PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED SEPTEMBER 9, 1999)
[LOGO]
$161,840,000 (APPROXIMATE)
--------------------------------------------------------------------------------
C-BASS MORTGAGE LOAN ASSET-BACKED CERTIFICATES, SERIES 2000-CB4
CREDIT-BASED ASSET SERVICING AND SECURITIZATION LLC
Seller
---------------------------
LITTON LOAN SERVICING LP
Servicer
---------------------------
RESIDENTIAL ASSET FUNDING CORPORATION
Depositor
---------------------------
<TABLE>
<CAPTION>
Initial Certificate Pass-Through
Class Balance Rate
------------------------------- ------------------- ------------
<S> <C> <C>
A-1F........................... $ 34,480,000 7.055%(1)
A-2F........................... 18,820,000 7.170%(1)
A-1A........................... 81,771,000 (2)
M-1............................ 11,531,000 7.565%(3)
M-2............................ 7,825,000 7.915%(3)
B-1............................ 4,942,000 8.705%(3)
B-2............................ 2,471,000 8.900%(3)
</TABLE>
-------------------------------
(1) The Class A-1F and Class A-2F Certificates will be subject to an interest
rate cap and, in the case of the Class A-2F Certificates only, a 0.50% per
annum increase following the optional termination date, as described in
this prospectus supplement.
(2) The Class A-1A Certificates will bear interest at a variable rate that is
subject to an interest rate cap and a margin increase following the
optional termination date, as described in this prospectus supplement.
(3) The Class M-1, Class M-2, Class B-1 and Class B-2 Certificates will be
subject to an interest rate cap.
THE CERTIFICATES
o Represent ownership interests in a trust consisting primarily of a pool of
first and second lien residential mortgage loans. The mortgage loans will
be segregated into two loan groups. Loan group 1 will consist of two
sub-groups, one primarily consisting of fixed-rate FHA insured and
uninsured mortgage loans and VA guaranteed and non-guaranteed mortgage
loans and one consisting of fixed-rate mortgage loans that are not FHA
insured or VA guaranteed. Loan group 2 will consist of adjustable-rate
mortgage loans.
o Only the seven classes of certificates identified above are being offered
by this prospectus supplement and the accompanying prospectus.
o The Class A-1F, Class A-2F and Class A-1A Certificates will be senior
certificates.
o The Class M-1, Class M-2, Class B-1 and Class B-2 Certificates are
subordinate to and provide credit enhancement for the Class A-1F, Class
A-2F and Class A-1A Certificates. The Class M-2, Class B-1, and Class B-2
Certificates are also subordinate to and provide credit enhancement for the
Class M-1 Certificates. The Class B-1 and Class B-2 Certificates are
subordinate to and provide credit enhancement for the Class M-2
Certificates. The Class B-2 Certificates are subordinate to and provide
credit enhancement for the Class B-1 Certificates.
CREDIT ENHANCEMENT
o Subordination--The subordinate certificates are subordinate in right of
certain payments to the senior certificates.
o Overcollateralization--Certain excess interest received from the mortgage
loans will be applied as payments of principal on the certificates to
maintain a required level of overcollateralization.
o Certain of the mortgage loans will be covered by either insurance from the
Federal Housing Administration or a guaranty from the United States
Department of Veterans Affairs.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
The underwriters will offer the certificates offered by this prospectus
supplement from time to time at varying prices to be determined at the time of
sale. The certificates will be available for delivery to investors in book-entry
form through the facilities of The Depository Trust Company, Clearstream
Luxembourg and the Euroclear System on or about December 13, 2000.
FIRST UNION SECURITIES, INC. BEAR, STEARNS & CO. INC.
The date of this prospectus supplement is December 7, 2000.
CAREFULLY CONSIDER THE "RISK FACTORS" BEGINNING ON PAGE S-9 OF THIS PROSPECTUS
SUPPLEMENT AND ON PAGE 3 IN THE ACCOMPANYING PROSPECTUS.
The offered certificates are not insured or guaranteed by any governmental
agency or instrumentality.
The offered certificates represent interest in the trust only and will not be
obligations of or represent interests in any other entity. This prospectus
supplement may be used to offer and sell the offered certificates only if it is
accompanied by the prospectus.
<PAGE>
IMPORTANT NOTICE ABOUT THE INFORMATION PRESENTED IN THIS
PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS
We provide information to you about the certificates in two separate
documents that progressively provide more detail: (1) the accompanying
prospectus, which provides general information, some of which may not apply to
your series of certificates, and (2) this prospectus supplement, which describes
the specific terms of your series of certificates. IF THE ACCOMPANYING
PROSPECTUS CONTEMPLATES MULTIPLE OPTIONS, YOU SHOULD RELY ON THE INFORMATION IN
THIS PROSPECTUS SUPPLEMENT AS TO THE APPLICABLE OPTION.
We cannot sell the certificates to you unless you have received both
this prospectus supplement and the accompanying prospectus.
We include cross-references in this prospectus supplement and the
accompanying prospectus to captions in these materials where you can find
further information concerning a particular topic. The following table of
contents provides the pages on which these captions are located.
i
<PAGE>
TABLE OF CONTENTS
SUMMARY......................................................................S-1
RISK FACTORS.................................................................S-9
Nature of sub-prime mortgage loans may increase risk of loss............S-9
Inclusion of delinquent mortgage loans increases risk of loss...........S-9
There are risks involving unpredictability of prepayments and
the effect of prepayments on yields..................................S-9
There are risks related to owner-financed mortgage loans...............S-10
The recovery of defaulted amounts under FHA and VA programs
is uncertain........................................................S-10
There are risks relating to alternatives to foreclosure................S-11
There is a risk that interest payments may be insufficient
to maintain overcollateralization...................................S-11
There is a risk that mortgage interest rates will affect
the offered certificates............................................S-11
There are risks relating to subordinate loans..........................S-12
There are risks in holding subordinate certificates....................S-12
There is a risk that interest payments on the mortgage loans
may be insufficient to pay interest on your certificates............S-13
There is a risk relating to the potential inadequacy
of credit enhancement for the offered certificates..................S-13
There is a risk because the certificates are not obligations
of any entity.......................................................S-13
There is a risk that there may be a delay in receipt
of liquidation proceeds, and that liquidation proceeds may be
less than the outstanding balance of the mortgage loan..............S-14
There is an increased risk of loss relating to high combined
loan-to-value ratios................................................S-14
There are risks relating to geographic concentration
of the mortgage loans...............................................S-14
There are risks relating to balloon loans..............................S-14
The lack of a secondary market may limit your ability
to sell your certificates...........................................S-15
Violations of federal and state laws may cause losses
on your certificates................................................S-15
In the event the seller is not able to repurchase
or replace defective mortgage loans you may suffer losses
on your certificates................................................S-15
There are risks of non-payment of insured amounts
under the primary mortgage insurance policy.........................S-16
THE MORTGAGE POOL...........................................................S-17
General................................................................S-17
Group 1 Mortgage Loan Statistics.......................................S-19
Sub-group 1A Mortgage Loan Statistics..................................S-27
Sub-group 1B Mortgage Loan Statistics..................................S-28
Group 2 Mortgage Loan Statistics.......................................S-29
The Index..............................................................S-40
FHA Mortgage Loans and VA Mortgage Loans...............................S-41
Terms of the Mortgage Loans............................................S-43
Primary Mortgage Insurance.............................................S-44
THE SELLER..................................................................S-44
UNDERWRITING STANDARDS......................................................S-45
THE SERVICER................................................................S-46
THE POOLING AND SERVICING AGREEMENT.........................................S-48
General................................................................S-48
Assignment of the Mortgage Loans.......................................S-49
Payments on Mortgage Loans; Deposits to Collection Account
and Distribution Account............................................S-50
Advances...............................................................S-51
The Trustee............................................................S-52
Servicing and Other Compensation and Payment of Expenses...............S-52
Pledge and Assignment of Servicer's Rights.............................S-53
Optional Termination...................................................S-53
Optional Purchase of Defaulted Loans...................................S-53
Events of Servicing Termination........................................S-53
Rights upon Event of Servicing Termination.............................S-54
Voting Rights..........................................................S-54
Amendment..............................................................S-54
DESCRIPTION OF THE CERTIFICATES.............................................S-55
General................................................................S-55
Book-Entry Certificates................................................S-55
Allocation of Available Funds..........................................S-59
Interest Distributions.................................................S-59
Principal Distributions................................................S-61
Allocation of Losses...................................................S-65
Application of Monthly Excess Cashflow Amounts.........................S-66
Pass-Through Rates.....................................................S-68
Calculation of LIBOR...................................................S-69
Reports to Certificateholders..........................................S-70
PREPAYMENT AND YIELD CONSIDERATIONS.........................................S-70
Additional Information.................................................S-72
Weighted Average Lives.................................................S-72
Final Scheduled Distribution Dates.....................................S-82
USE OF PROCEEDS.............................................................S-82
MATERIAL FEDERAL INCOME TAX CONSEQUENCES....................................S-82
REMIC Elections........................................................S-82
Taxation of the Offered Certificates...................................S-82
Other Matters..........................................................S-84
ii
<PAGE>
STATE TAX CONSIDERATIONS....................................................S-84
ERISA CONSIDERATIONS........................................................S-84
LEGAL INVESTMENT............................................................S-86
PLAN OF DISTRIBUTION........................................................S-86
ADDITIONAL INFORMATION......................................................S-87
LEGAL MATTERS...............................................................S-87
RATINGS.....................................................................S-87
iii
<PAGE>
SUMMARY
o THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION FROM THIS PROSPECTUS
SUPPLEMENT AND DOES NOT CONTAIN ALL OF THE INFORMATION THAT YOU NEED TO
CONSIDER IN MAKING YOUR INVESTMENT DECISION. TO UNDERSTAND ALL OF THE TERMS
OF THE OFFERING OF THE CERTIFICATES, CAREFULLY READ THIS ENTIRE PROSPECTUS
SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS.
o THIS SUMMARY PROVIDES AN OVERVIEW OF CERTAIN CALCULATIONS, CASH FLOW
PRIORITIES AND OTHER INFORMATION TO AID YOUR UNDERSTANDING AND IS QUALIFIED
BY THE FULL DESCRIPTION OF THESE CALCULATIONS, CASH FLOW PRIORITIES AND
OTHER INFORMATION IN THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING
PROSPECTUS. SOME OF THE INFORMATION CONSISTS OF FORWARD-LOOKING STATEMENTS
RELATING TO FUTURE ECONOMIC PERFORMANCE OR PROJECTIONS AND OTHER FINANCIAL
ITEMS. FORWARD-LOOKING STATEMENTS ARE SUBJECT TO A VARIETY OF RISKS AND
UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER FROM THE PROJECTED
RESULTS. THOSE RISKS AND UNCERTAINTIES INCLUDE, AMONG OTHERS, GENERAL
ECONOMIC AND BUSINESS CONDITIONS, REGULATORY INITIATIVES AND COMPLIANCE
WITH GOVERNMENTAL REGULATIONS, AND VARIOUS OTHER MATTERS, ALL OF WHICH ARE
BEYOND OUR CONTROL. ACCORDINGLY, WHAT ACTUALLY HAPPENS MAY BE VERY
DIFFERENT FROM WHAT WE PREDICT IN OUR FORWARD-LOOKING STATEMENTS.
-------------------------------
ISSUER
2000-CB4 Trust (the "Trust").
TITLE OF SERIES
C-BASS Mortgage Loan Asset-Backed Certificates, Series 2000-CB4.
THE CERTIFICATES
The Class A-1F, Class A-2F, Class A-1A, Class M-1, Class M-2, Class B-1, Class
B-2, Class N, Class X and Class R Certificates are the entire ownership interest
in a trust fund which is composed of first and second lien mortgage loans. The
Trust will issue the certificates pursuant to a pooling and servicing agreement
among Credit-Based Asset Servicing and Securitization LLC, as seller,
Residential Asset Funding Corporation, as depositor, Litton Loan Servicing LP,
as servicer, and The Chase Manhattan Bank, as trustee. The Trust is offering the
Class A-1F, Class A-2F, Class A-1A, Class M-1, Class M-2, Class B-1 and Class
B-2 Certificates as book-entry securities clearing through The Depository Trust
Company ("DTC") (in the United States) or Clearstream Banking ("Clearstream" and
formerly known as Cedel Bank) or the Euroclear System ("Euroclear") (in Europe).
See "Description of the Certificates--Book-Entry Registration and Definitive
Certificates" in this prospectus supplement.
THE OFFERED CERTIFICATES
The underwriters are offering to sell the Class A-1F, Class A-2F, Class A-1A,
Class M-1, Class M-2, Class B-1 and Class B-2 Certificates. The Class N, Class X
and Class R Certificates are not being offered.
DEPOSITOR OF MORTGAGE LOANS
Residential Asset Funding Corporation, a North Carolina corporation is the
depositor ("Depositor").
MORTGAGE LOAN SELLER
On the closing date, Credit-Based Asset Servicing and Securitization LLC will
sell the mortgage loans to the depositor. The mortgage loans were acquired
generally in accordance with the underwriting standards described in
"Underwriting Standards" in this prospectus supplement.
SERVICER
Litton Loan Servicing LP will service the mortgage loans. Subject to certain
limitations, the servicer must advance delinquent payments of principal and
interest on the mortgage loans, other than with respect to simple interest
mortgage loans and REO Properties. See "Pooling and Servicing Agreement--
Advances" in this prospectus supplement and "Servicing of the Loans--Advances
and Limitations Thereon" in the Prospectus. The servicer is a wholly-owned
subsidiary of the seller of the mortgage loans.
S-1
<PAGE>
TRUSTEE
The Chase Manhattan Bank, a New York banking corporation.
CUT-OFF DATE
November 1, 2000.
CLOSING DATE
On or about December 13, 2000.
FINAL SCHEDULED DISTRIBUTION DATES
The final scheduled distribution date for each class of offered Certificates is
set forth below:
<TABLE>
<CAPTION>
Final Scheduled
Class Distribution Date
----- -----------------
<S> <C>
o Class A-1F April 25, 2013
o Class A-2F November 25, 2031
o Class A-1A February 25, 2030
o Class M-1 November 25, 2031
o Class M-2 November 25, 2031
o Class B-1 November 25, 2031
o Class B-2 November 25, 2031
</TABLE>
Each such final scheduled distribution date has been calculated as described
under "Prepayment and Yield Considerations--Final Scheduled Distribution Dates"
in this prospectus supplement.
THE MORTGAGE POOL
On the closing date, the Trust will acquire a pool of mortgage loans that will
be divided into two loan groups, loan group 1 and loan group 2. Loan group 1 is
further divided into two sub-groups, sub-groups 1A and 1B.
Loan group 1 will consist of two sub-groups with the following aggregate
characteristics (percentages are based on the aggregate principal balance as of
November 1, 2000):
Aggregate Unpaid Principal Balance $82,772,965.81
Aggregate Original Principal Balance $91,143,428.01
Weighted Average Coupon (Gross) 9.826%
Gross Coupon Range 3.000% to 18.000%
Average Unpaid Principal Balance $65,588.72
Maximum Unpaid Principal Balance $863,746.47
Minimum Unpaid Principal Balance $248.96
Average Original Principal Balance $72,221.42
Maximum Original Principal Balance $865,000.00
Minimum Original Principal Balance $8,900.00
Weighted Average Stated Remaining Term 266 months
Stated Remaining Term Range 2 to 359 months
Weighted Average Seasoning 39 months
Age Range 1 to 411 months
Weighted Average Original Term 305 months
Original Term Range 36 to 424 months
Weighted Average CLTV 83.709%
CLTV Range 3.594% to 122.440%
Weighted Average Net Coupon 9.051%
Percentage of Loans with Prepayment Penalties 22.20%
Percentage of Second Lien Loans 0.35%
Percentage of Simple Interest Loans 2.57%
Percentage of Loans with Primary
Mortgage Insurance 31.27%
Percentage of FHA Insured Loans 7.21%
Percentage of FHA Uninsured Loans 3.66%
Percentage of VA Guaranteed Loans 1.54%
Percentage of VA Non-guaranteed Loans 0.26%
Percentage of Sub-Prime Loans 59.09%
Percentage of Performing Loans 89.16%
Percentage of Owner-Financed Loans 11.87%
Percentage of Sub-Performing Loans 5.65%
Sub-Performing with Forbearance Plans 0.40%
Sub-Performing with Bankruptcy Plans 0.51%
Percentage of Re-Performing Loans 5.19%
Re-Performing with Forbearance Plans 1.34%
Re-Performing with Bankruptcy Plans 2.29%
Percentage of Delinquent Loans 5.65%
S-2
<PAGE>
30-59 Days Delinquent 4.70%
60-89 Days Delinquent 0.95%
Maximum ZIP Code Concentration (%) 1.04%
Maximum ZIP Code Concentration (ZIP) 75034
Geographic Concentration in Excess of 5%:
New York 21.88%
California 13.89%
Florida 8.04%
Texas 7.85%
Michigan 5.78%
Sub-group 1A will consist of FHA insured, FHA uninsured, VA guaranteed and VA
non-guaranteed fixed-rate mortgage loans with the following characteristics
(percentages are based on the aggregate principal balance of the applicable
sub-group as of November 1, 2000):
Aggregate Unpaid Principal Balance $10,476,051.36
Aggregate Original Principal Balance $15,593,650.31
Weighted Average Coupon (Gross) 8.214%
Gross Coupon Range 5.000% to 16.500%
Average Unpaid Principal Balance $27,069.90
Maximum Unpaid Principal Balance $249,437.02
Minimum Unpaid Principal Balance $248.96
Average Original Principal Balance $40,293.67
Maximum Original Principal Balance $252,400.00
Minimum Original Principal Balance $8,900.00
Weighted Average Stated Remaining Term 270 months
Stated Remaining Term Range 2 to 359 months
Weighted Average Seasoning 83 months
Age Range 1 to 411 months
Weighted Average Original Term 353 months
Original Term Range 168 to 420 months
Weighted Average CLTV 99.690%
CLTV Range 51.700% to 121.370%
Weighted Average Net Coupon 7.714%
Percentage of Loans with Prepayment Penalties 0.00%
Percentage of Second Lien Loans 0.00%
Percentage of Simple Interest Loans 0.00%
Percentage of Loans with Primary
Mortgage Insurance 0.00%
Percentage of FHA Insured Loans 56.93%
Percentage of FHA Uninsured Loans 28.88%
Percentage of VA Guaranteed Loans 12.16%
Percentage of VA Non-guaranteed Loans 2.02%
Percentage of Sub-Prime Loans 0.00%
Percentage of Performing Loans 80.12%
Percentage of Owner-Financed Loans 0.00%
Percentage of Sub-Performing Loans 12.14%
Sub-Performing with Forbearance Plans 0.62%
Sub-Performing with Bankruptcy Plans 1.09%
Percentage of Re-Performing Loans 7.75%
Re-Performing with Forbearance Plans 4.06%
Re-Performing with Bankruptcy Plans 0.00%
Percentage of Delinquent Loans 12.14%
30-59 Days Delinquent 12.14%
60-89 Days Delinquent 0.00%
Maximum ZIP Code Concentration (%) 3.20%
Maximum ZIP Code Concentration (ZIP) 10469
Geographic Concentration in Excess of 5% :
Florida 15.73%
New York 10.90%
Ohio 8.38%
Pennsylvania 8.14%
Virginia 6.33%
California 6.13%
Texas 5.17%
Maryland 5.10%
Sub-group 1B will consist of conventional fixed-rate mortgage loans with the
following characteristics (percentages are based on the aggregate principal
balance of the applicable sub-group as of November 1, 2000):
Aggregate Unpaid Principal Balance $72,296,914.45
Aggregate Original Principal Balance $75,549,777.70
Weighted Average Coupon (Gross) 10.059%
Gross Coupon Range 3.000% to 18.000%
Average Unpaid Principal Balance $82,625.05
Maximum Unpaid Principal Balance $863,746.47
S-3
<PAGE>
Minimum Unpaid Principal Balance $9,333.13
Average Original Principal Balance $86,342.60
Maximum Original Principal Balance $865,000.00
Minimum Original Principal Balance $11,808.28
Weighted Average Stated Remaining Term 265 months
Stated Remaining Term Range 8 to 358 months
Weighted Average Seasoning 33 months
Age Range 2 to 353 months
Weighted Average Original Term 298 months
Original Term Range 36 to 424 months
Weighted Average CLTV 81.393%
CLTV Range 3.594% to 122.440%
Weighted Average Net Coupon 9.244%
Percentage of Loans with Prepayment Penalties 25.41%
Percentage of Second Lien Loans 0.41%
Percentage of Simple Interest Loans 2.95%
Percentage of Loans with Primary
Mortgage Insurance 35.80%
Percentage of FHA Loans 0.00%
Percentage of FHA Uninsured Loans 0.00%
Percentage of VA Guaranteed Loans 0.00%
Percentage of VA Non-guaranteed Loans 0.00%
Percentage of Sub-Prime Loans 67.65%
Percentage of Performing Loans 90.47%
Percentage of Owner-Financed Loans 13.59%
Percentage of Sub-Performing Loans 4.72%
Sub-Performing with Forbearance Plans 0.37%
Sub-Performing with Bankruptcy Plans 0.43%
Percentage of Re-Performing Loans 4.82%
Re-Performing with Forbearance Plans 0.95%
Re-Performing with Bankruptcy Plans 2.63%
Percentage of Delinquent Loans 4.72%
30-59 Days Delinquent 3.62%
60-89 Days Delinquent 1.09%
Maximum ZIP Code Concentration (%) 1.19%
Maximum ZIP Code Concentration (ZIP) 75034
Geographic Concentration in Excess of 5% :
New York 23.48%
California 15.01%
Texas 8.24%
Florida 6.92%
Michigan 6.50%
Loan group 2 will consist of adjustable-rate mortgage loans with the following
characteristics (percentages are based on the aggregate principal balance as of
November 1, 2000):
Aggregate Unpaid Principal Balance $81,948,589.40
Aggregate Original Principal Balance $83,236,289.02
Weighted Average Coupon (Gross) 10.728%
Gross Coupon Range 6.500% to 16.500%
Weighted Average Margin (Gross) 6.026%
Gross Margin Range 2.000% to 9.750%
Weighted Average Life Cap (Gross) 16.823%
Gross Life Cap Range: Max 10.000% to 21.500%
Weighted Average Life Floor (Gross) 10.289%
Gross Life Floor Range: Min 0.500% to 14.875%
Average Unpaid Principal Balance $114,134.53
Maximum Unpaid Principal Balance $632,985.80
Minimum Unpaid Principal Balance $13,533.57
Average Original Principal Balance $115,927.98
Maximum Original Principal Balance $650,000.00
Minimum Original Principal Balance $14,000.00
Weighted Average Stated Remaining Term 338 months
Stated Remaining Term Range 109 to 357 months
Weighted Average Seasoning 19 months
Age Range 3 to 204 months
Weighted Average Original Term 357 months
Original Term Range 180 to 360 months
Weighted Average CLTV 79.227%
CLTV Range 17.778% to 117.209%
Weighted Average Periodic Interest Cap 1.308%
Periodic Interest Cap Range 1.000% to 2.000%
Weighted Average Months to Interest Roll 16 months
S-4
<PAGE>
Months to Interest Roll Range 0 to 72 months
Weighted Average Interest Roll Frequency 6 months
Interest Roll Frequency Range 6 to 36 months
Weighted Average Initial Rate Cap 1.682%
Initial Rate Cap Range 1.000% to 6.000%
Percentage of Loans with Prepayment Penalties 68.04%
Index
Six Month LIBOR 91.87%
1 YR CMT 7.06%
Other 1.07%
Mortgage Interest Rates by Index
Six Month LIBOR 10.95%
1 YR CMT 8.04%
Other 9.75%
Gross Margin by Index
Six Month LIBOR 6.30%
1 YR CMT 2.85%
Other 3.23%
Weighted Average Net Coupon 9.763%
Percentage of Simple Interest Loans 0.09%
Percentage of Second Lien Loans 0.00%
Percentage of Loans with Primary
Mortgage Insurance 51.12%
Percentage of FHA Loans 1.52%
Percentage of FHA Uninsured Loans 0.48%
Percentage of VA Guaranteed Loans 0.21%
Percentage of VA Non-guaranteed Loans 0.00%
Percentage of Sub-Prime Loans 97.23%
Percentage of Performing Loans 94.62%
Percentage of Owner-Financed Loans 0.00%
Percentage of Sub-Performing Loans 2.48%
Sub-Performing with Forbearance Plans 0.43%
Sub-Performing with Bankruptcy Plans 0.00%
Percentage of Re-Performing Loans 2.89%
Re-Performing with Forbearance Plans 0.89%
Re-Performing with Bankruptcy Plans 1.39%
Percentage of Delinquent Loans 2.48%
30-59 Days Delinquent 2.48%
60-89 Days Delinquent 0.00%
Maximum ZIP Code Concentration (%) 1.15%
Maximum ZIP Code Concentration (ZIP) 10504
Geographic Concentration in Excess of 5% :
California 30.86%
Illinois 5.87%
Colorado 5.50%
Michigan 5.25%
See "The Mortgage Pool" in this prospectus supplement for more information about
the mortgage loans.
DISTRIBUTIONS--GENERAL
The distribution date will be the 25th day of each month or, if such day is not
a business day, the next business day, beginning on December 26, 2000.
Distributions will generally include payments made on the mortgage loans during
the related collection period. The collection period for any distribution date
is the period from the second day of the calendar month preceding the month in
which the distribution date occurs through the first day of the calendar month
in which the distribution date occurs.
RECORD DATE
The record date for each distribution date will be as follows: for the Class
A-1A Certificates, the business day before such distribution date (unless
definitive certificates are issued), and for the other certificates, the last
business day of the month preceding the month in which the distribution date
occurs (or the closing date, in the case of the first distribution date).
INTEREST DISTRIBUTIONS
On each distribution date, you will be entitled to receive, to the extent of
funds available for your class of certificates, interest accrued on your
certificate during the related accrual period and any interest which you earned
previously but which you did not receive. The accrual period for all offered
certificates, except for the Class A-1A Certificates, is the month immediately
preceding the month in which such distribution date occurs. Except for the first
accrual period, the accrual period for the Class A-1A
S-5
<PAGE>
Certificates is the period from the distribution date in the prior month to the
day prior to the current distribution date. The first accrual period for the
Class A-1A Certificates will begin on the closing date and end on December 25,
2000. Interest will be calculated for all offered certificates, except for the
Class A-1A Certificates, on the basis of a 360-day year consisting of twelve
30-day months. Interest will be calculated for the Class A-1A Certificates on
the basis of the actual number of days in the accrual period, based on a 360-day
year.
There are certain circumstances which could reduce the amount of interest paid
to you. See "Description of the Certificates--Interest Distributions" in this
prospectus supplement.
PASS-THROUGH RATES
Interest will accrue on the Class A-1F and Class A-2F Certificates during each
accrual period at a rate equal to the least of (i) the per annum rate for such
class as set forth on the cover page, plus, for the Class A-2F Certificates
only, following the optional termination date, 0.50% per annum, (ii) the Group 1
Net Funds Cap as described under "Description of the Certificates--Pass-Through
Rates" in this prospectus supplement, and (iii) the Pool Cap, as described under
"Description of the Certificates--Pass-Through Rates" in this prospectus
supplement.
Interest will accrue on the Class A-1A Certificates during each accrual period
at a rate equal to the least of (i) the sum of one-month LIBOR plus (a) a margin
of 0.32% on or prior to the optional termination date as described below under
"Optional Termination" and (b) a margin of 0.64% following the optional
termination date, (ii) the Group 2 Net Funds Cap as described under "Description
of the Certificates--Pass-Through Rates" in this prospectus supplement, and
(iii) the Pool Cap, as described under "Description of the
Certificates--Pass-Through Rates" in this prospectus supplement.
Interest will accrue on the Class M-1, Class M-2, Class B-1 and Class B-2
Certificates during each accrual period at a rate equal to the lesser of (i) the
applicable per annum rate for such class as set forth on the cover page, and
(ii) the Pool Cap as described under "Description of the
Certificates--Pass-Through Rates" in this prospectus supplement.
PRINCIPAL DISTRIBUTIONS
On each distribution date, you will receive a distribution of principal if there
are funds available on that date for your class of certificates. You should
review the priority of payments described under "Description of the
Certificates--Principal Distributions" in this prospectus supplement.
CREDIT ENHANCEMENT
Credit enhancement reduces the risk of harm caused to holders of certificates by
shortfalls in payments received on the mortgage loans. They can reduce the
effect of shortfalls on all classes, or they can allocate shortfalls so they
affect some classes before others. This transaction employs the following four
forms of credit enhancement. See "Description of the Certificates" in this
prospectus supplement.
SUBORDINATION. On each distribution date, classes that are lower in order of
payment priority will not receive payments until the classes that are higher in
order of payment priority have been paid in accordance with the priority of
distributions set forth under "Description of the Certificates--Principal
Distributions" in this prospectus supplement. If there are insufficient funds on
a distribution date to pay all classes, the subordinate classes are the first to
forego payment.
OVERCOLLATERALIZATION. Although the total initial principal balance of the
mortgage loans is $164,721,555.21, the total initial principal amount of the
offered certificates is only $161,840,000.00. The remaining 1.75% of the total
principal balance of the mortgage loans will absorb losses on the mortgage loans
before such losses affect the certificates. If the level of
overcollateralization falls below what is required under the pooling and
servicing agreement, the excess interest described in the next section will be
paid to the offered certificates as principal. This will have the effect of
reducing the principal balance of the certificates faster than the principal
balance of the mortgage loans until the required level of overcollateralization
is reached.
MONTHLY EXCESS CASHFLOW. Because more interest is expected to be paid by the
mortgagors than is necessary to pay the interest earned on the offered
certificates, we expect there to be excess interest each month. The excess
interest will be used to maintain overcollateralization, to pay interest that
was previously earned but not paid to the offered certificates, and to reimburse
the offered certificates for losses and certain shortfalls that they experienced
previously.
APPLICATION OF REALIZED LOSSES. If, on any distribution date after the balances
of the offered
S-6
<PAGE>
certificates have been reduced by the amount of cash paid on that date, the
total principal balance of the offered certificates is greater than the total
principal balance of the mortgage loans, the principal balance of the offered
certificates that are lower in order of payment priority will be reduced by the
amount of such excess.
OPTIONAL TERMINATION
The seller has the option to purchase all the mortgage loans and any properties
that the trust acquired in satisfaction of any of the mortgage loans. This
option can be exercised when the total principal balance of the mortgage loans,
including the mortgage loans related to the properties which the trust has
acquired, is 10% or less of the total principal balance of the mortgage loans on
the cut-off date. If the option is exercised, your certificate will be retired
early and you will be entitled to the following amounts to the extent available
therefor:
o the outstanding principal balance of your certificate;
o one month's interest on such balance at the related pass-through rate;
o any interest previously earned but not paid; and
o in the case of the Class A-1A Certificates only, any "LIBOR Carryover
Amount", as described in this prospectus supplement, from all previous
distribution dates.
You will receive the last two items only to the extent that there is enough cash
to make such payments. See "Pooling and Servicing Agreement-- Termination" in
this prospectus supplement.
CERTAIN MATERIAL FEDERAL INCOME TAX CONSEQUENCES
Two or more real estate mortgage investment conduits (each, a "REMIC"), as
defined under Sections 860A through 860G of the Internal Revenue Code, will
constitute the trust assets. The Trustee will make an election to treat this
trust as a REMIC Trust for federal income tax purposes.
For further information regarding the federal income tax consequences of
investing in the offered certificates, see "Certain Material Federal Income Tax
Consequences" in this prospectus supplement and "Federal Income Tax
Consequences" in the Prospectus.
RATINGS
The Trust will not issue the certificates unless they receive the respective
ratings set forth below from Standard & Poor's Ratings Services ("S&P"), Moody's
Investors Service, Inc. (" Moody's") and Fitch, Inc. (" Fitch"):
<TABLE>
<CAPTION>
Class S&P Moody's Fitch
----- --- ------- -----
<S> <C> <C> <C>
A-1A AAA Aaa AAA
A-1F AAA Aaa AAA
A-2F AAA Aaa AAA
M-1 AA Aa2 AA
M-2 A A2 A
B-1 BBB Baa2 BBB
B-2 Not Rated Not Rated BBB
</TABLE>
The ratings on the certificates indicate the likelihood that you will receive
all funds to which you are entitled by the terms of your certificate. The rating
agency that issues the rating reviews the nature and credit quality of the
mortgage loans and the soundness of the structure which the depositor has
created to allow the payments on the mortgage loans to flow to the holders of
the certificates. A rating is not a recommendation to buy, sell or hold
securities and the rating agency can revise or withdraw it at any time. A rating
does not address the likelihood of the payment of any LIBOR Carryover Amount,
the frequency of prepayments on the mortgage loans or the effect of such
prepayments on your yield. See "Prepayment and Yield Considerations" and
"Ratings" in this prospectus supplement and "Prepayment and Yield
Considerations" in the prospectus.
LEGAL INVESTMENT
You should consult with counsel to see if you are permitted to buy the offered
certificates, since legal investment rules will vary depending on the type of
entity purchasing the offered certificates, whether that entity is subject to
regulatory authority, and if so, by whom. The offered certificates will not be
"mortgage related securities" for purposes of the Secondary Mortgage Market
Enhancement Act of 1984, as amended, because the mortgage loans contain second
lien mortgage loans and owner-financed mortgage loans that were originated by
individuals and not by financial institutions or mortgagees approved by the
Secretary of Housing and Urban Development. See "Legal Investment" in this
prospectus supplement and in the prospectus.
S-7
<PAGE>
ERISA CONSIDERATIONS
The Class A Certificates may be purchased by an employee benefit plan or other
retirement arrangement subject to the Employee Retirement Income Security Act of
1974, as amended, or Section 4975 of the Internal Revenue Code of 1986, and by
persons investing on behalf of or with plan assets of such plans, provided
certain conditions are met. Other than insurance company general accounts which
satisfy the conditions described under "ERISA Considerations" herein, persons
investing on behalf of or with such plan assets may not purchase the Class M-1,
Class M-2, Class B-1 or Class B-2 Certificates. See "ERISA Considerations" in
this prospectus supplement and in the prospectus.
S-8
<PAGE>
RISK FACTORS
Investors should consider, among other things, the following factors --
as well as the factors listed under "Risk Factors" in the accompanying
prospectus -- before deciding to invest in the certificates.
NATURE OF SUB-PRIME MORTGAGE LOANS MAY INCREASE RISK OF LOSS.
Approximately 59.09% of the mortgage loans in loan group 1 and
approximately 97.23% of the mortgage loans in loan group 2 (in each case, by
aggregate principal balance as of the cut-off date) are of sub-prime credit
quality; i.e. do not meet the customary credit standards of FHLMC and FNMA.
Delinquencies and liquidation proceedings are more likely with these mortgage
loans than with mortgage loans that satisfy such credit standards. In the event
these mortgage loans do become delinquent or subject to liquidation, you may
face delays in receiving payment and losses if the credit enhancements are
insufficient to cover the delays and losses.
INCLUSION OF DELINQUENT MORTGAGE LOANS INCREASES RISK OF LOSS.
Approximately 4.70% and 0.95% of the mortgage loans in loan group 1 (by
aggregate principal balance as of the cut-off date) were 30 to 59 days and 60 to
89 days, respectively, contractually delinquent and approximately 2.48% and none
of the mortgage loans in loan group 2 (by aggregate principal balance as of the
cut-off date) were 30 to 59 days and 60 to 89 days, respectively, contractually
delinquent. Approximately 5.19% and 2.89% of the mortgage loans in loan group 1
and loan group 2, respectively (in each case, by aggregate principal balance as
of the cut-off date), were re-performing mortgage loans that were 90 days or
more contractually delinquent. As a result, the mortgage pool may bear more risk
than a pool of mortgage loans without any delinquencies but with otherwise
comparable characteristics. It is possible that a delinquent mortgage loan
(including a mortgage loan that is a reperforming mortgage loan) will not ever
become current or, if it does become current, that the mortgagor may become
delinquent again.
These past due payments on mortgage loans which were delinquent on or
prior to the cut-off date are called "arrearages" and, to the extent previously
advanced, are not a part of the Trust. The servicer will be required to make
advances of delinquent payments of principal and interest on delinquent mortgage
loans (other than simple interest mortgage loans), each to the extent such
advances are deemed recoverable, until such mortgage loans become current or the
related mortgaged property is acquired through foreclosure. In the event that a
mortgage loan is liquidated before the related arrearage is reduced to zero, the
arrearage, together with reimbursements for advances of principal and interest
and servicing advances with respect to such mortgage loan, will reduce the
liquidation proceeds available for distribution to certificateholders.
THERE ARE RISKS INVOLVING UNPREDICTABILITY OF PREPAYMENTS AND THE EFFECT OF
PREPAYMENTS ON YIELDS.
Mortgagors may prepay their mortgage loans in whole or in part at any
time. We cannot predict the rate at which mortgagors will repay their mortgage
loans. A prepayment of a mortgage loan generally will result in a prepayment on
the certificates.
o If you purchase your certificates at a discount and principal is repaid
more slowly than you anticipate, then your yield may be lower than you
anticipate.
o If you purchase your certificates at a premium and principal is repaid
faster than you anticipate, then your yield may be lower than you
anticipate.
o The rate of prepayments on the mortgage loans will be sensitive to
prevailing interest rates. Generally, if prevailing interest rates decline
significantly below the interest rates on the fixed-rate mortgage loans,
those mortgage loans are more likely to prepay than if prevailing rates
remain above the interest rates on such mortgage loans. Conversely, if
prevailing interest rates rise significantly, the prepayments on fixed-rate
mortgage loans are likely to decrease.
S-9
<PAGE>
o Approximately 45.00% of the mortgage loans, representing approximately
22.20% of the mortgage loans in loan group 1 (by aggregate principal
balance as of the cut-off date) and approximately 68.04% of the mortgage
loans in loan group 2 (by aggregate principal balance as of the cut-off
date) require the mortgagor to pay a penalty if the mortgagor prepays the
mortgage loan during periods ranging from one year to five years after the
mortgage loan was originated. A prepayment penalty may discourage a
mortgagor from prepaying the mortgage loan during the applicable period.
Such prepayment penalties will be distributed to holders of the Class N
Certificates and not to holders of the offered certificates.
o The seller may be required to purchase mortgage loans from the Trust in the
event certain breaches of representations and warranties have not been
cured. In addition, the seller has the option to purchase mortgage loans
sixty days or more delinquent. These purchases will have the same effect on
the holders of the offered certificates as a prepayment of the mortgage
loans.
o If the rate of default and the amount of losses on the mortgage loans is
higher than you expect, then your yield may be lower than you expect.
o The overcollateralization provisions are intended to result in an
accelerated rate of principal distributions to holders of the offered
certificates.
See "Prepayment and Yield Considerations" for a description of factors
that may influence the rate and timing of prepayments on the mortgage loans.
THERE ARE RISKS RELATED TO OWNER-FINANCED MORTGAGE LOANS.
