interest in the
personal property being financed.
ENFORCEMENT OF SECURITY INTEREST IN PERSONAL PROPERTY. So long as the
personal property has not become subject to the real estate law, a creditor can
repossess the property securing a contract by voluntary surrender, by
"self-help" repossession that is peaceful or, in the absence of voluntary
surrender and the ability to repossess without breach of the peace, by judicial
process. The holder of a contract must give the debtor a number of days' notice,
which varies from 10 to 30 days depending on the state, prior to commencement of
any repossession. Most states place restrictions on repossession sales,
including requiring prior notice to the debtor and commercial reasonableness in
effecting the sale. Most states also require that the debtor be given notice of
any sale prior to resale of the unit that the debtor may redeem it at or before
the resale.
Under the laws applicable in most states, a creditor is entitled to
obtain a deficiency judgment from a debtor for any deficiency on repossession
and resale of the property securing the debtor's loan. However, some states
impose prohibitions or limitations on deficiency judgments, and in many cases
the defaulting borrower would have no assets with which to pay a judgment.
Other statutory provisions, including federal and state bankruptcy and
insolvency laws and general equitable principles, may limit or delay the ability
of a lender to repossess and resell collateral or enforce a deficiency judgment.
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CONTRACTS
As a result of the assignment of the contracts to the trustee, the
trust fund will succeed collectively to all of the rights and will assume the
obligations of the obligee under the contracts. Each contract evidences both the
obligor's obligation to repay the loan, and the grant of a security interest in
the manufactured home. Aspects of both features of the contracts are described
more fully below.
The contracts generally are "chattel paper" as defined in the Uniform
Commercial Code in effect in the states in which the manufactured homes
initially were registered. The Uniform Commercial Code treats the sale of
chattel paper in a manner similar to perfection of a security interest in
chattel paper. The seller will transfer physical possession of the contracts to
the trustee or a designated custodian or may retain possession of the contracts
as custodian for the trustee. In addition, the seller will make an appropriate
filing of a financing statement in the appropriate states to give notice of the
trustee's ownership of the contracts. Unless otherwise specified in the
prospectus supplement, the contracts will not be stamped or marked otherwise to
reflect their assignment from the 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 the assignment, the
trustee's interest in contracts could be defeated.
SECURITY INTERESTS IN THE MANUFACTURED HOMES
The manufactured homes securing the contracts may be located in all 50
states. Security interests in manufactured homes may be perfected either by
notation of the secured party's lien on the certificate of title or by delivery
of the required documents and payment of a fee to the state motor vehicle
authority, depending on state law. In some non-title states, perfection is
governed by the Uniform Commercial Code. The servicer may effect the notation or
delivery of the required documents and fees, and obtain possession of the
certificate of title, as appropriate under the laws of the state in which any
manufactured home securing a manufactured housing conditional sales contract is
registered. In the event the servicer fails, due to clerical errors, to effect
the notation or delivery, or files the security interest under the wrong law,
the trustee may not have a first priority security interest in the manufactured
home securing a contract. As manufactured homes have become larger and often
have been attached to their sites without any apparent intention to move them,
courts in many states have held that manufactured homes may become subject to
real estate title and recording laws. As a result, a security interest in a
manufactured home could be rendered subordinate to the interests of other
parties claiming an interest in the home under applicable state real estate law.
In order to perfect a security interest in a manufactured home under real estate
laws, the secured party must file either a "fixture filing" under the provisions
of the Uniform Commercial Code or a real estate mortgage under the real estate
laws of the state where the home is located. These filings must be made in the
real estate records office of the county where the home is located.
Substantially all of the contracts contain provisions prohibiting the borrower
from permanently attaching the manufactured home to its site. So long as the
borrower does not violate this agreement, a security interest in the
manufactured home will be governed by the certificate of title laws or the
Uniform Commercial Code, and the notation of the security interest on the
certificate of title or the filing of a financing statement will be effective to
maintain the priority of the security interest in the manufactured home. If,
however, a manufactured home is permanently attached to its site, other parties
could obtain an interest in the manufactured home which is prior to the security
interest originally retained by the seller and transferred to the issuer. With
respect to a series of securities and if so described in the prospectus
supplement, the servicer may be required to perfect a security interest in the
manufactured home under applicable real estate laws. The servicer will represent
that at the date of the initial issuance of the related securities it has
obtained a perfected first priority security interest by proper notation or
delivery of the required documents and fees with respect to substantially all of
the manufactured homes securing the contracts.
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The sponsor will cause the security interests in the manufactured homes
to be assigned to the trustee on behalf of the holders. 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, continues to be named
as the secured party on the certificate of title relating to the manufactured
homes. In many states, the assignment is an effective conveyance of the security
interest without amendment of any lien noted on the related certificate of title
and the new secured party succeeds to the 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, the assignment of the security interest in the
manufactured home might not be effective or perfected or that, in the absence of
notation or delivery to the trustee, the assignment of the security interest in
the manufactured home might not be effective against creditors of the servicer
(or the seller) or a trustee in bankruptcy of the servicer, or the seller.
In the absence of fraud, forgery or permanent affixation of the
manufactured home to its site by the manufactured home owner, or administrative
error by state recording officials, the notation of the lien of the servicer, or
the seller, on the certificate of title or delivery of the required documents
and fees will be sufficient to protect the holders against the rights of
subsequent purchasers of a manufactured home or subsequent lenders who take a
security interest in the manufactured home. If there are any manufactured homes
as to which the security interest assigned to the trustee is not perfected, that
security interest would be subordinate to, among others, subsequent purchasers
for value of manufactured homes and holders of perfected security interests.
There also exists a risk in not identifying the trustee as the new secured party
on the certificate of title that, through fraud or negligence, the security
interest of the holders could be released.
In the event that the owner of a manufactured home moves it to a state
other than the state in which that manufactured home initially is registered,
under the laws of most states the perfected security interest in the
manufactured home would continue for four months after relocation and thereafter
until the owner re-registers the manufactured home in the state. If the owner
were to relocate a manufactured home to another state and not re-register the
manufactured home in that state, and if steps are not taken to re-perfect the
trustee's security interest in that state, the security interest in the
manufactured home would cease to be perfected. A majority of states generally
require surrender of a certificate of title to re-register a manufactured home;
accordingly, the trustee must surrender possession if it holds the certificate
of title to the manufactured home or, in the case of manufactured homes
registered in states which provide for notation of lien, the servicer would
receive notice of surrender if the security interest in the manufactured home is
noted on the certificate of title. Accordingly, the trustee would have the
opportunity to re-perfect its security interest in the manufactured home in the
state of relocation. In states which do not require a certificate of title for
registration of a manufactured home, re-registration could defeat perfection. In
the ordinary course of servicing the manufactured housing conditional sales
contracts, the servicer takes steps to effect the re-perfection upon receipt of
notice of registration or information from the obligor as to relocation.
Similarly, when an obligor under a manufactured housing conditional sales
contract sells a manufactured home, the trustee, or its custodian, must
surrender possession of the certificate of title or the servicer will receive
notice as a result of its lien noted thereon and accordingly will have an
opportunity to require satisfaction of the related manufactured housing
conditional sales contract before release of the lien. Under the servicing
agreement, the servicer is obligated to take steps as are necessary to maintain
perfection of security interests in the manufactured homes.
Under the laws of most states, liens for repairs performed on a
manufactured home and liens for personal property taxes take priority over a
perfected security interest. The seller will represent that it has no knowledge
of any liens with respect to any manufactured home securing payment on any
contract. However, those liens could arise at any time during the term of a
contract. No notice will be given to the trustee or holders in the event that a
lien arises.
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ENFORCEMENT OF SECURITY INTERESTS IN MANUFACTURED HOMES
The servicer on behalf of the trustee, to the extent required by the
related servicing agreement, may take action to enforce the trustee's security
interest with respect to contracts in default by repossession and resale of the
manufactured homes securing the defaulted contracts. So long as the manufactured
home has not become subject to the real estate law, a creditor can repossess a
manufactured home securing a contract by voluntary surrender, by "self-help"
repossession that is peaceful or, in the absence of voluntary surrender and the
ability to repossess without breach of the peace, by judicial process. The
holder of a contract must give the debtor a number of days' notice, which varies
from 10 to 30 days depending on the state, prior to commencement of any
repossession. The Uniform Commercial Code and consumer protection laws in most
states place restrictions on repossession sales, including requiring prior
notice to the debtor and commercial reasonableness in effecting the sale. The
law in most states also requires that the debtor be given notice of any sale
prior to resale of the unit so that the debtor may redeem at or before the
resale. In the event of the repossession and resale of a manufactured home, the
trustee would be entitled to be paid out of the sale proceeds before those
proceeds could be applied to the payment of the claims of unsecured creditors or
the holders of subsequently perfected security interests or, thereafter, to the
debtor.
Under the laws applicable in most states, a creditor is entitled to
obtain a deficiency judgment from a debtor for any deficiency on repossession
and resale of the manufactured home securing that debtor's loan. However, some
states impose prohibitions or limitations on deficiency judgments, and in many
cases the defaulting borrower would have no assets with which to pay a judgment.
Other statutory provisions, including federal and state bankruptcy and
insolvency laws and general equitable principles, may limit or delay the ability
of a lender to repossess and resell collateral or enforce a deficiency judgment.
CONSUMER PROTECTION LAWS
The so-called "holder-in-due-course" rule of the Federal Trade
Commission is intended to defeat the ability of the transferor of a consumer
credit contract which is the seller of goods which gave rise to the transaction,
and related lenders and assignees, to transfer the contract free of notice of
claims by the debtor thereunder. The effect of this rule is to subject the
assignee of contract to all claims and defenses which the debtor could assert
against the seller of goods. Liability under this rule is limited to amounts
paid under a contract; however, the obligor also may be able to asset the rule
to set off remaining amounts due as a defense against a claim brought by the
trustee against the obligor. Numerous other federal and state consumer
protection laws impose requirements applicable to the origination of the
contracts, including the Truth in Lending Act, the Federal Trade Commission Act,
the Fair Credit Billing Act, the Fair Credit Reporting Act, the Equal Credit
Opportunity Act, the Fair Debt Collection Practices Act and the Uniform Consumer
Credit Code. In the case of some of these laws, the failure to comply with their
provisions may affect the enforceability of the related contract.