REDUCED UNDERWRITING STANDARDS. Approximately 11.87% of the mortgage
loans in loan group 1 (by aggregate principal balance as of the cut-off date)
are owner-financed mortgage loans. None of the mortgage loans in loan group 2
are owner-financed mortgage loans. These mortgage loans were originated by the
individual sellers of the related mortgaged property who generally are
inexperienced in matters pertaining to mortgage banking These mortgage loans
were originated with less stringent standards than the other mortgage loans. The
mortgagor under an owner-financed mortgage loan generally does not complete a
mortgage loan application and the seller of the related property generally does
not verify the income or employment of the related mortgagor, nor obtain other
information customarily obtained during the mortgage loan origination process.
As a result, certain information concerning the owner-financed mortgage loans
that may be of interest to you is not available. In connection with an
acquisition of an owner-financed mortgage loan, the seller obtained and reviewed
the credit history and payment history of the mortgagor, as well as conducted an
assessment of the value of the property.
APPRAISALS MAY BE INACCURATE. In acquiring owner-financed mortgage
loans, the seller assesses the value of a property, generally using either a
prior appraisal, which must be re-certified if older than six months, or a
drive-by appraisal. A drive-by appraisal is not as accurate as a full real
estate appraisal because the appraiser does not have access to the interior of
the mortgaged property and may not have access to the rear of the mortgaged
property. As a result, the appraisal may reflect assumptions the appraiser made
regarding the interior or the rear of the mortgaged property which may not be
accurate. To the extent the seller has over-appraised the value of a property,
such amount may not be recovered during a liquidation proceeding.
THE RECOVERY OF DEFAULTED AMOUNTS UNDER FHA AND VA PROGRAMS IS UNCERTAIN.
Approximately 8.74% of the mortgage loans in loan group 1 and
approximately 1.73% of the mortgage loans in loan group 2 (in each case, by
aggregate principal balance as of the cut-off date) are covered by either
insurance from the Federal Housing Administration or a guaranty from the United
States Department of Veterans Affairs. As described in this prospectus
supplement, the amount of coverage may be limited. In addition, recovery of the
insured amounts from these agencies is dependent upon material compliance by the
originator and the servicer with applicable regulations. These regulations are
subject to interpretative uncertainties. If upon filing a claim for recovery of
a defaulted amount, it is discovered that the mortgage loan did not comply with
a regulation, the servicer may not be able to fully recover the insured amounts.
Defaults on mortgage loans either insured by the Federal Housing Administration
or guaranteed by the United States Department of Veterans Affairs should have
the same
S-10
<PAGE>
effect on the related certificates as a prepayment of such mortgage loans.
However, in the event that such guaranty or insurance is no longer available to
provide protection or does not cover the full amount of the loss, any losses on
such mortgage loans will be borne by the related certificateholders. See "The
Mortgage Pool--FHA Mortgage Loans and VA Mortgage Loans" in this prospectus
supplement.
THERE ARE RISKS RELATING TO ALTERNATIVES TO FORECLOSURE.
Certain of the mortgage loans will be delinquent as of the closing
date. Other mortgage loans may become delinquent after the closing date. The
servicer may either foreclose on any such mortgage loan or work out an agreement
with the mortgagor, which may involve waiving or modifying certain terms of the
mortgage loan. If the servicer extends the payment period or accepts a lesser
amount than the amount due pursuant to the mortgage note in satisfaction of the
mortgage note, your yield may be reduced.
THERE IS A RISK THAT INTEREST PAYMENTS MAY BE INSUFFICIENT TO MAINTAIN
OVERCOLLATERALIZATION.
Because the weighted average of the interest rates on the mortgage
loans is expected to be higher than the weighted average of the interest rates
on the certificates, the mortgage loans are expected to generate more interest
than is needed to pay interest owed on the certificates as well as certain fees
and expenses of the Trust. After these financial obligations of the Trust are
covered, the available excess interest will be used to maintain
overcollateralization. Any remaining interest will then be used to compensate
for losses that occur on the mortgage loans. We cannot assure you, however, that
enough excess interest will be generated to maintain the overcollateralization
level required by the rating agencies. The factors described below will affect
the amount of excess interest that the mortgage loans will generate:
o Every time a mortgage loan is prepaid in full, excess interest will be
reduced because the mortgage loan will no longer be outstanding and
generating interest or, in the case of a partial prepayment, will be
generating less interest.
o Every time a mortgage loan is liquidated or written off, excess interest
will be reduced because such mortgage loans will no longer be outstanding
and generating interest.
o If the rates of delinquencies, defaults or losses on the mortgage loans are
higher than expected, excess interest will be reduced by the amount
necessary to compensate for any shortfalls in cash available on such date
to pay certificateholders.
o The pass-through rate of the Class A-1A Certificates is based on one-month
LIBOR while all the mortgage loans in loan group 2 have rates that are
adjusted based on an index that in certain cases is different from the
index used to determine rates on the Class A-1A Certificates. As a result,
interest rates on the Class A-1A Certificates may increase relative to
interest rates on the mortgage loans in loan group 2, thus requiring that
more of the interest generated by the mortgage loans be applied to cover
interest on the Class A-1A Certificates.
THERE IS A RISK THAT MORTGAGE INTEREST RATES WILL AFFECT THE OFFERED
CERTIFICATES.
The Class A-1A Certificates will accrue interest at a pass-through rate
based on the one-month LIBOR index plus a specified margin, but are subject to a
cap. The other classes of offered certificates will accrue interest at a fixed
pass-through rate, subject to a cap. The cap on interest paid on the Class A-1F,
Class A-2F and Class A-1A Certificates will be based on the weighted average of
the interest rates on the mortgage loans in the related loan group or in the
pool, as applicable, adjusted for overcollateralization and net of any primary
mortgage insurance premium and certain expenses of the Trust. The cap on
interest paid on the Class M-1, Class M-2, Class B-1 and Class B-2 Certificates
will be based on the weighted average of the interest rates on the mortgage
loans, adjusted for overcollateralization and net of any primary mortgage
insurance premium and certain expenses of the Trust.
The pass-through rate on the Class A-1A Certificates adjusts monthly
while the mortgage interest rates on the mortgage loans in loan group 2 are
based on various indices which may adjust other than on a monthly basis.
Substantially all of the adjustable-rate mortgage loans have periodic and
maximum limitations on adjustments to the
S-11
<PAGE>
mortgage loan rate. Consequently, the operation of these interest rate caps may
limit increases in the pass-through rate for extended periods in a rising
interest rate environment.
Although holders of the Class A-1A Certificates will be entitled to
receive any LIBOR Carryover Amount from and to the limited extent of funds
available for such payments, there is no assurance that those funds will be
available or sufficient to pay such LIBOR Carryover Amount.
If the operation of an interest rate cap limits the accrual of interest
on the offered certificates (other than the Class A-1A Certificates), holders of
those certificates will not be entitled to receive any carry-over amount and
their yield would be adversely affected.
THERE ARE RISKS RELATING TO SUBORDINATE LOANS.
Approximately 0.35% of the mortgage loans in loan group 1 and none of
the mortgage loans in loan group 2 (by aggregate principal balance as of the
cut-off date) evidence a second lien that is subordinate to the rights of the
mortgagee under a first mortgage. The proceeds from any liquidation, insurance
or condemnation proceedings will be available to satisfy the outstanding
principal balance of such junior mortgage loans only to the extent that the
claims of any senior mortgage loans have been satisfied in full, including any
foreclosure costs. In circumstances where the servicer determines that it would
be uneconomical to foreclose on the related mortgaged property, the servicer may
write-off the entire outstanding principal balance of the related mortgage loan
as bad debt. The foregoing considerations will be particularly applicable to
junior mortgage loans that have high combined loan-to-value ratios because the
servicer is more likely to determine that foreclosure would be uneconomical.
THERE ARE RISKS IN HOLDING SUBORDINATE CERTIFICATES.
The protections afforded the senior certificates in this transaction
create risks for the subordinate certificates. Prior to any purchase of any
subordinate certificates, consider the following factors that may adversely
impact your yield:
o Because the subordinate certificates receive interest and principal
distributions after the related senior certificates receive such
distributions, there is a greater likelihood that the subordinate
certificates will not receive the distributions to which they are entitled
on any distribution date.
o If a simple interest mortgage loan becomes delinquent or the servicer
determines not to advance a delinquent payment on an actuarial mortgage
loan because such amount is not recoverable from a mortgagor, there may be
a shortfall in distributions on the certificates which will impact the
subordinate certificates prior to the senior certificates.
o With respect to simple interest mortgage loans, if monthly payments are
made in any month less than 30 days after the previous payment or
shortfalls in interest collections result from prepayments in full, there
may be a shortfall in distributions on the certificates. This will
disproportionately impact the subordinate certificates. In addition, the
portion of the shortfalls in the amount of interest collections on
actuarial mortgage loans that are attributable to prepayments in full and
are not covered by the servicer and shortfalls in interest collections on
any mortgage loans arising from the timing of partial principal prepayments
may result in a shortfall in distributions on the certificates, which will
disproportionately impact the subordinate certificates.
o The subordinate certificates are not expected to receive principal
distributions until, at the earliest, December 2003.
o Losses resulting from the liquidation of defaulted mortgage loans will
first reduce the level of overcollateralization, if any, for the
certificates. If there is no overcollateralization, losses will be
allocated to the subordinate certificates. A loss allocation results in a
reduction in a certificate balance without a corresponding distribution of
cash to the holder. A lower certificate balance will result in less
interest accruing on the certificate.
S-12
<PAGE>
o The earlier in the transaction that a loss on a mortgage loan occurs, the
greater the impact on yield.
See "Description of the Certificates" and "Prepayment and Yield
Considerations" in this prospectus supplement for more detail.
THERE IS A RISK THAT INTEREST PAYMENTS ON THE MORTGAGE LOANS MAY BE INSUFFICIENT
TO PAY INTEREST ON YOUR CERTIFICATES.
When a mortgage loan is prepaid in full, the mortgagor is charged
interest only up to the date on which payment is made, rather than for an entire
month. This may result in a shortfall in interest collections available for
payment on the next distribution date. Similarly, with respect to simple
interest mortgage loans, the mortgagor is only charged interest up to the date
on which payment is made. Therefore, if a mortgagor makes a payment on a simple
interest mortgage loan in any month less than 30 days after the previous payment
date, a shortfall in interest collections available for payment on the next
distribution date may result. The servicer is required to cover a portion of the
shortfall in interest collections that are attributable to prepayments in full
on actuarial mortgage loans, but only up to one-half of the servicing fee for
the related accrual period. The servicer is not required to cover any shortfall
in interest collections that are attributable to prepayments in full or the
timing of monthly payments on simple interest mortgage loans. If the credit
enhancement is insufficient to cover this shortfall in excess of the amount the
servicer covers, you may incur a loss.
In addition, the servicer will not cover shortfalls in interest
collections due to bankruptcy proceedings or the application of the Soldiers'
and Sailors' Civil Relief Act of 1940, as amended.
THERE IS A RISK RELATING TO THE POTENTIAL INADEQUACY OF CREDIT ENHANCEMENT FOR
THE OFFERED CERTIFICATES.
The credit enhancement features described in the summary are intended
to enhance the likelihood that holders of the offered certificates will receive
regular payments of interest and principal.
If delinquencies or defaults occur on the mortgage loans, neither the
servicer nor any other entity will advance scheduled monthly payments of
interest and principal on delinquent or defaulted actuarial mortgage loans if
such advances are not likely to be recovered. Neither the servicer nor any other
entity will advance scheduled monthly payments of principal and interest on
simple interest mortgage loans. We cannot assure you that the applicable credit
enhancement will adequately cover any shortfalls in cash available to pay your
certificates as a result of such delinquencies or defaults.
If substantial losses occur as a result of defaults and delinquent
payments on the mortgage loans, you may suffer losses.
THERE IS A RISK BECAUSE THE CERTIFICATES ARE NOT OBLIGATIONS OF ANY ENTITY.
The offered certificates represent an interest in the trust fund only.
No other person will insure or guarantee the offered certificates or will have
any obligation with respect to the certificates except for the obligations of
the depositor, the seller and the originator pursuant to certain limited
representations and warranties made with respect to the mortgage loans, of the
servicer with respect to its servicing obligations under the Pooling and
Servicing Agreement and, with respect to certain of the mortgage loans, of the
primary mortgage insurer under the primary mortgage insurance policy. No
governmental agency or instrumentality will guarantee or insure the certificates
or the underlying mortgage loans, except for insurance coverage of 4.38% of the
mortgage loans by the Federal Housing Administration and a guaranty of 0.88% of
the mortgage loans by the US Department of Veterans Affairs. Proceeds of the
assets included in the trust fund (including the mortgage loans) will be the
sole source of payments on the offered certificates. You will not be able to
receive money from any entity in the event that such proceeds are not enough to
make all payments provided for under the offered certificates.
S-13
<PAGE>
THERE IS A RISK THAT THERE MAY BE A DELAY IN RECEIPT OF LIQUIDATION PROCEEDS,
AND THAT LIQUIDATION PROCEEDS MAY BE LESS THAN THE OUTSTANDING BALANCE OF THE
MORTGAGE LOAN.
Substantial delays could be encountered in connection with the
liquidation of delinquent mortgage loans. Further, liquidation expenses such as
legal fees, real estate taxes and maintenance and preservation expenses will
reduce the portion of liquidation proceeds payable to you. If a mortgaged
property fails to provide adequate security for the mortgage loan, you will
incur a loss on your investment if the credit enhancements are insufficient to
cover the loss.
THERE IS AN INCREASED RISK OF LOSS RELATING TO HIGH COMBINED LOAN-TO-VALUE
RATIOS.
Mortgage loans with combined loan-to-value ratios in excess of 80% may
present a greater risk of loss than mortgage loans with combined loan-to-value
ratios equal to or below 80%. Approximately 24.24% of the mortgage loans,
representing approximately 32.28% of the mortgage loans in loan group 1 and
approximately 16.11% of the mortgage loans in loan group 2 (in each case, by
aggregate principal balance as of the cut-off date) had a combined loan-to-value
ratio in excess of 80%, and are not covered by FHA insurance, a VA guaranty, or
a primary mortgage insurance policy.
THERE ARE RISKS RELATING TO GEOGRAPHIC CONCENTRATION OF THE MORTGAGE LOANS.
The following chart lists the states with the highest concentrations of
mortgage loans for each loan group, based on the aggregate principal balance of
the mortgage loans as of the cut-off date.
<TABLE>
<CAPTION>
Loan Group 1 Loan Group 2
------------ ------------
<S> <C> <C> <C>
New York 21.88% California 30.86%
California 13.89% Illinois 5.87%
Florida 8.04% Colorado 5.50%
Texas 7.85% Michigan 5.25%
Michigan 5.78%
</TABLE>
Property in California may be particularly susceptible to certain types
of uninsurable hazards, such as earthquakes, hurricanes, floods, mudslides and
other natural disasters. Properties in Florida may be particularly susceptible
to certain types of uninsurable hazards such as hurricanes.
In addition, the conditions below will have a disproportionate impact
on the mortgage loans in general:
o Economic conditions in states listed above which may or may not affect real
property values may affect the ability of mortgagors to repay their loans
on time.
o Declines in the residential real estate markets in the states listed above
may reduce the values of properties located in those states, which would
result in an increase in the loan-to-value ratios or combined loan-to-value
ratios, as applicable.
o Any increase in the market value of properties located in the states listed
above would reduce the loan to-value ratios or combined loan-to-value
ratios and could, therefore, make alternative sources of financing
available to the mortgagors at lower interest rates, which could result in
an increased rate of prepayment of the mortgage loans.
THERE ARE RISKS RELATING TO BALLOON LOANS.
Balloon loans pose a risk because a mortgagor must make a large lump
sum payment of principal at the end of the loan term. If the mortgagor is unable
to pay the lump sum or refinance such amount, you may suffer a loss.
S-14
<PAGE>
Approximately 17.07% of the mortgage loans in loan group 1 and approximately
0.09% of the mortgage loans in loan group 2 (in each case, by aggregate
principal balance as of the cut-off date) are balloon loans.
THE LACK OF A SECONDARY MARKET MAY LIMIT YOUR ABILITY TO SELL YOUR CERTIFICATES.
The underwriters intend to make a secondary market in the certificates
they purchase, but they have no obligation to do so. There is no assurance that
such a secondary market will develop or, if it develops, that it will continue.
Consequently, you may not be able to sell your certificates readily or at prices
that will enable you to realize your desired yield. The market values of the
certificates are likely to fluctuate; these fluctuations may be significant and
could result in significant losses to you.
The secondary markets for mortgage backed securities have experienced
periods of illiquidity and can be expected to do so in the future. Illiquidity
can have a severely adverse effect on the prices of securities that are
especially sensitive to prepayment, credit, or interest rate risk, or that have
been structured to meet the investment requirements of limited categories of
investors.
VIOLATIONS OF FEDERAL AND STATE LAWS MAY CAUSE LOSSES ON YOUR CERTIFICATES.
Federal and state laws regulate the underwriting, origination,
servicing and collection of the loans. These laws have changed over time and
have become more restrictive or stringent with respect to specific activities of
the servicer and the originators. Actual or alleged violations of these federal
and state laws may, among other things:
o limit the ability of the servicer to collect principal or interest on the
mortgage loans,
o provide the mortgagors with a right to rescind the loans,
o entitle the mortgagors to refunds of amounts previously paid or to set-off
those amounts against their mortgage loan obligations,
o result in a litigation proceeding being brought against the Trust, and
o subject the Trust to liability for expenses, penalties and damages
resulting from the violations.
As a result, these violations or alleged violations could result in
shortfalls in the distributions due on your certificates. See "Risk
Factors--State and federal credit protection laws may limit collection of
principal and interest on the loans" in the prospectus and "Legal Aspects of
Loans" in the prospectus. Approximately 2.20% of the mortgage loans were
originated with interest rates or fees which make them subject to the Home
Ownership and Equity Protection Act of 1994 ("HIGH COST MORTGAGE LOANS") and
approximately 97.80% of the mortgage loans are not High Cost Mortgage Loans. See
"Risk Factors--State and federal credit protection laws may limit collection of
principal and interest on the loans" in the prospectus. The seller will make
representations and warranties with respect to each mortgage loan relating to
compliance with federal and state laws at the time of origination. The seller
will be required to repurchase or replace any mortgage loan that is not
originated or serviced in compliance with all federal, state or local laws.
However, repurchase or replacement of the affected mortgage loans will not
necessarily fully compensate the Trust or certificateholders for any losses
arising from the related breach. For example, if a mortgagor brings legal action
against the Trust, the Trustee will be entitled to indemnification from Trust
property for its defense costs. The seller will neither indemnify the Trust nor
have any other responsibility to the Trust or certificateholders (other than to
repurchase or replace such loan) for any losses and liabilities the Trust may
suffer with respect to mortgage loans as to which the representation as to
compliance with laws is breached. As a result, shortfalls in the distributions
due on your certificates could occur.
IN THE EVENT THE SELLER IS NOT ABLE TO REPURCHASE OR REPLACE DEFECTIVE MORTGAGE
LOANS YOU MAY SUFFER LOSSES ON YOUR CERTIFICATES.
The seller will make various representations and warranties related to
the mortgage loans.
S-15
<PAGE>
If the seller fails to cure a material breach of its representations
and warranties with respect to any mortgage loan in a timely manner, the seller
will be required to repurchase or replace the defective loan. See "The Pooling
and Servicing Agreement--Assignment of the Mortgage Loans" in this prospectus
supplement. In the event that the seller is not able to repurchase or replace
any defective mortgage loans at the date such action is required, for financial
or other reasons, you may suffer losses on your certificates. The inability of
the seller to repurchase or replace defective mortgage loans would likely cause
the mortgage loans to experience higher rates of delinquencies, defaults and
losses. As a result, shortfalls in the distributions due on your certificates
could occur.
THERE ARE RISKS OF NON-PAYMENT OF INSURED AMOUNTS UNDER THE PRIMARY MORTGAGE
INSURANCE POLICY.
Pursuant to the Pooling and Servicing Agreement, the servicer is
obligated to pay the premium due under the primary mortgage insurance policy
from amounts collected with respect to certain mortgage loans. The servicer's
failure to pay such premium, due to financial or other reasons, may result in
the cancellation of the primary mortgage insurance policy or failure of the
insurer to pay amounts otherwise due with respect to defaulted mortgage loans
covered under such policy. There can also be no assurance that any company
issuing a primary mortgage insurance policy covering a Mortgage Loan will not
experience adverse financial circumstances that will affect their ability to pay
any claim filed under such policy. Furthermore, there can be no assurance that
any such filed claim will be filed properly, which may adversely affect the
recovery of insurance proceeds on the related Mortgage Loan. This may have an
adverse affect on your certificates. See "The Mortgage Pool--Primary Mortgage
Insurance" in this prospectus supplement.
S-16
<PAGE>
THE MORTGAGE POOL
Credit-Based Asset Servicing and Securitization LLC (the "Seller")
provided the information set forth in the following paragraphs. None of the
Depositor, the Servicer, the Trustee, the Underwriters or any of their
respective affiliates have made or will make any representation as to the
accuracy or completeness of such information.
Certain information with respect to the Mortgage Loans to be included
in each Loan Group is set forth herein. Prior to the Closing Date, Mortgage
Loans may be removed from a Loan Group and other Mortgage Loans may be
substituted therefor. The Seller believes that the information set forth herein
with respect to each Loan Group as presently constituted is representative of
the characteristics of each Loan Group as it will be constituted at the Closing
Date, although certain characteristics of the Mortgage Loans in a Loan Group may
vary.
GENERAL
The assets included in the Trust (the "TRUST FUND") will consist of a
pool of 1,980 closed-end, fixed-rate and adjustable-rate mortgage loans (the
"MORTGAGE POOL") having original terms to maturity ranging from 36 months to 424
months (the "MORTGAGE LOANS") and an aggregate principal balance as of November
1, 2000 (the "CUT-OFF DATE") of $164,721,555.21. All Mortgage Loan statistics
set forth herein are based on principal balances, interest rates, terms to
maturity, mortgage loan counts and similar statistics as of the Cut-off Date.
All weighted averages specified herein are based on the principal balances of
the Mortgage Loans in the related Loan Group or sub-group, as applicable, as of
the Cut-off Date, as adjusted for the principal payments received or advanced on
or before such date (each, a "CUT-OFF DATE PRINCIPAL BALANCE"). The "PRINCIPAL
BALANCE" of a Mortgage Loan, as of any date, is equal to the principal balance
of such Mortgage Loan at its origination, less the sum of scheduled and
unscheduled payments and other recoveries in respect of principal made or
advanced on such Mortgage Loan. References to percentages of the Mortgage Loans
mean percentages based on the aggregate of the Cut-off Date Principal Balances
of the Mortgage Loans in the related Loan Group, unless otherwise specified. The
"POOL BALANCE" is equal to the aggregate of the Principal Balances of the
Mortgage Loans in both Loan Groups.
The Depositor will purchase the Mortgage Loans from the Seller pursuant
to the Mortgage Loan Purchase Agreement, dated as of the Cut-off Date (the
"MORTGAGE LOAN PURCHASE AGREEMENT"), between the Seller and the Depositor.
Pursuant to the Pooling and Servicing Agreement, dated as of November 1, 2000
(the "POOLING AND SERVICING AGREEMENT"), by and among the Depositor, the Seller,
the Servicer and the Trustee, the Depositor will cause the Mortgage Loans to be
assigned to the Trustee for the benefit of the Certificateholders. See "The
Pooling and Servicing Agreement" herein.
Each of the Mortgage Loans in the Mortgage Pool was selected from the
Seller's portfolio of mortgage loans. The Seller acquired the Mortgage Loans in
the secondary market in the ordinary course of its business and reunderwrote the
Mortgage Loans in accordance with its underwriting standards as described in
"Underwriting Standards" in this prospectus supplement. The Mortgage Loans in
the Mortgage Pool were originated or acquired by various entities. Approximately
24.34% and 11.87% of the Mortgage Loans in Loan Group 1 were originated or
acquired by Nomura Asset Capital Corporation and South Plains Mortgage,
respectively. Approximately 41.21% and 20.69% of the Mortgage Loans in Loan
Group 2 were originated or acquired by NC Capital Corporation and Long Beach
Mortgage Company, respectively.
Under the Pooling and Servicing Agreement, the Seller will make certain
representations and warranties to the Trustee relating to, among other things,
the due execution and enforceability of the Pooling and Servicing Agreement, its
title to the Mortgage Loans and certain characteristics of the Mortgage Loans
and, subject to certain limitations, will be obligated to repurchase or
substitute a similar mortgage loan for any Mortgage Loan as to which there
exists deficient documentation or an uncured breach of any such representation
or warranty, if such breach of any such representation or warranty materially
and adversely affects the Certificateholders' interests in such Mortgage Loan.
The Depositor will make no representations or warranties with respect to the
Mortgage Loans and will have no obligation to repurchase or substitute for
Mortgage Loans with deficient documentation or that are otherwise defective. The
Seller is selling the Mortgage Loans without recourse and will have no
obligation with respect to the Certificates in its capacity as Seller other than
the repurchase or substitution obligations described above.
S-17
<PAGE>
The Mortgage Pool will consist of two loan groups ("LOAN GROUP 1" or
"GROUP 1" and "LOAN GROUP 2" or "GROUP 2" respectively, and each, a "LOAN
GROUP"). Loan Group 1 consists of 1,262 fixed-rate Mortgage Loans with an
aggregate unpaid principal balance of $82,772,965.81 as of the Cut-off Date.
Loan Group 1 is further divided into two sub-groups ("SUB-GROUP 1A" and
"SUB-GROUP 1B"). Sub-group 1A consists of 387 FHA insured, FHA uninsured, VA
guaranteed and VA non-guaranteed fixed-rate Mortgage Loans (the "SUB-GROUP 1A
MORTGAGE LOANS") with an aggregate unpaid principal balance (the "SUB-GROUP 1A
LOAN BALANCE") of approximately $10,476,051.36 as of the Cut-off Date. Subgroup
1B consists of 875 fixed-rate Mortgage Loans (the "SUB-GROUP 1B MORTGAGE LOANS"
and, together with the Sub-group 1A Mortgage Loans, the "GROUP 1 MORTGAGE
LOANS") with an aggregate unpaid principal balance (the "SUB-GROUP 1B LOAN
BALANCE" and, together with the Sub-Group 1A Loan Balance, the "GROUP 1 LOAN
BALANCE" ) of approximately $72,296,914.45 as of the Cut-off Date. Loan Group 2
consists of 718 adjustable-rate Mortgage Loans (the "GROUP 2 MORTGAGE LOANS")
with an aggregate unpaid principal balance (the "GROUP 2 LOAN BALANCE") of
approximately $81,948,589.40 as of the Cut-off Date.
Each Loan Group consists of Performing Mortgage Loans, Sub-Performing
Mortgage Loans and Re-Performing Mortgage Loans, each as defined below:
o A "PERFORMING MORTGAGE LOAN" is a Mortgage Loan pursuant to which no
payment due under the related mortgage note (or any modification thereto)
prior to the Cut-off Date, is 30 or more days Delinquent.
o A "SUB-PERFORMING MORTGAGE LOAN" is a Mortgage Loan (that might be a
Forbearance Plan Mortgage Loan or a Bankruptcy Plan Mortgage Loan) pursuant
to which a payment due prior to the Cut-off Date under the terms of the
related mortgage note (or any modification thereto), is at least 30 but not
more than 89 days Delinquent. Certain Sub-Performing Mortgage Loans have
been modified in writing and are also characterized as follows:
(a) If a Sub-Performing Mortgage Loan is a "FORBEARANCE PLAN MORTGAGE
LOAN", the related mortgagor must make monthly payments ("MODIFIED
SCHEDULED PAYMENTS") in an amount at least equal to the sum of (i) the
amount of the monthly scheduled payment of principal and interest
determined in accordance with such Mortgage Loan's original
amortization schedule ("REGULAR SCHEDULED PAYMENTS") plus (ii) an
additional amount to be applied to pay down the total amount of
scheduled monthly payments due thereon on or before the Cut-off Date
but not received prior to the Cut-off Date plus the aggregate amount
of tax and insurance advances made with respect to such Mortgage Loan
to the extent remaining outstanding as of the Cut-off Date.
(b) If a Sub-Performing Mortgage Loan is a "BANKRUPTCY PLAN MORTGAGE
LOAN," the related mortgagor defaulted and, after default, became the
subject of a case under either Chapter 7 or 13 of the United States
Bankruptcy Code, 11 U.S.C. ss.ss. 101 et seq. (the "BANKRUPTCY CODE")
and, as of the Cut-off Date, had a confirmed bankruptcy plan. Each
such bankruptcy plan generally requires the related mortgagor to make
Modified Scheduled Payments in an amount at least equal to (i) the
Regular Scheduled Payment plus (ii) an additional amount sufficient to
pay down overdue amounts resulting from the period of default,
generally over a period of three to five years from the commencement
of such bankruptcy plan.
o A "RE-PERFORMING MORTGAGE LOAN" is a Mortgage Loan (that might be a
Forbearance Plan Mortgage Loan or a Bankruptcy Plan Mortgage Loan) which
had defaulted in the past and which is currently at least 90 days
Delinquent with respect to certain Regular Scheduled Payments but which
satisfies one of the following criteria (the "RE-PERFORMANCE TEST"):
(a) the mortgagor has made at least three aggregate Regular Scheduled
Payments in the three calendar months preceding the Cut-off Date
(regardless of either the timing of receipt of such payments or the
payment history of such loans prior to August 1, 2000), or
(b) the mortgagor has made at least four aggregate Regular Scheduled
Payments in the four calendar months preceding the Cut-off Date
(regardless of either the timing of receipt of such payments or the
payment history of such loans prior to July 1, 2000), or
S-18
<PAGE>
(c) the mortgagor has made at least five aggregate Regular Scheduled
Payments in the five calendar months preceding the Cut-off Date
(regardless of either the timing of receipt of such payments or the
payment history of such loans prior to June 1, 2000).
A Mortgage Loan is "DELINQUENT" if the scheduled monthly payment of
principal and interest on such Mortgage Loan which is payable by the related
mortgagor under the related Mortgage Note (the "MONTHLY PAYMENT") due on a due
date is not paid by the close of business on the next scheduled due date for
such Mortgage Loan. Thus, a Mortgage Loan for which the mortgagor failed to make
the Monthly Payment due on October 1, 2000 will be reported as Delinquent on
November 2, 2000 if the payment is not made by the close of business on November
1, 2000.
With respect to certain Delinquent Mortgage Loans, the total amount of
scheduled Monthly Payments due thereon on or before the Cut-off Date but not
received prior to the Cut-off Date, together with any outstanding servicing
advances on such Mortgage Loans, is referred to as the "ARREARAGE." The Servicer
has previously made advances in respect of the Arrearages. Any Arrearage will
not be included as part of the Trust Fund and, accordingly, payments with
respect to Arrearage will not be payable to the Certificateholders as and when
received. However, the Servicer shall be required to make servicing advances on
Delinquent Mortgage Loans and make advances of delinquent payments of principal
and interest on Delinquent Mortgage Loans (other than Simple Interest Mortgage
Loans or REO Properties), each to the extent such advances are deemed
recoverable, until such Mortgage Loans become current or an REO Property.
GROUP 1 MORTGAGE LOAN STATISTICS
Loan Group 1 consists of FHA Mortgage Loans, FHA Uninsured Mortgage
Loans, VA Mortgage Loans, VA Non-guaranteed Mortgage Loans and conventional
fixed rate Mortgage Loans. The Group 1 Loan Balance as of the Cut-off Date is
equal to approximately $82,772,965.81 and the Arrearage is equal to
approximately $1,418,393.75. The Group 1 Mortgage Loans have original terms to
maturity ranging from 36 to 424 months. The following statistical information,
unless otherwise specified, is based upon the Group 1 Loan Balance as of the
Cut-off Date.
The Group 1 Mortgage Loans are secured by mortgages, deeds of trust or
other similar security instruments (each, a "MORTGAGE") creating first or second
liens on primarily one to four family residential properties (each, a "MORTGAGED
PROPERTY"). Approximately 32.28% of the Group 1 Mortgage Loans have a Combined
Loan to-Value Ratio in excess of 80% and do not have FHA insurance, a VA
guaranty, or primary mortgage insurance. There can be no assurance that the
Combined Loan-to-Value Ratio of any Group 1 Mortgage Loan determined at any time
after origination is less than or equal to its original Combined Loan-to-Value
Ratio. Of the Group 1 Mortgage Loans, 70.54% have scheduled Monthly Payments due
on the first day of the month (with respect to each Mortgage Loan, a "DUE
DATE").
Approximately 7.21% and 3.66% of the Group 1 Mortgage Loans are FHA
Mortgage Loans and FHA Uninsured Mortgage Loans, respectively. Approximately
1.54% and 0.26% of the Group 1 Mortgage Loans are VA Mortgage Loans and VA
Non-guaranteed Mortgage Loans, respectively. See "The Mortgage Pool--FHA
Mortgage Loans and VA Mortgage Loans" in this prospectus supplement.
Approximately 89.16% of the Group 1 Mortgage Loans are Performing
Mortgage Loans. Approximately 5.65% of the Group 1 Mortgage Loans are
Sub-Performing Mortgage Loans, including 0.40% that are Forbearance Plan
Mortgage Loans and 0.51% that are Bankruptcy Plan Mortgage Loans. Of the Group 1
Mortgage Loans, approximately 4.70% are 30 to 59 days past due and approximately
0.95% are 60-89 days past due. Approximately 5.19% of the Group 1 Mortgage Loans
are Re-Performing Mortgage Loans, including 1.34% that are Forbearance Plan
Mortgage Loans and 2.29% that are Bankruptcy Plan Mortgage Loans.
Approximately 22.20% of the Group 1 Mortgage Loans provide for payment
by the mortgagor of a prepayment charge in limited circumstances on certain
prepayments.
S-19
<PAGE>
Approximately 17.07% of the Group 1 Mortgage Loans are Balloon Loans
and 11.87% of the Group 1 Mortgage Loans are Owner-Financed Mortgage Loans.
Each Group 1 Mortgage Loan accrues interest at a per annum rate (the
"MORTGAGE INTEREST RATE") of not less than 3.000% per annum and not more than
18.000% per annum and as of the Cut-off Date the weighted average Mortgage
Interest Rate of the Group 1 Mortgage Loans was approximately 9.826% per annum.
The weighted average remaining term to maturity of the Group 1 Mortgage
Loans will be approximately 266 months as of the Cut-off Date. None of the Group
1 Mortgage Loans had a first Due Date prior to September 1, 1966 or after
November 1, 2000 or will have a remaining term to maturity of less than 2 months
or greater than 359 months as of the Cut-off Date. The month of the latest
maturity date of any Group 1 Mortgage Loan is October, 2030.
The average Principal Balance of the Group 1 Mortgage Loans at
origination was approximately $72,221.42. The average Cut-off Date Principal
Balance of the Group 1 Mortgage Loans was approximately $65,588.72. No Group 1
Mortgage Loan had a Cut-off Date Principal Balance of greater than approximately
$863,746.47 or less than approximately $248.96.
Each Group 1 Mortgage Loan had a Net Mortgage Interest Rate of not less
than 1.580% per annum, and not more than 17.500% per annum and as of the Cut-off
Date, the weighted average Net Mortgage Interest Rate of the Group 1 Mortgage
Loans was approximately 9.051%.
Approximately 0.35% of the Group 1 Mortgage Loans are secured by a
second Mortgage that is junior to a first mortgage lien (a "First Lien") on the
related Mortgaged Property.
The Group 1 Mortgage Loans are expected to have the following
characteristics as of the Cut-off Date (the sum in any column may not equal the
total indicated due to rounding):
S-20
<PAGE>
CUT-OFF DATE PRINCIPAL BALANCES OF THE GROUP 1 MORTGAGE LOANS(1)
<TABLE>
<CAPTION>
% OF AGGREGATE PRINCIPAL
PRINCIPAL BALANCE BALANCE OF LOAN GROUP 1
NUMBER OF OUTSTANDING AS OF OUTSTANDING AS OF
PRINCIPAL BALANCE ($) MORTGAGE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
--------------------------------- --------------------- ------------------------- ----------------------------
<S> <C> <C> <C>
0 to 25,000.00 374 $ 3,268,589.89 3.95%
25,000.01 to 50,000.00 281 10,579,305.97 12.78
50,000.01 to 75,000.00 231 14,211,418.58 17.17
75,000.01 to 100,000.00 123 10,523,554.56 12.71
100,000.01 to 150,000.00 130 15,944,027.06 19.26
150,000.01 to 200,000.00 58 10,049,975.30 12.14
200,000.01 to 250,000.00 36 8,154,639.89 9.85
250,000.01 to 300,000.00 14 3,780,470.26 4.57
300,000.01 to 350,000.00 7 2,239,560.49 2.71
350,000.01 to 400,000.00 3 1,094,669.66 1.32
400,000.01 to 450,000.00 1 417,847.25 0.50
450,000.01 to 500,000.00 1 456,125.68 0.55
500,000.01 to 550,000.00 1 548,903.67 0.66
600,000.01 to 650,000.00 1 640,131.08 0.77
850,000.01 to 900,000.00 1 863,746.47 1.04
--------------------- ------------------------- ----------------------------
TOTAL 1,262 $ 82,772,965.81 100.00%
</TABLE>
---------------
(1) The average Cut-off Date Principal Balance of the Group 1 Mortgage Loans
was approximately $65,588.72.
S-21
<PAGE>
ORIGINAL TERMS TO MATURITY OF THE GROUP 1 MORTGAGE LOANS (1)
<TABLE>
<CAPTION>
% OF AGGREGATE PRINCIPAL
PRINCIPAL BALANCE BALANCE OF LOAN GROUP 1
NUMBER OF OUTSTANDING AS OF OUTSTANDING AS OF
ORIGINAL TERM (MONTHS) MORTGAGE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
-------------------------------- ---------------------- --------------------------- --------------------------------
<S> <C> <C> <C>
25 to 36 2 $ 63,192.54 0.08%
37 to 48 1 12,144.55 0.01
49 to 60 2 24,935.71 0.03
61 to 72 2 22,869.35 0.03
73 to 84 4 92,011.13 0.11
85 to 96 3 124,829.39 0.15
97 to 108 6 151,265.00 0.18
109 to 120 31 964,039.17 1.16
121 to 132 4 105,652.25 0.13
133 to 144 9 290,207.16 0.35
145 to 156 6 224,965.10 0.27
157 to 168 10 356,829.37 0.43
169 to 180 284 18,324,103.20 22.14
181 to 192 2 72,869.22 0.09
193 to 204 7 263,265.66 0.32
205 to 216 4 203,144.27 0.25
217 to 228 1 27,366.27 0.03
229 to 240 67 3,416,127.77 4.13
241 to 252 5 224,283.18 0.27
253 to 264 4 199,329.33 0.24
265 to 276 1 50,142.91 0.06
289 to 300 29 1,236,094.74 1.49
301 to 312 2 332,303.64 0.40
313 to 324 1 126,630.73 0.15
325 to 336 5 694,532.05 0.84
337 to 348 8 467,646.30 0.56
349 to 360 753 54,409,604.97 65.73
361 to 372 3 142,767.80 0.17
373 to 384 1 30,499.83 0.04
409 to 420 4 96,350.47 0.12
421 to 432 1 22,962.75 0.03
---------------------- --------------------------- --------------------------------
TOTAL 1,262 $ 82,772,965.81 100.00%
</TABLE>
---------------
(1) The weighted average original term of the Group 1 Mortgage Loans was
approximately 305 months.
S-22
<PAGE>
PROPERTY TYPES OF THE GROUP 1 MORTGAGE LOANS
<TABLE>
<CAPTION>
% OF AGGREGATE PRINCIPAL
PRINCIPAL BALANCE BALANCE OF LOAN GROUP 1
NUMBER OF OUTSTANDING AS OF OUTSTANDING AS OF
PROPERTY TYPE MORTGAGE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
-------------------------------- ---------------------- --------------------------- -------------------------
<S> <C> <C> <C>
2-Family 64 $ 7,126,008.37 8.61%
3-Family 11 1,583,038.14 1.91
4-Family 7 557,162.32 0.67
Condo 30 1,317,442.96 1.59
High Rise Condo 2 145,261.36 0.18
Manufactured 11 604,226.60 0.73
Mixed Use 1 249,437.02 0.30
Mobile Home 18 962,995.89 1.16
PUD (1) 11 1,802,974.97 2.18
Single Family 1,099 67,804,949.53 81.92
Townhouse 8 619,468.65 0.75
---------------------- --------------------------- -------------------------
TOTAL 1,262 $ 82,772,965.81 100.00%
</TABLE>
-------------
(1) PUD refers to a Planned Unit Development.
OCCUPANCY STATUS OF THE GROUP 1 MORTGAGE LOANS(1)
<TABLE>
<CAPTION>
% OF AGGREGATE PRINCIPAL
PRINCIPAL BALANCE BALANCE OF LOAN GROUP 1
NUMBER OF OUTSTANDING AS OF OUTSTANDING AS OF
OCCUPANCY STATUS MORTGAGE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
-------------------------------- ---------------------- --------------------------- --------------------------------
<S> <C> <C> <C>
Investor 109 $ 5,643,351.74 6.82%
Primary 1,140 76,008,809.84 91.83
Secondary 13 1,120,804.23 1.35
---------------------- --------------------------- --------------------------------
TOTAL 1,262 $ 82,772,965.81 100.00%
</TABLE>
-------------
(1) Based on a representation made by the borrower at the time of origination.
PURPOSE OF THE GROUP 1 MORTGAGE LOANS
<TABLE>
<CAPTION>
% OF AGGREGATE PRINCIPAL
PRINCIPAL BALANCE BALANCE OF LOAN GROUP 1
NUMBER OF OUTSTANDING AS OF OUTSTANDING AS OF
PURPOSE MORTGAGE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
-------------------------------- ---------------------- --------------------------- --------------------------------
<S> <C> <C> <C>
Cash Out 372 $ 32,219.933.89 38.93%
Purchase 791 41,850,500.54 50.56
Refinance 99 8,702,531.38 10.51
---------------------- --------------------------- --------------------------------
TOTAL 1,262 $ 82,772,965.81 100.00%
</TABLE>
S-23
<PAGE>
MORTGAGE INTEREST RATES OF THE GROUP 1 MORTGAGE LOANS(1)
<TABLE>
<CAPTION>
% OF AGGREGATE PRINCIPAL
PRINCIPAL BALANCE BALANCE OF LOAN GROUP 1
NUMBER OF OUTSTANDING AS OF OUTSTANDING AS OF
MORTGAGE INTEREST RATE (%) MORTGAGE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
-------------------------------- ---------------------- --------------------------- --------------------------------
<S> <C> <C> <C>
2.501% to 3.000% 1 $ 44,546.67 0.05%
4.501% to 5.000% 1 124,985.64 0.15
5.501% to 6.000% 15 681,744.49 0.82
6.001% to 6.500% 5 342,544.16 0.41
6.501% to 7.000% 171 2,384,827.98 2.88
7.001% to 7.500% 35 3,291,676.56 3.98
7.501% to 8.000% 94 5,145,262.66 6.22
8.001% to 8.250% 27 1,740,213.46 2.10
8.251% to 8.500% 111 4,177,829.27 5.05
8.501% to 8.750% 30 2,538,880.13 3.07
8.751% to 9.000% 61 5,891,629.77 7.12
9.001% to 9.250% 30 3,583,196.97 4.33
9.251% to 9.500% 68 7,263,773.47 8.78
9.501% to 9.750% 29 2,836,949.88 3.43
9.751% to 10.000% 118 9,409,531.60 11.37
10.001% to 10.250% 35 3,611,274.77 4.36
10.251% to 10.500% 75 7,322,545.39 8.85
10.501% to 10.750% 39 3,230,773.92 3.90
10.751% to 11.000% 61 5,292,899.94 6.39
11.001% to 11.250% 24 1,645,105.65 1.99
11.251% to 11.500% 32 2,019,586.95 2.44
11.501% to 11.750% 19 1,065,021.46 1.29
11.751% to 12.000% 48 2,649,437.86 3.20
12.001% to 12.250% 16 1,034,501.37 1.25
12.251% to 12.500% 23 1,315,161.87 1.59
12.501% to 12.750% 10 488,503.37 0.59
12.751% to 13.000% 18 781,397.24 0.94
13.001% to 13.250% 11 450,094.01 0.54
13.251% to 13.500% 8 213,478.20 0.26
13.501% to 13.750% 7 412,980.61 0.50
13.751% to 14.000% 14 859,490.96 1.04
14.001% to 14.250% 5 226,329.52 0.27
14.251% to 14.500% 3 81,813.37 0.10
14.501% to 14.750% 2 98,537.45 0.12
14.751% to 15.000% 5 198,941.56 0.24
15.001% to 15.250% 1 41,903.89 0.05
15.251% to 15.500% 5 142,851.57 0.17
15.501% to 15.750% 1 64,553.42 0.08
15.751% to 16.000% 1 37,352.42 0.05
16.251% to 16.500% 2 15,976.99 0.02
17.751% to 18.000% 1 14,859.34 0.02
---------------------- --------------------------- --------------------------------
TOTAL 1,262 $ 82,772,965.81 100.00%
</TABLE>
--------------
(1) The weighted average Mortgage Interest Rate of the Group 1 Mortgage Loans
as of the Cut-off Date was approximately 9.826% per annum.
S-24
<PAGE>
COMBINED LOAN-TO-VALUE OF THE GROUP 1 MORTGAGE LOANS (1)
<TABLE>
<CAPTION>
% OF AGGREGATE PRINCIPAL
PRINCIPAL BALANCE BALANCE OF LOAN GROUP 1
NUMBER OF MORTGAGE OUTSTANDING AS OF OUTSTANDING AS OF
COMBINED LOAN-TO-VALUE (%) LOANS THE CUT-OFF DATE THE CUT-OFF DATE
-------------------------------- ---------------------- --------------------------- --------------------------------
<S> <C> <C> <C>
0.001 to 5.000 1 $ 44,898.84 0.05%
5.001 to 10.000 1 74,226.51 0.09
10.001 to 15.000 1 19,182.74 0.02
20.001 to 25.000 1 24,421.44 0.03
25.001 to 30.000 3 95,107.16 0.11
30.001 to 35.000 3 123,307.82 0.15
35.001 to 40.000 5 348,324.95 0.42
40.001 to 45.000 3 175,863.72 0.21
45.001 to 50.000 12 465,920.41 0.56
50.001 to 55.000 12 1,514,626.56 1.83
55.001 to 60.000 27 1,306,798.34 1.58
60.001 to 65.000 41 3,502,357.97 4.23
65.001 to 70.000 62 3,726,863.76 4.50
70.001 to 75.000 105 9,833,037.51 11.88
75.001 to 80.000 172 16,461,104.43 19.89
80.001 to 85.000 110 9,494,177.39 11.47
85.001 to 90.000 139 10,673,236.31 12.89
90.001 to 95.000 81 5,276,495.38 6.37
95.001 to 100.000 377 14,758,311.92 17.83
100.001 to 105.000 77 3,020,223.79 3.65
105.001 to 110.000 15 881,435.70 1.06
110.001 to 115.000 5 261,696.10 0.32
115.001 to 120.000 6 388,222.76 0.47
120.001 to 125.000 3 303,124.30 0.37
---------------------- --------------------------- --------------------------------
TOTAL 1,262 $ 82,772,965.81 100.00%
</TABLE>
--------------
(1) The weighted average Combined Loan-to-Value Ratio of the Group 1 Mortgage
Loans at origination was approximately 83.709%.
The "COMBINED LOAN-TO-VALUE RATIO" of a Mortgage Loan shall generally
mean the ratio, expressed as a percentage of (i) the sum of (a) the original
principal amount of the Mortgage Loan plus (b) the outstanding balance of the
First Lien, if any, of the Mortgage Loan over (ii) the lesser of (x) the
appraised value of the related Mortgaged Property at origination or (y) the sale
price, if applicable.
S-25
<PAGE>
GEOGRAPHIC DISTRIBUTION OF THE GROUP 1 MORTGAGE LOANS(1)
<TABLE>
<CAPTION>
% OF AGGREGATE PRINCIPAL
PRINCIPAL BALANCE BALANCE OF LOAN GROUP 1
NUMBER OF OUTSTANDING AS OF OUTSTANDING AS OF
LOCATION MORTGAGE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
-------------------------------- ---------------------- --------------------------- --------------------------------
<S> <C> <C> <C>
Alabama 17 $ 698,459.92 0.84%
Alaska 2 99,874.50 0.12
Arizona 24 669,661.76 0.81
Arkansas 6 104,848.24 0.13
California 97 11,496,671.61 13.89
Colorado 8 479,985.10 0.58
Connecticut 12 1,235,538.78 1.49
Delaware 3 184,230.42 0.22
District of Columbia 1 63,207.67 0.08
Florida 137 6,651,780.29 8.04
Georgia 27 1,175,991.63 1.42
Hawaii 5 527,766.12 0.64
Idaho 1 52,052.20 0.06
Illinois 26 1,810,128.34 2.19
Indiana 32 1,871,524.60 2.26
Iowa 2 65,633.37 0.08
Kansas 4 223,939.87 0.27
Kentucky 12 609,625.15 0.74
Louisiana 16 448,862.77 0.54
Maryland 21 1,994,927.01 2.41
Massachusetts 16 1,570,135.03 1.90
Michigan 78 4,784,241.44 5.78
Minnesota 3 186,448.43 0.23
Mississippi 12 118,829.41 0.14
Missouri 17 864,032.32 1.04
Montana 1 36,634.63 0.04
Nevada 7 557,482.61 0.67
New Hampshire 4 242,291.83 0.29
New Jersey 40 3,885,884.82 4.69
New Mexico 10 423,470.56 0.51
New York 126 18,113,857.82 21.88
North Carolina 55 2,156,207.26 2.60
Ohio 48 2,783,159.23 3.36
Oklahoma 14 553,528.38 0.67
Oregon 9 675,703.20 0.82
Pennsylvania 121 3,424,629.51 4.14
Puerto Rico 2 58,032.89 0.07
Rhode Island 1 123,015.71 0.15
South Carolina 17 1,010,746.65 1.22
Tennessee 36 1,182,461.27 1.43
Texas 134 6,499,971.19 7.85
Utah 2 99,264.07 0.12
Virginia 39 1,653,293.24 2.00
Washington 13 1,162,590.08 1.40
West Virginia 2 27,460.43 0.03
Wisconsin 2 114,884.45 0.14
---------------------- --------------------------- --------------------------------
TOTAL 1,262 $ 82,772,965.81 100.00%
</TABLE>
-------------
(1) The greatest ZIP Code geographic concentration of the Group 1 Mortgage
Loans, by Group 1 Loan Balance as of the Cut-off Date, was approximately 1.04%
in the 75034 ZIP Code, located in Texas.
S-26
<PAGE>
DOCUMENTATION LEVELS OF THE GROUP 1 MORTGAGE LOANS (1)
<TABLE>
<CAPTION>
% OF AGGREGATE PRINCIPAL
PRINCIPAL BALANCE BALANCE OF LOAN GROUP 1
NUMBER OF OUTSTANDING AS OF OUTSTANDING AS OF
DOCUMENTATION LEVEL MORTGAGE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
-------------------------------- ---------------------- --------------------------- --------------------------------
<S> <C> <C> <C>
Alternative 91 $ 9,524,465.33 11.51%
Full 796 49,041,066.04 59.25
Limited 46 4,529,766.64 5.47
Missing 26 1,670,165.96 2.02
No Documentation 210 9,105,534.84 11.00
Stated 93 8,901,967.00 10.75
---------------------- --------------------------- --------------------------------
TOTAL 1,262 $ 82,772,965.81 100.00%
</TABLE>
--------------
(1) For a description of each documentation level, see "Underwriting Standards"
in this prospectus supplement.
STATUS OF THE GROUP 1 MORTGAGE LOANS
<TABLE>
<CAPTION>
% OF AGGREGATE PRINCIPAL
PRINCIPAL BALANCE BALANCE OF LOAN GROUP 1
NUMBER OF OUTSTANDING AS OF OUTSTANDING AS OF
STATUS MORTGAGE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
-------------------------------- ---------------------- --------------------------- --------------------------------
<S> <C> <C> <C>
Current 1,135 $ 73,797,297.43 89.16%
30 Days Past Due 54 3,890,993.10 4.70
60 Days Past Due 9 789,709.27 0.95
Re-performing 64 4,294,966.01 5.19
---------------------- --------------------------- --------------------------------
TOTAL 1,262 $ 82,772,965.81 100.00%
</TABLE>
SUB-GROUP 1A MORTGAGE LOAN STATISTICS
Sub-group 1A consists of FHA, FHA Uninsured, VA and VA Non-guaranteed
Mortgage Loans. The Sub-group 1A Loan Balance as of the Cut-off Date is equal to
approximately $10,476,051.36 and the Arrearage is equal to approximately
$326,475.28. The Sub-group 1A Mortgage Loans have original terms to maturity
ranging from 168 to 420 months. The following statistical information, unless
otherwise specified, is based upon the Sub-group 1A Loan Balance as of the
Cut-off Date.
The Sub-group 1A Mortgage Loans are secured by Mortgages creating first
liens on the related Mortgaged Properties. Approximately 28.58% of the Sub-group
1A Mortgage Loans have a Combined Loan-to-Value Ratio in excess of 80% and do
not have FHA insurance, a VA guaranty or primary mortgage insurance. There can
be no assurance that the Combined Loan-to-Value Ratio of any Sub-group 1A
Mortgage Loan determined at any time after origination is less than or equal to
its original Combined Loan-to-Value Ratio. Of the Sub-group 1A Mortgage Loans,
98.71% have a Due Date on the first day of the month.
Approximately 56.93% of the Sub-group 1A Mortgage Loans are FHA
Mortgage Loans, approximately 12.16% of the Sub-group 1A Mortgage Loans are VA
Mortgage Loans, approximately 28.88% of the Sub-group 1A Mortgage Loans are FHA
Uninsured Mortgage Loans and approximately 2.02% of the Sub-group 1A Mortgage
Loans are VA Non-guaranteed Mortgage Loans. See "The Mortgage Pool--FHA Mortgage
Loans and VA Mortgage Loans" in this prospectus supplement.
Approximately 87.86% of the Sub-group 1A Mortgage Loans are Performing
or Re-Performing Mortgage Loans. Approximately 12.14% of the Sub-group 1A
Mortgage Loans are Sub-Performing Mortgage Loans, including 0.62% that are
Forbearance Plan Mortgage Loans and 1.09% that are Bankruptcy Plan Mortgage
Loans. Of the Mortgage Loans in Sub-group 1A, approximately 12.14% are 30 to 59
days past due. Approximately 7.75%
S-27
<PAGE>
of the Sub-group 1A Mortgage Loans are Re-Performing Mortgage Loans, including
4.06% that are Forbearance Plan Mortgage Loans.
Of the Sub-group 1A Mortgage Loans, none provide for payment by the
mortgagor of a prepayment charge in limited circumstances on certain
prepayments.
None of the Sub-group 1A Mortgage Loans are Balloon Loans and none of
the Sub-group 1A Mortgage Loans are Owner-Financed Mortgage Loans.
Each Sub-group 1A Mortgage Loan accrues interest at a Mortgage Interest
Rate of not less than 5.000% per annum and not more than 16.500% per annum and
as of the Cut-off Date the weighted average Mortgage Interest Rate of the
Sub-group 1A Mortgage Loans was approximately 8.214% per annum.
The weighted average remaining term to maturity of the Sub-group 1A
Mortgage Loans will be approximately 270 months as of the Cut-off Date. None of
the Sub-group 1A Mortgage Loans had a first Due Date prior to September 1, 1966
or after November 1, 2000 or will have a remaining term to maturity of less than
2 months or greater than 359 months as of the Cut-off Date. The month of the
latest maturity date of any Sub-group 1A Mortgage Loan is October, 2030.
The average Principal Balance of the Sub-group 1A Mortgage Loans at
origination was approximately $40,293.67. The average Cut-off Date Principal
Balance of the Sub-group 1A Mortgage Loans was approximately $27,069.90. No
Sub-group 1A Mortgage Loan had a Cut-off Date Principal Balance of greater than
approximately $249,437.02 or less than approximately $248.96.
Each Sub-group 1A Mortgage Loan had a Net Mortgage Interest Rate of not
less than 4.500% per annum, and not more than 16.000% per annum and as of the
Cut-off Date, the weighted average Net Mortgage Interest Rate of the Sub-group
1A Mortgage Loans was approximately 7.714%.
None of the Sub-group 1A Mortgage Loans are secured by a second
Mortgage that is junior to a First Lien on the related Mortgaged Property.
SUB-GROUP 1B MORTGAGE LOAN STATISTICS
Sub-group 1B consists of fixed-rate Mortgage Loans. The Sub-group 1B
Loan Balance as of the Cut-off Date is equal to approximately $72,296,914.45 and
the Arrearage is equal to approximately $1,091,918.47. The Subgroup 1B Mortgage
Loans have original terms to maturity ranging from 36 to 424 months. The
following statistical information, unless otherwise specified, is based upon the
Sub-group 1B Loan Balance as of the Cut-off Date.
The Sub-group 1B Mortgage Loans are secured by Mortgages creating first
or second liens on the related Mortgaged Properties. Approximately 32.82% of the
Sub-group 1B Mortgage Loans have a Combined Loan-to-Value Ratio in excess of 80%
and do not have FHA insurance, a VA guaranty or primary mortgage insurance.
There can be no assurance that the Combined Loan-to-Value Ratio of any Sub-group
1B Mortgage Loan determined at any time after origination is less than or equal
to its original Combined Loan-to-Value Ratio. Of the Sub-group 1B Mortgage
Loans, 66.45% have a Due Date on the first day of the month.
Approximately 95.28% of the Sub-group 1B Mortgage Loans are Performing
or Re-Performing Mortgage Loans. Approximately 4.72% of the Sub-group 1B
Mortgage Loans are Sub-Performing Mortgage Loans, including 0.37% that are
Forbearance Plan Mortgage Loans and 0.43% that are Bankruptcy Plan Mortgage
Loans. Of the Mortgage Loans in Sub-group 1B, approximately 3.62% are 30 to 59
days past due and approximately 1.09% are 60 to 89 days or more days past due.
Approximately 4.82% of the Sub-group 1B Mortgage Loans are Re-Performing
Mortgage Loans, including 0.95% that are Forbearance Plan Mortgage Loans and
2.63% that are Bankruptcy Plan Mortgage Loans.
S-28
<PAGE>
Approximately 25.41% of the Sub-group 1B Mortgage Loans provide for
payment by the Mortgagor of a prepayment charge in limited circumstances on
certain prepayments. No such prepayment charge will be distributed to the
holders of the Offered Certificates.
Approximately 19.54% of the Sub-group 1B Mortgage Loans will not fully
amortize by their respective maturity dates (each, a "BALLOON LOAN"). The
Monthly Payment for each Balloon Loan is based on an amortization schedule
ranging from 180 months to 633 months, except for the final payment (the
"BALLOON PAYMENT") which is due and payable between the 84th month and the 420th
month following origination of such Mortgage Loan, depending on the terms of the
related mortgage note. With respect to the majority of the Balloon Loans, the
Monthly Payments for such Balloon Loans amortize over 360 months, but the
Balloon Payment is due on the 180th month. The amount of the Balloon Payment on
each Balloon Loan is substantially in excess of the amount of the scheduled
Monthly Payment for such Mortgage Loan.
Approximately 13.59% of the Sub-group 1B Mortgage Loans are
Owner-Financed Mortgage Loans.
Each Sub-group 1B Mortgage Loan accrues interest at a Mortgage Interest
Rate of not less than 3.000% per annum and not more than 18.000% per annum and
as of the Cut-off Date the weighted average Mortgage Interest Rate of the
Sub-group 1B Mortgage Loans was approximately 10.059% per annum.
Each Sub-group 1B Mortgage Loan had a Net Mortgage Interest Rate of not
less than 1.580% per annum, and not more than 17.500% per annum and as of the
Cut-off Date, the weighted average Net Mortgage Interest Rate of the Sub-group
1B Mortgage Loans was approximately 9.244%.
The weighted average remaining term to maturity of the Sub-group 1B
Mortgage Loans will be approximately 265 months as of the Cut-off Date. None of
the Sub-group 1B Mortgage Loans had a first Due Date prior to July 1, 1971 or
after October 14, 2000 or will have a remaining term to maturity of less than 8
months or greater than 358 months as of the Cut-off Date. The month of the
latest maturity date of any Sub-group 1B Mortgage Loan is September, 2030.
The average Principal Balance of the Sub-group 1B Mortgage Loans at
origination was approximately $86,342.60. The average Cut-off Date Principal
Balance of the Sub-group 1B Mortgage Loans was approximately $82,625.05. No
Sub-group 1B Mortgage Loan had a Cut-off Date Principal Balance greater than
approximately $863,746.47 or less than approximately $9,333.13.
Approximately 0.41% of the Sub-group 1B Mortgage Loans are secured by a
second Mortgage that is junior to a First Lien on the related Mortgaged
Property, and approximately 99.59% of the Sub-group 1B Mortgage Loans are
secured by a First Lien on the related Mortgaged Property.
GROUP 2 MORTGAGE LOAN STATISTICS
Loan Group 2 consists of 718 adjustable-rate Mortgage Loans. The Group
2 Loan Balance as of the Cut-off Date is equal to approximately $81,948,589.40
and the Arrearage is equal to approximately $1,055,688.13. The Group 2 Mortgage
Loans have original terms to maturity ranging from 180 months to 360 months. The
following statistical information, unless otherwise specified, is based upon the
Group 2 Loan Balance as of the Cut-off Date.
The Group 2 Mortgage Loans are secured by Mortgages which create First
Liens on the related Mortgaged Properties. Approximately 16.11% of the Group 2
Mortgage Loans have a Combined Loan-to-Value Ratio in excess of 80% and do not
have FHA insurance, a VA guaranty or primary mortgage insurance, and
approximately 1.73% of the Group 2 Mortgage Loans that are FHA or VA Mortgage
Loans have FHA insurance or a VA guaranty, respectively. There can be no
assurance that the Combined Loan-to-Value Ratio of any Group 2 Mortgage Loan
determined at any time after origination is less than or equal to its original
Combined Loan-to-Value Ratio. Approximately 99.00% of the Group 2 Mortgage Loans
have scheduled Monthly Payments due on the Due Date.
Approximately 1.52% and 0.48% of the Group 2 Mortgage Loans are FHA
Mortgage Loans and FHA Uninsured Mortgage Loans, respectively. Approximately
0.21% and 0.00% of the Group 2 Mortgage Loans are VA
S-29
<PAGE>
guaranteed and VA non-guaranteed Mortgage Loans, respectively. See "The Mortgage
Pool--FHA Mortgage Loans and VA Mortgage Loans."
Approximately 0.09% of the Group 2 Mortgage Loans are Balloon Loans.
Approximately 97.52% of the Group 2 Mortgage Loans are Performing or
Re-Performing Mortgage Loans. Approximately 2.48% of the Group 2 Mortgage Loans
are Sub-Performing Mortgage Loans, including 0.43% that are Forbearance Plan
Mortgage Loans. Of the Mortgage Loans in Loan Group 2, approximately 2.48% are
30 to 59 days past due and approximately 0.00% are 60 to 89 days or more past
due. Approximately 2.89% of the Group 2 Mortgage Loans are Re-Performing
Mortgage Loans including 0.89% that are Forbearance Plan Mortgage Loans and
1.39% that are Bankruptcy Plan Mortgage Loans.
Approximately 68.04% of the Group 2 Mortgage Loans provide for payment
by the mortgagor of a prepayment charge in limited circumstances on certain
prepayments.
The weighted average remaining term to maturity of the Group 2 Mortgage
Loans will be approximately 338 months as of the Cut-off Date. None of the Group
2 Mortgage Loans had a first Due Date prior to December 1, 1983 or after
September 1, 2000 or will have a remaining term to maturity of less than 109
months or greater than 357 months as of the Cut-off Date. The month of the
latest maturity date of any Group 2 Mortgage Loan is August, 2030.
The average Principal Balance of the Group 2 Mortgage Loans at
origination was approximately $115,927.98. The average Cut-off Date Principal
Balance of the Group 2 Mortgage Loans was approximately $114,134.53.
A substantial majority of the Group 2 Mortgage Loans provide for
semi-annual adjustment to the Mortgage Interest Rate thereon and for
corresponding adjustments to the Monthly Payment amount due thereon, in each
case on each adjustment date applicable thereto (each such date, an "ADJUSTMENT
DATE"). On each Adjustment Date for each Group 2 Mortgage Loan, the Mortgage
Interest Rate thereon will be adjusted to equal the sum of the index applicable
to determining the Mortgage Interest Rate on each Group 2 Mortgage Loan (the
"INDEX") and a fixed percentage amount (the "GROSS MARGIN"). The Mortgage
Interest Rate on each such Group 2 Mortgage Loan will not increase by more than
6.000% per annum on the first related Adjustment Date (the "INITIAL PERIODIC
RATE CAP") and 2.000% on any Adjustment Date thereafter (the "PERIODIC RATE
CAP"); provided, however, 0.27% and 0.12% of the Group 2 Mortgage Loans do not
have an Initial Periodic Rate Cap or a Periodic Rate Cap, respectively. The
Group 2 Mortgage Loans have a weighted average Initial Periodic Rate Cap of
approximately 1.682% per annum and a weighted average Periodic Rate Cap of
approximately 1.308% per annum thereafter (excluding those loans without
periodic caps or initial periodic caps). Each Mortgage Interest Rate on each
such Group 2 Mortgage Loan will not exceed a specified maximum Mortgage Interest
Rate over the life of such Group 2 Mortgage Loan (the "MAXIMUM MORTGAGE INTEREST
RATE") or be less than a specified minimum Mortgage Interest Rate over the life
of such Group 2 Mortgage Loan (the "MINIMUM MORTGAGE INTEREST RATE"). Effective
with the first Monthly Payment due on each Group 2 Mortgage Loan after each
related Adjustment Date, the Monthly Payment amount will be adjusted to an
amount that will amortize fully the outstanding Principal Balance of the related
Mortgage Loan over its remaining term, and pay interest at the Mortgage Interest
Rate as so adjusted. Due to the application of the Periodic Rate Caps and the
Maximum Mortgage Interest Rates, the Mortgage Interest Rate on each such
Mortgage Loan, as adjusted on any related Adjustment Date, may be less than the
sum of the Index and the related Gross Margin, rounded as described herein. See
"THE MORTGAGE POOL--THE INDEX" in this prospectus supplement. None of the Group
2 Mortgage Loans permits the related mortgagor to convert the adjustable
Mortgage Interest Rate thereon to a fixed Mortgage Interest Rate.
The Group 2 Mortgage Loans had Mortgage Interest Rates as of the
Cut-off Date of not less than 6.500% per annum and not more than 16.500% per
annum and the weighted average Mortgage Interest Rate was approximately 10.728%
per annum. As of the Cut-off Date, the Group 2 Mortgage Loans had Gross Margins
ranging from 2.000% to 9.750%, Minimum Loan Rates ranging from 0.500% per annum
to 14.875% per annum, omitting 25.78% of the Group 2 Mortgage Loans without
minimum rates, and Maximum Loan Rates ranging from 10.000% per annum to 21.500%
per annum. As of the Cut-off Date, the weighted average Gross Margin was
approximately 6.026%, the weighted average Minimum Loan Rate was approximately
10.289% per annum, omitting
S-30
<PAGE>
25.78% of the Group 2 Mortgage Loans without minimum rates, and the weighted
average Maximum Loan Rate was approximately 16.823% per annum. The latest next
Adjustment Date following the Cut-off Date on any Group 2 Mortgage Loan occurs
in November, 2006 and the weighted average number of months to the next
Adjustment Date following the Cut-off Date for all of the Group 2 Mortgage Loans
is 16 months.
Each Group 2 Mortgage Loan had a Net Mortgage Interest Rate of not less
than 5.330% per annum, and not more than 16.000% per annum and as of the Cut-off
Date, the weighted average Net Mortgage Interest Rate of the Group 2 Mortgage
Loans was approximately 9.763%.
No Group 2 Mortgage Loan had a Cut-off Date Principal Balance of
greater than approximately $632,985.80 or less than approximately $13,533.57.
The Group 2 Mortgage Loans are expected to have the following characteristics as
of the Cut-off Date (the sum in any column may not equal the total indicated due
to rounding):
S-31
<PAGE>
CUT-OFF DATE PRINCIPAL BALANCES OF THE GROUP 2 MORTGAGE LOANS(1)
<TABLE>
<CAPTION>
% OF AGGREGATE PRINCIPAL
PRINCIPAL BALANCE BALANCE OF LOAN GROUP 2
NUMBER OF OUTSTANDING AS OF OUTSTANDING AS OF
PRINCIPAL BALANCE ($) MORTGAGE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
---------------------------------- -------------------- ------------------------ --------------------------------
<S> <C> <C> <C>
0 to 25,000.00 19 $ 397,525.95 0.49%
25,000.01 to 50,000.00 104 4,208,661.92 5.14
50,000.01 to 75,000.00 142 8,895,156.65 10.85
75,000.01 to 100,000.00 139 12,072,158.92 14.73
100,000.01 to 150,000.00 159 19,086,260.41 23.29
150,000.01 to 200,000.00 71 12,133,144.27 14.81
200,000.01 to 250,000.00 34 7,684,016.96 9.38
250,000.01 to 300,000.00 20 5,480,831.54 6.69
300,000.01 to 350,000.00 12 3,786,024.53 4.62
350,000.01 to 400,000.00 4 1,455,971.39 1.78
400,000.01 to 450,000.00 6 2,603,624.91 3.18
450,000.01 to 500,000.00 5 2,383,876.69 2.91
500,000.01 to 550,000.00 1 508,567.46 0.62
600,000.01 to 650,000.01 2 1,252,767.80 1.53
-------------------- ------------------------ --------------------------------
TOTAL 718 $ 81,948,589.40 100.00%
</TABLE>
------------------------------------
(1) The average Cut-off Date Principal Balance of the Group 2 Mortgage Loans
was approximately $114,134.53.
ORIGINAL TERMS TO MATURITY OF THE GROUP 2 MORTGAGE LOANS(1)
<TABLE>
<CAPTION>
% OF AGGREGATE PRINCIPAL
PRINCIPAL BALANCE BALANCE OF LOAN GROUP 2
NUMBER OF OUTSTANDING AS OF OUTSTANDING AS OF
ORIGINAL TERM (MONTHS) MORTGAGE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
---------------------------------- -------------------- ------------------------ --------------------------------
<S> <C> <C> <C>
169 to 180 17 $ 1,190,867.28 1.45%
229 to 240 2 235,676.75 0.29
289 to 300 3 272,956.17 0.33
349 to 360 696 80,249,089.20 97.93
-------------------- ------------------------ --------------------------------
TOTAL 718 $ 81,948,589.40 100.00%
</TABLE>
------------------------------------
(1) The weighted average original term of the Group 2 Mortgage Loans was
approximately 357 months.
PROPERTY TYPES OF THE GROUP 2 MORTGAGE LOANS
<TABLE>
<CAPTION>
% OF AGGREGATE PRINCIPAL
PRINCIPAL BALANCE BALANCE OF LOAN GROUP 2
NUMBER OF OUTSTANDING AS OF OUTSTANDING AS OF
PROPERTY TYPE MORTGAGE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
---------------------------------- -------------------- ------------------------ --------------------------------
<S> <C> <C> <C>
2-Family 13 $ 1,494,996.45 1.82%
3-Family 7 889,121.50 1.08
4-Family 4 447,139.55 0.55
Condo 20 2,484,783.78 3.03
Low Rise Condo 1 94,971.90 0.12
Manufactured 11 706,141.63 0.86
Mobile Home 15 1,161,546.46 1.42
Multi Family 1 112,176.50 0.14
PUD (1) 26 3,891,394.99 4.75
Single Family 616 70,342,535.52 85.84
Townhouse 4 323,781.12 0.40
-------------------- ------------------------ --------------------------------
TOTAL 718 $ 81,948,589.40 100.00%
</TABLE>
------------------------------------
(1) PUD refers to Planned Unit Development.
S-32
<PAGE>
OCCUPANCY STATUS OF THE GROUP 2 MORTGAGE LOANS(1)
<TABLE>
<CAPTION>
% OF AGGREGATE PRINCIPAL
PRINCIPAL BALANCE BALANCE OF LOAN GROUP 2
NUMBER OF OUTSTANDING AS OF OUTSTANDING AS OF
OCCUPANCY STATUS MORTGAGE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
---------------------------------- -------------------- ------------------------ --------------------------------
<S> <C> <C> <C>
Investor 62 $ 4,299,254.07 5.25%
Primary 651 76,938,807.12 93.89
Secondary 5 710,528.21 0.87
-------------------- ------------------------ --------------------------------
TOTAL 718 $ 81,948,589.40 100.00%
</TABLE>
------------------------------------
(1) Based on a representation made by the borrower at the time of origination.
PURPOSE OF THE GROUP 2 MORTGAGE LOANS
<TABLE>
<CAPTION>
% OF AGGREGATE PRINCIPAL
PRINCIPAL BALANCE BALANCE OF LOAN GROUP 2
NUMBER OF OUTSTANDING AS OF OUTSTANDING AS OF
PURPOSE MORTGAGE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
---------------------------------- -------------------- ------------------------ --------------------------------
<S> <C> <C> <C>
Cash Out 381 $ 44,073,262.06 53.78%
Purchase 261 28,402,799.09 34.66
Refinance 76 9,472,528.25 11.56
-------------------- ------------------------ --------------------------------
TOTAL 718 $ 81,948,589.40 100.00%
</TABLE>
S-33
<PAGE>
MORTGAGE INTEREST RATES OF THE GROUP 2 MORTGAGE LOANS(1)
<TABLE>
<CAPTION>
% OF AGGREGATE PRINCIPAL
PRINCIPAL BALANCE BALANCE OF LOAN GROUP 2
NUMBER OF OUTSTANDING AS OF OUTSTANDING AS OF
MORTGAGE INTEREST RATE (%) MORTGAGE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
---------------------------------- -------------------- ------------------------ ------------------------------
<S> <C> <C> <C>
6.001% to 6.500% 1 $ 109,106.28 0.13%
6.501% to 7.000% 3 332,631.75 0.41
7.001% to 7.500% 9 2,207,954.25 2.69
7.501% to 8.000% 19 1,933,418.47 2.36
8.001% to 8.250% 6 1,003,781.25 1.22
8.251% to 8.500% 9 1,417,065.51 1.73
8.501% to 8.750% 10 1,664,314.96 2.03
8.751% to 9.000% 15 1,707,875.86 2.08
9.001% to 9.250% 19 2,998,323.65 3.66
9.251% to 9.500% 23 3,708,597.71 4.53
9.501% to 9.750% 34 5,577,242.06 6.81
9.751% to 10.000% 46 6,827,293.15 8.33
10.001% to 10.250% 33 4,572,577.60 5.58
10.251% to 10.500% 47 5,825,273.45 7.11
10.501% to 10.750% 48 6,219,910.11 7.59
10.751% to 11.000% 62 7,430,151.26 9.07
11.001% to 11.250% 34 2,965,228.83 3.62
11.251% to 11.500% 31 3,565,463.17 4.35
11.501% to 11.750% 33 2,776,520.31 3.39
11.751% to 12.000% 20 1,546,989.50 1.89
12.001% to 12.250% 28 2,339,500.89 2.85
12.251% to 12.500% 36 2,935,623.67 3.58
12.501% to 12.750% 19 1,867,073.08 2.28
12.751% to 13.000% 20 1,685,067.13 2.06
13.001% to 13.250% 25 2,019,493.12 2.46
13.251% to 13.500% 19 1,236,635.32 1.51
13.501% to 13.750% 21 1,434,287.55 1.75
13.751% to 14.000% 18 1,829,725.39 2.23
14.001% to 14.250% 11 648,791.14 0.79
14.251% to 14.500% 10 815,258.21 0.99
14.501% to 14.750% 2 337,267.87 0.41
14.751% to 15.000% 3 146,515.14 0.18
15.001% to 15.250% 1 22,250.00 0.03
15.251% to 15.500% 1 84,892.58 0.10
16.001% to 16.250% 1 43,745.36 0.05
16.251% to 16.500% 1 112,743.82 0.14%
-------------------- ------------------------ --------------------------------
TOTAL 718 $ 81,948,589.40 100.00%
</TABLE>
------------------------------------
(1) The weighted average Mortgage Interest Rate of the Group 2 Mortgage Loans
as of the Cut-off Date was approximately 10.728% per annum.
S-34
<PAGE>
COMBINED LOAN-TO-VALUE OF THE GROUP 2 MORTGAGE LOANS(1)
<TABLE>
<CAPTION>
% OF AGGREGATE PRINCIPAL
PRINCIPAL BALANCE BALANCE OF LOAN GROUP 2
NUMBER OF OUTSTANDING AS OF OUTSTANDING AS OF
COMBINED LOAN-TO-VALUE (%) MORTGAGE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
---------------------------------- -------------------- ------------------------ ------------------------------
<S> <C> <C> <C>
15.001 to 20.000 2 $ 98,941.77 0.12%
20.001 to 25.000 2 64,632.94 0.08
25.001 to 30.000 2 120,776.53 0.15
30.001 to 35.000 1 99,702.04 0.12
35.001 to 40.000 8 759,980.34 0.93
40.001 to 45.000 4 654,240.16 0.80
45.001 to 50.000 8 617,807.04 0.75
50.001 to 55.000 9 490,911.50 0.60
55.001 to 60.000 21 1,675,040.22 2.04
60.001 to 65.000 55 5,154,302.36 6.29
65.001 to 70.000 80 7,170,295.33 8.75
70.001 to 75.000 93 10,069,136.51 12.29
75.001 to 80.000 159 17,856,825.62 21.79
80.001 to 85.000 131 18,838,457.51 22.99
85.001 to 90.000 96 13,670,876.70 16.68
90.001 to 95.000 12 1,386,306.27 1.69
95.001 to 100.000 26 2,606,726.92 3.18
100.001 to 105.000 5 261,183.03 0.32
105.001 to 110.000 1 58,076.99 0.07
110.001 to 115.000 1 32,715.37 0.04
115.001 to 120.000 2 261,654.25 0.32
-------------------- ------------------------ ------------------------------
TOTAL 718 $ 81,948,589.40 100.00%
</TABLE>
------------------------------------
(1) The weighted average Combined Loan-to-Value Ratio of the Group 2 Mortgage
Loans at origination was approximately 79.227%.