TRANSFERS OF MANUFACTURED HOMES; ENFORCEABILITY OF "DUE-ON-SALE" CLAUSES
The contracts, in general, prohibit the sale or transfer of the related
manufactured homes without the consent of the servicer and permit the
acceleration of the maturity of the contracts by the servicer upon any sale or
transfer that is not consented to.
In the case of a transfer of a manufactured home after which the
servicer desires to accelerate the maturity of the related contract, the
servicer's ability to do so will depend on the enforceability under state law of
the "due-on-sale" clause. The Garn-St. Germain Depository Institutions Act of
1982 generally
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preempts state laws prohibiting enforcement of "due-on-sale" clauses applicable
to the manufactured homes, with some exemptions and conditions. Consequently, in
some states the servicer may be prohibited from enforcing a "due-on-sale" clause
in the contracts.
APPLICABILITY OF USURY LAWS
Title V of the Depository Institutions Deregulation and Monetary
Control Act of 1980 provides that, subject to the following conditions, state
usury limitations shall not apply to any loan which is secured by a first lien
on specified kinds of manufactured housing. The contracts would be covered if
they satisfy specified conditions, among other things, governing the terms of
any prepayments, late charges and deferral fees and requiring a 30-day notice
period prior to instituting any action leading to repossession of the related
unit.
Title V authorized any state to reimpose limitations on interest rates
and finance charges by adopting before April 1, 1983 a law or constitutional
provision which expressly rejects application of the federal law. Fifteen states
adopted such a law prior to the April 1, 1983 deadline. In addition, even where
Title V was not so rejected, and state is authorized by the law to adopt a
provision limiting discount points or other charges on loans covered by Title V.
The seller will represent that all of the contracts comply with applicable usury
law.
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 components of manufactured housing such 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 that claim constitutes a breach of a representation or warranty of
the person specified in the prospectus supplement, and the holders would suffer
a loss only to the extent that (1) the person breached its obligation to
repurchase the contract in the event an obligor is successful in asserting the
claim, and (2) the person, the servicer or the trustee were unsuccessful in
asserting any claim of contribution or subrogation on behalf of the holders
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 those 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, (1) 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, (2) may
be entitled to a stay of proceedings on any kind of foreclosure or repossession
action in the case of defaults on those obligations entered into prior to
military service for the duration of military service and (3) may have the
maturity of the obligations incurred prior to military service extended, the
payments lowered and the payment
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schedule readjusted for a period of time after the completion of military
service. However, the benefits of (1), (2), or (3) above are subject to
challenge by creditors and if, in the opinion of the court, the ability of a
person to comply with the obligations is not materially impaired by military
service, the court may apply equitable principles accordingly. If a borrower's
obligation to repay amounts otherwise due on a mortgage loan included in a trust
fund for a series is relieved under the Soldiers' and Sailors' Civil Relief Act
of 1940, none of the trust fund, the servicer, the sponsor nor the trustee will
be required to advance the amounts, and any loss in respect thereof may reduce
the amounts available to be paid to the holders of the securities of that
series.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
The following is a general discussion of the material anticipated
federal income tax consequences to investors of the purchase, ownership and
disposition of the securities offered hereby. The discussion is based upon laws,
regulations, rulings and decisions now in effect, all of which are subject to
change. The discussion below does not purport to deal with all federal tax
consequences applicable to all categories of investors, some of which may be
subject to special rules. Investors are urged to consult their own tax advisors
in determining the particular federal, state and local consequences to them of
the purchase, ownership and disposition of the securities. References in this
section to "sections" and the "code" refer to the Internal Revenue Code of 1986.
The following discussion addresses securities of five general types:
o securities representing interests in a grantor trust which the
sponsor will covenant not to elect to have treated as a REMIC or a
FASIT;
o securities representing interests in a trust, or a portion
thereof, which the sponsor will covenant to elect to have treated
as a REMIC under sections 860A through 860G;
o securities that are intended to be treated for federal income tax
purposes as indebtedness secured by the underlying loans;
o securities representing interests in a trust that is intended to
be treated as a partnership under the code; and
o 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.
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 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 sponsor, will deliver its opinion to
the sponsor that the related grantor trust will be classified as a
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grantor trust and not as a partnership or an association taxable as a
corporation. The opinion shall be attached on Form 8-K to be filed with the
Securities and Exchange Commission within fifteen days after the initial
issuance of the securities or filed with the Securities and Exchange Commission
as a post-effective amendment to the prospectus. Accordingly, each beneficial
owner of a grantor trust security will generally be treated as the owner of an
interest in the loans included in the grantor trust.
For purposes of the following discussion, a grantor trust security
representing an undivided equitable ownership interest in the principal of the
loans constituting the related grantor trust, together with interest thereon at
a pass-through rate, will be referred to as a "grantor trust fractional interest
security." A grantor trust security representing ownership of all or a portion
of the difference between interest paid on the loans constituting the related
grantor trust and interest paid to the beneficial owners of grantor trust
fractional interest securities issued with respect to the grantor trust will be
referred to as a "grantor trust strip security."
TAXATION OF BENEFICIAL OWNERS OF GRANTOR TRUST SECURITIES
Beneficial owners of grantor trust fractional interest securities
generally will be required to report on their federal income tax returns their
respective shares of the income from the loans (including amounts used to pay
reasonable servicing fees and other expenses but excluding amounts payable to
beneficial owners of any corresponding grantor trust strip securities) and,
subject to the limitations described below, will be entitled to deduct their
shares of any reasonable servicing fees and other expenses. If a beneficial
owner acquires a grantor trust fractional interest security for an amount that
differs from its outstanding principal amount, the amount includible in income
on a grantor trust fractional interest security may differ from the amount of
interest distributable thereon. See "Discount and Premium," below. Individuals
holding a grantor trust fractional interest security directly or through
pass-through entities will be allowed a deduction for reasonable servicing fees
and expenses only to the extent that the aggregate of the beneficial owner's
miscellaneous itemized deductions exceeds 2% of the beneficial owner's adjusted
gross income. Further, beneficial owners (other than corporations) subject to
the alternative minimum tax may not deduct miscellaneous itemized deductions in
determining alternative minimum taxable income.
Beneficial owners of grantor trust strip securities generally will be
required to treat the securities as "stripped coupons" under section 1286.
Accordingly, that beneficial owner will be required to treat the excess of the
total amount of payments on the security over the amount paid for the security
as original issue discount and to include the discount in income as it accrues
over the life of the security. See "--Discount and Premium," below.
Grantor trust fractional interest securities may also be subject to the
coupon stripping rules if a class of grantor trust strip securities is issued as
part of the same series of securities. The consequences of the application of
the coupon stripping rules would appear to be that any discount arising upon the
purchase of that security (and perhaps all stated interest thereon) would be
classified as original issue discount and includible in the beneficial owner's
income as it accrues (regardless of the beneficial owner's method of
accounting), as described below under "--Discount and Premium." The coupon
stripping rules will not apply, however, if (i) the pass-through rate is no more
than 100 basis points lower than the gross rate of interest payable on the
underlying loans and (ii) the difference between the outstanding principal
balance on the security and the amount paid for the security is less than 0.25%
of the principal balance times the weighted average remaining maturity of the
security.
SALES OF GRANTOR TRUST SECURITIES
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Any gain or loss recognized on the sale of a grantor trust security
(equal to the difference between the amount realized on the sale and the
adjusted basis of the grantor trust security) will be capital gain or loss,
except to the extent of accrued and unrecognized market discount, which will be
treated as ordinary income, and in the case of banks and other financial
institutions except as provided under section 582(c). The adjusted basis of a
grantor trust security will generally equal its cost, increased by any income
reported by the seller (including original issue discount and market discount
income) and reduced (but not below zero) by any previously reported losses, any
amortized premium and by any distributions of principal.
GRANTOR TRUST REPORTING
The trustee will furnish to each beneficial owner of a grantor trust
fractional interest security with each distribution a statement setting forth
the amount of the distribution allocable to principal on the underlying loans
and to interest thereon at the related interest rate. In addition, within a
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 the year any customary factual information that 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 prospectus supplement, an election will be made to
treat a trust as a REMIC. With respect to each series of securities for which
that election is made, Dewey Ballantine LLP, special tax counsel to the sponsor,
will deliver its opinion to the sponsor that, assuming compliance with the
pooling and servicing agreement, the trust will be treated as a REMIC for
federal income tax purposes. A trust for which a REMIC election is made will be
referred to in this prospectus as a "REMIC trust." The securities of each class
will be designated as "regular interests" in the REMIC trust except that a
separate class will be designated as the "residual interest" in the REMIC trust.
The prospectus supplement for each series of securities will state whether
securities of each class will constitute a REMIC regular security or a REMIC
residual security. The opinion shall be attached on Form 8-K to be filed with
the securities and Exchange Commission within fifteen days after the initial
issuance of the securities or filed with the securities and Exchange Commission
as a post-effective amendment to the prospectus.
A REMIC trust will not be subject to federal income tax except with
respect to income from prohibited transactions and in other instances described
below. See "--Taxes on a REMIC Trust." Generally, the total income from the
mortgage loans in a REMIC trust will be taxable to the beneficial owners of the
securities of that series, as described below.
Regulations issued by the Treasury Department on December 23, 1992 (the
"REMIC regulations") provide some guidance regarding the federal income tax
consequences associated with the purchase, ownership and disposition of REMIC
securities. While material provisions of the REMIC regulations are discussed
below, investors should consult their own tax advisors regarding the possible
application of the REMIC regulations in their specific circumstances.