S-35
<PAGE>
GEOGRAPHIC DISTRIBUTION OF THE GROUP 2 MORTGAGE LOANS(1)
<TABLE>
<CAPTION>
% OF AGGREGATE PRINCIPAL
PRINCIPAL BALANCE BALANCE OF LOAN GROUP 2
NUMBER OF OUTSTANDING AS OF OUTSTANDING AS OF
LOCATION MORTGAGE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
---------------------------------- -------------------- ------------------------ ------------------------------
<S> <C> <C> <C>
Alabama 2 $ 155,781.88 0.19%
Arizona 14 1,400,115.17 1.71
Arkansas 1 53,128.46 0.06
California 147 25,290,215.52 30.86
Colorado 38 4,506,823.48 5.50
Connecticut 12 1,295,267.62 1.58
Delaware 2 204,785.33 0.25
District of Columbia 1 81,416.81 0.10
Florida 33 2,964,772.28 3.62
Georgia 12 1,422,793.08 1.74
Hawaii 1 55,104.55 0.07
Idaho 4 547,850.12 0.67
Illinois 42 4,807,311.28 5.87
Indiana 15 775,344.13 0.95
Iowa 4 173,976.00 0.21
Kansas 3 178,877.05 0.22
Kentucky 6 404,014.63 0.49
Louisiana 7 301,406.27 0.37
Maine 3 194,352.09 0.24
Maryland 8 967,503.29 1.18
Massachusetts 28 2,993,859.35 3.65
Michigan 53 4,298,608.84 5.25
Minnesota 17 1,823,503.54 2.23
Missouri 12 904,452.15 1.10
Montana 3 319,980.64 0.39
Nebraska 3 215,101.74 0.26
Nevada 11 2,089,741.04 2.55
New Hampshire 3 321,676.77 0.39
New Jersey 34 3,425,075.56 4.18
New Mexico 2 166,607.68 0.20
New York 18 3,368,429.77 4.11
North Carolina 23 1,433,283.29 1.75
Ohio 37 2,571,526.21 3.14
Oklahoma 5 348,426.38 0.43
Oregon 7 575,873.06 0.70
Pennsylvania 16 1,705,654.61 2.08
Rhode Island 3 236,218.22 0.29
South Carolina 4 278,301.93 0.34
Tennessee 11 1,229,704.13 1.50
Texas 36 3,559,580.65 4.34
Utah 15 1,827,830.98 2.23
Virginia 4 639,672.74 0.78
Washington 10 1,322,587.13 1.61
Wisconsin 7 409,860.35 0.50
Wyoming 1 102,193.60 0.12
-------------------- ------------------------ ------------------------------
TOTAL 718 $ 81,948,589.40 100.00%
</TABLE>
------------------------------------
(1) The greatest ZIP Code geographic concentration of the Group 2 Mortgage
Loans, by Group 2 Loan Balance as of the Cut-off Date, was approximately
1.15% in the 10504 ZIP Code, located in New York.
S-36
<PAGE>
DOCUMENTATION LEVELS OF THE GROUP 2 MORTGAGE LOANS(1)
<TABLE>
<CAPTION>
% OF AGGREGATE PRINCIPAL
PRINCIPAL BALANCE BALANCE OF LOAN GROUP 2
NUMBER OF OUTSTANDING AS OF OUTSTANDING AS OF
DOCUMENTATION LEVEL MORTGAGE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
---------------------------------- -------------------- ------------------------ ------------------------------
<S> <C> <C> <C>
Alternative 28 $ 2,993,661.72 3.65%
Full 486 55,907,930.85 68.22
Limited 43 5,350,946.51 6.53
Missing 7 730,648.18 0.89
Stated 154 16,965,402.14 20.70
-------------------- ------------------------ ------------------------------
TOTAL 718 $ 81,948,589.40 100.00%
</TABLE>
------------------------------------
(1) For a description of each documentation level, see "Underwriting Standards"
in this prospectus supplement.
<TABLE>
<CAPTION>
STATUS OF THE GROUP 2 MORTGAGE LOANS
% OF AGGREGATE PRINCIPAL
PRINCIPAL BALANCE BALANCE OF LOAN GROUP 2
NUMBER OF OUTSTANDING AS OF OUTSTANDING AS OF
STATUS MORTGAGE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
---------------------------------- -------------------- ------------------------ ------------------------------
<S> <C> <C> <C>
Current 675 $ 77,543,761.19 94.62%
30 Days Past Due 18 2,032,851.18 2.48
Re-performing 25 2,371,977.03 2.89
-------------------- ------------------------ ------------------------------
TOTAL 718 $ 81,948,589.40 100.00%
</TABLE>
S-37
<PAGE>
LOAN GROUP 2 MAXIMUM LOAN RATE
<TABLE>
<CAPTION>
% OF AGGREGATE PRINCIPAL
PRINCIPAL BALANCE BALANCE OF LOAN GROUP 2
NUMBER OF OUTSTANDING AS OF OUTSTANDING AS OF
MAXIMUM LOAN RATE (%) MORTGAGE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
---------------------------------- -------------------- ------------------------ ------------------------------
<S> <C> <C> <C>
9.501 to 10.000 2 $ 139,065.85 0.17%
10.001 to 10.500 9 599,588.77 0.73
10.501 to 11.000 2 189,561.54 0.23
11.001 to 11.500 5 318,703.58 0.39
11.501 to 12.000 8 911,798.04 1.11
12.001 to 12.500 7 1,164,529.50 1.42
12.501 to 13.000 5 445,074.41 0.54
13.001 to 13.500 5 1,044,552.31 1.27
13.501 to 14.000 8 1,373,396.77 1.68
14.001 to 14.500 11 2,093,602.90 2.55
14.501 to 15.000 18 2,393,636.60 2.92
15.001 to 15.500 21 3,095,477.12 3.78
15.501 to 16.000 52 6,689,703.29 8.16
16.001 to 16.500 62 8,294,377.74 10.12
16.501 to 17.000 108 14,571,913.55 17.78
17.001 to 17.500 106 11,389,754.78 13.90
17.501 to 18.000 107 11,600,041.10 14.16
18.001 to 18.500 68 5,586,698.33 6.82
18.501 to 19.000 37 3,775,038.35 4.61
19.001 to 19.500 35 2,784,508.41 3.40
19.501 to 20.000 15 1,142,699.52 1.39
20.001 to 20.500 12 824,234.50 1.01
20.501 to 21.000 7 1,137,077.52 1.39
21.001 to 21.500 8 383,554.92 0.47
-------------------- ------------------------ ------------------------------
TOTAL 718 $ 81,948,589.40 100.00%
</TABLE>
S-38
<PAGE>
LOAN GROUP 2 MINIMUM LOAN RATE
<TABLE>
<CAPTION>
% OF AGGREGATE PRINCIPAL
PRINCIPAL BALANCE BALANCE OF LOAN GROUP 2
NUMBER OF OUTSTANDING AS OF OUTSTANDING AS OF
MINIMUM LOAN RATE (%) MORTGAGE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
---------------------------------- -------------------- ------------------------ -------------------------------
<S> <C> <C> <C>
No floor 168 $ 21,127,674.63 25.78%
0.01 to 0.50 9 599,588.77 0.73
0.51 to 1.00 3 268,975.65 0.33
1.01 to 1.50 4 265,686.86 0.32
1.51 to 2.00 4 365,506.00 0.45
2.01 to 2.50 2 199,650.01 0.24
2.51 to 3.00 2 116,052.58 0.14
3.01 to 3.50 1 32,715.37 0.04
7.01 to 7.50 3 772,563.39 0.94
7.51 to 8.00 1 92,591.39 0.11
8.01 to 8.50 12 2,193,076.42 2.68
8.51 to 9.00 24 3,278,978.96 4.00
9.01 to 9.50 31 4,959,156.00 6.05
9.51 to 10.00 70 9,570,265.48 11.68
10.01 to 10.50 82 9,791,300.36 11.95
10.51 to 11.00 100 11,644,769.17 14.21
11.01 to 11.50 63 5,607,879.74 6.84
11.51 to 12.00 47 3,636,601.52 4.44
12.01 to 12.50 42 3,462,498.18 4.23
12.51 to 13.00 19 1,382,964.57 1.69
13.01 to 13.50 17 1,268,857.64 1.55
13.51 to 14.00 6 618,323.46 0.75
14.01 to 14.50 7 650,555.64 0.79
14.51 to 15.00 1 42,357.61 0.05
-------------------- ------------------------ -------------------------------
TOTAL 718 $ 81,948,589.40 100.00%
</TABLE>
S-39
<PAGE>
LOAN GROUP 2 GROSS MARGIN
<TABLE>
<CAPTION>
% OF AGGREGATE PRINCIPAL
PRINCIPAL BALANCE BALANCE OF LOAN GROUP 2
NUMBER OF OUTSTANDING AS OF OUTSTANDING AS OF
GROSS MARGIN (%) MORTGAGE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
---------------------------------- -------------------- ------------------------ ------------------------------
<S> <C> <C> <C>
1.001 to 2.000 16 $ 1,043,910.91 1.27%
2.001 to 3.000 33 4,890,415.30 5.97
3.001 to 4.000 10 844,912.19 1.03
4.001 to 5.000 34 3,699,088.33 4.51
5.001 to 6.000 159 20,795,993.63 25.38
6.001 to 7.000 392 44,808,633.79 54.68
7.001 to 8.000 54 4,526,929.41 5.52
8.001 to 9.000 13 858,308.64 1.05
9.001 to 10.000 7 480,397.20 0.59
-------------------- ------------------------ ------------------------------
TOTAL 718 $ 81,948,589.40 100.00%
</TABLE>
LOAN GROUP 2 INITIAL RATE CAP
<TABLE>
<CAPTION>
% OF AGGREGATE PRINCIPAL
PRINCIPAL BALANCE BALANCE OF LOAN GROUP 2
NUMBER OF OUTSTANDING AS OF OUTSTANDING AS OF
INITIAL RATE CAP (%) MORTGAGE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
---------------------------------- -------------------- ------------------------ ------------------------------
<S> <C> <C> <C>
None 3 $ 224,252.60 0.27%
1.0000 208 22,771,907.67 27.79
1.4000 1 80,567.97 0.10
1.5000 318 40,256,340.92 49.12
2.0000 27 3,017,477.76 3.68
3.0000 160 15,154,476.94 18.49
6.0000 1 443,565.54 0.54
-------------------- ------------------------ ------------------------------
TOTAL 718 $ 81,948,589.40 100.00%
</TABLE>
LOAN GROUP 2 PERIODIC RATE CAP
<TABLE>
<CAPTION>
% OF AGGREGATE PRINCIPAL
PRINCIPAL BALANCE BALANCE OF LOAN GROUP 2
NUMBER OF OUTSTANDING AS OF OUTSTANDING AS OF
PERIODIC RATE CAP (%) MORTGAGE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
---------------------------------- -------------------- ------------------------ ------------------------------
<S> <C> <C> <C>
None 1 $ 99,839.09 0.12%
1.000 353 36,240,404.64 44.22
1.500 337 40,870,811.15 49.87
2.000 27 4,737,534.52 5.78
-------------------- ------------------------ ------------------------------
TOTAL 718 $ 81,948,589.40 100.00%
</TABLE>
THE INDEX
With respect to approximately 91.87% of the Group 2 Mortgage Loans, the
Index is the average of interbank offered rates for six-month U.S. dollar
deposits in the London market based on quotations of major banks, and most
recently available as of a day specified in the related note as published by
Fannie Mae ("SIX MONTH LIBOR"); with respect to approximately 7.06% of the Group
2 Mortgage Loans, the Index is the weekly average yield on United States
Treasury securities adjusted to a constant maturity of one year as published by
the Federal
S-40
<PAGE>
Reserve Board in Statistical Release H.15(519) and most recently available as of
a day specified in the related note ("One Year CMT"); and with respect to
approximately 1.07% of the Group 2 Mortgage Loans, the Index is a variety of
indices, none of which comprise more than 0.31% of the Group 2 Mortgage Loans.
Listed below are some historical values for the months indicated of two of the
indices.
SIX MONTH LIBOR
<TABLE>
<CAPTION>
YEAR
----------------------------------------------------------------------------
MONTH 2000 1999 1998 1997 1996 1995 1994
----------- ---------- --------- --------- ----------- ---------- ----------------------
<S> <C> <C> <C> <C> <C> <C> <C>
January 6.29% 4.97% 5.63% 5.69% 5.27% 6.69% 3.38%
February 6.33% 5.13% 5.70% 5.69% 5.30% 6.44% 4.00%
March 6.53% 5.06% 5.75% 5.94% 5.50% 6.50% 4.25%
April 6.73% 5.04% 5.81% 6.00% 5.56% 6.38% 4.69%
May 7.11% 5.25% 5.75% 6.00% 5.63% 6.00% 5.00%
June 7.00% 5.65% 5.78% 5.91% 5.79% 6.00% 5.25%
July 6.89% 5.71% 5.75% 5.80% 5.88% 5.88% 5.31%
August 6.83% 5.92% 5.59% 5.84% 5.77% 5.91% 5.31%
September 6.76% 5.96% 5.25% 5.84% 5.73% 5.95% 5.75%
October 6.72% 6.12% 4.98% 5.79% 5.57% 5.88% 5.94%
November 6.64% 6.06% 5.15% 5.91% 5.54% 5.69% 6.56%
December 6.13% 5.07% 5.84% 5.60% 5.51% 7.00%
</TABLE>
ONE YEAR CMT
<TABLE>
<CAPTION>
YEAR
----------------------------------------------------------------------------
MONTH 2000 1999 1998 1997 1996 1995 1994
----------- ---------- --------- --------- ----------- ---------- ----------------------
<S> <C> <C> <C> <C> <C> <C> <C>
January 6.12% 4.51% 5.24% 5.61% 5.09% 7.05% 3.54%
February 6.22% 4.70% 5.31% 5.53% 4.94% 6.70% 3.87%
March 6.22% 4.78% 5.39% 5.80% 5.34% 6.43% 4.32%
April 6.15% 4.69% 5.38% 5.99% 5.54% 6.27% 4.82%
May 6.33% 4.85% 5.44% 5.87% 5.64% 6.00% 5.31%
June 6.17% 5.10% 5.41% 5.69% 5.81% 5.64% 5.27%
July 6.08% 5.03% 5.36% 5.54% 5.85% 5.59% 5.48%
August 6.18% 5.20% 5.21% 5.56% 5.67% 5.75% 5.56%
September 6.13% 5.25% 4.71% 5.52% 5.83% 5.62% 5.76%
October 6.01% 5.43% 4.12% 5.46% 5.55% 5.59% 6.11%
November 6.09% 5.55% 4.53% 5.46% 5.42% 5.43% 6.54%
December 5.84% 4.52% 5.53% 5.47% 5.31% 7.14%
</TABLE>
If any Index becomes unpublished or is otherwise unavailable, the
Servicer will select an alternative index which is based upon comparable
information.
FHA MORTGAGE LOANS AND VA MORTGAGE LOANS
Approximately 56.93% of the Sub-group 1A Mortgage Loans are subject to
FHA insurance as described herein (the "FHA MORTGAGE LOANS") and approximately
12.16% of the Sub-group 1A Mortgage Loans are subject to a VA guaranty as
described herein (the "VA MORTGAGE LOANS"). Approximately 28.88% of the
Sub-group 1A Mortgage Loans are Mortgage Loans which were originated using FHA
documents but, for varying reasons, are not subject to FHA insurance (the "FHA
UNINSURED MORTGAGE LOANS"). Approximately 2.02% of the Subgroup 1A Mortgage
Loans are Mortgage Loans which were originated using VA documents but, for
varying reasons, are not
S-41
<PAGE>
subject to a VA guaranty (the "VA NON-GUARANTEED MORTGAGE LOANS"). The Seller
acquired the FHA Uninsured Mortgage Loans and the VA Non-guaranteed Mortgage
Loans without any FHA insurance or a VA guaranty in effect. Approximately 1.73%
of the Group 2 Mortgage Loans are FHA Mortgage Loans or are VA Mortgage Loans.
Approximately 0.48% of the Group 2 Mortgage Loans are FHA Uninsured Mortgage
Loans or are VA Non-guaranteed Mortgage Loans. All FHA Mortgage Loans and VA
Mortgage Loans must conform to HUD or VA origination guidelines, as the case may
be, at the time of origination. The FHA Mortgage Loans will be insured by the
Federal Housing Administration (the "FHA") of the United States Department of
Housing and Urban Development ("HUD")as authorized under the National Housing
Act of 1934, as amended (the "NATIONAL HOUSING ACT"), and the United States
Housing Act of 1937, as amended (the "UNITED STATES HOUSING ACT"). No FHA
Mortgage Loan may have an interest rate or original principal amount exceeding
the applicable FHA limits at the time of origination of such FHA Mortgage Loan.
The VA Mortgage Loans will be partially guaranteed by The United States
Department of Veterans Affairs (the "VA") under the Servicemen's Readjustment
Act of 1944, as amended. The Servicemen's Readjustment Act of 1944, as amended,
permits a veteran (or in certain instances the spouse of a veteran) to obtain a
mortgage loan guaranty by the VA covering mortgage financing of the purchase of
a one- to four-family dwelling unit at interest rates permitted by the VA. The
program has a current mortgage loan limit of $203,000, requires no down payment
from the purchaser and permits the guarantee of mortgage loans of generally up
to 30 years' duration. However, no VA Mortgage Loan will have an original
principal amount greater than five times the amount of the related guarantee.
The Servicer collects insurance premiums for the FHA Mortgage Loans and
pays them to the FHA. The regulations governing FHA-insured single-family
mortgage insurance programs generally provide that insurance benefits are
payable upon foreclosure (or other acquisition of possession) and conveyance of
the mortgaged premises to HUD. With respect to a defaulted FHA Mortgage Loan,
the Servicer may be limited in its ability to initiate foreclosure proceedings.
Historically, pursuant to an assignment program (the "ASSIGNMENT PROGRAM"), HUD
in certain circumstances offered qualified mortgagors who had defaulted on an
FHA insured mortgage loan an opportunity to avoid foreclosure and retain their
homes. Under the Assignment Program, the FHA serviced FHA insured mortgage loans
that had defaulted and been assigned to HUD under the Assignment Program In
addition, HUD gave forbearance for a period of no longer than 36 months to
mortgagors who had demonstrated a temporary inability to make full payments due
to circumstances beyond the mortgagor's control such as a reduction in income or
increase in expenses. The Assignment Program was terminated and replaced with
mandatory loss mitigation procedures in April 1996 whereby servicers of
defaulted FHA-insured mortgage loans must choose from a variety of tools to cure
a default prior to filing an FHA insurance claim.
HUD has the option, in most cases, to pay insurance claims in cash or
in debentures issued by HUD. Presently, claims for most programs are being paid
in cash and, for the most part, claims have not been paid in debentures since
1965. HUD debentures issued in satisfaction of FHA insurance claims bear
interest at the applicable HUD debenture interest rate and mature 20 years from
the date of issue.
The amount of insurance benefits the FHA generally pays is equal to the
entire unpaid principal amount of the defaulted FHA Mortgage Loan, adjusted to
reimburse the Servicer of that FHA Mortgage Loan for certain costs and expenses
and to deduct certain amounts the Servicer receives or retains after default.
When entitlement to insurance benefits results from foreclosure (or other
acquisition of possession) and conveyance to HUD, the Servicer is generally
compensated for no more than two-thirds of its foreclosure costs and attorneys'
fees (which fees are evaluated based upon HUD guidelines), and is compensated
for accrued and unpaid mortgage interest for a limited period prior to the
institution of foreclosure or other acquisition in general only to the extent it
was allowed pursuant to a forbearance plan approved by HUD, and the Servicer is
otherwise in material compliance with FHA regulations. Provided that the
Servicer is in material compliance with FHA regulations, the Servicer will
generally be entitled to the debenture interest which would have been earned, as
of the date the cash payment is received, had the benefits been paid in
debentures. Except where unpaid mortgage interest is recoverable pursuant to an
approved special forbearance plan, such debenture interest is generally payable
from a date 60 days after the mortgagor's first uncorrected failure to perform
any obligation or make any payment due under the mortgage loan, which results in
no recovery of interest accrued during the first two months of delinquency.
S-42
<PAGE>
Under certain circumstances, as set forth in the regulations, HUD is
authorized to request or require the Servicer to pursue a deficiency judgment
against any defaulting mortgagor. In this regard, HUD may request or require the
Servicer (as the case may be under the regulations) to pursue a deficiency
judgment in connection with the foreclosure. Under neither case would the
Servicer be responsible for collecting on the judgment. Further, in all cases,
HUD may reimburse the Servicer for all additional costs of seeking the judgment.
As of the date hereof, the maximum guaranty that may be issued by the
VA under a VA Mortgage Loan are generally (a) as to loans with an original
principal amount of $45,000 or less, 50% of such loan, (b) as to loans with an
original principal amount of greater than $45,000, but not more than $56,250,
$22,500; (c) as to loans with an original principal amount of more than $56,250,
but not more than $144,000, the lesser of $36,000 or 40% of the loan, and (d) as
to loans with an original principal amount of more than $144,000 (for an
owner-occupied, single family home or condominium unit), the lesser of $50,750
or 25% of the loan. The liability on the guaranty is reduced or increased pro
rata with any reduction or increase in the amount of indebtedness, but in no
event will the amount payable on the guaranty exceed the amount of the original
guaranty. The VA may, at its option and without regard to the guaranty, make
full payment to a mortgage holder of unsatisfied indebtedness on a mortgage upon
its assignment to the VA.
With respect to a defaulted VA Mortgage Loan, the Servicer is, absent
exceptional circumstances, authorized to announce its intention to foreclose
only when the default has continued for three months. However, notwithstanding
the foregoing, the regulations require the Servicer to take immediate action if
it determines that the debtor has abandoned the property to be foreclosed upon
or that the property has been or may be subject to extraordinary waste or if
there exist conditions justifying the appointment of a receiver for the
property. Generally, a claim for the guaranty is submitted after liquidation of
the mortgaged property. Upon default and subsequent termination of a
VA-guaranteed loan by a servicer, the VA makes a determination, using a formula,
whether it will reduce its maximum claim liability by acquiring and reselling
the property or by paying the claim on its guaranty without such acquisition. If
the VA determines it will acquire the property, it will establish a maximum
price, known as the specified amount, which the servicer may bid at the
foreclosure sale in order for the servicer to subsequently convey the property
to the VA. If the servicer purchases the property at the sale for no more than
such specified amount, it may convey the property to the VA in return for the
payment of such amount. The VA also pays, up to the maximum amount of the loan
guaranty, the claim for the difference between the price paid for the property
and any balance remaining on the loan. If, however, the VA determines that
acquiring and disposing of the property would increase rather than reduce the
government's loss, it will not establish a maximum bid price for the holder to
bid at the foreclosure sale (thus, a "no-bid"), but rather will solely pay the
guaranty claim up to the maximum amount of the guaranty, once the loss on the
loan has been established. In the event of a no-bid, the servicer must foreclose
on the defaulted VA Mortgage Loan and thus a loss may be incurred on such
mortgage loan in an amount equal to the difference between (a) the total
indebtedness and (b) the sum of (i) the guaranteed amount and (ii) the proceeds
of any foreclosure.
The amount payable under the guaranty will be the percentage of the VA
Mortgage Loan originally guaranteed applied to the indebtedness outstanding as
of the applicable date of computation specified in the VA regulations. Payments
under the guaranty will be applied to the unpaid principal amount of the VA
Mortgage Loan, interest accrued on the unpaid balance thereof to the appropriate
date of computation and limited expenses of the mortgagee, but in each case only
to the extent that such amounts have not been recovered through liquidation of
the mortgaged property. The amount payable under the guaranty may in no event
exceed the amount of the original guaranty.
TERMS OF THE MORTGAGE LOANS
The Mortgage Loans accrue interest on a simple interest basis (the
"SIMPLE INTEREST MORTGAGE LOANS") or a self-amortizing basis (the "ACTUARIAL
MORTGAGE LOANS"). Approximately 1.34% of the Mortgage Loans are expected to be
Simple Interest Mortgage Loans, and approximately 98.66% of the Mortgage Loans
are expected to be Actuarial Mortgage Loans, in each case as a percentage of the
Cut-off Date Principal Balance.
For Simple Interest Mortgage Loans, the Mortgage Loan is amortized over
a series of equal monthly payments. Each monthly interest payment is calculated
by multiplying the outstanding Principal Balance of the loan by the stated
interest rate. Such product is then multiplied by a fraction, the numerator of
which is the number of
S-43
<PAGE>
days elapsed since the preceding payment of interest was made and the
denominator of which is either 365 or 360, depending on applicable state law.
Payments received on a Simple Interest Mortgage Loan are applied first to
interest accrued to the date payment is received and second to reduce the unpaid
Principal Balance of the Mortgage Loan. Accordingly, if a mortgagor makes a
payment on the Mortgage Loan less than 30 days after the previous payment, the
interest collected for the period since the preceding payment was made will be
less than 30 days' interest, and the amount of principal repaid in such month
will be correspondingly greater. Conversely, if a mortgagor makes a payment on
the Mortgage Loan more than 30 days after the previous payment, the interest
collected for the period since the preceding payment was made will be greater
than 30 days' interest, and the amount of principal repaid in the month will be
correspondingly reduced. As a result, based on the payment characteristics of a
particular mortgagor, the principal due on the final due date of a Simple
Interest Mortgage Loan may vary from the principal payment that would be made if
payments for such Mortgage Loan were always made on their due dates.
For Actuarial Mortgage Loans, interest will be calculated based on a
360-day year of twelve 30-day months. When a full prepayment of principal is
made on an Actuarial Mortgage Loan during a month, the mortgagor is charged
interest only on the days of the month actually elapsed up to the date of such
prepayment, at a daily interest rate that is applied to the principal amount of
the loan so prepaid. When a partial prepayment of principal is made on an
Actuarial Mortgage Loan during a month, the mortgagor generally is not charged
interest on the amount of the partial prepayment during the month in which such
prepayment is made.
If a mortgagor pays more than one installment on a Simple Interest
Mortgage Loan at a time, the regular installment will be treated as described
above. However, the entire amount of the additional installment will be treated
as a receipt of one or more regular principal payments and applied to reduce the
Principal Balance of the related Mortgage Loan. Although such mortgagor will not
be required to make the next monthly installment, interest will continue to
accrue on the Principal Balance of such Mortgage Loan, as reduced by the
application of the early installment. As a result, when such mortgagor pays the
next required installment on a Simple Interest Mortgage Loan, such payment may
be insufficient to cover the interest that has accrued since the last payment by
the mortgagor. Notwithstanding such insufficiency, such Mortgage Loan would be
considered to be current. This situation would continue until the monthly
installments are once again sufficient to cover all accrued interest and to
reduce the Principal Balance of such Mortgage Loan. Depending on the Principal
Balance and interest rate of the related Mortgage Loan and on the number of
installments paid early, there may be extended periods of time during which
Simple Interest Mortgage Loans in respect of which such additional installments
have been made are not amortizing and are considered current.
PRIMARY MORTGAGE INSURANCE
Approximately 31.27% of the Group 1 Mortgage Loans and approximately
51.12% of the Group 2 Mortgage Loans (in each case, by aggregate Principal
Balance as of the Cut-off Date) are covered by a primary mortgage insurance
policy.
Each such Mortgage Loan has an original loan-to-value ratio in excess
of 60%. However, the related primary mortgage insurance policy insures only that
portion of the Mortgage Loan in excess of 60% of the value of such Mortgage
Loan, as calculated and more fully described in the policy, a copy of which is
available from the Servicer upon request. None of the Mortgage Loans covered by
a primary mortgage insurance policy is an FHA or VA Mortgage Loan.
THE SELLER
Credit-Based Asset Servicing and Securitization LLC is a Delaware
limited liability company with its principal place of business in New York, New
York. The information set forth in the following paragraphs has been provided by
the Seller and neither the Depositor nor any other party makes any
representation as to the accuracy or completeness of such information.
The Seller was established in July 1996 as a venture of Mortgage
Guaranty Insurance Corporation ("MGIC"), Enhance Financial Services Group, Inc.
("EFSG") and certain members of management of the Seller. Each of MGIC and EFSG
has approximately a 46% interest in the Seller with the management of the Seller
owning
S-44
<PAGE>
the remainder. EFSG and MGIC are publicly traded companies which file such
periodic reports with the Securities and Exchange Commission (the "COMMISSION")
as are required by the Securities Exchange Act of 1934, as amended, and the
rules and regulations of the Commission thereunder. Radian Group Inc. ("Radian")
and EFSG announced on November 14, 2000 that they had entered into a definitive
agreement pursuant to which Radian would acquire EFSG, including EFSG's 46%
interest in the Seller. The transaction, which is expected to close in the first
quarter of 2001, is subject to various regulatory approvals, as well as the
approval of Radian and EFSG stockholders and certain conditions.
On September 30, 2000, the Seller had approximately $955 million in
assets, approximately $716 million in liabilities and approximately $239 million
in equity.
The Seller's principal business is the purchasing of performing,
sub-performing and non-performing residential mortgage loans from banks and
other financial institutions and individuals and mortgage-related securities,
including non-investment grade subordinated securities, for investment and
securitization. Substantially all of the mortgage loans the Seller owns are
serviced by its wholly-owned subsidiary, Litton Loan Servicing LP. The Seller
does not originate mortgages. The Seller is a HUD-approved investing mortgagee.
UNDERWRITING STANDARDS
The following is a description of the underwriting standards used by
the Seller in connection with its acquisition of the Mortgage Loans.
Each Mortgage Loan included in the Trust Fund has satisfied the credit,
appraisal and underwriting guidelines the Seller established that are described
below. To determine satisfaction of such guidelines, the Seller or a loan
reviewer in general reviewed the files related to the Mortgage Loans in
connection with the acquisition of the Mortgage Loans by the Seller. These files
may include the documentation pursuant to which the mortgage loan was originally
underwritten, as well as the mortgagor's payment history on the mortgage loan.
The Seller's underwriting guidelines when re-underwriting mortgage loans are
intended to evaluate the mortgagor's credit standing, repayment ability and
willingness to repay debt, as well as the value and adequacy of the mortgaged
property as collateral. In general, to establish the adequacy of the mortgaged
property as collateral, the Seller will obtain a current appraisal, broker's
price opinion, and/or drive-by or desk review of such property, prepared within
six months of the Seller's purchase. A mortgagor's ability and willingness to
repay debts (including the Mortgage Loan) in a timely fashion must be
demonstrated by the quality, quantity and durability of income history, history
of debt management, history of debt repayment, and net worth accumulation.
Accordingly, the Seller also obtains and reviews a current credit report for the
mortgagor.
The Seller purchases mortgage loans that were originated pursuant to
one of the following documentation programs:
Full Documentation. Mortgage loans originally underwritten with "FULL
DOCUMENTATION" include a detailed application designed to provide pertinent
credit information. As part of the description of the mortgagor's financial
condition, the mortgagor was required to fill out a detailed application
designed to provide pertinent credit information. As part of the description of
the mortgagor's financial condition, the mortgagor provided a balance sheet,
current as of the origination of the mortgage loan, describing assets and
liabilities and a statement of income and expenses, as well as authorizing the
originator to obtain a credit report which summarizes the mortgagor's credit
history with local merchants and lenders and any record of bankruptcy. In
addition, an employment verification was obtained wherein the employer reported
the length of employment with that organization, the mortgagor's salary as of
the mortgage loan's origination, and an indication as to whether it is expected
that the mortgagor will continue such employment after the mortgage loan's
origination. If a mortgagor was self-employed when such mortgagor's loan was
originated, the mortgagor submitted copies of signed tax returns. The originator
was also provided with deposit verification at all financial institutions where
the mortgagor had demand or savings accounts.
In determining the adequacy of the property as collateral at
origination, an independent appraisal was made of each property considered for
financing. The appraiser inspected the property and verified that it was in good
condition and that construction, if new, had been completed at the time of the
loan's origination. Such appraisal was
S-45
<PAGE>
based on the appraiser's judgment of values, giving appropriate weight to both
the then market value of comparable homes and the cost of replacing the
property.
Other Levels of Documentation. Other mortgage loans purchased and
re-underwritten by the Seller were originally underwritten pursuant to
alternative documentation programs that require less documentation and
verification than do traditional "FULL DOCUMENTATION" programs, including "NO
DOCUMENTATION," "LIMITED DOCUMENTATION" and "ALTERNATIVE DOCUMENTATION" programs
for certain qualifying mortgage loans. Under a "NO DOCUMENTATION" program, the
originator does not undertake verification of a mortgagor's income or assets.
Under a "LIMITED DOCUMENTATION" program, certain underwriting documentation
concerning income and employment verification is waived. "ALTERNATIVE
DOCUMENTATION" programs allow a mortgagor to provide W-2 forms instead of tax
returns, permits bank statements in lieu of verification of deposits and permits
alternative methods of employment verification. Under "STATED DOCUMENTATION"
programs, a mortgagor's income is deemed to be that stated on the mortgage
application and is not independently verified by the originator. These are
underwriting programs designed to streamline the underwriting process by
eliminating the requirement for income verification. Depending on the facts and
circumstances of a particular case, the originator of the mortgage loan may have
accepted other mortgage loans based on limited documentation that eliminated the
need for either income verification and/or asset verification. The objective use
of limited documentation is to shift the emphasis of the underwriting process
from the credit standing of the mortgagor to the value and adequacy of the
mortgaged property as collateral.
Owner-Financed Mortgage Loans. The Owner-financed Mortgage Loans
comprise approximately 11.87% of the Group 1 Mortgage Loans and none of the
Group 2 Mortgage Loans (in each case, by Cut-off Date Principal Balance).
The Seller routinely purchases mortgage loans which are owner-financed
mortgage loans ("OWNER FINANCED MORTGAGE LOANS"). Owner-financed Mortgage Loans
are originated by the individual sellers of the related mortgaged property who
generally are inexperienced in matters pertaining to mortgage banking. These
mortgage loans were originated with less stringent standards than the other
mortgage loans the Seller purchases typically. The mortgagor under an
owner-financed mortgage loan generally does not complete a mortgage loan
application and the seller of the related property generally does not verify the
income or employment of the related mortgagor. In connection with the Seller's
acquisition of an Owner-financed Mortgage Loan, the Seller obtained and reviewed
the credit history and payment history of the mortgagor. In deciding to purchase
Owner-financed Mortgage Loans, the Seller generally places considerable emphasis
on the value of the mortgaged property. The Seller, in connection with its
underwriting of an Owner-financed Mortgage Loan, calculates the loan-to-value
ratio of the mortgage loan at the time of acquisition for underwriting purposes
to determine the mortgagor's equity in the related mortgaged property. A
drive-by appraisal of the market value of each mortgaged property relating to an
Owner-financed Mortgage Loan generally was obtained within 90 days prior to the
Seller's purchase of such mortgage loan. However, in certain instances, the
Seller may have utilized a previous appraisal if it was completed within one
year prior to the Seller's purchase, in which case the Seller will generally
require the appraiser to recertify the value in such appraisal. The Seller may
have acquired an Owner-financed Mortgage Loan based upon a statistical valuation
provided by independent data providers of the mortgaged property and
subsequently obtained a drive-by appraisal, generally within three months of
acquisition.
For a discussion of the certain risks related to Owner-financed
Mortgage Loans that a Certificateholder should consider prior to purchase, see
"Risk Factors--There are risks related to owner-financed mortgage loans" in this
prospectus supplement.
THE SERVICER
Litton Loan Servicing LP provided the information set forth in the
following paragraphs. None of the Depositor, the Seller, the Trustee, the
Underwriters or any of their respective affiliates have made or will make any
representation as to the accuracy or completeness of such information.
Litton Loan Servicing LP (the "Servicer"), a Delaware limited
partnership and a wholly-owned subsidiary of the Seller, will act as the
servicer of the Mortgage Loans pursuant to the Pooling and Servicing Agreement.
Litton Loan Servicing LP was formed in December 1996, with all of the general
and limited partnership interests owned by
S-46
<PAGE>
EFSG, MGIC and C-BASS Holding LLC. On October 1, 1998 Litton Loan Servicing,
Inc. was a wholly-owned subsidiary of EFSG and transferred its business to the
Servicer. From and after October 1, 1998, the Servicer has been conducting all
activities formerly conducted by Litton Loan Servicing, Inc. The Servicer
currently employs approximately 226 individuals. The main office of the Servicer
is located at 5373 W. Alabama, Houston, Texas 77056. The Servicer is currently a
FNMA and FHLMC approved servicer and an approved FHA and VA lender with a
servicing portfolio in excess of $5.15 billion. The Servicer specializes in
servicing sub-performing mortgage loans and entering into workouts with the
related mortgagors. Recent transactions for which the Servicer acts as servicer
include C-BASS ABS, LLC 1998-1, Merrill Lynch Mortgage Investors, Inc. Series
1998-FF2, Series 1998-FF3, Series 1998-GN3, Series 1999-H1, Series 1999-H2,
Series 1999-CB1, Series 1999-CB2, Series 1999-CB4, Series 1999-NC1, Series
2000-FF1, Series 2000-CB1, New Century Mortgage Securities, Inc., Series
1999-NCC, Financial Asset Securities Corp., Series 1998-3, Series 1999-CB5,
Series 2000-1, Asset Backed Funding Corporation, Series 1999-1, Series 2000-CB2,
Prudential Securities Secured Financing Corporation Series 2000-CB3 and
PaineWebber Mortgage Acceptance Corporation IV, Series 2000HE-1.
Fitch assigned the Servicer its RSS1 residential special servicer
rating on November 16, 1999. The rating is based on the Servicer's ability to
manage and liquidate nonperforming residential mortgage loans and real estate
owned assets. This RSS1 rating is the highest special servicer rating attainable
from Fitch which reflects the Servicer's sophisticated proprietary default
management technology, the financial strength of its well-capitalized parent and
its highly experienced management and staff.
Fitch assigned the Servicer its RPS2 primary servicer rating for
sub-prime and high loan-to-value ratio product. The RPS2 rating is currently the
highest subprime primary servicer rating attainable from Fitch for any subprime
servicer, which is based on the strength of the Servicer's loan administration
processes including new loan set-up procedures and related technology, loan
accounting/cash management and loan reporting. The RPS2 rating for high
loan-to-value ratio product is based on the Servicer's intensive focus on early
collection and loss mitigation.