SPECIAL TAX ATTRIBUTES
REMIC regular securities and REMIC residual securities will be "regular
or residual interests in a REMIC" within the meaning of section
7701(a)(19)(C)(xi) and "real estate assets" within the meaning of section
856(c)(5)(A). If at any time during a calendar year less than 95% of the assets
of a REMIC trust consist of "qualified mortgages" (within the meaning of section
860G(a)(3)) then the portion of the
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REMIC regular securities and REMIC residual securities that are qualifying
assets under those sections during the calendar year may be limited to the
portion of the assets of the REMIC trust that are qualified mortgages.
Similarly, income on the REMIC regular securities and REMIC residual securities
will be treated as "interest on obligations secured by mortgages on real
property" within the meaning of section 856(c)(3)(B) , subject to the same
limitation as described in the preceding sentence. For purposes of applying this
limitation, a REMIC trust should be treated as owning the assets represented by
the qualified mortgages. The assets of the trust fund will include, in addition
to the mortgage loans, payments on the mortgage loans held pending distribution
on the REMIC regular securities and REMIC residual securities and any
reinvestment income thereon. REMIC regular securities and REMIC residual
securities held by a financial institution to which section 585, 586 or 593
applies will be treated as evidences of indebtedness for purposes of section
582(c)(1). REMIC regular securities will also be qualified mortgages with
respect to other REMICs.
TAXATION OF BENEFICIAL OWNERS OF REMIC REGULAR SECURITIES
Except as indicated below in this federal income tax discussion, the
REMIC regular securities will be treated for federal income tax purposes as debt
instruments issued by the REMIC trust on the settlement date and not as
ownership interests in the REMIC trust or its assets. Beneficial owners of REMIC
regular securities that otherwise report income under a cash method of
accounting will be required to report income with respect to those securities
under an accrual method. For additional tax consequences relating to REMIC
regular securities purchased at a discount or with premium, see "--Discount and
Premium," below.
TAXATION OF BENEFICIAL OWNERS OF REMIC RESIDUAL SECURITIES
DAILY PORTIONS. Except as indicated below, a beneficial owner of a
REMIC residual security for a REMIC trust generally will be required to report
its daily portion of the taxable income or net loss of the REMIC trust for each
day during a calendar quarter that the beneficial owner owned the REMIC residual
security. For this purpose, the daily portion shall be determined by allocating
to each day in the calendar quarter its ratable portion of the taxable income or
net loss of the REMIC trust for the quarter and by allocating the amount so
allocated among the beneficial owners of residual securities (on that day) in
accordance with their percentage interests on that day. Any amount included in
the gross income or allowed as a loss of any beneficial owner of a residual
security by virtue of this paragraph will be treated as ordinary income or loss.
The requirement that each beneficial owner of a REMIC residual security
report its daily portion of the taxable income or net loss of the REMIC trust
will continue until there are no securities of any class outstanding, even
though the beneficial owner of the REMIC residual security may have received
full payment of the stated interest and principal on its REMIC residual
security.
The trustee will provide to beneficial owners of REMIC residual
securities of each series of securities (i) any information as is necessary to
enable them to prepare their federal income tax returns and (ii) any reports
regarding the securities of the series that may be required under the code.
TAXABLE INCOME OR NET LOSS OF A REMIC TRUST. The taxable income or net
loss of a REMIC trust will be the income from the qualified mortgages it holds
and any reinvestment earnings less deductions allowed to the REMIC trust. The
taxable income or net loss for a given calendar quarter will be determined in
the same manner as for an individual having the calendar year as the taxable
year and using the accrual method of accounting, with modifications. The first
modification is that a deduction will be allowed for accruals of interest
(including any original issue discount, but without regard to the investment
interest limitation in section 163(d)) on the REMIC regular securities (but not
the REMIC
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residual securities), even though REMIC regular securities are for non-tax
purposes evidences of beneficial ownership rather than indebtedness of a REMIC
trust. Second, market discount or premium equal to the difference between the
total stated principal balances of the qualified mortgages and the basis to the
REMIC trust generally will be included in income (in the case of discount) or
deductible (in the case of premium) by the REMIC trust as it accrues under a
constant yield method, taking into account the "prepayment assumption" (as
defined in the prospectus supplement, see "--Discount and Premium--Original
Issue Discount," below). The basis to a REMIC trust in the qualified mortgages
is the aggregate of the issue prices of all the REMIC regular securities and
REMIC residual securities in the REMIC trust on the settlement date. If,
however, a substantial amount of a class of REMIC regular securities or REMIC
residual securities has not been sold to the public, then the fair market value
of all the REMIC regular securities or REMIC residual securities in that class
as of the date of the prospectus supplement should be substituted for the issue
price.
Third, no item of income, gain, loss or deduction allocable to a
prohibited transaction (see "--Taxes on a REMIC Trust--Prohibited Transactions"
below) will be taken into account. Fourth, a REMIC trust generally may not
deduct any item that would not be allowed in calculating the taxable income of a
partnership by virtue of section 703(a)(2). Finally, the limitation on
miscellaneous itemized deductions imposed on individuals by section 67 will not
be applied at the REMIC trust level to any servicing and guaranty fees. (See,
however, "--Pass-Through of Servicing and Guaranty Fees to Individuals" below.)
In addition, under the REMIC regulations, any expenses that are incurred in
connection with the formation of a REMIC trust and the issuance of the REMIC
regular securities and REMIC residual securities are not treated as expenses of
the REMIC trust for which a deduction is allowed. If the deductions allowed to a
REMIC trust exceed its gross income for a calendar quarter, the excess will be a
net loss for the REMIC trust for that calendar quarter. The REMIC regulations
also provide that any gain or loss to a REMIC trust from the disposition of any
asset, including a qualified mortgage or "permitted investment" (as defined in
section 860G(a)(5) ) will be treated as ordinary gain or loss.
A beneficial owner of a REMIC residual security may be required to
recognize taxable income without being entitled to receive a corresponding
amount of cash. This could occur, for example, if the qualified mortgages are
considered to be purchased by the REMIC trust at a discount, some or all of the
REMIC regular securities are issued at a discount, and the discount included as
a result of a prepayment on a mortgage loan that is used to pay principal on the
REMIC regular securities exceeds the REMIC trust's deduction for unaccrued
original issue discount relating to the REMIC regular securities. Taxable income
may also be greater in earlier years because interest expense deductions,
expressed as a percentage of the outstanding principal amount of the REMIC
regular securities, may increase over time as the earlier classes of REMIC
regular securities are paid, whereas interest income with respect to any given
mortgage loan expressed as a percentage of the outstanding principal amount of
that mortgage loan, will remain constant over time.
BASIS RULES AND DISTRIBUTIONS. A beneficial owner of a REMIC residual
security has an initial basis in its security equal to the amount paid for that
REMIC residual security. That basis is increased by amounts included in the
income of the beneficial owner and decreased by distributions and by any net
loss taken into account with respect to the REMIC residual security. A
distribution on a REMIC residual security to a beneficial owner is not included
in gross income to the extent it does not exceed the beneficial owner's basis in
the REMIC residual security (adjusted as described above) and, to the extent it
exceeds the adjusted basis of the REMIC residual security, shall be treated as
gain from the sale of the REMIC residual security.
A beneficial owner of a REMIC residual security is not allowed to take
into account any net loss for any calendar quarter to the extent that the net
loss exceeds the beneficial owner's adjusted basis in its REMIC residual
security as of the close of the calendar quarter (determined without regard to
the net
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loss). Any loss disallowed by reason of this limitation may be carried forward
indefinitely to future calendar quarters and, subject to the same limitation,
may be used only to offset income from the REMIC residual security.
EXCESS INCLUSIONS. Any excess inclusions with respect to a REMIC
residual security are subject to special tax rules. With respect to a beneficial
owner of a REMIC residual security, the excess inclusion for any calendar
quarter is defined as the excess (if any) of the daily portions of taxable
income over the sum of the "daily accruals" for each day during a quarter that
the REMIC residual security was held by the beneficial owner. The daily accruals
are determined by allocating to each day during a calendar quarter its ratable
portion of the product of the "adjusted issue price" of the REMIC residual
security at the beginning of the calendar quarter and 120% of the "federal
long-term rate" in effect on the settlement date, based on quarterly
compounding, and properly adjusted for the length of the quarter. For this
purpose, the adjusted issue price of a REMIC residual security as of the
beginning of any calendar quarter is equal to the issue price of the REMIC
residual security, increased by the amount of daily accruals for all prior
quarters and decreased by any distributions made with respect to the REMIC
residual security before the beginning of that quarter. The issue price of a
REMIC residual security is the initial offering price to the public (excluding
bond houses and brokers) at which a substantial number of the REMIC residual
securities 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 that income by losses from other activities. For
beneficial owners that are subject to tax only on unrelated business taxable
income (as defined in section 511 ), an excess inclusion of a beneficial owner
is treated as unrelated business taxable income. With respect to variable
contracts (within the meaning of section 817 ), a life insurance company cannot
adjust its reserve to the extent of any excess inclusion, except as provided in
regulations. The REMIC regulations indicate that if a beneficial owner of a
REMIC residual security is a member of an affiliated group filing a consolidated
income tax return, the taxable income of the affiliated group cannot be less
than the sum of the excess inclusions attributable to all residual interests in
REMICs held by members of the affiliated group. For a discussion of the effect
of excess inclusions on foreign investors that own REMIC residual securities,
see "--Foreign Investors" below.
The Treasury Department also has the authority to issue regulations
that would treat all taxable income of a REMIC trust as excess inclusions if the
REMIC residual security does not have "significant value." Although the Treasury
Department did not exercise this authority in the REMIC regulations, future
regulations may contain this rule. If that rule were adopted, it is unclear how
significant value would be determined for these purposes. If no similar rule is
applicable, excess inclusions should be calculated as discussed above.
In the case of any REMIC residual securities that are held by a real
estate investment trust, the aggregate excess inclusions with respect to REMIC
residual securities reduced (but not below zero) by the real estate investment
trust taxable income (within the meaning of section 857(b)(2) , excluding any
net capital gain) will be allocated among the shareholders of that trust in
proportion to the dividends received by the shareholders from the trust, and any
amount so allocated will be treated as an excess inclusion with respect to a
REMIC residual security as if held directly by the shareholder. Similar rules
will apply in the case of regulated investment companies, common trust funds and
cooperatives that hold a REMIC residual security.
PASS-THROUGH OF SERVICING AND GUARANTY FEES TO INDIVIDUALS. A
beneficial owner of a REMIC residual security who is an individual will be
required to include in income a share of any servicing and guaranty fees. A
deduction for these fees will be allowed to a beneficial owner only to the
extent that
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those fees, along with some of the beneficial owner's other miscellaneous
itemized deductions exceed 2% of the beneficial owner's adjusted gross income.
In addition, a beneficial owner of a REMIC residual security may not be able to
deduct any portion of the fees in computing a beneficial owner's alternative
minimum tax liability. A beneficial owner's share of the fees will generally be
determined by (i) allocating the amount of the expenses for each calendar
quarter on a pro rata basis to each day in the calendar quarter, and (ii)
allocating the daily amount among the beneficial owners in proportion to their
respective holdings on that day.
TAXES ON A REMIC TRUST
PROHIBITED TRANSACTIONS. The Code imposes a tax on a REMIC equal to
100% of the net income derived from "prohibited transactions." In general, a
prohibited transaction means the disposition of a qualified mortgage other than
under specified exceptions, the receipt of investment income from a source other
than a mortgage loan or other permitted investments, the receipt of compensation
for services, or the disposition of an asset purchased with the payments on the
qualified mortgages for temporary investment pending distribution on the regular
and residual interests.
CONTRIBUTIONS TO A REMIC AFTER THE STARTUP DAY. The Code imposes a tax
on a REMIC equal to 100% of the value of any property contributed to the REMIC
after the "startup day" (generally the same as the settlement date). Exceptions
are provided for cash contributions to a REMIC (i) during the three month period
beginning on the startup day, (ii) made to a qualified reserve fund by a
beneficial owner of a residual interest, (iii) in the nature of a guarantee,
(iv) made to facilitate a qualified liquidation or clean-up call, and (v) as
otherwise permitted by treasury regulations.
NET INCOME FROM FORECLOSURE PROPERTY. The Code imposes a tax on a REMIC
equal to the highest corporate rate on "net income from foreclosure property."
The terms "foreclosure property" (which includes property acquired by deed in
lieu of foreclosure) and "net income from foreclosure property" are defined by
reference to the rules applicable to real estate investment trusts. Generally,
foreclosure property would be treated as such for a period of three years, with
a possible extension. Net income from foreclosure property generally means gain
from the sale of foreclosure property that is inventory property and gross
income from foreclosure property other than qualifying rents and other
qualifying income for a real estate investment trust.
SALES OF REMIC SECURITIES
Except as provided below, if a REMIC regular residual security is sold,
the seller will recognize gain or loss equal to the difference between the
amount realized in the sale and its adjusted basis in the security. The adjusted
basis of a REMIC regular security generally will equal the cost of that security
to the seller, increased by any original issue discount or market discount
included in the seller's gross income with respect to the security and reduced
by distributions on that security previously received by the seller of amounts
included in the stated redemption price at maturity and by any premium that has
reduced the seller's interest income with respect to the security. See
"--Discount and Premium." The adjusted basis of a REMIC residual security is
determined as described above under "--Taxation of Beneficial Owners of REMIC
Residual Securities--Basis Rules and Distributions." Except as provided in the
following paragraph or under section 582(c) , any gain or loss will be capital
gain or loss, provided the security is held as a "capital asset" (generally,
property held for investment) within the meaning of section 1221.
Gain from the sale of a REMIC regular security that might otherwise be
capital gain will be treated as ordinary income to the extent that the gain does
not exceed the excess, if any, of (i) the amount that would have been includible
in the income of the beneficial owner of a REMIC regular security had
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income accrued at a rate equal to 110% of the "applicable federal rate"
(generally, an average of current yields on treasury securities) as of the date
of purchase over (ii) the amount actually includible in the beneficial owner's
income. In addition, gain recognized on a sale by a beneficial owner of a REMIC
regular security who purchased the security at a market discount would also be
taxable as ordinary income in an amount not exceeding the portion of the
discount that accrued during the period a security was held by the beneficial
owner, reduced by any market discount includible in income under the rules
described below under "--Discount and Premium."
If a beneficial owner of a REMIC residual security sells its REMIC
residual security at a loss, the loss will not be recognized if, within six
months before or after the sale of the REMIC residual security, the beneficial
owner purchases another residual interest in any REMIC or any interest in a
taxable mortgage pool (as defined in section 7701(i) ) comparable to a residual
interest in a REMIC. That disallowed loss would be allowed upon the sale of the
other residual interest (or comparable interest) if the rule referred to in the
preceding sentence does not apply to that sale. While this rule may be modified
by treasury regulations, no such regulations have yet been published.
TRANSFERS OF REMIC RESIDUAL SECURITIES. Section 860E(e) imposes a
substantial tax, payable by the transferor (or, if a transfer is through a
broker, nominee, or other middleman as the transferee's agent, payable by that
agent) upon any transfer of a REMIC residual security to a disqualified
organization and upon a pass-through entity (including regulated investment
companies, real estate investment trusts, common trust funds, partnerships,
trusts, estates, cooperatives, and nominees) that owns a REMIC residual security
if the pass-through entity has a disqualified organization as a record-holder.
For purposes of the preceding sentence, a transfer includes any transfer of
record or beneficial ownership, whether by purchase, by default under a secured
lending agreement or otherwise.
The term "disqualified organization" includes the United States, any
state or political subdivision thereof, any foreign government, any
international organization, or any agency or instrumentality of the foregoing
(other than taxable instrumentalities), any cooperative organization furnishing
electric energy or providing telephone service to persons in rural areas, or any
organization (other than a farmers' cooperative) that is exempt from federal
income tax, unless the organization is subject to the tax on unrelated business
income. Moreover, an entity will not qualify as a REMIC unless there are
reasonable arrangements designed to ensure that (i) residual interests in the
entity are not held by disqualified organizations and (ii) information necessary
for the application of the REMIC tax will be made available. Restrictions on the
transfer of a REMIC residual security and other provisions that are intended to
meet this requirement are described in the pooling and servicing agreement, and
will be discussed more fully in the prospectus supplement relating to the
offering of any REMIC residual security. In addition, a pass-through entity
(including a nominee) that holds a REMIC residual security may be subject to
additional taxes if a disqualified organization is a record-holder of an
interest in that entity. A transferor of a REMIC residual security (or an agent
of a transferee of a REMIC residual security, as the case may be) will be
relieved of that tax liability if (i) the transferee furnishes to the transferor
(or the transferee's agent) an affidavit that the transferee is not a
disqualified organization, and (ii) the transferor (or the transferee's agent)
does not have actual knowledge that the affidavit is false at the time of the
transfer. Similarly, no tax will be imposed on a pass-through entity for a
period with respect to an interest in that entity is owned by a disqualified
organization if (i) the record-holder of the interest furnishes to the
pass-through entity an affidavit that it is not a disqualified organization, and
(ii) during that period, the pass-through entity has no actual knowledge that
the affidavit is false.
The Taxpayer Relief Act of 1997 adds provisions to the code that will
apply to an "electing large partnership." If an electing large partnership holds
a 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). An exception to this tax,
otherwise available to a pass-through entity
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that is furnished with affidavits by record holders of interests in the entity
and that does not know the affidavits are false, is not available to an electing
large partnership.
Under the REMIC regulations, a transfer of a "noneconomic residual
interest" to a U.S. Person (as defined below in "--Foreign Investors--grantor
trust securities and REMIC regular securities") will be disregarded for all
federal tax purposes unless no significant purpose of the transfer is to impede
the assessment or collection of tax. A REMIC residual security would be treated
as constituting a noneconomic residual interest unless, at the time of the
transfer, (i) the present value of the expected future distributions on the
REMIC residual security is no less than the product of the present value of the
"anticipated excess inclusions" with respect to that security and the highest
corporate rate of tax for the year in which the transfer occurs, and (ii) the
transferor reasonably expects that the transferee will receive distributions
from the applicable REMIC trust in an amount sufficient to satisfy the liability
for income tax on any "excess inclusions" at or after the time when the
liability accrues. Anticipated excess inclusions are the excess inclusions that
are anticipated to be allocated to each calendar quarter (or portion thereof)
following the transfer of a REMIC residual security, determined as of the date
the security is transferred and based on events that have occurred as of that
date and on the prepayment assumption. See "--Discount and Premium" and
"--Taxation of Beneficial Owners of REMIC Residual Securities--Excess
Inclusions."
The REMIC regulations provide that a significant purpose to impede the
assessment or collection of tax exists if, at the time of the transfer, a
transferor of a REMIC residual security has "improper knowledge" (i.e., either
knew, or should have known, that the transferee would be unwilling or unable to
pay taxes due on its share of the taxable income of the REMIC trust). A
transferor is presumed not to have improper knowledge if (i) the transferor
conducts, at the time of a transfer, a reasonable investigation of the financial
condition of the transferee and, as a result of the investigation, the
transferor finds that the transferee has historically paid its debts as they
come due and finds no significant evidence to indicate that the transferee will
not continue to pay its debts as they come due in the future; and (ii) the
transferee makes representations to the transferor in the affidavit relating to
disqualified organizations discussed above. Transferors of a REMIC residual
security should consult with their own tax advisors for further information
regarding the transfers.