In addition, Fitch has also assigned the Servicer its Special Servicer
Designation TM for residential mortgages.
Delinquency and Foreclosure Experience. The following table sets forth
the delinquency and foreclosure experience of the mortgage loans the Servicer
serviced as of the dates indicated. The Servicer's portfolio of mortgage loans
may differ significantly from the Mortgage Loans in terms of interest rates,
principal balances, geographic distribution, types of properties and other
possibly relevant characteristics. There can be no assurance, and no
representation is made, that the delinquency and foreclosure experience with
respect to the Mortgage Loans will be similar to that reflected in the table
below, nor is any representation made as to the rate at which losses may be
experienced on liquidation of defaulted Mortgage Loans. The actual delinquency
experience on the Mortgage Loans will depend, among other things, upon the value
of the real estate securing such Mortgage Loans and the ability of the related
mortgagor to make required payments. It should be noted that the Servicer's
business emphasizes to a certain degree the acquisition of servicing rights with
respect to non-performing and subperforming mortgage loans and the Servicer has
been an active participant in the market for such servicing rights since 1997.
The acquisition of such servicing rights may have affected the delinquency and
foreclosure experience of the Servicer.
S-47
<PAGE>
DELINQUENCY 1
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 2000 AS OF DECEMBER 31, 1999 AS OF DECEMBER 31, 1998
------------------------------- ------------------------------ ---------------------------------
% BY % BY % BY
NO. OF PRINCIPAL PRINCIPAL NO. OF PRINCIPAL PRINCIPAL NO. OF PRINCIPAL PRINCIPAL
LOANS BALANCE (2) BALANCE LOANS BALANCE (2) BALANCE LOANS BALANCE (2) BALANCE
------ -------------- ------- ------ ------------- --------- ------ --------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Current Loans 48,699 $3,371,172,566 67.5% 37,105 $2,580,776,677 69.98% 39,063 $2,489,678,138 78.01%
Period of Delinquency(4)
30 Days 7,146 $502,100,981 10.1% 4,638 $323,122,291 8.76% 3,689 $233,734,152 7.32%
60-89 Days 2,723 $196,753,561 3.9% 1,886 $133,339,006 3.62% 1,497 $87,944,512 2.76%
90 Days or More 3,030 $179,919,121 3.6% 2,056 $127,745,979 3.46% 2,578 $121,504,523 3.81%
------ -------------- ------- ------ -------------- ------- ------ -------------- -------
TOTAL DELINQUENCY 12,899 $878,773,663 17.6% 8,580 $584,207,276 15.84% 7,764 $443,183,187 13.89%
====== ============== ======= ====== ============== ======= ====== ============== =======
Foreclosures/Bankruptcy(4) 7,883 $613,260,143 12.3% 5,503 $433,109,387 11.74% 2,780 $197,668,255 6.19%
Real Estate Owned 1,938 $128,836,135 2.6% 1,264 $89,691,707 2.43% 1,009 $60,867,154 1.91%
------ -------------- ------- ------ -------------- ------- ------ -------------- -------
TOTAL PORTFOLIO 71,419 $4,992,042,507 100.00% 52,452 $3,687,785,047 100.00% 50,616 $3,191,396,734 100.00%
====== ============== ======= ====== ============== ======= ====== ============== =======
</TABLE>
-------------------
(1) The table shows mortgage loans which were delinquent or for which
foreclosure proceedings had been instituted as of the date indicated.
(2) For the Real Estate Owned properties, the principal balance is at the time
of foreclosure.
(3) No mortgage loan is included in this section of the table as delinquent
until it is 30 days past due.
(4) Exclusive of the number of loans and principal balance shown in Period of
Delinquency.
It is unlikely that the delinquency experience of the Mortgage Loans
comprising the Mortgage Pool will correspond to the delinquency experience of
the Servicer's mortgage portfolio set forth in the foregoing table. The
statistics shown above represent the delinquency experience for the Servicer's
mortgage servicing portfolio only for the periods presented, whereas the
aggregate delinquency experience on the Mortgage Loans comprising the Mortgage
Pool will depend on the results obtained over the life of the Mortgage Pool. The
Servicer does not have significant historical delinquency, bankruptcy,
foreclosure or default experience that may be referred to for purposes of
estimating the future delinquency and loss experience of Mortgage Loans. There
can be no assurance that the Mortgage Loans comprising the Mortgage Pool will
perform consistent with the delinquency or foreclosure experience described
herein. It should be noted that if the residential real estate market should
experience an overall decline in property values, the actual rates of
delinquencies and foreclosures could be higher than those previously experienced
by the Servicer. In addition, adverse economic conditions may affect the timely
payment by mortgagors of scheduled payments of principal and interest on the
Mortgage Loans and, accordingly, the actual rates of delinquencies and
foreclosures with respect to the Mortgage Pool.
THE POOLING AND SERVICING AGREEMENT
GENERAL
The Certificates will be issued pursuant to the Pooling and Servicing
Agreement. The Trust Fund created under the Pooling and Servicing Agreement will
consist of (i) all of the Depositor's right, title and interest in the Mortgage
Loans, the related mortgage notes, mortgages and other related documents, (ii)
all payments on or collections in respect of the Mortgage Loans due after the
Cut-off Date, together with any proceeds thereof, (iii) any Mortgaged Properties
acquired on behalf of Certificateholders by foreclosure or by deed in lieu of
foreclosure, and any revenues received thereon, (iv) the rights of the Trustee
under all insurance policies required to be maintained pursuant to the Pooling
and Servicing Agreement and (v) the rights of the Depositor under the Mortgage
Loan Purchase Agreement. The Offered Certificates will be transferable and
exchangeable at the corporate trust offices of the Trustee.
S-48
<PAGE>
ASSIGNMENT OF THE MORTGAGE LOANS
On or about December 13, 2000 ( the "CLOSING DATE" ), the Depositor
will transfer to the Trust Fund all of its right, title and interest in and to
each Mortgage Loan, the related mortgage notes, mortgages and other related
documents (collectively, the "RELATED DOCUMENTS"), including all scheduled
payments with respect to each such Mortgage Loan due after the Cut-off Date and
all rights under the related FHA Insurance Agreement or the VA Guaranty, as
applicable. The Trustee, concurrently with such transfer, will deliver the
Certificates to the Depositor. Each Mortgage Loan transferred to the Trust Fund
will be identified on a schedule (the "MORTGAGE LOAN SCHEDULE") delivered to the
Trustee pursuant to the Pooling and Servicing Agreement. Such Mortgage Loan
Schedule will include information such as the Principal Balance of each Mortgage
Loan as of the Cut-off Date, its Mortgage Interest Rate as well as other
information.
The Pooling and Servicing Agreement will require that, within the time
period specified therein, the Seller will deliver or cause to be delivered to
Bank One Trust Company, NA (the "CUSTODIAN"), as the Trustee's agent for such
purpose, the mortgage notes endorsed to the Trustee on behalf of the
Certificateholders and the Related Documents. In lieu of delivery of original
mortgages or mortgage notes, if such original is not available or lost, the
Seller may deliver or cause to be delivered true and correct copies thereof, or,
with respect to a lost mortgage note, a lost note affidavit executed by the
Seller or the originator of such Mortgage Loan.
Within 60 days following the Closing Date, the Trustee will review (or
cause the Custodian to review) the Mortgage Loans and the Related Documents
pursuant to the Pooling and Servicing Agreement and if any Mortgage Loan or
Related Document is found to be defective in any material respect and such
defect has a material and adverse effect on the Certificateholders and is not
cured within 120 days following notification thereof to the Seller (or within 90
days of the earlier of the Seller's discovery or receipt of notification if such
defect would cause the Mortgage Loan not to be a "qualified mortgage" for REMIC
purposes) and the Trustee by the Custodian (or 150 days following the Closing
Date, in the case of missing mortgages or assignments), the Seller will be
obligated to either (i) substitute for such Mortgage Loan an Eligible Substitute
Mortgage Loan; however, such substitution is permitted only within two years of
the Closing Date and may not be made unless an opinion of counsel is provided to
the effect that such substitution will not disqualify any of the REMICs
comprising the Trust Fund as a REMIC or result in a prohibited transaction tax
under the Code or (ii) purchase such Mortgage Loan at a price (the "PURCHASE
PRICE") equal to the outstanding Principal Balance of such Mortgage Loan as of
the date of purchase, plus all accrued and unpaid interest thereon, computed at
the Mortgage Interest Rate through the end of the calendar month in which the
purchase is effected, plus the amount of any unreimbursed Advances and Servicing
Advances made by the Servicer. If, however, a Mortgage Loan is discovered to be
defective in a manner that would cause it to be a "DEFECTIVE OBLIGATION" within
the meaning of Treasury regulations relating to REMICs, the Seller will be
obligated to cure the defect or make the required purchase or substitution no
later than 90 days after the earlier of its discovery or receipt of notification
of the defect. The Purchase Price will be deposited in the Collection Account on
or prior to the next succeeding Determination Date after such obligation arises.
The obligation of the Seller to repurchase or substitute for a Defective
Mortgage Loan is the sole remedy regarding any defects in the Mortgage Loans and
Related Documents available to the Trustee or the Certificateholders.
In connection with the substitution of an Eligible Substitute Mortgage
Loan, the Seller will be required to deposit in the Collection Account on or
prior to the next succeeding Determination Date after such obligation arises an
amount (the "SUBSTITUTION ADJUSTMENT") equal to the excess of the Principal
Balance of the related Defective Mortgage Loan over the Principal Balance of
such Eligible Substitute Mortgage Loan.
An "ELIGIBLE SUBSTITUTE MORTGAGE LOAN" is a mortgage loan the Seller
substitutes for a Defective Mortgage Loan which must, on the date of such
substitution,
(i) have an outstanding Principal Balance (or in the case of a
substitution of more than one Mortgage Loan for a Defective Mortgage Loan, an
aggregate Principal Balance), not in excess of, and not more than 5% less than,
the Principal Balance of the Defective Mortgage Loan;
(ii) have a Mortgage Interest Rate, with respect to a Group 1 Mortgage
Loan, not less than the Mortgage Interest Rate of the Defective Mortgage Loan
and not more than 1% in excess of the Mortgage Interest Rate of such Defective
Mortgage Loan or, with respect to a Group 2 Mortgage Loan, have a Maximum Loan
Rate and Minimum
S-49
<PAGE>
Loan Rate not less than the respective rate for the Defective Mortgage Loan and
have a Gross Margin equal to or greater than the Defective Mortgage Loan;
(iii) have the same Due Date as the Defective Mortgage Loan;
(iv) have a remaining term to maturity not more than one year earlier
and not later than the remaining term to maturity of the Defective Mortgage
Loan;
(v) comply with each representation and warranty as to the Mortgage
Loans set forth in the Pooling and Servicing Agreement (deemed to be made as of
the date of substitution);
(vi) have been underwritten or re-underwritten by the Seller in
accordance with the same underwriting criteria and guidelines as the Mortgage
Loans being replaced;
(vii) must be of the same or better credit quality as the Mortgage Loan
being replaced; and
(viii) satisfy certain other conditions specified in the Pooling and
Servicing Agreement.
The Seller will make certain representations and warranties as to the
accuracy in all material respects of certain information furnished to the
Trustee with respect to each Mortgage Loan (e.g., Cut-off Date Principal Balance
and the Mortgage Interest Rate). In addition, the Seller will represent and
warrant, on the Closing Date, that, among other things: (i) at the time of
transfer to the Depositor, the Seller has transferred or assigned all of its
right, title and interest in each Mortgage Loan and the Related Documents, free
of any lien; and (ii) each Mortgage Loan complied, at the time of origination,
in all material respects with applicable state and federal laws. Upon discovery
of a breach of any such representation and warranty which materially and
adversely affects the interests of the Certificateholders in the related
Mortgage Loan and Related Documents, the Seller will have a period of 90 days
after discovery or notice of the breach to effect a cure. If the breach cannot
be cured within the 90-day period, the Seller will be obligated to (i)
substitute for such Defective Mortgage Loan an Eligible Substitute Mortgage Loan
or (ii) purchase such Defective Mortgage Loan from the Trust Fund. The same
procedure and limitations that are set forth above for the substitution or
purchase of Defective Mortgage Loans as a result of deficient documentation
relating thereto will apply to the substitution or purchase of a Defective
Mortgage Loan as a result of a breach of a representation or warranty in the
Pooling and Servicing Agreement that materially and adversely affects the
interests of the Certificateholders.
Mortgage Loans required to be transferred to the Seller as described in
the preceding paragraphs are referred to as "DEFECTIVE MORTGAGE LOANS."
Pursuant to the Pooling and Servicing Agreement, the Servicer will
service and administer the Mortgage Loans as more fully set forth therein.
PAYMENTS ON MORTGAGE LOANS; DEPOSITS TO COLLECTION ACCOUNT AND DISTRIBUTION
ACCOUNT
The Servicer will establish and maintain or cause to be maintained a
separate trust account (the "COLLECTION ACCOUNT") for the benefit of the holders
of the Certificates. The Collection Account will be an Eligible Account (as
defined herein). Upon receipt by the Servicer of amounts in respect of the
Mortgage Loans (excluding amounts representing the Servicing Fee, the mortgage
insurance premiums, reimbursement for Advances and Servicing Advances, insurance
proceeds to be applied to the restoration or repair of a Mortgaged Property or
similar items), the Servicer will deposit such amounts in the Collection
Account. Amounts so deposited may be invested in permitted investments (as
described in the Pooling and Servicing Agreement) maturing no later than one
Business Day prior to the date on which the amount on deposit therein is
required to be deposited in the Distribution Account. A "BUSINESS DAY" is any
weekday that is not a federally recognized holiday, beginning at 9:00 a.m.
Eastern Time and ending at 5:00 p.m. Eastern Time. The Trustee will establish an
account (the "DISTRIBUTION ACCOUNT") into which will be deposited amounts
withdrawn from the Collection Account for distribution to Certificateholders on
a Distribution Date. The Distribution Account will be an Eligible Account.
Amounts on deposit therein may be invested in permitted investments maturing on
or before the Business Day prior to the related Distribution Date
S-50
<PAGE>
unless such permitted investments are invested in investments managed or advised
by the Trustee or an affiliate thereof, in which case such permitted investments
may mature on the related Distribution Date.
An "ELIGIBLE ACCOUNT" is a segregated account that is:
(i) an account or accounts maintained with a federal or state chartered
depository institution or trust company the short-term unsecured debt
obligations of which (or, in the case of a depository institution or trust
company that is the principal subsidiary of a holding company, the short-term
unsecured debt obligations of such holding company) are rated "A-1" (or the
equivalent) by each of the Rating Agencies at the time any amounts are held on
deposit therein,
(ii) an account or accounts the deposits in which are fully insured by
the Federal Deposit Insurance Corporation (to the limits established by such
corporation), the uninsured deposits in which account are otherwise secured such
that, as evidenced by an opinion of counsel delivered to the Trustee and to each
Rating Agency, the Certificateholders will have a claim with respect to the
funds in such account or a perfected first priority security interest against
such collateral (which shall be limited to permitted investments) securing such
funds that is superior to claims of any other depositors or creditors of the
depository institution with which such account is maintained,
(iii) a trust account or accounts maintained with the trust department
of a federal or state chartered depository institution, national banking
association or trust company acting in its fiduciary capacity, or
(iv) otherwise acceptable to each Rating Agency without reduction or
withdrawal of their then current ratings of the Certificates as evidenced by a
letter from each Rating Agency to the Trustee.
Permitted investments are specified in the Pooling and Servicing Agreement and
are limited to investments which meet the criteria of the Rating Agencies from
time to time as being consistent with their then current ratings of the
Certificates.
ADVANCES
Subject to the following limitations, the Servicer will be obligated to
advance or cause to be advanced at least one Business Day prior to each
Distribution Date its own funds, or funds in the Collection Account that are not
included in the Available Funds for such Distribution Date, in an amount equal
to the aggregate of all payments of principal and interest, net of the Servicing
Fee and any mortgage insurance premiums that were due during the related
Collection Period on the Actuarial Mortgage Loans, other than Balloon Payments,
and that were not received by the related Determination Date and, with respect
to Balloon Loans which are Actuarial Mortgage Loans, with respect to which the
Balloon Payment is not made when due, an assumed monthly payment that would have
been due on the related Due Date based on the original principal amortization
schedule for such Balloon Loan (any such advance, an "ADVANCE").
The Servicer will not make any Advances of principal or interest with
respect to Simple Interest Mortgage Loans or REO Properties.
Advances with respect to Actuarial Mortgage Loans are required to be
made only to the extent the Servicer deems them to be recoverable from related
late collections, insurance proceeds or liquidation proceeds. The purpose of
making such Advances is to maintain a regular cash flow to the
Certificateholders, rather than to guarantee or insure against losses. The
Servicer will not be required, however, to make any Advances with respect to
reductions in the amount of the Monthly Payments on the Mortgage Loans due to
bankruptcy proceedings or the application of the Soldiers' and Sailors' Civil
Relief Act of 1940, as amended (the "RELIEF ACT"). Subject to the recoverability
standard above, the Servicer's obligation to make Advances as to any Actuarial
Mortgage Loan will continue until the earlier of such time as the Trust acquires
title to the related Mortgaged Property or such Mortgage Loan is paid in full by
the mortgagor or disposed of by the Trust.
All Advances will be reimbursable to the Servicer from late
collections, insurance proceeds and liquidation proceeds from the Mortgage Loan
as to which such unreimbursed Advance was made. In addition, any Advances
S-51
<PAGE>
previously made in respect of any Mortgage Loan that the Servicer deems to be
nonrecoverable from related late collections, insurance proceeds or liquidation
proceeds may be reimbursed to the Servicer out of any funds in the Collection
Account prior to the distributions on the Certificates. In the event the
Servicer fails in its obligation to make any such Advance, the Trustee, in its
capacity as successor Servicer, will be obligated to make any such Advance, to
the extent required in the Pooling and Servicing Agreement.
In the course of performing its servicing obligations, the Servicer
will pay all reasonable and customary "out-of-pocket" costs and expenses
incurred in the performance of its servicing obligations, including, but not
limited to, the cost of (i) the preservation, restoration and protection of the
Mortgaged Properties, (ii) any enforcement or judicial proceedings, including
foreclosures, and (iii) the management and liquidation of Mortgaged Properties
acquired in satisfaction of the related mortgage. Each such expenditure will
constitute a "SERVICING ADVANCE."
The Servicer's right to reimbursement for Servicing Advances is limited
to late collections on the related Mortgage Loan, including liquidation
proceeds, released mortgaged property proceeds, insurance proceeds and such
other amounts the Servicer may collect from the related mortgagor or otherwise
relating to the Mortgage Loan in respect of which such unreimbursed amounts are
owed, unless such amounts are deemed to be nonrecoverable by the Servicer, in
which event reimbursement will be made to the Servicer from any funds in the
Collection Account prior to the distributions on the Certificates.
THE TRUSTEE
The Chase Manhattan Bank, a New York banking corporation, will act as
trustee (the "TRUSTEE") for the Certificates pursuant to the Pooling and
Servicing Agreement. The Trustee's offices for notices under the Pooling and
Servicing Agreement are located at 450 West 33rd Street, 14th floor, New York,
New York 10001, Attention: Structured Finance, C-BASS Series 2000-CB4. The
Trustee's telephone number is (212) 946-3307. The principal compensation to be
paid to the Trustee in respect of its obligations under the Pooling and
Servicing Agreement will be the "TRUSTEE FEE." The Pooling and Servicing
Agreement will provide that the Trustee and any director, officer, employee or
agent of the Trustee will be indemnified by the Trust Fund and will be held
harmless against any loss, liability or expense (not including expenses,
disbursements and advances incurred or made by the Trustee in the ordinary
course of the Trustee's performance in accordance with the provisions of the
Pooling and Servicing Agreement) the Trustee incurs arising out of or in
connection with the acceptance or administration of its obligations and duties
under the Pooling and Servicing Agreement, other than any loss, liability or
expense (i) that constitutes a specific liability of the Trustee under the
Pooling and Servicing Agreement or (ii) incurred by reason of willful
misfeasance, bad faith or negligence in the performance of the Trustee's duties
under the Pooling and Servicing Agreement, or by reason of reckless disregard,
of the Trustee's obligations and duties under the Pooling and Servicing
Agreement.
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
The principal compensation (the "SERVICING FEE") to be paid to the
Servicer in respect of its servicing activities for the Certificates will be at
the "SERVICING FEE RATE" of 0.50% per annum on the Principal Balance of each
Mortgage Loan. As additional servicing compensation, the Servicer is entitled to
retain all service-related fees, including assumption fees, modification fees,
extension fees and late payment charges, to the extent collected from
mortgagors, together with any interest or other income earned on funds held in
the Collection Account and any escrow accounts. The Servicer is obligated to
offset any Prepayment Interest Shortfall on Actuarial Mortgage Loans on any
Distribution Date (payments the Servicer makes in satisfaction of such
obligation, "COMPENSATING INTEREST") by an amount not in excess of one-half of
its Servicing Fee for such Distribution Date. The Servicer will not offset any
Prepayment Interest Shortfall on Simple Interest Mortgage Loans on any
Distribution Date. The Servicer is obligated to pay certain insurance premiums
and certain ongoing expenses associated with the Mortgage Pool and incurred by
the Servicer in connection with its responsibilities under the Pooling and
Servicing Agreement and is entitled to reimbursement therefor as provided in the
Pooling and Servicing Agreement.
The Servicer, in its capacity as a special servicer, is also entitled
to an additional servicing fee (the "SPECIAL SERVICING FEE"), in connection with
Mortgage Loans that are 90 or more days Delinquent (other than with respect to
the Re-Performing Mortgage Loans). As more fully described in the Pooling and
Servicing Agreement, the Special
S-52
<PAGE>
Servicing Fee is equal to $150 per Mortgage Loan that is 90 or more days
Delinquent, payable monthly for eighteen consecutive months commencing in the
first month after the Cut-off Date in which payments on such Mortgage Loan are
90 or more days Delinquent, unless such Mortgage Loan becomes less than 90 days
Delinquent or is liquidated or repurchased. The Servicer will remain entitled to
receive any Special Servicing Fees owed but not paid from previous Distribution
Dates.
The "DETERMINATION DATE" with respect to any Distribution Date will be
the 10th day of the calendar month in which such Distribution Date occurs or, if
such day is not a Business Day, the Business Day immediately preceding such 10th
day. With respect to any Determination Date and each Mortgage Loan as to which a
principal prepayment in full was applied during the prior calendar month, the
"PREPAYMENT INTEREST SHORTFALL" is an amount equal to the interest at the
Mortgage Interest Rate for such Mortgage Loan (net of the Servicing Fee Rate and
mortgage insurance premium, if any) on the amount of such principal prepayment
for the number of days commencing on the date on which the principal prepayment
is applied and ending on the last day of the prior calendar month.
PLEDGE AND ASSIGNMENT OF SERVICER'S RIGHTS
On or after the Closing Date, the Servicer will pledge and assign all
of its right, title and interest in, to and under the Pooling and Servicing
Agreement to one or more lenders (each, a "SERVICING RIGHTS PLEDGEE") selected
by the Servicer, including First Union National Bank, as the representative of
certain lenders. In the event that an Event of Servicing Termination (as defined
below) occurs, the Trustee and the Depositor have agreed to the appointment of
the selected Serving Rights Pledgee or its designee as the successor servicer,
provided that at the time of such appointment the Servicing Rights Pledgee or
such designee meets the requirements of a successor servicer described in the
Pooling and Servicing Agreement (including being acceptable to the Rating
Agencies) and that the selected Servicing Rights Pledgee or such designee agrees
to be subject to the terms of the Pooling and Servicing Agreement.
OPTIONAL TERMINATION
The Seller will have the right to purchase all of the Mortgage Loans
and REO Properties in the Trust Fund and thereby effect the early retirement of
the Certificates, on any Distribution Date on which the aggregate Principal
Balance of such Mortgage Loans and REO Properties is less than 10% of the
aggregate Principal Balance of the Mortgage Loans as of the Cut-Off Date. The
first Distribution Date on which such option could be exercised is referred to
herein as the "OPTIONAL TERMINATION Date". In the event that the option is
exercised, the purchase will be made at a price (the "TERMINATION PRICE")
generally equal to par plus accrued and unpaid interest for each Mortgage Loan
at the related Mortgage Interest Rate to but not including the first day of the
month in which such purchase price is distributed plus the amount of any
unreimbursed Advances and Servicing Advances made by the Servicer. Proceeds from
such purchase will be included in Available Funds and will be distributed to the
holders of the Certificates in accordance with the Pooling and Servicing
Agreement. Any such purchase of Mortgage Loans and REO Properties will result in
the early retirement of the Certificates.
OPTIONAL PURCHASE OF DEFAULTED LOANS
As to any Mortgage Loan which is Delinquent in payment by 60 days or
more, the Seller may, at its option, purchase such Mortgage Loan from the Trust
Fund at the Purchase Price for such Mortgage Loan.
EVENTS OF SERVICING TERMINATION
Events of Servicing Termination will consist, among other things, of:
(i) any failure by the Servicer to deposit in the Collection Account or
Distribution Account the required amounts or remit to the Trustee any payment
which continues unremedied for one Business Day following written notice to the
Servicer; (ii) any failure of the Servicer to make any Advance with respect to
an Actuarial Mortgage Loan or to cover any Prepayment Interest Shortfalls on
Actuarial Mortgage Loans, as described herein, which failure continues
unremedied for one Business Day; (iii) any failure of the Servicer to observe or
perform in any material respect any other of its covenants or agreements in the
Pooling and Servicing Agreement, which continues unremedied for 30 days after
the first date on
S-53
<PAGE>
which (x) the Servicer has knowledge of such failure or (y) written notice of
such failure is given to the Servicer; (iv) insolvency, readjustment of debt,
marshalling of assets and liabilities or similar proceedings, and certain
actions by or on behalf of the Servicer indicating its insolvency or inability
to pay its obligations; or (v) cumulative Realized Losses as of any Distribution
Date exceed the permitted amount specified in the Pooling and Servicing
Agreement.
RIGHTS UPON EVENT OF SERVICING TERMINATION
So long as an Event of Servicing Termination under the Pooling and
Servicing Agreement remains unremedied, the Trustee may, and at the direction of
the holders of the Offered Certificates evidencing not less than 51% of the
Voting Rights is required to, terminate all of the rights and obligations of the
Servicer in its capacity as servicer with respect to the Mortgage Loans, as
provided in the Pooling and Servicing Agreement, whereupon the Trustee will
succeed to all of the responsibilities and duties of the Servicer under the
Pooling and Servicing Agreement, including the obligation to make any required
Advances, subject to the pledge and assignment to the Servicing Rights Pledgee
as described above. No assurance can be given that termination of the rights and
obligations of the Servicer under the Pooling and Servicing Agreement would not
adversely affect the servicing of the related Mortgage Loans, including the
delinquency experience of such Mortgage Loans.
No holder of an Offered Certificate, solely by virtue of such holder's
status as a holder of an Offered Certificate, will have any right under the
Pooling and Servicing Agreement to institute any proceeding with respect
thereto, unless such holder previously has given to the Trustee written notice
of default and unless the holders of Offered Certificates having not less than
51% of the Voting Rights evidenced by the Offered Certificates so agree and have
offered indemnity satisfactory to the Trustee.
VOTING RIGHTS
With respect to any Determination Date, the percentage of all the
Voting Rights allocated among holders of the Certificates (other than the Class
N, Class X and Class R Certificates) will be 98% and will be allocated among the
classes of such Certificates in the proportion that the aggregate Certificate
Principal Balance of all the Certificates of such class then outstanding bear to
the aggregate Certificate Principal Balance of all Certificates then
outstanding. With respect to any Determination Date, the percentage of all the
Voting Rights allocated among holders of the Class N and Class X Certificates
will be 2%. The Voting Rights allocated to a class of Certificates will be
allocated among all holders of each such class in proportion to the outstanding
certificate balances (or Percentage Interest) of such Certificates. The Class R
Certificates will not have any Voting Rights.
AMENDMENT
The Seller, the Depositor, the Servicer and the Trustee may amend the
Pooling and Servicing Agreement without the consent of the holders of the
Certificates, for certain limited purposes set forth in the Pooling and
Servicing Agreement. In addition, the Seller, the Depositor, the Servicer and
the Trustee and the holders of a majority in interest of any class of Offered
Certificates affected thereby may amend the Pooling and Servicing Agreement 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 of any class of Offered Certificates;
provided, however, that no such amendment may (i) reduce in any manner the
amount of, or delay the timing of, distributions required to be made on any
class of Offered Certificates without the consent of the holders of such
Certificates; (ii) adversely affect in any material respect the interests of the
holders of any class of Offered Certificates in a manner other than as described
in clause (i) above, without the consent of the holders of such class evidencing
percentage interests aggregating at least 66%; or (iii) reduce the aforesaid
percentage of aggregate outstanding principal amounts of Offered Certificates,
the holders of which are required to consent to any such amendment, without the
consent of the holders of all such Certificates.
S-54
<PAGE>
DESCRIPTION OF THE CERTIFICATES
GENERAL
The Certificates will be issued pursuant to the Pooling and Servicing
Agreement. Set forth below are summaries of the specific terms and provisions
pursuant to which the Offered Certificates will be issued. The following
summaries do not purport to be complete and are subject to, and are qualified in
their entirety by reference to, the provisions of the Pooling and Servicing
Agreement. When particular provisions or terms used in the Pooling and Servicing
Agreement are referenced, the actual provisions (including definitions of terms)
are incorporated by reference.
The Trust will issue the Class A-1F, Class A-2F, Class A-1A
Certificates (the "CLASS A CERTIFICATES" or the "SENIOR CERTIFICATES"), the
Class M-1, Class M-2, Class B-1, Class B-2, Class N and Class X Certificates
(the "SUBORDINATED CERTIFICATES") and the Class R Certificates (the "RESIDUAL
CERTIFICATES"). The Senior Certificates, the Subordinated Certificates and the
Residual Certificates are collectively referred to herein as the "CERTIFICATES."
Only the Class A, Class M-1, Class M-2, Class B-1 and Class B-2 Certificates are
offered hereby (the "OFFERED CERTIFICATES").
The Offered Certificates will have the respective Original Certificate
Principal Balances specified on the cover hereof, subject to a permitted
variance of plus or minus five percent.
The Offered Certificates will be issued in book-entry form as described
below. The Offered Certificates will be issued in minimum dollar denominations
of $25,000 and integral multiples of $1 in excess thereof.
Distributions on the Offered Certificates will be made by the Trustee
on the 25th day of each month, or if such day is not a Business Day, on the
first Business Day thereafter, commencing in December 2000 (each, a
"DISTRIBUTION DATE"), to the persons in whose names such Certificates are
registered at the close of business on the Record Date. With respect to the
Offered Certificates (other than the Class A-1A Certificates), the "RECORD DATE"
is the last Business Day of the month immediately preceding the month in which
the related Distribution Date occurs or the Closing Date, in the case of the
first Distribution Date. With respect to the Class A-1A Certificates, the
"RECORD DATE" is the Business Day immediately preceding such Distribution Date;
provided, however, that if any Class A-1A Certificate becomes a Definitive
Certificate (as defined herein), the Record Date for such Certificate will be
the last Business Day of the month immediately preceding the month in which the
related Distribution Date occurs.
BOOK-ENTRY CERTIFICATES
The Offered Certificates will be book-entry Certificates (the
"BOOK-ENTRY CERTIFICATES"). Persons acquiring beneficial ownership interests in
the Offered Certificates ("CERTIFICATE OWNERS") will hold such Certificates
through DTC in the United States, or Clearstream or Euroclear (in Europe) if
they are participants of such systems (the "PARTICIPANTS"), or indirectly
through organizations which are participants in such systems (the "INDIRECT
PARTICIPANTS"). The Book-Entry Certificates will be issued in one or more
certificates which equal the aggregate Certificate Principal Balance of such
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 such positions in customers' securities accounts in the
depositaries' names on the books of DTC. Citibank will act as depositary for
Clearstream and The Chase Manhattan Bank will act as depositary for Euroclear
(in such capacities, individually the "RELEVANT DEPOSITARY" and collectively the
"EUROPEAN DEPOSITARIES"). Investors may hold such beneficial interests in the
Book-Entry Certificates in minimum denominations of $25,000. Except as described
below, no person acquiring a Book-Entry Certificate (each, a "BENEFICIAL OWNER")
will be entitled to receive a physical certificate representing such Certificate
(a "DEFINITIVE CERTIFICATE"). Unless and until Definitive Certificates are
issued, it is anticipated that the only "CERTIFICATEHOLDER" of the Offered
Certificates will be Cede & Co., as nominee of DTC. Certificate Owners will not
be Certificateholders as that term is used in the Pooling and Servicing
Agreement. Certificate Owners are only permitted to exercise their rights
indirectly through Participants and DTC.
S-55
<PAGE>
The beneficial owner's ownership of a Book-Entry Certificate will be
recorded on the records of the brokerage firm, bank, thrift institution or other
financial intermediary (each, a "FINANCIAL INTERMEDIARY") that maintains the
beneficial owner's account for such purpose. In turn, the Financial
Intermediary's ownership of such Book-Entry Certificate will be recorded on the
records of DTC (or of a participating firm that acts as agent for the Financial
Intermediary, whose interest will in turn be recorded on the records of DTC, if
the beneficial owner's Financial Intermediary is not a DTC Participant and on
the records of Clearstream or Euroclear, as appropriate).
Certificate Owners will receive all distributions of principal of and
interest on the Book-Entry Certificates from the Trustee through DTC and DTC
Participants. While the Book-Entry Certificates are outstanding (except under
the circumstances described below), under the rules, regulations and procedures
creating and affecting DTC and its operations (the "RULES"), DTC is required to
make book-entry transfers among Participants on whose behalf it acts with
respect to the Book-Entry Certificates and is required to receive and transmit
distributions of principal of, and interest on, the Book-Entry Certificates.
Participants and Indirect Participants with whom Certificate Owners have
accounts with respect to Book-Entry Certificates are similarly required to make
book-entry transfers and receive and transmit such distributions on behalf of
their respective Certificate Owners. Accordingly, although Certificate Owners
will not possess certificates representing their respective interests in the
Book-Entry Certificates, the Rules provide a mechanism by which Certificate
Owners will receive distributions and will be able to transfer their interest.
Certificateholders will not receive or be entitled to receive
certificates representing their respective interests in the Book-Entry
Certificates, except under the limited circumstances described below. Unless and
until Definitive Certificates are issued, Certificateholders who are not
Participants may transfer ownership of Book-Entry Certificates only through
Participants and Indirect Participants by instructing such Participants and
Indirect Participants to transfer Book-Entry Certificates, by book-entry
transfer, through DTC for the account of the purchasers of such Book-Entry
Certificates, which account is maintained with their respective Participants.
Under the Rules and in accordance with DTC's normal procedures, transfers of
ownership of Book-Entry Certificates will be executed through DTC and the
accounts of the respective Participants at DTC will be debited and credited.
Similarly, the Participants and Indirect Participants will make debits or
credits, as the case may be, on their records on behalf of the selling and
purchasing Certificateholders.
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 such
securities settled during such processing will be reported to the relevant
Euroclear or Clearstream Participants on such Business Day. Cash received in
Clearstream or Euroclear as a result of sales of securities by or through a
Clearstream Participant or Euroclear Participant to a DTC Participant will be
received with value on the DTC settlement date but will be available in the
relevant Clearstream or Euroclear cash account only as of the Business Day
following settlement in DTC. For information with respect to tax documentation
procedures relating to the Certificates, see "Material Federal Income Tax
Consequences--Partnership Interests," "Material Federal Income Tax
Consequences--Debt Securities," "Material Federal Income Tax
Consequences--Foreign Investors," and "Material Federal Income Tax
Consequences--Backup Withholding" in the prospectus and "Global Clearance,
Settlement and Tax Documentation Procedures--Certain U.S. Federal Income Tax
Documentation Requirements" in Annex I in this prospectus supplement.
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
accordance with DTC rules on behalf of the relevant European international
clearing system by the Relevant Depositary; however, such cross market
transactions will require delivery of instructions to the relevant European
international clearing system by the counterparty in such system in accordance
with its rules and procedures and within its established deadlines (European
time). The relevant European international clearing system will, if the
transaction meets its settlement requirements, deliver instructions to the
Relevant Depositary to take action to effect final settlement on its behalf by
delivering or receiving securities in DTC, and making or receiving payment in
S-56
<PAGE>
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.
DTC which is a New York-chartered limited purpose trust company,
performs services for its Participants, some of which (and/or their
representatives) own DTC. In accordance with its normal procedures, DTC is
expected to record the positions held by each DTC Participant in the Book-Entry
Certificates, whether held for its own account or as a nominee for another
person. In general, beneficial ownership of Book-Entry Certificates will be
subject to the Rules, as in effect from time to time.
Clearstream, 67 Bd Grande-Duchesse Charlotte, L-1331 Luxembourg, was
incorporated in 1970 as a limited company under Luxembourg law. Clearstream is
owned by banks, securities dealers and financial institutions, and currently has
about 100 shareholders, including U.S. financial institutions or their
subsidiaries. No single entity may own more than five percent of Clearstream's
stock.
Clearstream is registered as a bank in Luxembourg, and as such is
subject to regulation by the Institute Monetaire Luxembourgeois ("IML"), the
Luxembourg Monetary Authority, which supervises Luxembourg banks.
Clearstream holds securities for its customers ("CLEARSTREAM
PARTICIPANTS") and facilitates the clearance and settlement of securities
transactions by electronic book-entry transfers between their accounts.
Clearstream provides various services, including safekeeping, administration,
clearance and settlement of internationally traded securities and securities
lending and borrowing. Clearstream also deals with domestic securities markets
in several countries through established depository and custodial relationships.
Clearstream has established an electronic bridge with Morgan Guaranty Trust as
the Euroclear Operator in Brussels to facilitate settlement of trades between
systems. Clearstream currently accepts over 70,000 securities issues on its
books.
Clearstream's customers are world-wide financial institutions including
underwriters, securities brokers and dealers, banks, trust companies and
clearing corporations. Clearstream's United States customers are limited to
securities brokers and dealers and banks. Currently, Clearstream has
approximately 3,000 customers located in over 60 countries, including all major
European countries, Canada, and the United States. Indirect access to
Clearstream is available to other institutions which clear through or maintain a
custodial relationship with an account holder of Clearstream.