REPORTING AND OTHER ADMINISTRATIVE MATTERS. For purposes of the
administrative provisions , each REMIC trust will be treated as a partnership
and the beneficial owners of REMIC residual securities will be treated as
partners. The trustee will prepare, sign and file federal income tax returns for
each REMIC trust, which returns are subject to audit by the IRS. Moreover,
within a reasonable time after the end of each calendar year, the trustee will
furnish to each beneficial owner that received a distribution during that year a
statement setting forth the portions of any distributions that constitute
interest distributions, original issue discount, and any other information
required by treasury regulations and, with respect to beneficial owners of REMIC
residual securities in a REMIC trust, information necessary to compute the daily
portions of the taxable income (or net loss) of the REMIC trust for each day
during the year. The trustee will also act as the tax matters partner for each
REMIC trust, either in its capacity as a beneficial owner of a REMIC residual
security or in a fiduciary capacity. Each beneficial owner of a REMIC residual
security, by the acceptance of its REMIC residual security, agrees that the
trustee will act as its fiduciary in the performance of any duties required of
it in the event that it is the tax matters partner.
Each beneficial owner of a REMIC residual security is required to treat
items on its return consistently with the treatment on the return of the REMIC
trust, unless the beneficial owner either files a statement 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.
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TERMINATION
In general, no special tax consequences will apply to a beneficial
owner of a REMIC regular security upon the termination of a REMIC trust by
virtue of the final payment or liquidation of the last mortgage loan remaining
in the trust fund. If a beneficial owner of a REMIC residual security's adjusted
basis in its REMIC residual security at the time the termination occurs exceeds
the amount of cash distributed to the beneficial owner in liquidation of its
interest, although the matter is not entirely free from doubt, it would appear
that the beneficial owner of the REMIC residual security is entitled to a loss
equal to the amount of that excess.
DEBT SECURITIES
With respect to each series of debt securities, Dewey Ballantine LLP,
special tax counsel to the sponsor, will deliver its opinion to the sponsor that
the securities will be classified as debt secured by the related loans.
Consequently, the debt securities will not be treated as ownership interests in
the loans or the trust. Beneficial owners will be required to report income
received with respect to the debt securities in accordance with their normal
method of accounting. For additional tax consequences relating to debt
securities purchased at a discount or with premium, see "--Discount and
Premium," below.
SPECIAL TAX ATTRIBUTES
As described above, REMIC securities will possess special tax
attributes by virtue of the REMIC provisions. In general, debt securities will
not possess these special tax attributes. Investors to whom these attributes are
important should consult their own tax advisors regarding investment in debt
securities.
SALE OR EXCHANGE
If a beneficial owner of a debt security sells or exchanges the
security, the beneficial owner will recognize gain or loss equal to the
difference, if any, between the amount received and the beneficial owner's
adjusted basis in the security. The adjusted basis in the security generally
will equal its initial cost, increased by any original issue discount or market
discount previously included in the seller's gross income with respect to the
security and reduced by the payments previously received on the security, other
than payments of qualified stated interest, and by any amortized premium.
In general (except as described in "--Discount and Premium--Market
Discount," below), except for financial institutions subject to section 582(c) ,
any gain or loss on the sale or exchange of a debt security recognized by an
investor who holds the security as a capital asset (within the meaning of
section 1221 ), will be capital gain or loss and will be long-term or short-term
depending on whether the security has been held for more than one year.
PARTNERSHIP INTERESTS
With respect to each series of partnership interests, Dewey Ballantine
LLP, special tax counsel to the sponsor, will deliver its opinion to the sponsor
that the trust will be treated as a partnership and not an association taxable
as a corporation for federal income tax purposes. The opinion shall be attached
on Form 8-K to be filed with the Securities and Exchange Commission within
fifteen days after the initial issuance of the securities or filed with the
Securities and Exchange Commission as a post-effective amendment to the
prospectus. Accordingly, each beneficial owner of a partnership interest will
generally be treated as the owner of an interest in the loans.
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SPECIAL TAX ATTRIBUTES
As described above, REMIC securities will possess special tax
attributes by virtue of the REMIC provisions. In general, partnership interests
will not possess these special tax attributes. Investors to whom these
attributes are important should consult their own tax advisors regarding
investment in partnership interests.
TAXATION OF BENEFICIAL OWNERS OF PARTNERSHIP INTERESTS
If the trust is treated as a partnership for federal income tax
purposes, the trust will not be subject to federal income tax. Instead, each
beneficial owner of a partnership interest will be required to separately take
into account an allocable share of income, gains, losses, deductions, credits
and other tax items of the trust. These partnership allocations are made in
accordance with the code, treasury regulations and the partnership agreement
(here, the trust agreement and related documents).
The trust's assets will be the assets of the partnership. The trust's
income will consist primarily of interest and finance charges earned on the
underlying mortgage loans. The trust's deductions will consist primarily of
interest accruing with respect to any indebtedness issued by the trust,
servicing and other fees, and losses or deductions upon collection or
disposition of the trust's assets.
The trust could have an obligation to make payments of withholding tax
on behalf of a beneficial owner of a partnership interest. (See "Backup
Withholding" and "Foreign Investors" below).
Substantially all of the taxable income allocated to a beneficial owner
of a partnership interest that is a pension, profit sharing or employee benefit
plan or other tax-exempt entity (including an individual retirement account)
will constitute "unrelated business taxable income" generally taxable to the
holder under the code.
Under section 708 , the trust will be deemed to terminate for federal
income tax purposes if 50% or more of the capital and profits interests in the
trust are sold or exchanged within a 12-month period. Under the final
regulations issued on May 9, 1997 if such a termination occurs, the trust is
deemed to contribute all of its assets and liabilities to a newly formed
partnership in exchange for a partnership interest. Immediately thereafter, the
terminated partnership distributes interests in the new partnership to the
purchasing partner and remaining partners in proportion to their interests in
liquidation of the terminated partnership.
SALE OR EXCHANGE OF PARTNERSHIP INTERESTS
Generally, capital gain or loss will be recognized on a sale or
exchange of partnership interests in an amount equal to the difference between
the amount realized and the seller's tax basis in the partnership interests
sold. A beneficial owner of a partnership interest's tax basis in a partnership
interest will generally equal the beneficial owner's cost increased by the
beneficial owner's share of trust income (includible in income) and decreased by
any distributions received with respect to the partnership interest. In
addition, both the tax basis in the partnership interest and the amount realized
on a sale of a partnership interest would take into account the beneficial
owner's share of any indebtedness of the trust. A beneficial owner acquiring
partnership interests at different prices may be required to maintain a single
aggregate adjusted tax basis in the partnership interest, and upon sale or other
disposition of some of the partnership interests, allocate a portion of the
aggregate tax basis to the partnership interests sold (rather than maintaining a
separate tax basis in each partnership interest for purposes of computing gain
or loss on a sale of that partnership interest).
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Any gain on the sale of a partnership interest attributable to the
beneficial owner's share of unrecognized accrued market discount on the assets
of the trust would generally be treated as ordinary income to the holder and
would give rise to special tax reporting requirements. If a beneficial owner of
a partnership interest is required to recognize an aggregate amount of income
over the life of the partnership interest that exceeds the aggregate cash
distributions with respect thereto, that excess will generally give rise to a
capital loss upon the retirement of the partnership interest. If a beneficial
owner sells its partnership interest at a profit or loss, the transferee will
have a higher or lower basis in the partnership interests than the transferor
had. The tax basis of the trust's assets will not be adjusted to reflect that
higher or lower basis unless the trust files an election under section 754.
PARTNERSHIP REPORTING MATTERS
The Owner trustee is required to (i) keep complete and accurate books
of the trust, (ii) file a partnership information return (IRS Form 1065) with
the IRS for each taxable year of the trust and (iii) report each beneficial
owner of a partnership interest's allocable share of items of trust income and
expense to beneficial owners and the IRS on Schedule K-1. The trust will provide
the Schedule K-1 information to nominees that fail to provide the trust with the
information statement described below and those nominees will be required to
forward the information to the beneficial owners of the partnership interests.
Generally, beneficial owners of a partnership interests must file tax returns
that are consistent with the information return filed by the trust or be subject
to penalties unless the beneficial owner of a partnership interest notifies the
IRS of all the inconsistencies.
Under section 6031 , any person that holds partnership interests as a
nominee at any time during a calendar year is required to furnish the trust with
a statement containing information on the nominee, the beneficial owners and the
partnership interests so held. Required information includes (i) the name,
address and taxpayer identification number of the nominee and (ii) as to each
beneficial owner (x) the name, address and identification number of the person,
(y) whether the person is a United States person, a tax-exempt entity or a
foreign government, and international organization, or any wholly owned agency
or instrumentality of either of the foregoing, and (z) information on
partnership interests that were held, bought or sold on behalf of the person
throughout the year. In addition, brokers and financial institutions that hold
partnership interests through a nominee are required to furnish directly to the
trust information as to themselves and their ownership of partnership interests.
A clearing agency registered under section 17A of the Securities Exchange Act of
1934 is not required to furnish any such information statement to the trust.
Nominees, brokers and financial institutions that fail to provide the trust with
the information described above may be subject to penalties.
The Code provides for administrative examination of a partnership as if
the partnership were a separate and distinct taxpayer. Generally, the statute of
limitations for partnership items does not expire before three years after the
date on which the partnership information return is filed. Any adverse
determination following an audit of the return of the trust by the appropriate
taxing authorities could result in an adjustment of the returns of the
beneficial owner of a partnership interests, and a beneficial owner of a
partnership interest may be precluded from separately litigating a proposed
adjustment to the items of the trust. An adjustment could also result in an
audit of the beneficial owner of a partnership interest's returns and
adjustments of items note related to the income and losses of the trust.
FASIT SECURITIES
If provided in a prospectus supplement, an election will be made to
treat the trust as a FASIT within the meaning of section 860L(a). With respect
to each series of securities for which an election is made, Dewey Ballantine
LLP, special tax counsel to the sponsor, will deliver its opinion to the sponsor
that, assuming compliance with the pooling and servicing agreement, the trust
will be treated as a FASIT
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for federal income tax purposes. A trust for which a FASIT election is made will
be referred to in this prospectus 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). The
opinion shall be attached on Form 8-K to be filed with the securities and
Exchange Commission within fifteen days after the initial issuance of the
securities or filed with the securities and Exchange Commission as a
post-effective amendment to the prospectus.
SPECIAL TAX ATTRIBUTES
FASIT securities held by a real estate investment trust will constitute
"real estate assets" within the meaning of 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 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
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 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 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 that treatment. FASIT regular securities held by a regulated
investment company will not constitute "government securities" within the
meaning of section 851(b)(4)(A)(i). FASIT regular securities held by financial
institutions will constitute an "evidence of indebtedness" within the meaning of
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 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 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 those 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 of 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, debt instruments, other than debt instruments issued by the owner
of the FASIT or a related party, and hedges, and contracts to acquire the same,
foreclosure property and regular interests in another FASIT or in a REMIC. Based
on identical statutory language applicable to REMICs, it appears that the
"substantially all" requirement should be met if at all times the aggregate
adjusted basis of the nonqualified assets is less than one percent of the
aggregate adjusted basis of all the FASIT's assets. The FASIT provisions,
sections 860H through 860L, also require the FASIT
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ownership interest and "high-yield regular interests" to be held only by 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 sponsor had no
knowledge or reason to know as of the date the asset was acquired by the FASIT
that a default had occurred or would occur.
The various interests in a FASIT also must meet additional
requirements. All of the interests in a FASIT must be either one or more classes
of regular interests or 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 (1) unconditionally entitles the
holder to receive a specified principal amount (or other similar amount), (2)
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,
(3) has a stated maturity of not longer than 30 years, (4) has an issue price
not greater than 125% of its stated principal amount, and (5) has a yield to
maturity not greater than 5 percentage points higher than the related applicable
federal rate, as defined in 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 (1), (2) (4) or (5) is a "high-yield regular
interest." A high-yield regular interest that fails requirement (2) 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 the 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 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
in that association. 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 "prohibited transactions" by a FASIT are taxable to the
holder of the ownership interest in a FASIT at a 100% rate. Prohibited
transactions generally include (1) 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
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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; (2) the
receipt of income from nonpermitted assets; (3) the receipt of compensation for
services; or (4) the receipt of any income derived from a loan originated by the
FASIT. It is unclear the extent to which tax on these transactions could be
collected from the FASIT trust directly under the applicable statutes rather
than from the holder of the FASIT residual security.
DUE TO THE COMPLEXITY OF THESE RULES, THE ABSENCE OF TREASURY
REGULATIONS AND THE CURRENT UNCERTAINTY AS TO THE MANNER TO THEIR APPLICATION TO
THE TRUST AND TO HOLDERS OF FASIT SECURITIES, IT IS PARTICULARLY IMPORTANT THAT
POTENTIAL INVESTORS CONSULT THEIR OWN TAX ADVISORS REGARDING THE TAX TREATMENT
OF THEIR ACQUISITION OWNERSHIP AND DISPOSITION OF THE FASIT REGULAR SECURITIES.
DISCOUNT AND PREMIUM
A security purchased for an amount other than its outstanding principal
amount will be subject to the rules governing original issue discount, market
discount or premium. In addition, all grantor trust strip securities and some
grantor trust fractional interest securities will be treated as having original
issue discount by virtue of the coupon stripping rules in section 1286. In very
general terms, (1) original issue discount is treated as a form of interest and
must be included in a beneficial owner's income as it accrues (regardless of the
beneficial owner's regular method of accounting) using a constant yield method;
(2) market discount is treated as ordinary income and must be included in a
beneficial owner's income as principal payments are made on the security (or
upon a sale of a security); and (3) if a beneficial owner so elects, premium may
be amortized over the life of the security and offset against inclusions of
interest income. These tax consequences are discussed in greater detail below.
ORIGINAL ISSUE DISCOUNT
In general, a security will be considered to be issued with original
issue discount equal to the excess, if any, of its "stated redemption price at
maturity" over its "issue price." The issue price of a security is the initial
offering price to the public, excluding bond houses and brokers, at which a
substantial number of the securities was sold. The issue price also includes any
accrued interest attributable to the period between the beginning of the first
remittance period and the settlement date. The stated redemption price at
maturity of a security that has a notional principal amount or receives
principal only or that is or may be an accrual security is equal to the sum of
all distributions to be made under the security. The stated redemption price at
maturity of any other security is its stated principal amount, plus an amount
equal to the excess, if any, of the interest payable on the first distribution
date over the interest that accrues for the period from the settlement date to
the first distribution date.
Notwithstanding the general definition, original issue discount will be
treated as zero if the discount is less than 0.25% of the stated redemption
price at maturity multiplied by its weighted average life. The weighted average
life of a security is apparently computed for this purpose as the sum, for all
distributions included in the stated redemption price at maturity of the amounts
determined by multiplying (1) the number of complete years (rounding down for
partial years) from the settlement date until the date on which each
distribution is expected to be made under the assumption that the mortgage loans
prepay at the rate specified in the prospectus supplement by (2) a fraction, the
numerator of which is the amount of the distribution and the denominator of
which is the security's stated redemption price at maturity. If original issue
discount is treated as zero under this rule, the actual amount of original issue
discount must be allocated to the principal distributions on the security and,
when each distribution is received, gain equal to the discount allocated to the
distribution will be recognized.
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Section 1272(a)(6) contains special original issue discount rules
directly applicable to REMIC securities and debt securities. The Taxpayer Relief
Act of 1997 extends application of section 1272(a)(6) to the grantor trust
securities for tax years beginning after August 5, 1997. Under these rules, (1)
the amount and rate of accrual of original issue discount on each series of
securities will be based on (x) the prepayment assumption, and (y) in the case
of a security calling for a variable rate of interest, an assumption that the
value of the index upon which the variable rate is based remains equal to the
value of that rate on the settlement date, and (2) adjustments will be made in
the amount of discount accruing in each taxable year in which the actual
prepayment rate differs from the prepayment assumption.
Section 1272(a)(6)(B)(iii) requires that the prepayment assumption used
to calculate original issue discount be determined in the manner prescribed in
treasury regulations. To date, no such regulations have been promulgated. The
legislative history of this Code provision indicates that the assumed prepayment
rate must be the rate used by the parties in pricing the particular transaction.
The sponsor anticipates that the prepayment assumption for each series of
securities will be consistent with this standard. The sponsor makes no
representation, however, that the mortgage loans for a given series will prepay
at the rate reflected in the prepayment assumption for that series or at any
other rate. Each investor must make its own decision as to the appropriate
prepayment assumption to be used in deciding whether or not to purchase any of
the securities.
Each beneficial owner must include in gross income the sum of the
"daily portions" of original issue discount on its security for each day during
its taxable year on which it held the security. For this purpose, in the case of
an original beneficial owner, the daily portions of original issue discount will
be determined as follows. A calculation will first be made of the portion of the
original issue discount that accrued during each "accrual period." The trustee
will supply, at the time and in the manner required by the IRS, to beneficial
owners, brokers and middlemen information with respect to the original issue
discount accruing on the securities. The trustee will report original issue
discount based on accrual periods of no longer than one year either (1)
beginning on a distribution date or, in the case of the first accrual period,
the settlement date, and ending on the day before the next distribution date or
(2) beginning on the next day following a distribution date and ending on the
next distribution date.
Under section 1272(a)(6), the portion of original issue discount
treated as accruing for any accrual period will equal the excess, if any, of (1)
the sum of (A) the present values of all the distributions remaining to be made
on the security, if any, as of the end of the accrual period and (B) the
distribution made on the security during the accrual period of amounts included
in the stated redemption price at maturity, over (2) the adjusted issue price of
the security at the beginning of the accrual period. The present value of the
remaining distributions referred to in the preceding sentence will be calculated
based on (1) the yield to maturity of the security, calculated as of the
settlement date, giving effect to the prepayment assumption, (2) events
(including actual prepayments) that have occurred prior to the end of the
accrual period, (3) the prepayment assumption, and (4) in the case of a security
calling for a variable rate of interest, an assumption that the value of the
index upon which the variable rate is based remains the same as its value on the
settlement date over the entire life of the security. The adjusted issue price
of a security at any time will equal the issue price of the security, increased
by the aggregate amount of previously accrued original issue discount with
respect to that security, and reduced by the amount of any distributions made on
the security as of that time of amounts included in the stated redemption price
at maturity. The original issue discount accruing during any accrual period will
then be allocated ratably to each day during the period to determine the daily
portion of original issue discount.
In the case of grantor trust strip securities and some REMIC
securities, the calculation described in the preceding paragraph may produce a
negative amount of original issue discount for one or more accrual periods. No
definitive guidance has been issued regarding the treatment of the negative
amounts. The legislative history to section 1272(a)(6) indicates that the
negative amounts may be used to offset
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subsequent positive accruals but may not offset prior accruals and may not be
allowed as a deduction item in a taxable year in which negative accruals exceed
positive accruals. Beneficial owners of the securities should consult their own
tax advisors concerning the treatment of negative accruals.
A subsequent purchaser of a security that purchases the security at a
cost less than its remaining stated redemption price at maturity also will be
required to include in gross income for each day on which it holds the security,
the daily portion of original issue discount with respect to that security, but
reduced, if the cost of the security to the purchaser exceeds its adjusted issue
price, by an amount equal to the product of (1) the daily portion and (2) a
constant fraction, the numerator of which is the excess and the denominator of
which is the sum of the daily portions of original issue discount on the
security for all days on or after the day of purchase.