The Euroclear System ("EUROCLEAR") was created in 1968 to hold
securities for its participants ("EUROCLEAR PARTICIPANTS") and to clear and
settle transactions between Euroclear Participants through simultaneous
electronic book-entry delivery against payment, thereby eliminating the need for
physical movement of certificates and any risk from lack of simultaneous
transfers of securities and cash. Transactions may be settled in any of 29
currencies, including United States dollars. Euroclear includes various other
services, including securities lending and borrowing and interfaces with
domestic markets in several countries generally similar to the arrangements for
cross-market transfers with DTC described above. Euroclear is operated by the
Brussels, Belgium office of Morgan Guaranty Trust Company of New York (the
"EUROCLEAR OPERATOR"), under contract with Euroclear Clearance Systems S.C., a
Belgian cooperative corporation (the "COOPERATIVE"). All operations are
conducted by the Euroclear Operator, and all Euroclear securities clearance
accounts and Euroclear cash accounts are accounts with the Euroclear Operator,
not the Cooperative. The Cooperative establishes policy for Euroclear on behalf
of Euroclear Participants. Euroclear Participants include banks (including
central banks), securities brokers and dealers and other professional financial
intermediaries. Indirect access to Euroclear is also available to other firms
that clear through or maintain a custodial relationship with a Euroclear
Participant, either directly or indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. As such, it is
regulated and examined by the Board of Governors of the Federal Reserve System
and the New York State Banking Department, as well as the Belgian Banking
Commission.
Securities clearance accounts and cash accounts with the Euroclear
Operator are governed by the Terms and Conditions Governing Use of Euroclear and
the related Operating Procedures of the Euroclear System and applicable Belgian
law (collectively, the "TERMS AND CONDITIONS"). The Terms and Conditions govern
transfers of securities and cash within Euroclear, withdrawals of securities and
cash from Euroclear, and receipts of payments with respect to securities in
Euroclear. All securities in Euroclear are held on a fungible basis without
attribution of
S-57
<PAGE>
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
Distribution Date by the Trustee to Cede & Co., as nominee of DTC. DTC will be
responsible for crediting the amount of such payments to the accounts of the
applicable DTC Participants in accordance with DTC's normal procedures. Each DTC
Participant will be responsible for disbursing such payments to the beneficial
owners of the Book-Entry Certificates that it represents and to each Financial
Intermediary for which it acts as agent. Each such Financial Intermediary will
be responsible for disbursing funds to the beneficial owners of the Book-Entry
Certificates that it represents.
Under a book-entry format, beneficial owners of the Book-Entry
Certificates may experience some delay in their receipt of payments, since such
payments will be forwarded by the Trustee to Cede & Co. Distributions with
respect to Certificates held through Clearstream or Euroclear will be credited
to the cash accounts of Clearstream Participants or Euroclear Participants in
accordance with the relevant system's rules and procedures, to the extent
received by the Relevant Depositary. Such distributions will be subject to tax
reporting in accordance with relevant United States tax laws and regulations.
See "Material Federal Income Tax Consequences--Partnership Interests," "Material
Federal Income Tax Consequences--Debt Securities," "Material Federal Income Tax
Consequences-- Foreign Investors," and "Material Federal Income Tax
Consequences--Backup Withholding" in the Prospectus. Because DTC can only act on
behalf of DTC Participants, the ability of a beneficial owner to pledge
Book-Entry Certificates to persons or entities that do not participate in the
Depository system, or otherwise take actions in respect of such Book-Entry
Certificates, may be limited due to the lack of physical certificates for such
Book-Entry Certificates. In addition, issuance of the Book-Entry Certificates in
book-entry form may reduce the liquidity of such Certificates in the secondary
market since certain potential investors may be unwilling to purchase
Certificates for which they cannot obtain physical certificates.
Monthly and annual reports on the Trust Fund will be provided to Cede &
Co., as nominee of DTC, and may be made available by Cede & Co. to beneficial
owners upon request, in accordance with the rules, regulations and procedures
creating and affecting the DTC Participants to whose DTC accounts the Book-Entry
Certificates of such beneficial owners are credited.
DTC has advised the Trustee that, unless and until Definitive
Certificates are issued, DTC will take any action the holders of the Book-Entry
Certificates are permitted to take under the Pooling and Servicing Agreement
only at the direction of one or more Financial Intermediaries to whose DTC
accounts the Book-Entry Certificates are credited, to the extent that such
actions are taken on behalf of Financial Intermediaries whose holdings include
such Book-Entry Certificates. Clearstream or the Euroclear Operator, as the case
may be, will take any other action permitted to be taken by a Certificateholder
under the Agreement on behalf of a Clearstream Participant or Euroclear
Participant only in accordance with its relevant rules and procedures and
subject to the ability of the Relevant Depositary to effect such actions on its
behalf through DTC. DTC may take actions, at the direction of the related
Participants, with respect to some Book-Entry Certificates which conflict with
actions taken with respect to other Book-Entry Certificates.
Definitive Certificates will be issued to beneficial owners of the
Book-Entry Certificates, or their nominees, rather than to DTC, only if (a) DTC
or the Depositor advises the Trustee in writing that DTC is no longer willing,
qualified or able to discharge properly its responsibilities as nominee and
depository with respect to the Book-Entry Certificates and the Depositor or the
Trustee is unable to locate a qualified successor, (b) the Depositor, at its
sole option, with the consent of the Trustee, elects to terminate a book-entry
system through DTC or (c) after the occurrence of an Event of Default,
beneficial owners having Percentage Interests aggregating not less than 51% of
the Book-Entry Certificates advise the Trustee and DTC through the Financial
Intermediaries and the DTC Participants in writing that the continuation of a
book-entry system through DTC (or a successor thereto) is no longer in the best
interests of beneficial owners.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the Trustee will be required to notify all beneficial
owners of the occurrence of such event and the availability through DTC of
Definitive Certificates. Upon surrender by DTC of the global certificate or
certificates representing the Book-Entry
S-58
<PAGE>
Certificates and instructions for re-registration, the Trustee will issue
Definitive Certificates, and thereafter the Trustee will recognize the holders
of such Definitive Certificates as Certificateholders under the Agreement.
Although DTC, Clearstream and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of Book-Entry Certificates among
participants of DTC, Clearstream and Euroclear, they are under no obligation to
perform or continue to perform such procedures and such procedures may be
discontinued at any time.
Neither the Depositor, the 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 Cede &
Co. as nominee for DTC, or for maintaining, supervising or reviewing any records
relating to such beneficial ownership interests.
ALLOCATION OF AVAILABLE FUNDS
Distributions to holders of each class of Offered Certificates will be
made on each Distribution Date from Available Funds. "AVAILABLE FUNDS" will be
equal to the sum of the following amounts with respect to the Mortgage Loans,
net of amounts reimbursable or payable to the Servicer, including the Servicing
Fee and any accrued and unpaid Servicing Fee and the primary mortgage insurance
fee:
(i) the aggregate amount of Monthly Payments on the Mortgage Loans due
during the related Collection Period and received by the Trustee one business
day prior to the related Distribution Date,
(ii) certain unscheduled payments in respect of the Mortgage Loans,
including prepayments (but excluding any prepayment penalties and Arrearages
collected), insurance proceeds and liquidation proceeds net of certain expenses
received during the related Prepayment Period,
(iii) payments from the Servicer in connection with Advances and
Prepayment Interest Shortfalls for such Distribution Date,
(iv) the Purchase Price for any repurchased Mortgage Loan deposited to
the Collection Account during the related Prepayment Period,
(v) any Substitution Adjustments deposited in the Collection Account
during the related Prepayment Period, and
(vi) on the Distribution Date on which the Trust is to be terminated in
accordance with the Pooling and Servicing Agreement, the Termination Price.
The "COLLECTION PERIOD" with respect to any Distribution Date means the
period from the second day of the calendar month preceding the month in which
such Distribution Date occurs through the first day of the month in which such
Distribution Date occurs.
The "PREPAYMENT PERIOD" with respect to any Distribution Date means the
calendar month preceding the month in which such Distribution Date occurs.
INTEREST DISTRIBUTIONS
On each Distribution Date, based upon the information provided to it in
the Remittance Report, the Trustee will distribute the Interest Remittance
Amount in the following order of priority to the extent available:
first, to the Trustee, the Trustee Fee;
second, concurrently, to the Class A-1F, Class A-2F and Class A-1A
Certificates, pro rata, the applicable Accrued Certificate Interest for such
Distribution Date;
S-59
<PAGE>
third, concurrently, to the Class A-1F, Class A-2F and Class A-1A
Certificates, pro rata, the applicable Interest Carry Forward Amount for the
Class A-1F, Class A-2F and Class A-1A Certificates, respectively;
fourth, to the Class M-1 Certificates, the Accrued Certificate Interest
thereon for such Distribution Date;
fifth, to the Class M-2 Certificates, the Accrued Certificate Interest
thereon for such Distribution Date;
sixth, to the Class B-1 Certificates, the Accrued Certificate Interest
thereon for such Distribution Date;
seventh, to the Class B-2 Certificates, the Accrued Certificate
Interest thereon for such Distribution Date; and
eighth, the amount, if any, of the Interest Remittance Amount remaining
after application with respect to the priorities set forth above which is
defined as the "MONTHLY EXCESS INTEREST AMOUNT" for such Distribution Date and
will be applied as described below under "Description of the
Certificates--Application of Monthly Excess Cashflow Amounts."
"ACCRUED CERTIFICATE INTEREST" for each Class of Offered Certificates
and each Distribution Date means an amount equal to the interest accrued during
the related Interest Accrual Period on the Certificate Principal Balance of such
class of Certificates, minus each class's Interest Percentage of shortfalls
caused by the Relief Act for such Distribution Date.
"INTEREST CARRY FORWARD AMOUNT" means for any class of Certificates and
any Distribution Date the sum of (a) the excess, if any, of the Accrued
Certificate Interest and any Interest Carry Forward Amount for the prior
Distribution Date, over the amount in respect of interest actually distributed
on each class on such prior Distribution Date and (b) interest on such excess at
the applicable Pass-Through Rate (x) with respect to the Offered Certificates
(other than the Class A-1A Certificates) on the basis of a 360-day year
consisting of twelve 30-day months and (y) with respect to the Class A-1A
Certificates, on the basis of the actual number of days elapsed since the prior
Distribution Date. The "CLASS A INTEREST CARRY FORWARD AMOUNT" for any
Distribution Date is the sum of the Interest Carry Forward Amounts for the Class
A Certificates for such Distribution Date.
"INTEREST REMITTANCE AMOUNT" means, as of any Determination Date, the
sum, without duplication, of (i) all interest collected or advanced with respect
to the related Collection Period on the Mortgage Loans (less the Servicing Fee,
the mortgage insurance premiums, certain amounts available for reimbursement of
Advances and Servicing Advances as described above under "The Pooling and
Servicing Agreement--Advances" and certain other reimbursable expenses pursuant
to the Pooling and Servicing Agreement), (ii) all Compensating Interest the
Servicer paid on such Determination Date with respect to the Mortgage Loans and
(iii) the portion of any payment in connection with any substitution, Purchase
Price, Termination Price, liquidation proceeds (net of certain expenses) or
insurance proceeds relating to interest with respect to the Mortgage Loans
received during the related Collection Period.
The "INTEREST ACCRUAL PERIOD" for any Distribution Date and each class
of Offered Certificates, other than the Class A-1A Certificates, will be from
and including the first day of each month, commencing November 1, 2000, to and
including the last day of such month. With respect to the Offered Certificates
other than the Class A-1A Certificates, all calculations of interest will be
made on the basis of a 360-day year assumed to consist of twelve 30-day months.
With respect to the Class A-1A Certificates, the "Interest Accrual Period" for
any Distribution Date will be the period from the preceding Distribution Date,
or in the case of the first Distribution Date, from the Closing Date, to the day
prior to the current Distribution Date, and calculations of interest will be
made on the basis of the actual number of days in the Interest Accrual Period
and on a 360-day year.
The "INTEREST PERCENTAGE" is, with respect to any class of Certificates
and any Distribution Date, the ratio (expressed as a decimal carried to six
places) of the Accrued Certificate Interest for such class to the Accrued
Certificate Interest for all classes, in each case with respect to such
Distribution Date.
S-60
<PAGE>
If the Interest Remittance Amount and the Monthly Excess Cashflow
Amount are insufficient on any Distribution Date to distribute the aggregate
Accrued Certificate Interest on the Class A Certificates entitled to
distributions of interest, any shortfall in available amounts will be allocated
to the Class A Certificates pro rata in accordance with their Interest
Percentages.
PRINCIPAL DISTRIBUTIONS
With respect to each Distribution Date (a) before the Stepdown Date or
(b) with respect to which a Trigger Event is in effect, Holders of the Class
A-1F and Class A-2F Certificates will in the aggregate be entitled to receive
the Group 1 Principal Percentage of the Principal Distribution Amount for such
Distribution Date and the Holders of the Class A-1A Certificates will be
entitled to receive the Group 2 Principal Percentage of the Principal
Distribution Amount for such Distribution Date, until the Certificate Principal
Balances thereof have been reduced to zero. Principal amounts otherwise
distributable to the Class A-1F and Class A-2F Certificates will be distributed
to the Class A-1A Certificates once the Certificate Principal Balances of the
Class A-1F and Class A-2F Certificates have been reduced to zero. Principal
amounts otherwise distributable to the Class A-1A Certificates will be
distributed to the Class A-1F and Class A-2F Certificates once the Certificate
Principal Balance of the Class A-1A Certificates has been reduced to zero.
Amounts allocated to the Class A-1F and Class A-2F Certificates will be
distributed sequentially to the Class A-1F and Class A-2F Certificates, in that
order, until the Certificate Principal Balances thereof are reduced to zero.
Once the Certificate Principal Balances of the Class A Certificates have been
reduced to zero, the Holders of the Class M-1 Certificates will be entitled to
receive 100% of the Principal Distribution Amount for such Distribution Date
until the Certificate Principal Balance of the Class M-1 Certificates has been
reduced to zero. Once the Certificate Principal Balance of the Class M-1
Certificates has been reduced to zero, the Holders of the Class M-2 Certificates
will be entitled to receive 100% of the Principal Distribution Amount until the
Certificate Principal Balance of the Class M-2 Certificates has been reduced to
zero. Similarly, once the Certificate Principal Balance of the Class M-2
Certificates has been reduced to zero, the Holders of the Class B-1 Certificates
will be entitled to receive 100% of the Principal Distribution Amount until the
Certificate Principal Balance of the Class B-1 Certificates has been reduced to
zero. Finally, once the Certificate Principal Balance of the Class B-1
Certificates has been reduced to zero, the Holders of the Class B-2 Certificates
will be entitled to receive 100% of the Principal Distribution Amount until the
Certificate Principal Balance of the Class B-2 Certificates has been reduced to
zero.
The "GROUP 1 PRINCIPAL PERCENTAGE" with respect to any Distribution
Date and the Class A-1F and Class A-2F Certificates, will be the percentage
equivalent of a fraction, the numerator of which is the amount of principal
collections (including any principal advanced by the Servicer) allocable to Loan
Group 1 for the related Collection Period or Prepayment Period, as applicable,
and the denominator of which is the amount of principal collections (including
any principal advanced by the Servicer) allocable to Loan Group 1 and Loan Group
2 for the related Collection Period or Prepayment Period, as applicable. The
"GROUP 2 PRINCIPAL PERCENTAGE" with respect to any Distribution Date and the
Class A-1A Certificates, will be the percentage equivalent of a fraction, the
numerator of which is the amount of principal collections (including any
principal advanced by the Servicer) allocable to Loan Group 2 for the related
Collection Period or Prepayment Period, as applicable, and the denominator of
which is the amount of principal collections (including any principal advanced
by the Servicer) allocable to Loan Group 1 and Loan Group 2 for the related
Collection Period or Prepayment Period, as applicable.
With respect to each Distribution Date (a) on or after the Stepdown
Date and (b) as long as a Trigger Event is not in effect, the Holders of all
classes of Certificates will be entitled to receive payments of principal, in
the order of priority and in the amounts set forth below:
first, concurrently as follows:
(i) the Group 1 Principal Percentage of the lesser of (x) the Principal
Distribution Amount and (y) Class A Principal Distribution Amount will be
distributed sequentially, to the Class A-1F and Class A-2F Certificates, in that
order, until the Certificate Principal Balance of each such class has been
reduced to zero and then to the Class A-1A Certificates, until the Certificate
Principal Balance of such class has been reduced to zero; and
(ii) the Group 2 Principal Percentage of the lesser of (x) the
Principal Distribution Amount and (y) Class A Principal Distribution Amount will
be distributed to the Class A-1A Certificates, until the Certificate Principal
S-61
<PAGE>
Balance of such class has been reduced to zero and then sequentially to the
Class A-1F and Class A-2F Certificates, in that order, until the Certificate
Principal Balance of each such class has been reduced to zero;
second, the lesser of (x) the excess of (i) the Principal Distribution
Amount over (ii) the amount distributed to the Class A Certificates in priority
first above and (y) the Class M-1 Principal Distribution Amount will be
distributed to the Class M-1 Certificates, until the Certificate Principal
Balance thereof has been reduced to zero;
third, the lesser of (x) the excess of (i) the Principal Distribution
Amount over (ii) the sum of the amount distributed to the Class A Certificates
in priority first above and the amount distributed to the Class M-1 Certificates
in priority second above and (y) the Class M-2 Principal Distribution Amount
will be distributed to the Class M-2 Certificates, until the Certificate
Principal Balance thereof has been reduced to zero;
fourth, the lesser of (x) the excess of (i) the Principal Distribution
Amount over (ii) the sum of the amount distributed to the Class A Certificates
pursuant to priority first above, the amount distributed to the Class M-1
Certificates pursuant to priority second above and the amount distributed to the
Class M-2 Certificates pursuant to priority third above and (y) the Class B-1
Principal Distribution Amount will be distributed to the Class B-1 Certificates,
until the Certificate Principal Balance thereof has been reduced to zero;
fifth, the lesser of (x) the excess of (i) the Principal Distribution
Amount over (ii) the sum of the amount distributed to the Class A Certificates
pursuant to priority first above, the amount distributed to the Class M-1
Certificates pursuant to priority second above, the amount distributed to the
Class M-2 Certificates pursuant to priority third above and the amount
distributed to the Class B-1 Certificates pursuant to priority fourth above and
(y) the Class B-2 Principal Distribution Amount will be distributed to the Class
B-2 Certificates, until the Certificate Principal Balance thereof has been
reduced to zero; and
sixth, any amount of the Principal Distribution Amount remaining after
making all of the distributions in priority first, second, third, fourth and
fifth above will be included as part of the Monthly Excess Cashflow Amount and
will be applied as described below under "Description of the
Certificates--Application of Monthly Excess Cashflow Amounts."
For purposes of the foregoing, the following terms will have the
respective meanings set forth below.
The "CERTIFICATE PRINCIPAL BALANCE" with respect to any class of
Certificates and any Distribution Date, will equal the principal balance of such
class on the date of the initial issuance of the Certificates as reduced, but
not below zero, by:
o all amounts distributed on previous Distribution Dates on such class on
account of principal; and
o such class's share of any Applied Realized Loss Amount for previous
Distribution Dates.
"CLASS A PRINCIPAL DISTRIBUTION AMOUNT" means as of any Distribution
Date on or after the Stepdown Date and as long as a Trigger Event is not in
effect, the excess of (x) the sum of the Certificate Principal Balances of the
Class A Certificates immediately prior to such Distribution Date over (y) the
lesser of (A) the product of (i) approximately 64.0% and (ii) the Pool Balance
as of the last day of the related Collection Period and (B) the Pool Balance as
of the last day of the related Collection Period minus the product of (i) 0.50%
and (ii) the Pool Balance on the Cut-off Date.
"CLASS M-1 PRINCIPAL DISTRIBUTION AMOUNT" means as of any Distribution
Date on or after the Stepdown Date and as long as a Trigger Event is not in
effect, the excess of (x) the sum of (i) the sum of the Certificate Principal
Balances of the Class A Certificates (after taking into account the payment of
the Class A Principal Distribution Amount on such Distribution Date) and (ii)
the Certificate Principal Balance of the Class M-1 Certificates immediately
prior to such Distribution Date over (y) the lesser of (A) the product of (i)
approximately 78.0% and (ii) the Pool Balance as of the last day of the related
Collection Period and (B) the Pool Balance as of the last day of the related
Collection Period minus the product of (i) 0.50% and (ii) the Pool Balance on
the Cut-off Date.
S-62
<PAGE>
"CLASS M-2 PRINCIPAL DISTRIBUTION AMOUNT" means as of any Distribution
Date on or after the Stepdown Date and as long as a Trigger Event is not in
effect, the excess of (x) the sum of (i) the sum of the Certificate Principal
Balances of the Class A Certificates (after taking into account the payment of
the Class A Principal Distribution Amount on such Distribution Date), (ii) the
Certificate Principal Balance of the Class M-1 Certificates (after taking into
account the payment of the Class M-1 Principal Distribution Amount on such
Distribution Date) and (iii) the Certificate Principal Balance of the Class M-2
Certificates immediately prior to such Distribution Date over (y) the lesser of
(A) the product of (i) approximately 87.5% and (ii) the Pool Balance as of the
last day of the related Collection Period and (B) the Pool Balance as of the
last day of the related Collection Period minus the product of (i) 0.50% and
(ii) the Pool Balance on the Cut-off Date.
"CLASS B-1 PRINCIPAL DISTRIBUTION AMOUNT" means as of any Distribution
Date on or after the Stepdown Date and as long as a Trigger Event is not in
effect, the excess of (x) the sum of (i) the sum of the Certificate Principal
Balances of the Class A Certificates (after taking into account the payment of
the Class A Principal Distribution Amount on such Distribution Date), (ii) the
Certificate Principal Balance of the Class M-1 Certificates (after taking into
account the payment of the Class M-1 Principal Distribution Amount on such
Distribution Date), (iii) the Certificate Principal Balance of the Class M-2
Certificates (after taking into account the payment of the Class M-2 Principal
Distribution Amount on such Distribution Date) and (iv) the Certificate
Principal Balance of the Class B-1 Certificates immediately prior to such
Distribution Date over (y) the lesser of (A) the product of (i) approximately
93.5% and (ii) the Pool Balance as of the last day of the related Collection
Period and (B) the Pool Balance as of the last day of the related Collection
Period minus the product of (i) 0.50% and (ii) the Pool Balance on the Cut-off
Date.
"CLASS B-2 PRINCIPAL DISTRIBUTION AMOUNT" means as of any Distribution
Date on or after the Stepdown Date and as long as a Trigger Event is not in
effect, the excess of (x) the sum of (i) the sum of the Certificate Principal
Balances of the Class A Certificates (after taking into account the payment of
the Class A Principal Distribution Amount on such Distribution Date), (ii) the
Certificate Principal Balance of the Class M-1 Certificates (after taking into
account the payment of the Class M-1 Principal Distribution Amount on such
Distribution Date), (iii) the Certificate Principal Balance of the Class M-2
Certificates (after taking into account the payment of the Class M-2 Principal
Distribution Amount on such Distribution Date), (iv) the Certificate Principal
Balance of the Class B-1 Certificates (after taking into account the payment of
the Class B-1 Principal Distribution Amount on such Distribution Date) and (v)
the Certificate Principal Balance of the Class B-2 Certificates immediately
prior to such Distribution Date over (y) the lesser of (A) the product of (i)
approximately 96.5% and (ii) the Pool Balance as of the last day of the related
Collection Period and (B) the Pool Balance as of the last day of the related
Collection Period minus the product of (i) 0.50% and (ii) the Pool Balance on
the Cut-off Date.
"EXTRA PRINCIPAL DISTRIBUTION AMOUNT" means, as of any Distribution
Date, the lesser of (x) the Monthly Excess Interest Amount for such Distribution
Date and (y) the Overcollateralization Deficiency for such Distribution Date.
"OVERCOLLATERALIZATION AMOUNT" means, as of any Distribution Date the
excess, if any, of (x) the Pool Balance as of the last day of the immediately
preceding Collection Period over (y) the aggregate Certificate Principal Balance
of all classes of Offered Certificates (after taking into account all
distributions of principal on such Distribution Date).
"OVERCOLLATERALIZATION DEFICIENCY" means, as of any Distribution Date,
the excess, if any, of (x) the Targeted Overcollateralization Amount for such
Distribution Date over (y) the Overcollateralization Amount for such
Distribution Date, calculated for this purpose after taking into account the
reduction on such Distribution Date of the Certificate Principal Balances of all
classes of Certificates resulting from the distribution of the Principal
Distribution Amount (but not the Extra Principal Distribution Amount) on such
Distribution Date, but prior to taking into account any Applied Realized Loss
Amounts on such Distribution Date.
"OVERCOLLATERALIZATION RELEASE AMOUNT" means, with respect to any
Distribution Date on or after the Stepdown Date on which a Trigger Event is not
in effect, the lesser of (x) the Principal Remittance Amount for such
Distribution Date and (y) the excess, if any, of (i) the Overcollateralization
Amount for such Distribution Date, assuming that 100% of the Principal
Remittance Amount is applied as a principal payment on the Certificates on such
Distribution Date, over (ii) the Targeted Overcollateralization Amount for such
Distribution Date.
S-63
<PAGE>
"PRINCIPAL DISTRIBUTION AMOUNT" means as of any Distribution Date, the
sum of (i) the Principal Remittance Amount (minus the Overcollateralization
Release Amount, if any) and (ii) the Extra Principal Distribution Amount, if
any.
"PRINCIPAL REMITTANCE AMOUNT" means, with respect to any Distribution
Date, to the extent of funds available therefor as described herein, the amount
equal to the sum (less certain amounts available for reimbursement of Advances
and Servicing Advances as described above under "The Pooling and Servicing
Agreement--Advances" and certain other reimbursable expenses pursuant to the
Pooling and Servicing Agreement) of the following amounts (without duplication)
with respect to the Mortgage Loans and the immediately preceding Collection
Period: (i) each payment of principal on a Mortgage Loan due during such
Collection Period and received by the Servicer on or prior to the related
Determination Date, including any Advances with respect thereto, (ii) all full
and partial principal prepayments received by the Servicer during the related
Prepayment Period, (iii) the liquidation proceeds (net of certain expenses)
allocable to principal actually collected by the Servicer during the related
Prepayment Period, (iv) the portion of the Purchase Price allocable to principal
of all repurchased Defective Mortgage Loans with respect to such Prepayment
Period and (v) any Substitution Adjustments received on or prior to the previous
Determination Date and not yet distributed, and (vi) on the Distribution Date on
which the Trust is to be terminated in accordance with the Pooling and Servicing
Agreement, that portion of the Termination Price in respect of principal.
"RE-PERFORMING 60+ DAY DELINQUENT LOAN" means each Mortgage Loan with
respect to which, as of any date of determination, (x) any portion of a Monthly
Payment is, as of the last day of the prior Collection Period, two months or
more past due and (y) with respect to which the mortgagor has made three Monthly
Payments within the three calendar months preceding such date of determination.
To the extent that, as of any date of determination, more than 10% of the
Mortgage Loans (measured by scheduled principal balance) are Re-Performing 60+
Day Delinquent Loans, the Re-Performing 60+ Day Delinquent Loans constituting
such excess shall be deemed to be 60+ Day Delinquent Loans.
"SENIOR ENHANCEMENT PERCENTAGE" for any Distribution Date is the
percentage obtained by dividing (x) the sum of (i) the aggregate Certificate
Principal Balance of the Subordinated Certificates and (ii) the
Overcollateralization Amount, in each case before taking into account the
distribution of the Principal Distribution Amount on such Distribution Date by
(y) the Pool Balance as of the last day of the related Collection Period.
"SENIOR SPECIFIED ENHANCEMENT PERCENTAGE" on any date of determination
thereof means approximately 36%.
"60+ DAY DELINQUENT LOAN" means each Mortgage Loan with respect to
which any portion of a Monthly Payment is, as of the last day of the prior
Collection Period, two months or more past due (other than a Re-Performing 60+
Day Delinquent Loan), each Mortgage Loan in foreclosure, all REO Property and
each Mortgage Loan for which the Mortgagor has filed for bankruptcy after the
Closing Date. Any Mortgage Loan which, on a 3-month rolling average basis, has
made its scheduled principal and interest payments, will not be considered to be
a 60+ Day Delinquent Loan.
"STEPDOWN DATE" means the later to occur of (x) the earlier to occur of
(A) the Distribution Date in December 2003 and (B) the Distribution Date on
which the aggregate Certificate Principal Balance of the Class A Certificates is
reduced to zero, and (y) the first Distribution Date on which the Senior
Enhancement Percentage is greater than or equal to the Senior Specified
Enhancement Percentage.
"TARGETED OVERCOLLATERALIZATION AMOUNT" means as of any Distribution
Date, (x) prior to the Stepdown Date, 1.75% of the initial Pool Balance and (y)
on and after the Stepdown Date, the lesser of (i) 1.75% of the initial Pool
Balance and (ii) the greater of (A) 3.50% of the Pool Balance as of the last day
of the related Collection Period and (B) 0.50% of the initial Pool Balance.
A "TRIGGER EVENT" has occurred on a Distribution Date if (i) the
six-month rolling average of 60+ Day Delinquent Loans equals or exceeds 45% of
the Senior Enhancement Percentage; provided, that if the Certificate Principal
Balance of the Senior Certificates has been reduced to zero, a Trigger Event
will have occurred if the six-month rolling average of 60+ Day Delinquent Loans
equals or exceeds 20% or (ii) the aggregate amount of Realized
S-64
<PAGE>
Losses incurred since the Cut-off Date through the last day of the related
Collection Period divided by the initial Pool Balance exceeds the applicable
percentages set forth below with respect to such Distribution Date:
<TABLE>
<CAPTION>
DISTRIBUTION DATE OCCURRING IN PERCENTAGE
------------------------------ ----------
<S> <C>
December 2003 through November 2004 2.75%
December 2004 through November 2005 3.50%
December 2005 through November 2006 4.00%
December 2006 and thereafter 4.50%
</TABLE>
ALLOCATION OF LOSSES
A "REALIZED LOSS" is:
o as to any Liquidated Mortgage Loan, the unpaid Principal Balance thereof
plus accrued and unpaid interest thereon at the Mortgage Interest Rate
through the last day of the month of liquidation, less the net proceeds
from the liquidation of, and any insurance proceeds from, such Mortgage
Loan and the related Mortgaged Property.
o as to any Mortgage Loan, a Deficient Valuation.
o as to any Mortgage Loan, a reduction in the Principal Balance thereof
resulting from a Servicer Modification.
A "LIQUIDATED MORTGAGE LOAN" is any defaulted Mortgage Loan as to which
the Servicer has determined that all amounts which it expects to recover from or
on account of such Mortgage Loan have been recovered.
A Realized Loss may result from the personal bankruptcy of a mortgagor
if the bankruptcy court establishes the value of the Mortgaged Property at an
amount less than the then outstanding Principal Balance of the Mortgage Loan
secured by such Mortgaged Property and reduces the secured debt to such value.
In such case, the Trust, as the holder of such Mortgage Loan, would become an
unsecured creditor to the extent of the difference between the outstanding
Principal Balance of such mortgage loan and such reduced secured debt (such
difference, a "DEFICIENT VALUATION").
If a Mortgage Loan is in default, or if default is reasonably
foreseeable, the Servicer may permit a modification of such Mortgage Loan to
reduce its Principal Balance and/or extend its term to a term not longer than
the latest maturity date of any other Mortgage Loan (any such modification, a
"SERVICER MODIFICATION"). Any such principal reduction will constitute a
Realized Loss at the time of such reduction. An extension of the term will not
result in a Realized Loss unless coupled with a principal reduction.
Realized Losses will, in effect, be absorbed first by the Class X
Certificates (through the application of the Monthly Excess Interest Amount to
fund such deficiency, as well as through a reduction in the
Overcollateralization Amount).
If, after giving effect to the distribution of the Principal
Distribution Amount on any Distribution Date the aggregate Certificate Principal
Balance of the Offered Certificates exceeds the Pool Balance as of the end of
the related Collection Period, such excess will be allocated against the Class
B-2, Class B-1, Class M-2 and Class M-1 Certificates, and the Class A-1F, Class
A-2F and Class A-1A Certificates pro rata, in that order and until the
respective Certificate Principal Balances thereof are reduced to zero. Any
allocation of such excess in reduction of a Certificate Principal Balance is
referred to as an "APPLIED REALIZED LOSS AMOUNT." Any such reduction of a
Certificate Principal Balance will not be reversed or reinstated. However, on
future Distribution Dates, Certificateholders of the related class may receive
amounts in respect of prior reductions in the related Certificate Principal
Balances as described below. Such subsequent payments will be applied in the
reverse of the order set forth above.
S-65
<PAGE>
APPLICATION OF MONTHLY EXCESS CASHFLOW AMOUNTS.
The weighted average Net Mortgage Interest Rate for the Mortgage Loans
is generally expected to be higher than the weighted average of the Pass-Through
Rates on the Offered Certificates, thus generating certain excess interest
collections which, in the absence of losses, will not be necessary to fund
interest distributions on the Certificates. This excess interest for a
Collection Period, together with interest on the Overcollateralization Amount
itself, is the "MONTHLY EXCESS INTEREST AMOUNT."
The "NET MORTGAGE INTEREST RATE" for each Mortgage Loan is the
applicable Mortgage Interest Rate, less (i) the Servicing Fee Rate, (ii) the
rate at which the Trustee Fee accrues and (iii) the rate at which the mortgage
insurance premium, if any, is calculated.
The required level of overcollateralization for any Distribution Date
is the Targeted Overcollateralization Amount. The Targeted Overcollateralization
Amount is initially $2,882,627.22.
If Realized Losses not covered by an application of the Monthly Excess
Interest Amount occur, such Realized Losses will result in an
Overcollateralization Deficiency (since it will reduce the Pool Balance without
giving rise to a corresponding reduction of the aggregate Certificate Principal
Balance of the Certificates). The cashflow priorities of the Trust Fund require
that, in this situation, an Extra Principal Distribution Amount be paid (subject
to the availability of any Monthly Excess Cashflow Amount in subsequent months)
for the purpose of re-establishing the Overcollateralization Amount at the
then-required Targeted Overcollateralization Amount.
On and after the Stepdown Date and assuming that a Trigger Event is not
in effect, the Targeted Overcollateralization Amount may be permitted to
decrease or "step-down." If the Targeted Overcollateralization Amount is
permitted to "step-down" on a Distribution Date, the Pooling and Servicing
Agreement permits a portion of the Principal Remittance Amount for such
Distribution Date not to be passed through as a distribution of principal on the
Offered Certificates on such Distribution Date. This has the effect of
decelerating the amortization of the Certificates relative to the Pool Balance,
thereby reducing the actual level of the Overcollateralization Amount to the
new, lower Targeted Overcollateralization Amount. This portion of the Principal
Remittance Amount not distributed as principal on the Certificates therefore
releases overcollateralization from the Trust Fund. The amount of such releases
are the "OVERCOLLATERALIZATION RELEASE AMOUNTS."
On any Distribution Date, the sum of the Monthly Excess Interest
Amount, the Overcollateralization Release Amount and any portion of the
Principal Distribution Amount (without duplication) remaining after principal
distributions on the Offered Certificates is the "MONTHLY EXCESS CASHFLOW
AMOUNT", which is required to be applied in the following order of priority (the
"MONTHLY EXCESS CASHFLOW ALLOCATION") on such Distribution Date:
(i) to fund any remaining applicable Accrued Certificate Interest
for such Distribution Date, pro rata, among the Class A-1F,
Class A-2F and Class A-1A Certificates;
(ii) to fund the remaining Interest Carry Forward Amounts for the
classes of Class A Certificates, if any, pro rata, among the
Class A-1F, Class A-2F and Class A-1A Certificates;
(iii) to fund the Extra Principal Distribution Amount for such
Distribution Date;
(iv) to fund any remaining Accrued Certificate Interest for such
Distribution Date for the Class M-1 Certificates;
(v) to fund the Interest Carry Forward Amount for the Class M-1
Certificates, if any;
(vi) to fund the Class M-1 Realized Loss Amortization Amount for
such Distribution Date;
(vii) to fund any remaining Accrued Certificate Interest for such
Distribution Date for the Class M-2 Certificates;
S-66
<PAGE>
(viii) to fund the Interest Carry Forward Amount for the Class M-2
Certificates, if any;
(ix) to fund the Class M-2 Realized Loss Amortization Amount for
such Distribution Date;
(x) to fund any remaining Accrued Certificate Interest for such
Distribution Date for the Class B-1 Certificates;
(xi) to fund the Interest Carry Forward Amount for the Class B-1
Certificates, if any;
(xii) to fund the Class B-1 Realized Loss Amortization Amount for
such Distribution Date;
(xiii) to fund any remaining Accrued Certificate Interest for such
Distribution Date for the Class B-2 Certificates;
(xiv) to fund the Interest Carry Forward Amount for the Class B-2
Certificates, if any;
(xv) to fund the Class B-2 Realized Loss Amortization Amount for
such Distribution Date;
(xvi) to fund the amount of any Class A-1A LIBOR Carryover Amount;
(xvii) to pay any Special Servicing Fees for such Distribution Date
or which remain unpaid from any previous Distribution Date;
and
(xviii) to fund distributions to the Holders of the Class N, Class X
and Class R Certificates in the amounts specified in the
Pooling and Servicing Agreement.
For purposes of the foregoing, the following terms will have the respective
meanings set forth below.
"CLASS M-1 APPLIED REALIZED LOSS AMOUNT" means, as to the Class M-1
Certificates and as of any Distribution Date, the lesser of (x) the Certificate
Principal Balance thereof (after taking into account the distribution of the
Principal Distribution Amount on such Distribution Date, but prior to the
application of the Class M-1 Applied Realized Loss Amount, if any, on such
Distribution Date) and (y) the excess of (i) the Applied Realized Loss Amount as
of such Distribution Date over (ii) the sum of the Class M-2 Applied Realized
Loss Amount, the Class B-1 Applied Realized Loss Amount and the Class B-2
Applied Realized Loss Amount, in each case as of such Distribution Date.
"CLASS M-1 REALIZED LOSS AMORTIZATION AMOUNT" means, as to the Class
M-1 Certificates and as of any Distribution Date, the lesser of (x) the Unpaid
Realized Loss Amount for the Class M-1 Certificates as of such Distribution Date
and (y) the excess of (i) the Monthly Excess Cashflow Amount over (ii) the sum
of the amounts described in clauses (i) through (v) of the Monthly Excess
Cashflow Allocation for such Distribution Date.
"CLASS M-2 APPLIED REALIZED LOSS AMOUNT" means, as to the Class M-2
Certificates and as of any Distribution Date, the lesser of (x) the Certificate
Principal Balance thereof (after taking into account the distribution of the
Principal Distribution Amount on such Distribution Date, but prior to the
application of the Class M-2 Applied Realized Loss Amount, if any, on such
Distribution Date) and (y) the excess of (i) the related Applied Realized Loss
Amount as of such Distribution Date over (ii) the sum of the Class B-1 Applied
Realized Loss Amount and the Class B-2 Applied Realized Loss Amount, in each
case, as of such Distribution Date.
"CLASS M-2 REALIZED LOSS AMORTIZATION AMOUNT" means, as to the Class
M-2 Certificates and as of any Distribution Date, the lesser of (x) the Unpaid
Realized Loss Amount for the Class M-2 Certificates as of such Distribution Date
and (y) the excess of (i) the Monthly Excess Cashflow Amount over (ii) the sum
of the amounts described in clauses (i) through (viii) of the Monthly Excess
Cashflow Allocation for such Distribution Date.