MARKET DISCOUNT
A beneficial owner that purchases a security at a market discount, that
is, at a purchase price less than the remaining stated redemption price at
maturity of the security, or, in the case of a security with original issue
discount, its adjusted issue price, will be required to allocate each principal
distribution first to accrued market discount on the security, and recognize
ordinary income to the extent that the distribution does not exceed the
aggregate amount of accrued market discount on the security not previously
included in income. With respect to securities that have unaccrued original
issue discount, the market discount must be included in income in addition to
any original issue discount. A beneficial owner that incurs or continues
indebtedness to acquire a security at a market discount may also be required to
defer the deduction of all or a portion of the interest on the indebtedness
until the corresponding amount of market discount is included in income. In
general terms, market discount on a security may be treated as accruing either
(1) under a constant yield method or (2) in proportion to remaining accruals of
original issue discount, if any, or if none, in proportion to remaining
distributions of interest on the security, in any case taking into account the
prepayment assumption. The trustee will make available, as required by the IRS,
to beneficial owners of securities information necessary to compute the accrual
of market discount.
Notwithstanding the above rules, market discount on a security will be
considered to be zero if that discount is less than 0.25% of the remaining
stated redemption price at maturity of the security multiplied by its weighted
average remaining life. Weighted average remaining life presumably would be
calculated in a manner similar to weighted average life, taking into account
payments, including prepayments, prior to the date of acquisition of the
security by the subsequent purchaser. If market discount on a security is
treated as zero under this rule, the actual amount of market discount must be
allocated to the remaining principal distributions on the security and, when
each distribution is received, gain equal to the discount allocated to that
distribution will be recognized.
SECURITIES PURCHASED AT A PREMIUM
A purchaser of a security that purchases the security at a cost greater
than its remaining stated redemption price at maturity will be considered to
have purchased that "premium security" at a premium. The purchaser need not
include in income any remaining original issue discount and may elect, under
section 171(c)(2) , to treat the premium as an "amortizable bond premium." If a
beneficial owner makes that election, the amount of any interest payment that
must be included in the beneficial owner's income for each period ending on a
distribution date will be reduced by the portion of the premium allocable to
each period based on the plan's yield to maturity. The premium amortization
should be made using constant yield principles. If the election is made by the
beneficial owner, the election will also apply to all bonds the interest on
which is not excludible from gross income held by the beneficial owner at the
beginning of the first taxable year to which the election applies and to all the
fully taxable bonds
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thereafter acquired by it, and is irrevocable without the consent of the IRS. If
the election is not made, (1) the beneficial owner must include the full amount
of each interest payment in income as it accrues, and (2) the premium must be
allocated to the principal distributions on the plan and, when each principal
distribution is received, a loss equal to the premium allocated to that
distribution will be recognized. Any tax benefit from the premium not previously
recognized will be taken into account in computing gain or loss upon the sale or
disposition of the plan.
Some securities may provide for only nominal distributions of principal
in comparison to the distributions of interest thereon. It is possible that the
IRS or the Treasury Department may issue guidance excluding some securities from
the rules generally applicable to debt instruments issued at a premium. In
particular, it is possible that a security will be treated as having original
issue discount equal to the excess of the total payments to be received thereon
over its issue price. In that event, section 1272(a)(6) would govern the accrual
of the original issue discount, but a beneficial owner would recognize
substantially the same income in any given period as would be recognized if an
election were made under section 171(c)(2). Unless and until the Treasury
Department or the IRS publishes specific guidance relating to the tax treatment
of these securities, the trustee intends to furnish tax information to
beneficial owners of the securities in accordance with the rules described in
the preceding paragraph.
SPECIAL ELECTION
For any security acquired on or after April 4, 1994, a beneficial owner
may elect to include in gross income all "interest" that accrues on the security
by using a constant yield method. For purposes of the election, the term
"interest" includes stated interest, acquisition discount, original issue
discount, de minimis original issue discount, market discount, de minimis market
discount and unstated interest as adjusted by any amortizable bond premium or
acquisition premium. A beneficial owner should consult its own tax advisor
regarding the time and manner of making and the scope of the election and the
implementation of the constant yield method.
BACKUP WITHHOLDING
Distributions of interest and principal, as well as distributions of
proceeds from the sale of securities, may be subject to the "backup withholding
tax" under section 3406 at a rate of 31% if recipients of the distributions fail
to furnish to the payor information, including their taxpayer identification
numbers, or otherwise fail to establish an exemption from the tax. Any amounts
deducted and withheld from a distribution to a recipient would be allowed as a
credit against that recipient's federal income tax. Furthermore, penalties may
be imposed by the IRS on a recipient of distributions that is required to supply
information but that does not do so in the proper manner.
The Internal Revenue Service recently issued final withholding
regulations, that change the rules relating to presumptions currently available
relating to information reporting and backup withholding. The withholding
regulations would provide alternative methods of satisfying the beneficial
ownership certification requirement. The withholding regulations are effective
January 1, 2001, although valid withholding certificates that are held on
December 31, 2000 remain valid until the earlier of December 31, 2001 or the due
date of expiration of the certificate under the rules as currently in effect.
FOREIGN INVESTORS
The withholding regulations would require, in the case of securities
held by a foreign partnership, that (x) the certification described above be
provided by the partners rather than by the foreign partnership and (y) the
partnership provide information, including a United States taxpayer
identification number. See "--Backup Withholding" above. A look-through rule
would apply in the case of tiered partnerships.
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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 the beneficial owner is not a U.S. Person, and provides the
name and address of that beneficial owner, and (c) the last U.S. Person in the
chain of payment to the beneficial owner receives a statement from the
beneficial owner or a financial institution holding on its behalf and does not
have actual knowledge that the statement is false. Beneficial owners should be
aware that the IRS might take the position that this exemption does not apply to
a beneficial owner that also owns 10% or more of the REMIC residual securities
of any REMIC trust, or to a beneficial owner that is a "controlled foreign
corporation" described in section 881(c)(3)(C).
REMIC RESIDUAL SECURITIES AND FASIT OWNERSHIP SECURITIES
Amounts distributed to a beneficial owner of a REMIC residual security
that is a not a U.S. Person generally will be treated as interest for purposes
of applying the 30%, or lower treaty rate, withholding tax on income that is not
effectively connected with a U.S. trade or business. Temporary treasury
regulations clarify that amounts not constituting excess inclusions that are
distributed on a REMIC residual security or a FASIT ownership security to a
beneficial owner that is not a U.S. Person generally will be exempt from U.S.
federal income and withholding tax, subject to the same conditions applicable to
distributions on grantor trust securities, debt securities and REMIC regular
securities, as described above, but only to the extent that the obligations
directly underlying the REMIC or FASIT trust that issued the REMIC residual
security or FASIT ownership security, e.g., mortgage loans or regular interests
in another REMIC or FASIT, were issued after July 18, 1984. In no case will any
portion of REMIC or FASIT income that constitutes an excess inclusion be
entitled to any exemption from the withholding tax or a reduced treaty rate for
withholding. See "--REMIC Securities--Taxation of Beneficial Owners of REMIC
residual securities--Excess Inclusions."
PARTNERSHIP INTERESTS
Depending upon the particular terms of the trust agreement and
servicing agreement, a trust may be considered to be engaged in a trade or
business in the United States for purposes of federal withholding taxes with
respect to non-U.S. persons. If the trust is considered to be engaged in a trade
or business in the United States for those purposes and the trust is treated as
a partnership, the income of the trust distributable to a non-U.S. person would
be subject to federal withholding tax. Also, in those cases, a non-U.S.
beneficial owner of a partnership interest that is a corporation may be subject
to the branch profits tax. If the trust is notified that a beneficial owner of a
partnership interest is a foreign person, the trust may withhold as if it were
engaged in a trade or business in the United States in order to protect the
trust from possible adverse consequences of a failure to withhold. A foreign
holder generally would be entitled to file with the IRS a claim for refund with
respect to withheld taxes, taking the position that no taxes were due because
the trust was not in a U.S. trade or business.
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FASIT REGULAR SECURITIES
"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 the high-yield FASIT
regular securities will be restored to ownership thereof as completely as
possible. The last preceding owner will, in any event, be taxable on all income
with respect to the 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
Section 406 of ERISA and section 4975 of the Internal Revenue Code
prohibit a "plan," which is a pension, profit sharing or other employee benefit
plan and individual retirement arrangements from engaging in transactions
involving "plan assets" with persons that are "parties in interest" under ERISA
or "disqualified persons" under the Internal Revenue Code with respect to the
plan, unless a statutory or administrative exemption applies to the transaction.
ERISA and the Internal Revenue Code also prohibit generally actions involving
conflicts of interest by persons who are fiduciaries of those plans or
arrangements. A violation of these "prohibited transaction" rules may generate
excise tax and other liabilities under ERISA and the Internal Revenue Code for
those persons. In addition, investments by plans are subject to ERISA's general
fiduciary requirements, including the requirement of investment prudence and
diversification and the requirement that a plan's investments be made in
accordance with the documents governing the plan. Employee benefit plans that
are governmental plans, as defined in Section 3(32) of ERISA, and church plans,
as defined in section 3(33) of ERISA, are not subject to ERISA requirements.
Accordingly, assets of these plans may be invested in securities without regard
to the ERISA considerations discussed below, subject to the provisions of other
applicable federal, state and local law. Any plan which is qualified and exempt
from taxation under section 401(a) and 501(a) of the Internal Revenue Code,
however, is subject to the prohibited transaction rules of section 503 of the
Internal Revenue Code.
Transactions involving the trust might be deemed to constitute
prohibited transactions under ERISA and the Internal Revenue Code with respect
to a plan, including an individual retirement arrangement, that purchased
securities. Therefore, in the absence of an exemption, the purchase, sale or
holding of a security by a plan, including individual retirement arrangements,
subject to section 406 of ERISA or section 4975 of the Internal Revenue Code
might result in prohibited transactions and the imposition of excise taxes and
civil penalties.
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CERTIFICATES
The Department of Labor has issued to various underwriters individual
prohibited transaction exemptions, which generally exempt from the application
of the prohibited transaction provisions of section 406(a), 406(b)(1), 406(b)(2)
and 407(a) of ERISA and the excise taxes imposed by sections 4975(a) and (b) of
the Internal Revenue Code, transactions with respect to the initial purchase,
the holding and the subsequent resale by plans of certificates in pass-through
trusts that consist of secured receivables, secured loans and other secured
obligations that meet the conditions and requirements of the underwriter
exemptions. The underwriter exemptions will only be available for securities
that are certificates.
Among the conditions that must be satisfied in order for the
underwriter exemptions to apply to offered certificates are the following:
o 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;
o 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;
o the certificates acquired by the plan have received a rating at
the time of the acquisition that is one of the three highest
generic rating categories from Standard & Poor's, Moody's
Investors Service, Duff & Phelps Credit Rating Co. or Fitch
Investors Service;
o the trustee is not an affiliate of any other member of the
restricted group, as defined below)
o 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 in exchange for the assignment of the
loans to the trust estate represents not more than the fair market
value of the loans; the sum of all payments made to and retained
by any servicer represents not more than reasonable compensation
for that person's services under the pooling and servicing
agreement and reimbursement of that person's reasonable expenses;
o the plan investing in the certificates is an "accredited investor"
as defined in Rule 501(a)(1) of Regulation D of the Securities and
Exchange Commission under the Securities Act of 1933; and
o 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:
o the corpus of the trust estate must consist solely of assets of
the type that have been included in other investment pools;
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o certificates in the other investment pools must have been rated in
one of the three highest rating categories of Standard & Poor's,
Moody's Investors Service, Fitch Investors Service or Duff &
Phelps Credit Rating Co. for at least one year prior to the plan's
acquisition of certificates; and
o certificates evidencing interests in other investment pools must
have been purchased by investors other than plans for at least one
year prior to the plan's acquisition of certificates.
Moreover, the underwriter exemptions provide relief from
self-dealing/conflict of interest prohibited transactions that may occur when
the plan fiduciary causes a plan to acquire certificates in a trust in which the
fiduciary, or its affiliate, is an obligor on the receivables held in the trust;
although, among other requirements, (1) in the case of an acquisition in
connection with the initial issuance of certificates, at least fifty percent of
each class of certificates in which plans have invested is acquired by persons
independent of the restricted group and at least fifty percent of the aggregate
interest in the trust is acquired by persons independent of the restricted
group; (2) the fiduciary, or its affiliate, is an obligor with respect to five
percent or less of the fair market value of the obligations contained in the
trust; (3) the plan's investment in certificates of any class does not exceed
twenty-five percent of all of the certificates of that class outstanding at the
time of the acquisition; and (4) immediately after the acquisition, no more than
twenty-five percent of the assets of the plan with respect to which the person
is a fiduciary are invested in certificates representing an interest in one or
more trusts containing assets sold or serviced by the same entity. The
underwriter exemptions do not apply to plans sponsored by the "restricted
group," which is the sponsor, the underwriters, the trustee, any servicer, any
obligor with respect to mortgage loans included in the trust fund constituting
more than five percent of the aggregate unamortized principal balance of the
assets in the trust fund, or any affiliate of the parties.
In addition to the underwriter exemptions, the Department of Labor has
issued Prohibited Transaction Class Exemption ("PTCE") 83-1 which provides an
exemption for transactions involving the sale or exchange of residential
mortgage pool pass-through certificates by plans and for transactions in
connection with the servicing and operation of the mortgage pool.
NOTES
The underwriter exemptions will not be available for securities that
are notes. Under the "plan assets regulation" issued by the United States
Department of Labor, the assets of the trust would be treated as plan assets of
a plan for the purposes of ERISA and the Internal Revenue Code only if the plan
acquired an equity interest in the trust and none of the exceptions contained in
the plan assets regulation were applicable. An "equity interest" is defined
under the plan assets regulation as an interest other than an instrument which
is treated as indebtedness under applicable local law and which has no
substantial equity features. Accordingly, if the 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 Internal Revenue
Code. If the notes are treated as indebtedness without substantial equity
features, the trust's assets would not be deemed assets of a plan. However, in
that case, the acquisition or holding of the notes by or on behalf of a plan
could nevertheless give rise to a prohibited transaction, if the acquisition and
holding of notes by or on behalf of a plan was deemed to be a prohibited loan to
a party in interest with respect to the plan. Exemptions from the prohibited
transaction rules could be applicable to the purchase and holding of notes by a
plan, depending on the type and circumstances of the plan fiduciary making the
decision to acquire the notes. Included among these exemptions are: PTCE 84-14,
regarding transactions effected by "qualified professional asset managers"; PTCE
90-1, regarding transactions entered into by insurance company pooled separate
accounts; PTCE 91-38, regarding transactions entered into by bank collective
investment funds; PTCE 95-60, regarding transactions entered into by insurance
company general accounts; and PTCE 96-23, regarding transactions effected by
"in-house asset
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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 purchase and holding of the 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.
In John Hancock Mutual Life Insurance Co. v. Harris Trust and Savings
Bank, 510 U.S. 86 (1993), the United States Supreme Court ruled that assets held
in an insurance company's general account may be deemed to be "plan assets" for
ERISA purposes.
LEGAL INVESTMENT
The related prospectus supplement will describe whether or not the
securities will constitute "mortgage-related securities" within the meaning of
SMMEA. Accordingly, investors whose investment authority is subject to legal
restrictions should consult their own legal advisors to determine whether and to
what extent the securities constitute legal investments for them.
AVAILABLE INFORMATION
The sponsor has filed a registration statement with respect to the
securities with the Securities and Exchange Commission. This prospectus, which
forms a part of the registration statement, and the prospectus supplement
relating to each series of securities contain summaries of the material terms of
the agreements, but do not contain all of the information in the registration
statement. For further information, reference is made to the registration
statement and its exhibits. The registration statement and exhibits can be
inspected and copied at prescribed rates at the public reference facilities
maintained by the Securities and Exchange Commission at its Public Reference
Section, 450 Fifth Street, NW, Washington, D.C. 20549, and at its Regional
Office located as follows, Midwest Regional Office, 500 West Madison Street,
Chicago, Illinois 60661; and Northeast Regional Office, Seven World Trade
Center, New York, New York 10048. In addition, the Securities and Exchange
Commission maintains a World Wide Web site at http://www.sec.gov containing
reports, proxy and information statements and other information regarding
registrants, including the sponsor, that file electronically with the Securities
and Exchange Commission.
Each trust fund will be required to file reports with the Securities
and Exchange Commission as required by the Securities Exchange Act of 1934. The
sponsor intends to cause each trust fund to suspend filing the reports if and
when the 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 and you must not rely upon such
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information or representations. This prospectus and any prospectus supplement do
not constitute an offer to sell or a solicitation of an offer to buy any
securities other than the securities offered hereby and thereby nor an offer of
the securities to any person in any state or other jurisdiction in which that
offer would be unlawful. You should not assume that information in this
prospectus is correct as of any time subsequent to its date.
INCORPORATION OF DOCUMENTS BY REFERENCE
All documents that we subsequently file with the Securities and
Exchange Commission under section 13(a), 13(c), 14 or 15(d) of the Securities
Exchange Act of 1934, after the date of this prospectus shall be incorporated by
reference in this prospectus and be a part of this prospectus. Any statement
contained in a document incorporated by reference shall be modified or
superseded if a statement contained in this prospectus, the prospectus
supplement or in any other document subsequently incorporated by reference
modifies or replaces that statement.
The sponsor will provide without charge, on request of each person to
whom this prospectus is delivered, a copy of any of the documents that are
incorporated by reference in this prospectus. Requests should be directed to the
sponsor at One First Union Center, 301 S. College Street, Charlotte, North
Carolina 28288-0630, telephone no. (704) 374- 4868.
PLAN OF DISTRIBUTION
The sponsor may offer each series of securities through First Union
Securities or one or more other firms that may be designated at the time of each
offering of the 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 will describe the specific
terms of the offering of the series and of each class within the series, the
names of the underwriters, the purchase price of the securities, the proceeds to
the sponsor from the sale, any securities exchange on which the securities may
be listed, and, if applicable, the initial public offering prices, the discounts
and commissions to the underwriters and any discounts and concessions allowed or
reallowed to dealers. The place and time of delivery of each series will be
stated in the prospectus supplement. First Union is an affiliate of the sponsor.
LEGAL MATTERS
Dewey Ballantine LLP, New York, New York, or any other counsel
identified in the prospectus supplement, will pass upon legal matters for the
sponsor.
FINANCIAL INFORMATION
The sponsor has determined that its financial statements are not
material to the offering made hereby.
A new trust will be formed to own the primary assets and to issue each
series of securities. Each new trust will have no assets or obligations prior to
the issuance of the securities and will not engage in any activities other than
those described in this prospectus. Accordingly, no financial statements with
respect to the trusts will be included in this prospectus or any prospectus
supplement.
A prospectus supplement and the related Form 8-K may contain financial
statements of any credit enhancer.
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HOME LOAN TRUST 2000-1
ISSUER
HOME LOAN AND INVESTMENT BANK, F.S.B.
ORIGINATOR AND MASTER SERVICER
RESIDENTIAL ASSET FUNDING CORPORATION
DEPOSITOR
$40,610,000
Class A-1 Certificates
$14,664,000
Class A-2 Certificates
MORTGAGE PASS-THROUGH
CERTIFICATES, SERIES 2000-1
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PROSPECTUS SUPPLEMENT
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FIRST UNION SECURITIES, INC.
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We suggest that you rely on the information contained or incorporated by
reference in this prospectus supplement and the accompanying prospectus. We
have not authorized anyone to provide you with different information.
We are not offering the securities offered hereby in any state where the offer
is not permitted.
Dealers will be required to deliver a prospectus supplement and prospectus when
acting as underwriters of the securities offered hereby and with respect to
their unsold allotments or subscriptions. In addition, all dealers selling the
securities, whether or not participating in this offering, may be required to
deliver a prospectus supplement and prospectus until ninety days after the date
of this prospectus supplement.
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