"CLASS B-1 APPLIED REALIZED LOSS AMOUNT" means, as to the Class B-1
Certificates and as of any Distribution Date, the lesser of (x) the Certificate
Principal Balance thereof (after taking into account the distribution
S-67
<PAGE>
of the Principal Distribution Amount on such Distribution Date, but prior to the
application of the Class B-1 Applied Realized Loss Amount, if any, on such
Distribution Date) and (y) the excess of (i) the related Applied Realized Loss
Amount as of such Distribution Date over (ii) the Class B-2 Applied Realized
Loss Amount as of such Distribution Date.
"CLASS B-1 REALIZED LOSS AMORTIZATION AMOUNT" means, as to the Class
B-1 Certificates and as of any Distribution Date, the lesser of (x) the Unpaid
Realized Loss Amount for the Class B-1 Certificates as of such Distribution Date
and (y) the excess of (i) the Monthly Excess Cashflow Amount over (ii) the sum
of the amounts described in clauses (i) through (xi) of the Monthly Excess
Cashflow Allocation for such Distribution Date.
"CLASS B-2 APPLIED REALIZED LOSS AMOUNT" means, as to the Class B-2
Certificates and as of any Distribution Date, the lesser of (x) the Certificate
Principal Balance thereof (after taking into account the distribution of the
Principal Distribution Amount on such Distribution Date, but prior to the
application of the Class B-2 Applied Realized Loss Amount, if any, on such
Distribution Date) and (y) the Applied Realized Loss Amount as of such
Distribution Date.
"CLASS B-2 REALIZED LOSS AMORTIZATION AMOUNT" means, as to the Class
B-2 Certificates and as of any Distribution Date, the lesser of (x) the Unpaid
Realized Loss Amount for the Class B-2 Certificates as of such Distribution Date
and (y) the excess of (i) the Monthly Excess Cashflow Amount over (ii) the sum
of the amounts described in clauses (i) through (xiv) of the Monthly Excess
Cashflow Allocation for such Distribution Date.
"REALIZED LOSS AMORTIZATION AMOUNT" means each of the Class M-1
Realized Loss Amortization Amount, the Class M-2 Realized Loss Amortization
Amount, the Class B-1 Realized Loss Amortization Amount and Class B-2 Realized
Loss Amortization Amount.
"UNPAID REALIZED LOSS AMOUNT" means for any class of Subordinated
Certificates and as to any Distribution Date, the excess of (x) the cumulative
amount of related Applied Realized Loss Amounts with respect to such class for
all prior Distribution Dates over (y) the cumulative amount of related Realized
Loss Amortization Amounts with respect to such class for all prior Distribution
Dates.
PASS-THROUGH RATES
Interest for each Distribution Date will accrue on the Offered
Certificates (other than the Class A Certificates) during the related Interest
Accrual Period at a rate equal to the lesser of (i) the applicable per annum
rate for such class as set forth on the cover page of this prospectus supplement
(each such rate, a "PASS-THROUGH RATE") and (ii) the Pool Cap for such
Distribution Date. The Pass-Through Rate is 7.055% for the Class A-1F
Certificates, 7.170% for the Class A-2F Certificates, LIBOR plus 0.32%, or on
each Distribution Date following the Optional Termination Date, LIBOR plus
0.64%, for the Class A-1A Certificates, 7.565% for the Class M-1 Certificates,
7.915% for the Class M-2 Certificates, 8.705% for the Class B-1 Certificates and
8.900% for the Class B-2 Certificates.
Interest for each Distribution Date will accrue on the Class A-1F
Certificates during the related Interest Accrual Period at a rate equal to the
least of (i) 7.055% per annum, (ii) the Group 1 Net Funds Cap for such
Distribution Date and (iii) the Pool Cap.
Interest for each Distribution Date will accrue on the Class A-2F
Certificates during the related Interest Accrual Period at a rate equal to the
least of (i) 7.170% per annum, or on each Distribution Date following the
Optional Termination Date, 7.670% per annum, (ii) the Group 1 Net Funds Cap for
such Distribution Date and (iii) the Pool Cap.
Interest for each Distribution Date will accrue on the Class A-1A
Certificates during the related Interest Accrual Period at a rate equal to the
least of (i) the Pass-Through Rate for the Class A-1A Certificates for such
Distribution Date, (ii) the Group 2 Net Funds Cap for such Distribution Date and
(iii) the Pool Cap.
S-68
<PAGE>
With respect to the Offered Certificates, other than the Class A-1A
Certificates, interest in respect of any Distribution Date will accrue during
the related Interest Accrual Period on the basis of a 360-day year consisting of
twelve 30-day months. With respect to the Class A-1A Certificates, interest in
respect of any Distribution Date will accrue during the related Interest Accrual
Period on the basis of a 360-day year and the actual number of days elapsed.
The Pass-Through Rate for the Class A-1A Certificates for each
Distribution Date will be LIBOR as of the related LIBOR Determination Date plus
the Class A-1A Certificate Margin. The "CLASS A-1A CERTIFICATE MARGIN" on each
Distribution Date on or prior to the Optional Termination Date will equal 0.32%
per annum and on each Distribution Date following the Optional Termination Date,
will equal 0.64% per annum.
The "GROUP 1 NET FUNDS CAP" for any Distribution Date will equal the
product of (i) the average of the Net Mortgage Interest Rates of the Group 1
Mortgage Loans, weighted on the basis of the related Mortgage Loan balances as
of the first day of the related Collection Period and (ii) the Pool Balance
divided by the aggregate Certificate Principal Balance of the Offered
Certificates.
The "GROUP 2 NET FUNDS CAP" for any Distribution Date will equal the
product of (i) the average of the Net Mortgage Interest Rates of the Group 2
Mortgage Loans, weighted on the basis of the related Mortgage Loan balances as
of the first day of the related Collection Period, expressed on the basis of an
assumed 360-day year and the actual number of days elapsed during the related
accrual period and (ii) the Pool Balance divided by the aggregate Certificate
Principal Balance of the Offered Certificates.
The "POOL CAP" for any Distribution Date will equal the product of (i)
the average of the Net Mortgage Interest Rates, weighted on the basis of the
Mortgage Loan balances as of the first day of the related Collection Period and
(ii) the Pool Balance divided by the aggregate Certificate Principal Balance of
the Offered Certificates.
If on any Distribution Date, the Accrued Certificate Interest for the
Class A-1A Certificates is based on the Group 2 Net Funds Cap or the Pool Cap,
the excess of (i) the amount of interest the Class A-1A Certificates would have
been entitled to receive on such Distribution Date based on its applicable
Pass-Through Rate, over (ii) the amount of interest the Class A-1A Certificates
received on such Distribution Date based on the Group 2 Net Funds Cap or the
Pool Cap, together with the unpaid portion of any such excess from prior
Distribution Dates (and interest accrued thereon at the then applicable
Pass-Through Rate on the Class A-1A Certificates) will be the "CLASS A-1A LIBOR
CARRYOVER AMOUNT". Any Class A-1A LIBOR Carryover Amount will be paid on future
Distribution Dates from and to the extent of funds available in a reserve fund
maintained by the Trustee (the "EXCESS RESERVE FUND ACCOUNT"). The source of
funds on deposit in the Excess Reserve Fund Account will be limited to an
initial deposit of $5,000 and, as provided in the Pooling and Servicing
Agreement, amounts that would otherwise be distributed on the Class X
Certificates. The Class A-1A LIBOR Carryover Amount is also referred to herein
as a "LIBOR CARRYOVER AMOUNT".
CALCULATION OF LIBOR
LIBOR for the first Distribution Date will be determined on the second
business day preceding the Closing Date and for each subsequent Distribution
Date will be determined on the second business day prior to the immediately
preceding Distribution Date (each such date, a "LIBOR DETERMINATION DATE"). With
respect to each Distribution Date, "LIBOR" will equal the interbank offered rate
for one-month United States dollar deposits in the London market as quoted on
Tolerate Page 3750 as of 11:00 A.M., London time, on the related LIBOR
Determination Date. "TELERATE PAGE 3750" means the display designated as page
3750 on the Bridge Telerate (or such other page as may replace page 3750 on that
service for the purpose of displaying London interbank offered rates of major
banks). If such rate does not appear on such page (or such other page as may
replace that page on that service, or if such service is no longer offered, such
other service for displaying LIBOR or comparable rates as may be selected by the
Trustee after consultation with the Servicer), the rate will be the Reference
Bank Rate. The "REFERENCE BANK RATE" will be determined on the basis of the
rates at which deposits in U.S. Dollars are offered by the reference banks
(which shall be three major banks that are engaged in transactions in the London
interbank market, selected by the Trustee after consultation with the Servicer)
as of 11:00 A.M., London time, on the related LIBOR Determination Date to prime
banks in the London interbank market for a period of one month in amounts
approximately equal to the Certificate Principal Balance of the Class A-1A
Certificates. The Trustee will request
S-69
<PAGE>
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
will be the arithmetic mean of the quotations. If on such date fewer than two
quotations are provided as requested, the rate will be the arithmetic mean of
the rates quoted by one or more major banks in New York City, selected by the
Trustee after consultation with the Servicer, as of 11:00 A.M., New York City
time, on such date for loans in U.S. Dollars to leading European banks for a
period of one month in amounts approximately equal to the Certificate Principal
Balance of the Class A-1A Certificates. If no such quotations can be obtained,
the rate will be LIBOR for the prior Distribution Date.
The establishment of LIBOR on each LIBOR Determination Date by the
Trustee and the Trustee's calculation of the rate of interest applicable to the
Class A-1A Certificates for the related Interest Accrual Period shall (in the
absence of manifest error) be final and binding.
REPORTS TO CERTIFICATEHOLDERS
Monthly reports concerning the Trust Fund and the Certificates will be
made available by the Trustee to the Certificateholders. In addition, within 60
days after the end of each calendar year, beginning with the 2000 calendar year,
information for tax reporting purposes will be made available by the Trustee to
each person who has been a Certificateholder of record at any time during the
preceding calendar year.
PREPAYMENT AND YIELD CONSIDERATIONS
The yields to maturity and weighted average lives of the Offered
Certificates will depend upon, among other things, the price at which such
Offered Certificates are purchased, the amount and timing of principal payments
on the applicable Loan Group, the allocation of Available Funds to various
classes of Offered Certificates, the amount and timing of mortgagor
delinquencies and defaults on the Mortgage Loans, the rate of liquidations and
Realized Losses and the allocation of Realized Losses to various classes of
Offered Certificates.
The rate of payment of principal, the aggregate amount of distributions
and the yield to maturity of the Offered Certificates will be affected by the
rate of defaults resulting in Realized Losses, by the severity of these losses
and by the timing thereof. If a purchaser of an Offered Certificate calculates
its anticipated yield based on an assumed rate of default and amount of Realized
Losses that is lower than the default rate and amount of losses actually
incurred, its actual yield to maturity will be lower than that so calculated.
The timing of Realized Losses will also affect an investor's actual yield to
maturity, even if the average rate of defaults and severity of losses are
consistent with an investor's expectations. In general, the earlier a loss
occurs, the greater is the effect on an investor's yield to maturity. There can
be no assurance as to the delinquency, foreclosure or loss experience with
respect to the Mortgage Loans. Some of the Mortgage Loans may have a greater
than normal risk of future defaults and delinquencies, as compared to newly
originated, high quality one- to four-family residential mortgage loans of
comparable size and geographic concentration because such Mortgage Loans have in
the past defaulted, and in addition, the Bankruptcy Plan Mortgage Loans have
been involved in subsequent proceedings under the federal Bankruptcy Code,
either as liquidations under Chapter 7 or reorganizations with approved
bankruptcy plans under Chapter 13. See "The Mortgage Pool--General" in this
prospectus supplement.
The rate of principal payments, the aggregate amount of distributions
and the yields to maturity of the Offered Certificates will be related to the
rate and timing of payments of principal on the Mortgage Loans. The rate of
principal payments on the Mortgage Loans will in turn be affected by the
amortization schedules of the Mortgage Loans and by the rate of principal
prepayments (including for this purpose prepayments resulting from refinancing,
liquidations of the Mortgage Loans due to defaults, casualties or condemnations
and repurchases by the Seller or Servicer). Because certain of the Mortgage
Loans contain prepayment penalties, the rate of principal payments may be less
than the rate of principal payments for mortgage loans which did not have
prepayment penalties. The Mortgage Loans are subject to the "due-on-sale"
provisions included therein. See "The Mortgage Pool" in this prospectus
supplement.
Unscheduled payments of principal (whether resulting from prepayments,
repurchases, liquidations, casualties or condemnations) will result in
distributions on the related Offered Certificates of principal amounts which
would otherwise be distributed over the remaining terms of the Mortgage Loans.
Since the rate of payment of principal on the Mortgage Loans will depend on
future events and a variety of other factors, no assurance can be
S-70
<PAGE>
given as to such rate or the rate of principal prepayments. The extent to which
the yield to maturity of a class of Offered Certificates may vary from the
anticipated yield will depend upon the degree to which such class of Offered
Certificates is purchased at a discount or premium, and the degree to which the
timing of payments thereon is sensitive to prepayments, liquidations and
purchases of the Mortgage Loans. Further, an investor should consider the risk
that, in the case of any Offered Certificate purchased at a discount, a slower
than anticipated rate of principal payments (including prepayments) on the
Mortgage Loans could result in an actual yield to such investor that is lower
than the anticipated yield and, in the case of any Offered Certificate purchased
at a premium, a faster than anticipated rate of principal payments on the
Mortgage Loans could result in an actual yield to such investor that is lower
than the anticipated yield.
The rate of principal payments (including prepayments) on pools of
mortgage loans may vary significantly over time and may be influenced by a
variety of economic, geographic, social and other factors, including changes in
mortgagors' housing needs, job transfers, unemployment, mortgagors' net equity
in the mortgaged properties and servicing decisions. In general, if prevailing
interest rates were to fall significantly below the Mortgage Interest Rates on
the Mortgage Loans, such Mortgage Loans could be subject to higher prepayment
rates than if prevailing interest rates were to remain at or above the Mortgage
Interest Rates on such Mortgage Loans. Conversely, if prevailing interest rates
were to rise significantly, the rate of prepayments on such Mortgage Loans would
generally be expected to decrease. As is the case with the Group 1 Mortgage
Loans, the Group 2 Mortgage Loans may be subject to a greater rate of principal
prepayments in a low interest rate environment. For example, if prevailing
interest rates were to fall, mortgagors with adjustable-rate Mortgage Loans may
be inclined to refinance their adjustable-rate Mortgage Loans with a fixed-rate
loan to "lock in" a lower interest rate. The existence of the applicable
Periodic Rate Cap and Maximum Rate also may affect the likelihood of prepayments
resulting from refinancings. No assurances can be given as to the rate of
prepayments on the Mortgage Loans in stable or changing interest rate
environments. In addition, the delinquency and loss experience of the Group 2
Mortgage Loans may differ from that on the Group 1 Mortgage Loans because the
amount of the Monthly Payments on the Group 2 Mortgage Loans are subject to
adjustment on each Adjustment Date. In addition, a majority of the Group 2
Mortgage Loans will not have their initial Adjustment Date for one to five years
after the origination thereof. The prepayment experience of the Delayed First
Adjustment Mortgage Loans may differ from that of the other Group 2 Mortgage
Loans. The Delayed First Adjustment Mortgage Loans may be subject to greater
rates of prepayments as they approach their initial Adjustment Dates even if
market interest rates are only slightly higher or lower than the Mortgage
Interest Rates on the Delayed First Adjustment Mortgage Loans as borrowers seek
to avoid changes in their Monthly Payments.
The weighted average life and yield to maturity of each class of
Certificates will also be influenced by the amount of Monthly Excess Cashflow
Amounts generated by the Mortgage Loans and applied in reduction of the
Certificate Principal Balances of such Certificates. The level of Monthly Excess
Cashflow Amounts available on any Distribution Date to be applied in reduction
of the Certificate Principal Balance of the Certificates will be influenced by,
among other factors, (i) the overcollateralization level of the Mortgage Loans
at such time (i.e., the extent to which interest on the Mortgage Loans is
accruing on a higher Principal Balance than the aggregate Certificate Principal
Balance of the Certificates); (ii) the delinquency and default experience of the
Mortgage Loans; and (iii) the level of the various indices for the Group 2
Mortgage Loans. To the extent that greater amounts of Monthly Excess Cashflow
Amounts are distributed in reduction of the Certificate Principal Balance of a
class of Certificates, the weighted average life thereof can be expected to
shorten. No assurance can be given as to the amount of Monthly Excess Cashflow
Amounts distributed at any time or in the aggregate.
For ease of presentation, Loan Group 1 has been divided into two
sub-groups. Each sub-group consists of Mortgage Loans with distinct
characteristics which are likely to produce differing prepayment, delinquency
and loss experience among the sub-groups. However, since the Class A-1F and
Class A-2F Certificates represent an interest in Loan Group 1 (including both
sub-groups), the prepayment, delinquency and loss experience on such classes of
Senior Certificates will represent a combination of the experience on the two
sub-groups. Similarly, the prepayment, delinquency and loss experience on the
Subordinated Certificates will reflect a combination of the experience of both
Loan Groups. There can be no assurance that any such combined experience will
correlate with the experience expected on a particular sub-group or loan group
of Mortgage Loans.
The Subordinated Certificates are not expected to receive any principal
distributions until at least the Distribution Date in December, 2003 (unless the
respective Certificate Principal Balances of the Senior Certificates
S-71
<PAGE>
are reduced to zero prior thereto). As a result, the weighted average lives of
the Subordinated Certificates will be longer than would have been the case if
principal distributions were to be made on a pro rata basis. The longer weighted
average lives may increase the risk that an Applied Realized Loss Amount will be
allocated to one or more classes of Subordinated Certificates.
ADDITIONAL INFORMATION
The Depositor has filed certain yield tables and other computational
materials with respect to certain classes of the Class A Certificates with the
Commission in a report on Form 8-K and may file certain additional yield tables
and other computational materials with respect to one or more classes of Offered
Certificates with the Commission in a report on Form 8-K. Such tables and
materials were prepared by one or more of the Underwriters at the request of
certain prospective investors, based on assumptions provided by, and satisfying
the special requirements of, such prospective investors. Such tables and
assumptions may be based on assumptions that differ from the Structuring
Assumptions. Accordingly, such tables and other materials may not be relevant to
or appropriate for investors other than those specifically requesting them.
WEIGHTED AVERAGE LIVES
The timing of changes in the rate of principal prepayments on the
Mortgage Loans may significantly affect an investor's actual yield to maturity,
even if the average rate of principal prepayments is consistent with such
investor's expectation. In general, the earlier a principal prepayment on the
Mortgage Loans occurs, the greater the effect of such principal prepayment on an
investor's yield to maturity. The effect on an investor's yield of principal
prepayments occurring at a rate higher (or lower) than the rate anticipated by
the investor during the period immediately following the issuance of the Offered
Certificates may not be offset by a subsequent like decrease (or increase) in
the rate of principal prepayments.
The projected weighted average life of any class of Offered
Certificates is the average amount of time that will elapse from the Closing
Date, until each dollar of principal is scheduled to be repaid to the investors
in such class of Offered Certificates. Because it is expected that there will be
prepayments and defaults on the Mortgage Loans, the actual weighted average
lives of the classes of Offered Certificates are expected to vary substantially
from the weighted average remaining terms to stated maturity of the Mortgage
Loans as set forth herein under "The Mortgage Pool."
Prepayments on mortgage loans are commonly measured relative to a
prepayment model or standard. The prepayment models used in this prospectus
supplement ("PREPAYMENT MODELS") are based on an assumed rate of prepayment each
month of the then unpaid principal balance of a pool of mortgage loans similar
to the Mortgage Loans. The Prepayment Model used in this prospectus supplement
(the "CONSTANT PREPAYMENT RATE" or "CPR") is a prepayment assumption which
represents a constant 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. For Loan Group 1, a 100% Prepayment Assumption assumes a
prepayment rate of 12% CPR with respect to Sub-group 1A and 21% CPR with respect
to Sub-group 1B.
For Group 2, the Prepayment Assumption used in this prospectus
supplement (the "Prepayment Vector" or "PV") is a 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. A 100% Prepayment Assumption for the Group 2 Loans assumes
prepayment rates of 3.5% per annum of the then outstanding principal balance of
the related mortgage loans in the first month of life of those mortgage loans
and an additional 3.5% per annum in each month thereafter up to and including
the 10th month, from the 11th month through the 22nd month a prepayment rate of
35% CPR, from the 23rd month through the 25th month a prepayment rate of 50%
CPR, from the 26th month through the 34th month a prepayment rate of 35% CPR, in
the 35th month through the 37th month a prepayment rate of 50% CPR and in the
38th month and in each month thereafter during the life of those mortgage loans
a prepayment rate of 35% CPR. No prepayment assumption purports to be a
historical description of prepayment experience or a prediction of the
anticipated rate of prepayment of any pool of mortgage loans, including the
related mortgage loans.
S-72
<PAGE>
The tables on pages S-75 through S-81 were prepared on the basis of the
assumptions in the following paragraph and the tables set forth below. There may
be certain differences between the loan characteristics included in such
assumptions and the characteristics of the actual Mortgage Loans. Any such
discrepancy may have an effect upon the percentages of Original Certificate
Principal Balances outstanding and weighted average lives of the Offered
Certificates set forth in the tables on pages S-75 through S-81. In addition,
since the actual Mortgage Loans in the Trust Fund may have characteristics that
differ from those assumed in preparing the tables set forth below, the
distributions of principal of the Offered Certificates may be made earlier or
later than indicated in the tables.
The percentages and weighted average lives in the tables on pages S-75
through S-81 were determined using the following assumptions collectively (the
"STRUCTURING ASSUMPTIONS"): (i) the Mortgage Loans consist of 2 groups of loans
with the characteristics set forth in the table below, (ii) the closing date for
the Offered Certificates occurs on December 13, 2000 and the Offered
Certificates were sold to investors on such date, (iii) distributions on the
Certificates are made on the 25th day of each month regardless of the day on
which the Distribution Date actually occurs, commencing in December, 2000, in
accordance with the allocation of Available Funds set forth above under
"Description of the Certificates", (iv) the Mortgage Loans prepay in accordance
with the Prepayment Scenarios indicated, (v) prepayments include thirty days'
interest thereon, (vi) the Seller is not required to substitute or repurchase
any or all of the Mortgage Loans pursuant to the Pooling and Servicing Agreement
and no optional termination is exercised, except with respect to the entries
identified by the row heading "Weighted Average Life to Call" in the tables
below, (vii) the Overcollateralization Target Amount is set initially as
specified herein and thereafter decreases as described in the definition
thereof, (viii) scheduled payments for all Mortgage Loans are received on the
Due Date commencing in December, 2000, the principal portion of such payments is
computed prior to giving effect to prepayments received in such month and there
are no losses or delinquencies with respect to such Mortgage Loans, (ix) all
Mortgage Loans prepay at the same rate and all such payments are treated as
prepayments in full of individual Mortgage Loans, with no shortfalls in
collection of interest, (x) such prepayments are received on the last day of
each month commencing in November 2000, (xi) LIBOR is at all times equal to
6.7275%, (xii) the Pass-through Rates for the Offered Certificates are as set
forth or described on the cover of this prospectus supplement, (xiii) the
Mortgage Interest Rate for each Adjustable Rate Mortgage Loan is adjusted on its
next Adjustment Date (and on subsequent Adjustment Dates, if necessary) to equal
the sum of (a) the assumed level of the Index and (b) the respective Gross
Margin (such sum being subject to the applicable Periodic Rate Caps, Minimum
Loan Rates and Maximum Loan Rates), and (xiv) with respect to the Adjustable
Rate Mortgage Loans, the 1 Year CMT Index is equal to 5.72%, the 3 Year CMT
index is equal to 5.34% and Six Month LIBOR is equal to 6.45125%. Nothing
contained in the foregoing assumptions should be construed as a representation
that the Mortgage Loans will not experience delinquencies or losses.
Based on the foregoing assumptions and the following assumed mortgage
loan characteristics, the tables indicate the projected weighted average lives
of each class of Offered Certificates, and set forth the percentages of the
original Certificate Principal Balance of each such class that would be
outstanding after each of the dates shown.
S-73
<PAGE>
ASSUMED MORTGAGE LOAN CHARACTERISTICS
<TABLE>
<CAPTION>
STATED
NET REMAINING ORIGINAL REMAINING
COLL TYPE CURRENT BAL WAC(GROSS) COUPON TERM TERM TERM
----------------- --------------- ------------ ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
ARM 1,966,243.87 8.7855 8.1037 NA 355 270
ARM 2,392,351.33 8.3477 7.8064 NA 346 269
ARM 262,190.85 6.8274 5.4074 NA 360 348
ARM 1,065,180.79 7.1280 6.2547 NA 360 339
ARM 443,565.54 7.6300 7.1300 NA 360 348
ARM 99,839.09 8.7500 8.2500 NA 360 177
ARM 15,196,605.16 12.1293 11.2096 NA 360 317
ARM 73,994.42 12.2500 11.7500 128 360 308
ARM 6,364,462.27 11.1545 10.2405 NA 360 337
ARM 22,370,236.75 10.6815 9.7618 NA 360 352
ARM 23,666,356.99 10.4162 9.2741 NA 358 353
ARM 2,500,992.53 10.7819 10.0419 NA 360 352
ARM 5,218,937.98 10.7015 9.6858 NA 331 327
ARM 327,631.83 11.5065 10.5903 NA 360 351
FIXED FHA/VA 507,983.42 7.7215 7.2215 NA 352 28
FIXED FHA/VA 638,971.44 9.1376 8.6376 NA 342 88
FIXED FHA/VA 347,016.22 9.4188 8.9188 NA 242 150
FIXED FHA/VA 1,624,608.68 9.4388 8.9388 NA 353 205
FIXED FHA/VA 2,058,930.81 8.0267 7.5267 NA 356 277
FIXED FHA/VA 5,298,540.79 7.7686 7.2686 NA 360 340
FIXED 344,031.60 9.6483 9.1483 NA 115 42
FIXED 2,258,576.17 9.1371 8.6142 NA 158 96
FIXED 4,997,285.75 9.7408 9.0762 NA 183 155
FIXED 4,616,115.81 9.8695 9.1926 NA 268 216
FIXED 8,333,640.99 9.1185 8.5376 NA 352 261
FIXED 37,620,761.59 10.0283 9.2051 NA 359 343
FIXED 14,126,502.54 11.0278 9.9455 149 362 329
</TABLE>
<TABLE>
<CAPTION>
GROSS 1STINT INTADJ LIFE INITIAL PERIODIC
INDEX TYPE MARGIN RESET FREQ CAP LIFE FLOOR ADJ.CAP ADJ. CAP
-------------- --------- ---------- ------- -------- ----------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
ARM 1 Yr CMT 3.2692 2 12 13.3135 1.1081 1.6464 1.5749
ARM 1 Yr CMT 2.7191 9 12 12.6624 1.3258 1.4287 1.5281
ARM 1 Yr CMT 2.7500 48 12 11.8274 NA 2.0000 2.0000
ARM 1 Yr CMT 2.7500 53 12 12.8207 NA 1.5000 2.0000
ARM 1 Yr CMT 2.7500 72 12 13.6250 NA 6.0000 2.0000
ARM 3 Yr CMT 2.5000 33 36 16.0000 NA NA NA
ARM 6Mo LIBOR 6.2019 4 6 16.8052 9.1021 1.7968 1.1738
ARM 6Mo LIBOR 3.0000 2 6 14.2500 7.2500 1.5000 1.5000
ARM 6Mo 6.7130 10 6 16.7927 10.1212 1.8347 1.1407
LIBOR
ARM 6Mo LIBOR 6.3720 16 6 17.1357 8.8597 1.4321 1.1967
ARM 6Mo LIBOR 6.1245 20 6 17.3050 6.7394 1.6619 1.4343
ARM 6Mo LIBOR 6.6204 28 6 17.5002 10.1255 2.5888 1.1497
ARM 6Mo LIBOR 6.2194 32 6 17.6352 5.8191 1.6182 1.4564
ARM 6Mo LIBOR 6.2964 51 6 17.5065 11.5065 2.5488 1.0000
NA NA NA NA 0.0000 NA NA NA
NA NA NA NA 0.0000 NA NA NA
NA NA NA NA 0.0000 NA NA NA
NA NA NA NA 0.0000 NA NA NA
NA NA NA NA 0.0000 NA NA NA
NA NA NA NA 0.0000 NA NA NA
NA NA NA NA 0.0000 NA NA NA
NA NA NA NA 0.0000 NA NA NA
NA NA NA NA 0.0000 NA NA NA
NA NA NA NA 0.0000 NA NA NA
NA NA NA NA 0.0000 NA NA NA
NA NA NA NA 0.0000 NA NA NA
NA NA NA NA 0.0000 NA NA NA
</TABLE>
S-74
<PAGE>
PERCENTAGE OF ORIGINAL PRINCIPAL BALANCE OUTSTANDING (1)
<TABLE>
<CAPTION>
CLASS A-1F
------------------------------------------------------------------------------------------
PREPAYMENT
ASSUMPTION
---------------- ---------------- ----------------- ---------------- --------------
Distribution Date 0% 75% 100% 125% 150%
---------------- ---------------- ----------------- ---------------- --------------
<S> <C> <C> <C> <C> <C>
Initial Balance 100% 100% 100% 100% 100%
November 25, 2001 96 61 49 37 25
November 25, 2002 91 27 8 0 0
November 25, 2003 87 0 0 0 0
November 25, 2004 82 0 0 0 0
November 25, 2005 77 0 0 0 0
November 25, 2006 72 0 0 0 0
November 25, 2007 66 0 0 0 0
November 25, 2008 59 0 0 0 0
November 25, 2009 54 0 0 0 0
November 25, 2010 47 0 0 0 0
November 25, 2011 41 0 0 0 0
November 25, 2012 33 0 0 0 0
November 25, 2013 0 0 0 0 0
Weighted Average Life (2) to 8.48 1.35 1.02 0.80 0.65
Maturity
Weighted Average Life (2) to 8.48 1.35 1.02 0.80 0.65
Call
</TABLE>
(1) Rounded to the nearest whole percentage.
(2) The weighted average life of any class of Certificates is determined by (i)
multiplying the assumed net reduction, if any, in the Certificate Principal
Balance on each Distribution Date of such class of Certificates by the
number of years from the date of issuance of the Certificates to the related
Distribution Date, (ii) summing the results, and (iii) dividing the sum by
the aggregate amount of the assumed net reduction in the Certificate
Principal Balance of such class of Certificates.
S-75
<PAGE>
PERCENTAGE OF ORIGINAL PRINCIPAL BALANCE OUTSTANDING (1)
<TABLE>
<CAPTION>
CLASS A-2F
------------------------------------------------------------------------------------------
PREPAYMENT
ASSUMPTION
---------------- ---------------- ----------------- ---------------- --------------
Distribution Date 0% 75% 100% 125% 150%
---------------- ---------------- ----------------- ---------------- --------------
<S> <C> <C> <C> <C> <C>
Initial Balance 100% 100% 100% 100% 100%
November 25, 2001 100 100 100 100 100
November 25, 2002 100 100 100 83 53
November 25, 2003 100 99 57 20 0
November 25, 2004 100 75 51 20 0
November 25, 2005 100 53 28 13 0
November 25, 2006 100 33 9 0 0
November 25, 2007 100 17 0 0 0
November 25, 2008 100 4 0 0 0
November 25, 2009 100 0 0 0 0
November 25, 2010 100 0 0 0 0
November 25, 2011 100 0 0 0 0
November 25, 2012 100 0 0 0 0
November 25, 2013 83 0 0 0 0
November 25, 2014 72 0 0 0 0
November 25, 2015 61 0 0 0 0
November 25, 2016 47 0 0 0 0
November 25, 2017 33 0 0 0 0
November 25, 2018 18 0 0 0 0
November 25, 2019 5 0 0 0 0
November 25, 2020 0 0 0 0 0
Weighted Average Life (2) 15.69 5.30 3.98 2.91 2.05
to Maturity
Weighted Average Life (2) 15.69 5.30 3.98 2.91 2.05
to Call
</TABLE>
(1) Rounded to the nearest whole percentage.
(2) The weighted average life of any class of Certificates is determined by (i)
multiplying the assumed net reduction, if any, in the Certificate Principal
Balance on each Distribution Date of such class of Certificates by the
number of years from the date of issuance of the Certificates to the
related Distribution Date, (ii) summing the results, and (iii) dividing the
sum by the aggregate amount of the assumed net reduction in the Certificate
Principal Balance of such class of Certificates.
S-76
<PAGE>
PERCENTAGE OF ORIGINAL PRINCIPAL BALANCE OUTSTANDING (1)
<TABLE>
<CAPTION>
CLASS A-1A
------------------------------------------------------------------------------------------
PREPAYMENT
ASSUMPTION
---------------- ---------------- ----------------- ---------------- --------------
Distribution Date 0% 75% 100% 125% 150%
---------------- ---------------- ----------------- ---------------- --------------
<S> <C> <C> <C> <C> <C>
Initial Balance 100% 100% 100% 100% 100%
November 25, 2001 99 74 65 57 48
November 25, 2002 99 52 40 29 20
November 25, 2003 98 37 25 15 6
November 25, 2004 98 32 24 15 6
November 25, 2005 97 27 20 14 6
November 25, 2006 96 24 17 12 6
November 25, 2007 95 21 15 9 5
November 25, 2008 94 19 11 6 4
November 25, 2009 93 16 9 5 3
November 25, 2010 92 13 7 3 2
November 25, 2011 90 10 5 3 1
November 25, 2012 88 8 4 2 0
November 25, 2013 86 6 3 1 0
November 25, 2014 84 5 2 0 0
November 25, 2015 82 4 1 0 0
November 25, 2016 79 3 1 0 0
November 25, 2017 76 2 0 0 0
November 25, 2018 73 2 0 0 0
November 25, 2019 69 1 0 0 0
November 25, 2020 63 1 0 0 0
November 25, 2021 58 0 0 0 0
November 25, 2022 52 0 0 0 0
November 25, 2023 46 0 0 0 0
November 25, 2024 39 0 0 0 0
November 25, 2025 32 0 0 0 0
November 25, 2026 24 0 0 0 0
November 25, 2027 16 0 0 0 0
November 25, 2028 8 0 0 0 0
November 25, 2029 2 0 0 0 0
November 25, 2030 0 0 0 0 0
Weighted Average Life(2) 20.76 4.04 2.95 2.18 1.51
Maturity
Weighted Average Life(2) to 20.65 3.57 2.52 1.81 1.26
Call
</TABLE>
(1) Rounded to the nearest whole percentage.
(2) The weighted average life of any class of Certificates is determined by (i)
multiplying the assumed net reduction, if any, in the Certificate Principal
Balance on each Distribution Date of such class of Certificates by the
number of years from the date of issuance of the Certificates to the
related Distribution Date, (ii) summing the results, and (iii) dividing the
sum by the aggregate amount of the assumed net reduction in the Certificate
Principal Balance of such class of Certificates.
S-77
<PAGE>
PERCENTAGE OF ORIGINAL PRINCIPAL BALANCE OUTSTANDING(1)
<TABLE>
<CAPTION>
CLASS M-1
------------------------------------------------------------------------------------------
PREPAYMENT
ASSUMPTION
---------------- ---------------- ----------------- ---------------- --------------
Distribution Date 0% 75% 100% 125% 150%
---------------- ---------------- ----------------- ---------------- --------------
<S> <C> <C> <C> <C> <C>
Initial Balance 100% 100% 100% 100% 100%
November 25, 2001 100 100 100 100 100
November 25, 2002 100 100 100 100 100
November 25, 2003 100 100 100 100 100
November 25, 2004 100 76 54 73 100
November 25, 2005 100 61 41 27 60
November 25, 2006 100 48 30 19 27
November 25, 2007 100 39 23 14 8
November 25, 2008 100 31 17 10 6
November 25, 2009 100 25 13 7 3
November 25, 2010 100 20 10 5 0
November 25, 2011 100 16 8 3 0
November 25, 2012 100 13 6 0 0
November 25, 2013 100 9 3 0 0
November 25, 2014 100 7 1 0 0
November 25, 2015 100 6 0 0 0
November 25, 2016 100 4 0 0 0
November 25, 2017 100 2 0 0 0
November 25, 2018 100 0 0 0 0
November 25, 2019 100 0 0 0 0
November 25, 2020 99 0 0 0 0
November 25, 2021 89 0 0 0 0
November 25, 2022 80 0 0 0 0
November 25, 2023 71 0 0 0 0
November 25, 2024 61 0 0 0 0
November 25, 2025 50 0 0 0 0
November 25, 2026 38 0 0 0 0
November 25, 2027 25 0 0 0 0
November 25, 2028 13 0 0 0 0
November 25, 2029 0 0 0 0 0
Weighted Average Life(2) to 24.75 7.03 5.58 5.09 5.52
Maturity
Weighted Average Life(2) to 24.58 6.37 4.99 4.58 4.62
Call
</TABLE>
(1) Rounded to the nearest whole percentage.
(2) The weighted average life of any class of Certificates is determined by (i)
multiplying the assumed net reduction, if any, in the Certificate Principal
Balance on each Distribution Date of such class of Certificates by the
number of years from the date of issuance of the Certificates to the
related Distribution Date, (ii) summing the results, and (iii) dividing the
sum by the aggregate amount of the assumed net reduction in the Certificate
Principal Balance of such class of Certificates.
S-78
<PAGE>
PERCENTAGE OF ORIGINAL PRINCIPAL BALANCE OUTSTANDING(1)
<TABLE>
<CAPTION>
CLASS M-2
------------------------------------------------------------------------------------------
PREPAYMENT
ASSUMPTION
---------------- ---------------- ----------------- ---------------- --------------
Distribution Date 0% 75% 100% 125% 150%
---------------- ---------------- ----------------- ---------------- --------------
<S> <C> <C> <C> <C> <C>
Initial Balance 100% 100% 100% 100% 100%
November 25, 2001 100 100 100 100 100
November 25, 2002 100 100 100 100 100
November 25, 2003 100 100 100 100 100
November 25, 2004 100 76 54 39 42
November 25, 2005 100 61 41 27 18
November 25, 2006 100 48 30 19 12
November 25, 2007 100 39 23 14 8
November 25, 2008 100 31 17 10 3
November 25, 2009 100 25 13 6 0
November 25, 2010 100 20 10 2 0
November 25, 2011 100 16 8 0 0
November 25, 2012 100 13 3 0 0
November 25, 2013 100 9 0 0 0
November 25, 2014 100 6 0 0 0
November 25, 2015 100 3 0 0 0
November 25, 2016 100 0 0 0 0
November 25, 2017 100 0 0 0 0
November 25, 2018 100 0 0 0 0
November 25, 2019 100 0 0 0 0
November 25, 2020 98 0 0 0 0
November 25, 2021 89 0 0 0 0
November 25, 2022 80 0 0 0 0
November 25, 2023 71 0 0 0 0
November 25, 2024 61 0 0 0 0
November 25, 2025 50 0 0 0 0
November 25, 2026 38 0 0 0 0
November 25, 2027 25 0 0 0 0
November 25, 2028 13 0 0 0 0
November 25, 2029 0 0 0 0 0
Weighted Average Life(2) to 24.74 6.92 5.41 4.65 4.39
Maturity
Weighted Average Life(2) to 24.58 6.37 4.89 4.22 4.02
Call
</TABLE>
(1) Rounded to the nearest whole percentage.
(2) The weighted average life of any class of Certificates is determined by (i)
multiplying the assumed net reduction, if any, in the Certificate Principal
Balance on each Distribution Date of such class of Certificates by the
number of years from the date of issuance of the Certificates to the
related Distribution Date, (ii) summing the results, and (iii) dividing the
sum by the aggregate amount of the assumed net reduction in the Certificate
Principal Balance of such class of Certificates.
S-79
<PAGE>
PERCENTAGE OF ORIGINAL PRINCIPAL BALANCE OUTSTANDING(1)
<TABLE>
<CAPTION>
CLASS B-1
------------------------------------------------------------------------------------------
PREPAYMENT ASSUMPTION
---------------- ---------------- ----------------- ---------------- --------------
Distribution Date 0% 75% 100% 125% 150%
---------------- ---------------- ----------------- ---------------- --------------
<S> <C> <C> <C> <C> <C>
Initial Balance 100% 100% 100% 100% 100%
November 25, 2001 100 100 100 100 100
November 25, 2002 100 100 100 100 100
November 25, 2003 100 100 100 100 100
November 25, 2004 100 76 54 39 27
November 25, 2005 100 61 41 27 18
November 25, 2006 100 48 30 19 9
November 25, 2007 100 39 23 12 1
November 25, 2008 100 31 17 4 0
November 25, 2009 100 25 11 0 0
November 25, 2010 100 20 5 0 0
November 25, 2011 100 16 0 0 0
November 25, 2012 100 10 0 0 0
November 25, 2013 100 2 0 0 0
November 25, 2014 100 0 0 0 0
November 25, 2015 100 0 0 0 0
November 25, 2016 100 0 0 0 0
November 25, 2017 100 0 0 0 0
November 25, 2018 100 0 0 0 0
November 25, 2019 100 0 0 0 0
November 25, 2020 98 0 0 0 0
November 25, 2021 89 0 0 0 0
November 25, 2022 80 0 0 0 0
November 25, 2023 71 0 0 0 0
November 25, 2024 61 0 0 0 0
November 25, 2025 50 0 0 0 0
November 25, 2026 38 0 0 0 0
November 25, 2027 25 0 0 0 0
November 25, 2028 10 0 0 0 0
November 25, 2029 0 0 0 0 0
Weighted Average Life(2) to 24.70 6.73 5.19 4.37 3.95
Maturity
Weighted Average Life(2) to 24.58 6.37 4.85 4.09 3.72
Call
</TABLE>
(1) Rounded to the nearest whole percentage
(2) The weighted average life of any class of Certificates is determined by (i)
multiplying the assumed net reduction, if any, in the Certificate Principal
Balance on each Distribution Date of such class of Certificates by the
number of years from the date of issuance of the Certificates to the
related Distribution Date, (ii) summing the results, and (iii) dividing the
sum by the aggregate amount of the assumed net reduction in the Certificate
Principal Balance of such class of Certificates.
S-80
<PAGE>
PERCENTAGE OF ORIGINAL PRINCIPAL BALANCE OUTSTANDING(1)
<TABLE>
<CAPTION>
CLASS B-2
------------------------------------------------------------------------------------------
PREPAYMENT ASSUMPTION
---------------- ---------------- ----------------- ---------------- --------------
Distribution Date 0% 75% 100% 125% 150%
---------------- ---------------- ----------------- ---------------- --------------
<S> <C> <C> <C> <C> <C>
Initial Balance 100% 100% 100% 100% 100%
November 25, 2001 100 100 100 100 100
November 25, 2002 100 100 100 100 100
November 25, 2003 100 100 100 100 100
November 25, 2004 100 76 54 39 25
November 25, 2005 100 61 41 25 6
November 25, 2006 100 48 30 8 0
November 25, 2007 100 39 16 0 0
November 25, 2008 100 31 4 0 0
November 25, 2009 100 21 0 0 0
November 25, 2010 100 10 0 0 0
November 25, 2011 100 2 0 0 0
November 25, 2012 100 0 0 0 0
November 25, 2013 100 0 0 0 0
November 25, 2014 100 0 0 0 0
November 25, 2015 100 0 0 0 0
November 25, 2016 100 0 0 0 0
November 25, 2017 100 0 0 0 0
November 25, 2018 100 0 0 0 0
November 25, 2019 100 0 0 0 0
November 25, 2020 98 0 0 0 0
November 25, 2021 89 0 0 0 0
November 25, 2022 80 0 0 0 0
November 25, 2023 71 0 0 0 0
November 25, 2024 61 0 0 0 0
November 25, 2025 50 0 0 0 0
November 25, 2026 38 0 0 0 0
November 25, 2027 21 0 0 0 0
November 25, 2028 0 0 0 0 0
Weighted Average Life(2) to 24.57 6.33 4.81 4.02 3.59
Maturity
Weighted Average Life(2) to 24.55 6.28 4.76 3.98 3.55
Call
</TABLE>
(1) Rounded to the nearest whole percentage
(2) The weighted average life of any class of Certificates is determined by (i)
multiplying the assumed net reduction, if any, in the Certificate Principal
Balance on each Distribution Date of such class of Certificates by the
number of years from the date of issuance of the Certificates to the
related Distribution Date, (ii) summing the results, and (iii) dividing the
sum by the aggregate amount of the assumed net reduction in the Certificate
Principal Balance of such class of Certificates.
S-81
<PAGE>
FINAL SCHEDULED DISTRIBUTION DATES
The Final Scheduled Distribution Date of each class of Offered
Certificates is set forth under "Summary of Prospectus Supplement" in this
prospectus supplement. The Final Scheduled Distribution Dates for the Class A-1F
and Class A-1A Certificates have been calculated on the basis of the Structuring
Assumptions and the assumptions that there are no prepayments and no Monthly
Excess Interest Amounts are used to create overcollateralization. The Final
Scheduled Distribution Date for each other class of Offered Certificates has
been set to equal the Distribution Date in the thirteenth month after the month
of maturity of the latest maturing Mortgage Loan. Since the rate of
distributions in reduction of the Certificate Principal Balance of each class of
Offered Certificates will depend on the rate of payment (including prepayments)
of the Mortgage Loans, the Certificate Principal Balance of any such class could
be reduced to zero significantly earlier or later than the Final Scheduled
Distribution Date. The rate of payments on the Mortgage Loans will depend on
their particular characteristics, as well as on prevailing interest rates from
time to time and other economic factors, and no assurance can be given as to the
actual payment experience of the Mortgage Loans.
USE OF PROCEEDS
The Depositor will apply the net proceeds of the sale of the Offered
Certificates to the purchase price of the Mortgage Loans transferred to the
Trust Fund. See "Plan of Distribution" in this prospectus supplement.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
The discussion in this section and in the prospectus is based upon
laws, regulations, rulings and decisions now in effect, all of which are subject
to change. The discussion below and in the prospectus does not purport to deal
with all federal tax consequences applicable to all categories of investors,
some of which may be subject to special rules. Investors may wish to consult
their own tax advisors in determining the federal, state, local and any other
tax consequences to them of the purchase, ownership and disposition of the
Offered Certificates. References in this section and in the "ERISA
Considerations" section to the code and sections are to the Internal Revenue
Code.
REMIC ELECTIONS
The trustee will cause one or more REMIC elections to be made with
respect to specified assets of the Trust Fund for federal income tax purposes.
Dewey Ballantine LLP, special tax counsel, will advise that, in its opinion, for
federal income tax purposes, assuming the REMIC elections are made and
compliance with the pooling and servicing agreement, the Trust Fund will be
treated as one or more REMICs for federal income tax purposes. Except as
discussed below under The Class A-1A Certificates, each of the Offered
Certificates will be a regular interest in a REMIC.
TAXATION OF THE OFFERED CERTIFICATES
The owners of the Offered Certificates will be treated for tax purposes
as owning two separate investments:
o a REMIC regular interest; and
o the right to receive Rate Payments.
A "RATE PAYMENT" for a class of Offered Certificates is the positive difference,
if any, between the accrued interest distributable with respect to such class
over the weighted average of the Net Mortgage Interest Rates of the Mortgage
Loans held by the Trust Fund. In the case of the Class A-1A Certificates, the
right to receive Rate Payments also includes the right to receive LIBOR
Carryover Amounts. The owners of the Offered Certificates must allocate the
purchase price of their certificates between these two investments based on
their relative fair market values. The purchase price allocated to the REMIC
regular interest portion of the investment will be the issue price of the
Offered Certificates for purposes of calculating accruals of original issue
discount. See "Material Federal Income Tax Consequences--Discount and Premium"
in the prospectus.
S-82
<PAGE>
Taxation of REMIC Regular Interests.
For federal income tax purposes, regular interests in a REMIC are
treated as debt instruments issued by the REMIC on the date on which those
interests are created, and not as ownership interests in the REMIC or its
assets. Owners of Offered Certificates that otherwise report income under a cash
method of accounting will be required to report income with respect to the
regular interest portion of the Offered Certificates under an accrual method.
See "Material Federal Income Tax Consequences--REMIC Securities--Taxation of
Beneficial Owners of REMIC Regular Securities" in the prospectus.
It is anticipated that the Offered Certificates will not have any
original issue discount other than possibly original issue discount within a de
minimis exception and that, accordingly, the provisions of sections 1271 through
1273 and 1275 of the Code generally will not apply to the Offered Certificates.
Original issue discount will be considered de minimis if it is less than 0.25%
of the principal amount of an Offered Certificate multiplied by its expected
weighted average life. The prepayment assumption that will be used in
determining the rate of accrual of original issue discount on the Offered
Certificates is 12% CPR with respect to Sub-group 1A, 21% CPR with respect to
Sub-group 1B and 100% PV with respect to Loan Group 2. No representation is made
that any of the mortgage loans will prepay at these rates or any other rate. See
"Prepayment and Yield Considerations" in this prospectus supplement and
"Material Federal Income Tax Consequences--Discount and Premium" in the
prospectus.
In addition, a subsequent purchaser who buys an Offered Certificate for
less than its principal amount may be subject to the "market discount" rules of
the Code. See "Certain Federal Income Tax Considerations--Discount and
Premium--Market Discount" in the prospectus. A subsequent purchaser who buys an
Offered Note for more than its principal amount may be subject to the "market
premium" rules of the Code. See "Certain Federal Income Tax Considerations --
Discount and Premium--Securities Purchased at a Premium" in the prospectus.
REMIC regular interests possess special tax attributes by virtue of the
REMIC provisions of the code. See "Material Federal Income Tax
Consequences--REMIC Securities--Special Tax Attributes" in the prospectus.
However, no portion of an Offered Certificateholder's basis or income allocable
to the right to receive Rate Payments will qualify for such treatment. As a
result, Offered Certificates are not suitable investments for inclusion in other
REMICs.
Taxation of Rate Payments.
The proper federal income tax treatment of the right to receive Rate
Payments is not clear and special tax counsel cannot make a reliable estimation
of the degree of certainty of treatment among several possible treatments and
unknown other treatments the Internal Revenue Service may apply. Special tax
counsel believes that a likely treatment of the right to receive Rate Payments
is as a notional principal contract. The Trust Fund intends to treat the right
to receive Rate Payments for federal income tax purposes as a notional principal
contract. Treasury Regulations under section 446 relating to notional principal
contracts provide that taxpayers, regardless of their method of accounting,
generally must recognize the ratable daily portion of a periodic payment for the
taxable year to which that portion relates. Assuming treatment as a notional
principal contract, any Rate Payments will be periodic payments. Income with
respect to periodic payments under a notional principal contract for a taxable
year should constitute ordinary income. The purchase price allocated to the
right to receive the Rate Payments will be treated as a nonperiodic payment
under these regulations. This nonperiodic payment may be amortized using several
methods, including the level payment method described in these regulations.
Alternative federal income tax characterization of the right to receive
Rate Payments is possible, including treatment of the right to receive Rate
Payments as indebtedness or an interest in a partnership. Foreign holders of the
Offered Certificates may be subject to withholding in respect of payments of
Rate Payments in the event that such payments are treated as indebtedness or an
interest in a partnership. The amount, timing and character of the income and
deductions for an owner of the right to receive Rate Payments would differ if
the right to receive Rate Payments were held to constitute indebtedness or an
interest in a partnership, but for most investors in most circumstances, those
differences would not be material. Because the Trust Fund will treat the right
to receive Rate Payments as a notional principal contract, the Trustee will not
attempt to satisfy the tax reporting requirements that would apply under these
alternative characterizations of the right to receive Rate Payments. Investors
that are
S-83
<PAGE>
foreign persons may wish to consult their own tax advisors in determining the
federal, state, local and other tax consequences to them of the purchase,
ownership and disposition of the Offered Certificates.
OTHER MATTERS
For a discussion of backup withholding and taxation of foreign
investors in the Offered Certificates, see "Certain Federal Income Tax
Considerations--Foreign Investors--Grantor Trust Securities and REMIC Regular
Securities" and "--Backup Withholding" in the prospectus.
STATE TAX CONSIDERATIONS
The Depositor makes no representations regarding the tax consequences
of purchase, ownership or disposition of the Offered Certificates under the tax
laws of any state. Investors considering an investment in the Offered
Certificates should consult their own tax advisors regarding such tax
consequences.
All investors should consult their own tax advisors regarding the
federal, state, local or foreign income tax consequences of the purchase,
ownership and disposition of the Offered Certificates.
ERISA CONSIDERATIONS
Section 406 of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), prohibits "parties in interest" with respect to an employee
benefit plan subject to ERISA and/or a plan or other arrangement subject to the
excise tax provisions set forth under Section 4975 of the Code (each of the
foregoing, a "PLAN") from engaging in certain transactions involving such Plan
and its assets unless a statutory, regulatory or administrative exemption
applies to the transaction. Section 4975 of the Code imposes certain excise
taxes on prohibited transactions involving plans described under that Section;
ERISA authorizes the imposition of civil penalties for prohibited transactions
involving plans not covered under Section 4975 of the Code. Any Plan fiduciary
which proposes to cause a Plan to acquire any of the Certificates should consult
with its counsel with respect to the potential consequences under ERISA and the
Code of the Plan's acquisition and ownership of such Certificates. See "ERISA
Considerations" in the Prospectus.
Certain employee benefit plans, including governmental plans and
certain church plans, are not subject to ERISA's requirements. Accordingly,
assets of such plans may be invested in the Certificates without regard to the
ERISA considerations described herein and in the Prospectus, subject to the
provisions of other applicable federal and state law. Any such plan which is
qualified and exempt from taxation under Sections 401(a) and 501(a) of the Code
may nonetheless be subject to the prohibited transaction rules set forth in
Section 503 of the Code.
Except as noted above, 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. A fiduciary which decides to
invest the assets of a Plan in the Certificates should consider, among other
factors, the extreme sensitivity of the investments to the rate of principal
payments (including prepayments) on the Mortgage Loans.
The DOL issued to First Union Securities Inc. an individual
administrative exemption, Prohibited Transaction Exemption 96-22, which was
recently amended pursuant to Prohibited Transaction Exemption 2000-58
(collectively the "EXEMPTION"), from some of the prohibited transaction rules of
ERISA with respect to the initial purchase, the holding and the subsequent
resale by a plan of certificates in pass-through trusts that meet the conditions
and requirements of the Exemption.
Among the conditions that must be satisfied for the Exemption to apply
with respect to a trust containing residential mortgage loans with combined
loan-to-value ratios in excess of 100% such as the Trust, are the following:
(1) the acquisition of the certificates by a Plan is on terms
(including the price for the certificates) that are at least as favorable to the
Plan as they would be in an arm's length transaction with an unrelated party;
S-84
<PAGE>
(2) the rights and interests evidenced by the certificates acquired by
the Plan are not subordinated to the rights and interests evidenced by other
certificates of the trust;
(3) the certificates acquired by the Plan have received a rating at the
time of such acquisition that is one of the two highest generic rating
categories from S&P, Moody's or Fitch (collectively, the "EXEMPTION RATING
AGENCIES");
(4) the trustee must not be an affiliate of any other member of the
Restricted Group (as defined below);
(5) the sum of all payments made to and retained by the underwriters in
connection with the distribution of the certificates represents not more than
reasonable compensation for underwriting the certificates; the sum of all
payments made to and retained by the seller pursuant to the assignment of the
loans to the trust represents not more than the fair market value of such loans;
the sum of all payments made to and retained by the servicer represents not more
than reasonable compensation for such person's services under the agreement
pursuant to which the loans are pooled and reimbursements of such person's
reasonable expenses in connection therewith; and
(6) the Plan investing in the certificates is an "accredited investor"
as defined in Rule 501(a)(1) of Regulation D of the Securities and Exchange
Commission under the Securities Act of 1933.
The trust must also meet the following requirements:
(i) the corpus of the trust must consist solely of assets of the type
that have been included in other investment pools;
(ii) certificates in such other investment pools must have been rated
in one of the four highest generic rating categories by an Exemption Rating
Agency for at least one year prior to the Plan's acquisition of certificates;
and
(iii) certificates evidencing interests in such other investment pools
must have been purchased by investors other than Plans for at least one year
prior to any Plan's acquisition of the certificates.
Moreover, the Exemption provides relief from certain
self-dealing/conflict of interest prohibited transactions that may occur when
the Plan fiduciary causes a Plan to acquire certificates in a trust holding
receivables as to which the fiduciary (or its affiliate) is an obligor provided
that, among other requirements, (i) in the case of an acquisition in connection
with the initial issuance of certificates, at least fifty percent (50%) of each
class of certificates in which Plans have invested is acquired by persons
independent of the Restricted Group; (ii) such fiduciary (or its affiliate) is
an obligor with respect to five percent (5%) or less of the fair market value of
the obligations contained in the trust; (iii) a Plan's investment in
certificates of any class does not exceed twenty-five percent (25%) of all of
the certificates of that class outstanding at the time of the acquisition; and
(iv) immediately after the acquisition, no more than twenty-five percent (25%)
of the assets of any Plan with respect to which such person is a fiduciary are
invested in certificates representing an interest in one or more trusts
containing assets sold or serviced by the same entity. The Exemption does not
apply to Plans sponsored by the sponsor, the Underwriters, the Trustee, the
Servicer, any obligor with respect to Mortgage Loans included in the Trust
constituting more than five percent of the aggregate unamortized principal
balance of the assets in the Trust, or any affiliate of such parties (the
"RESTRICTED GROUP").
The Exemption will apply to the acquisition and holding by Plans of the
Class A Certificates if all conditions of the Exemption are met.
Because the characteristics of the Class M-1, Class M-2, Class B-1 and
Class B-2 Certificates may not meet the requirements of the Exemption or any
other issued exemption under ERISA, the purchase and holding of the Class M-1,
Class M-2, Class B-1 and Class B-2 Certificates by a Plan or by individual
retirement accounts or other plans subject to Section 4975 of the Code may
result in prohibited transactions or the imposition of excise taxes or civil
penalties. Consequently, transfers of the Class M-1, Class M-2, Class B-1 and
Class B-2 Certificates will not be registered by the Trustee unless the Trustee
receives: (i) a representation from the transferee of such Certificate,
S-85
<PAGE>
acceptable to and in form and substance satisfactory to the Trustee, to the
effect that such transferee is not an employee benefit plan subject to Section
406 of ERISA or a plan or arrangement subject to Section 4975 of the Code, nor a
person acting on behalf of any such plan or arrangement nor using the assets of
any such plan or arrangement to effect such transfer; or (ii) if the purchaser
is an insurance company, a representation that the purchaser is an insurance
company which is purchasing such Certificates with funds contained in an
"insurance company general account" (as such term is defined in Section V (e) of
Prohibited Transaction Class Exemption 95-60 ("PTCE 95-60")) and that the
purchase and holding of such Certificates are covered under Sections I and III
of PTCE 95-60. Such representation as described above will be deemed to have
been made to the Trustee by a beneficial owner's acceptance of a Class M-1,
Class M-2, Class B-1 or Class B-2 Certificate in book-entry form. In the event
that such representation is violated, such attempted transfer or acquisition
shall be void and of no effect.
Prospective Plan investors should consult with their legal advisors
concerning the impact of ERISA and the Code, the applicability of the Exemption
and PTCE 95-60, and the potential consequences in their specific circumstances,
prior to making an investment in the Offered Certificates. Moreover, each Plan
fiduciary should determine whether under the general fiduciary standards of
investment prudence and diversification, an investment in the Offered
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.
LEGAL INVESTMENT
The Offered Certificates will not constitute "mortgage related
securities" for purposes of the Secondary Mortgage Market Enhancement Act of
1984, as amended ("SMMEA"), because the Mortgage Pool includes second lien
Mortgage Loans and Owner-financed Mortgage Loans that were originated by
individuals and not by financial institutions or mortgagees approved by the
Secretary of Housing and Urban Development.
There may be restrictions on the ability of certain investors,
including depository institutions, either to purchase the Offered Certificates
or to purchase Offered Certificates representing more than a specified
percentage of the investor's assets. Investors should consult their own legal
advisors in determining whether and to what extent the Offered Certificates
constitute legal investments for such investors. See "Legal Investment" in the
Prospectus.
PLAN OF DISTRIBUTION
Subject to the terms and conditions set forth in the Underwriting
Agreement between the Depositor and First Union Securities, Inc. ("FIRST
UNION"), an affiliate of the Depositor, as representative (in such capacity, the
"REPRESENTATIVE") of First Union and Bear, Stearns & Co. Inc. (together with
First Union, the "UNDERWRITERS"), the Underwriters have severally agreed to
purchase and the Depositor has agreed to sell to the Underwriters the Offered
Certificates.
Distribution of the Offered Certificates will be made by the
Underwriters from time to time in negotiated transactions or otherwise at
varying prices to be determined at the time of sale. The Underwriters may effect
such transactions by selling Offered Certificates to or through dealers and such
dealers may receive from the Underwriters, for which it acts as agent,
compensation in the form of underwriting discounts, concessions or commissions.
The Underwriters and any dealers that participate with the Underwriters in the
distribution of such Offered Certificates may be deemed to be underwriters, and
any discounts, commissions or concessions received by them, and any profits on
resale of the Offered Certificates purchased by them, may be deemed to be
underwriting discounts and commissions under the 1933 Act.
The Depositor has been advised by the Underwriters that they intend to
make a market in the Offered Certificates but have no obligation to do so. There
can be no assurance that a secondary market for the Offered Certificates will
develop or, if it does develop, that it will continue.
The Depositor has agreed to indemnify the Underwriters against, or make
contributions to the Underwriters with respect to, certain liabilities,
including liabilities under the Act.
S-86
<PAGE>
ADDITIONAL INFORMATION
Residential Asset Funding Corporation has filed with the Securities and
Exchange Commission a registration statement (Registration No. 333-81721) under
the Securities Act of 1933, with respect to the Offered Certificates offered
pursuant to this prospectus supplement. This prospectus supplement and the
accompanying prospectus, which form a part of the registration statement, omit
certain information contained in such registration statement pursuant to the
rules and regulations of the Securities and Exchange Commission. You may read
and copy the registration statement at the Public Reference Room at the
Securities and Exchange Commission at Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. and at the Securities and Exchange Commission's regional
offices at Seven World Trade Center, 13th Floor, New York, New York, 10048 and
Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. Please call the Securities and Exchange Commission at
1-800-SEC-0330 for further information on the Public Reference Rooms. In
addition, the Securities and Exchange Commission maintains a site on the World
Wide Web containing reports, proxy materials, information statements and other
items. The address is http://www.sec.gov.
LEGAL MATTERS
Certain legal matters in connection with the issuance of the Offered
Certificates will be passed upon for the Depositor and for the Underwriter by
Dewey Ballantine LLP, New York, New York.
RATINGS
It is a condition to the issuance of the Offered Certificates that the
Certificates receive the following ratings from S&P, Moody's and Fitch:
<TABLE>
<CAPTION>
Class S&P Moody's Fitch
----- --- ------- -----
<S> <C> <C> <C>
A-1A AAA Aaa AAA
A-1F AAA Aaa AAA
A-2F AAA Aaa AAA
M-1 AA Aa2 AA
M-2 A A2 A
B-1 BBB Baa2 BBB
B-2 Not Rated Not Rated BBB
</TABLE>
A securities rating addresses the likelihood of the receipt by a
certificateholder of distributions on the Mortgage Loans. The rating takes into
consideration the characteristics of the Mortgage Loans and the structural,
legal and tax aspects associated with the certificates. The ratings on the
Offered Certificates do not, however, constitute statements regarding the
likelihood of the payment of any LIBOR Carryover Amount, the frequency of
prepayments on the Mortgage Loans, or the possibility that a holder of an
Offered Certificate might realize a lower than anticipated yield.
The Depositor has not engaged any rating agency other than the Rating
Agencies to provide ratings on the Offered Certificates. However, there can be
no assurance as to whether any other rating agency will rate the Offered
Certificates, or, if it does, what rating would be assigned by any such other
rating agency. Any rating on the Offered Certificates by another rating agency,
if assigned at all, may be lower than the ratings assigned to the Offered
Certificates by the Rating Agencies.
A security rating is not a recommendation to buy, sell or hold
securities and may be subject to revision or withdrawal at any time by the
assigning rating organization. Each security rating should be evaluated
independently of any other security rating. In the event that the ratings
initially assigned to any of the Offered Certificates by the Rating Agencies are
subsequently lowered for any reason, no person or entity is obligated to provide
any additional support or credit enhancement with respect to such Offered
Certificates.
S-87
<PAGE>
INDEX OF PRINCIPAL DEFINITIONS
A
Accrued Certificate Interest.......................60
Actuarial Mortgage Loans...........................43
Adjustment Date....................................30
Advance............................................51
Alternative Documentation..........................46
Assignment Program.................................42
Available Funds....................................59
B
Balloon Loan.......................................29
Balloon Payment....................................29
Bankruptcy Code....................................18
beneficial owner...................................56
Book-Entry Certificates............................55
Business Day.......................................50
C
Certificate Owners.................................55
Certificate Principal Balance......................62
Certificateholder..................................56
Class A Certificates...............................55
Class A Interest Carry Forward Amount..............60
Class A Principal Distribution Amount..............62
Class A-1A Certificate Margin......................69
Class A-1A LIBOR Carryover Amount..................69
Class B-1 Applied Realized Loss Amount.............68
Class B-1 Principal Distribution Amount............63
Class B-1 Realized Loss Amortization Amount........68
Class B-2 Applied Realized Loss Amount.............68
Class B-2 Principal Distribution Amount............63
Class B-2 Realized Loss Amortization Amount........68
Class M-1 Applied Realized Loss Amount.............67
Class M-1 Realized Loss Amortization Amount........67
Class M-2 Applied Realized Loss Amount.............68
Class M-2 Realized Loss Amortization Amount........68
Clearstream.........................................1
Clearstream Participants...........................57
Closing Date.......................................49
Collection Account.................................50
Collection Period..................................59
Combined Loan-to-Value Ratio.......................25
Commission.........................................45
Compensating Interest..............................52
Constant Prepayment Rate...........................73
Cut-off Date Principal Balance.....................17
D
Deficient Valuation................................65
Definitive Certificate.............................56
Delinquent.........................................19
Depositor...........................................1
Determination Date.................................53
Distribution Account...............................51
Distribution Date..................................55
DTC.................................................1
E
EFSG...............................................44
Eligible Account...................................51
Eligible Substitute Mortgage Loan..................49
ERISA..............................................85
Euroclear.......................................1, 57
Euroclear Operator.................................57
Euroclear Participants.............................57
European Depositaries..............................56
Exemption Rating Agencies..........................86
Extra Principal Distribution Amount................63
F
FHA................................................42
FHA Mortgage Loans.................................41
FHA Uninsured Mortgage Loans.......................41
Financial Intermediary.............................56
First Lien.........................................20
First Union........................................87
Forbearance Plan Mortgage Loan.....................18
Full Documentation.............................45, 46
G
Gross Margin.......................................30
Group 1............................................18
Group 1 Loan Balance...............................18
Group 1 Mortgage Loans.............................18
Group 1 Net Funds Cap..............................69
Group 1 Principal Percentage.......................61
Group 2............................................18
Group 2 Loan Balance...............................18
Group 2 Mortgage Loans.............................18
Group 2 Net Funds Cap..............................69
Group 2 Principal Percentage.......................61
H
High Cost Mortgage Loans...........................15
HUD................................................42
I
IML................................................57
Index..............................................30
Indirect Participants..............................55
Initial Periodic Rate Cap..........................30
Interest Accrual Period............................60
Interest Carry Forward Amount......................60
Interest Percentage................................61
Interest Remittance Amount.........................60
L
LIBOR..............................................70
LIBOR Carryover Amount..........................7, 70
S-88
<PAGE>
LIBOR Determination Date...........................70
Limited Documentation..............................46
Liquidated Mortgage Loan...........................65
Loan Group.........................................18
Loan Group 1.......................................18
Loan Group 2.......................................18
M
MGIC...............................................44
Modified Scheduled Payments........................18
Monthly Excess Cashflow Allocation.................66
Monthly Excess Cashflow Amount.....................66
Monthly Excess Interest Amount.....................60
Monthly Payment....................................19
Mortgage...........................................19
Mortgage Interest Rate.............................20
Mortgage Loan Purchase Agreement...................17
Mortgage Loan Schedule.............................49
Mortgage Loans.....................................17
Mortgage Pool......................................17
Mortgaged Property.................................19
N
National Housing Act...............................42
Net Mortgage Interest Rate.........................66
New Regulations.....................................3
No Documentation...................................46
no-bid.............................................43
O
Offered Certificates...............................55
One Year CMT.......................................41
Optional Termination Date..........................53
Overcollateralization Amount.......................63
Overcollateralization Deficiency...................63
Overcollateralization Release Amount...............64
P
Participants.......................................55
Pass-Through Rate..................................69
Performing Mortgage Loan...........................18
Periodic Rate Cap..................................30
Plan...............................................85
Pool Balance.......................................17
Pool Cap...........................................69
POOLING AND SERVICING AGREEMENT....................17
Prepayment Interest Shortfall......................53
Prepayment Period..................................59
Principal Balance..................................17
Principal Distribution Amount......................64
Principal Remittance Amount........................64
PTCE 95-60.........................................87
Purchase Price.....................................49
R
Rate Payment.......................................83
Realized Loss......................................65
Realized Loss Amortization Amount..................68
Record Date........................................55
Reference Bank Rate................................70
Regular Scheduled Payments.........................18
Related Documents..................................49
Relevant Depositary................................55
Relief Act.........................................51
REMIC...............................................7
Re-Performance Test................................19
Re-Performing 60+ Day Delinquent Loan..............64
Re-Performing Mortgage Loan........................19
Representative.....................................87
Residual Certificates..............................55
Restricted Group...................................86
Rules..............................................56
S
S&P.................................................7
Seller.............................................17
Senior Certificates................................55
Senior Enhancement Percentage......................64
Senior Specified Enhancement Percentage............64
Servicer...........................................46
Servicer Modification..............................65
Servicing Fee......................................52
Servicing Fee Rate.................................52
Simple Interest Mortgage Loans.....................43
Six Month LIBOR....................................40
60+ Day Delinquent Loan............................64
SMMEA..............................................87
Special Servicing Fee..............................53
Stated Documentation...............................46
Stepdown Date......................................65
Structuring Assumptions............................73
Sub-group 1A.......................................18
Sub-group 1A Mortgage Loans........................18
Sub-group 1B Loan Balance..........................18
Sub-group 1B Mortgage Loans........................18
Subordinated Certificates..........................55
Sub-Performing Mortgage Loan.......................18
Substitution Adjustment............................49
T
Targeted Overcollateralization Amount..............65
Telerate Page 3750.................................70
Termination Price..................................53
Terms and Conditions...............................58
Trigger Event......................................65
Trust...............................................1
Trust Fund.........................................17
Trustee............................................52
U
Underwriters.......................................87
United States Housing Act..........................42
S-89
<PAGE>
Unpaid Realized Loss Amount........................68
V
VA 42
VA Mortgage Loans..................................41
VA Non-guaranteed Mortgage Loans...................42
S-90
<PAGE>
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the Offered Certificates will
be offered globally (the "Global Securities") and will be available only in
book-entry form. Investors in the Global Securities may hold such Global
Securities through any of The Depository Trust Company ("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 holding Global Securities
through Clearstream and Euroclear will be conducted in the ordinary way in
accordance with their normal rules and operating procedures and in accordance
with conventional eurobond practice (i.e., seven calendar day settlement).
Secondary market trading between investors holding Global Securities
through DTC will be conducted according to the rules and procedures applicable
to U.S. corporate debt obligations.
Secondary cross-market trading between 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 such
capacity) and as DTC Participants.
Non-U.S. holders (as described below) of Global Securities will be
subject to U.S. withholding taxes unless such holders meet certain requirements
and deliver appropriate U.S. tax documents to the securities clearing
organizations or their participants.
Initial Settlement
All Global Securities will be held in book-entry form by DTC in the
name of Cede & Co. 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
respective Depositaries, which in turn will hold such positions in accounts as
DTC Participants.
Investors electing to hold their Global Securities through DTC will
follow the settlement practices applicable to conventional eurobonds, except
that there will be no temporary global security and no "lock-up" or restricted
period. 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 mortgage
loan asset backed certificates issues in same-day funds.
Trading between Clearstream and/or Euroclear Participants. Secondary
market trading between Clearstream Participants or Euroclear Participants will
be settled using the procedures applicable to conventional eurobonds in same-day
funds.
A-1
<PAGE>
Trading between DTC seller and Clearstream or Euroclear purchaser. 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 respective Depositary,
as the case may be, to receive the Global Securities against payment. Payment
will include interest accrued on the Global Securities from and including the
last coupon payment date to and excluding the settlement date, on the basis of
either a 360-day year comprised of 30-day months or the actual number of days in
such accrual period and a year assumed to consist of 360 days, as applicable.
For transactions settling on the 31st of the month, payment will include
interest accrued to and excluding the first day of the following month. Payment
will then be made by the respective Depositary of the DTC Participant's account
against delivery of the Global Securities. After settlement has been completed,
the Global Securities will be 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 (i. e., the trade fails),the Clearstream or Euroclear cash
debt will be valued instead as of the actual settlement date.
Clearstream Participants and Euroclear Participants will need to make
available to the respective clearing systems the funds necessary to process
same-day funds settlement. The most direct means of doing so is to preposition
funds for settlement, either from cash on hand or existing lines of credit, as
they would for any settlement occurring within Clearstream or Euroclear. Under
this approach, they may take on credit exposure to Clearstream or Euroclear
until the Global Securities are credited to their accounts one day later.
As an alternative, if Clearstream or Euroclear has extended a line of
credit to them, Clearstream Participants or Euroclear Participants can elect not
to preposition funds and allow that credit line to be drawn upon the finance
settlement. Under this procedure, Clearstream Participants or Euroclear
Participants purchasing Global Securities would incur overdraft charges for one
day, assuming they cleared the overdraft when the Global Securities were
credited to their accounts. However, interest on the Global Securities would
accrue from the value date. Therefore, in many cases the investment income on
the Global Securities earned during that one-day period may substantially reduce
or offset the amount of such overdraft charges, although this result will depend
on each Clearstream Participant's or Euroclear Participant's particular cost of
funds.
Since the settlement is taking place during New York business hours,
DTC Participants can employ their usual procedures for sending Global Securities
to the respective European Depositary 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 Depositary, to a DTC Participant. The seller will send
instructions to Clearstream or Euroclear through a Clearstream Participant or
Euroclear Participant at least one business day prior to settlement. In these
cases Clearstream or Euroclear will instruct the respective Depositary, as
appropriate, to deliver the Global Securities to the DTC Participant's account
against payment. Payment will include interest accrued on the Global Securities
from and including the last coupon payment to and excluding the settlement date
on the basis of either a 360-day year comprised of 30-day months or the actual
number of days in such accrual period and a year assumed to consist of 360 days,
as applicable. For transactions settling on the 31st of the month, payment will
include interest accrued to and excluding the first day of the following month.
The payment will then be reflected in the account of the Clearstream Participant
or Euroclear Participant the following day, and receipt of the cash proceeds in
the Clearstream Participant's or Euroclear Participant's account would be
back-valued to the value date (which would be the preceding day, when settlement
occurred in New York). Should the Clearstream Participant or Euroclear
Participant have a line of credit with its respective clearing system and elect
to be in debt in anticipation of receipt of the sale proceeds in its account,
the back-valuation will extinguish any overdraft incurred over that one-day
period. If settlement is not completed on the intended value date (i. e. , the
trade fails), receipt of the cash proceeds in the Clearstream Participant's or
Euroclear Participant's account would instead be valued as of the actual
settlement date.
A-2
<PAGE>
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 were taken. At
least three techniques should be readily available to eliminate this potential
problem:
(a) borrowing through Clearstream or Euroclear for one day (until the
purchase side of the day trade is reflected in their Clearstream or Euroclear
accounts) in accordance with the clearing system's customary procedures;
(b) borrowing the Global 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
Final withholding regulations (the "NEW REGULATIONS") effective January
1, 2001 revise the documentation required from non-U.S. Persons having validly
existing IRS Forms, such as IRS Form W-8, 1001 or 4224. The New Regulations
replace a number of current tax certification forms (including IRS Forms W-9,
1001 and 4224, with a new series of IRS Forms (as discussed below) and generally
standardize the period of time for which withholding agents can rely on such
forms. Existing forms and statements will remain valid until the earlier of
their expiration or December 31, 2000, although taxpayers may begin compliance
with the New Regulations immediately.
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% U.S. withholding tax that generally applies
to payments of interest (including original issue discount) on registered debt
issued by U.S. Persons, unless (i) each clearing system, bank or other financial
institution that holds customers' securities in the ordinary course of its trade
or business in the chain of intermediaries between such beneficial owner and the
U.S. entity required to withhold tax complies with applicable certification
requirements and (ii) such beneficial owner takes one of the following steps to
obtain an exemption or reduced tax rate:
Exemption for non-U.S. Persons (Form W-8BEN). Beneficial owners of
Global Securities that are non-U.S. Persons can obtain a complete exemption from
the withholding tax by filing a signed Form W-8BEN (Certificate of Foreign
Status of Beneficial Owner for United States Withholding). If the information
shown on Form W-8BEN changes, a new Form W-8BEN must be filed within 30 days of
such change.
Exemption for non-U.S. Persons with effectively connected income (Form
W-8EC1). A non-U.S. Person, including a non-U.S. corporation or bank with a U.S.
branch, for which the interest income is effectively connected with its conduct
of a trade or business in the United States, can obtain an exemption from the
withholding tax by filing Form W-8ECI (Exemption from Withholding on Income
Effectively Connected with the Conduct of a Trade or Business in the United
States).
Exemption or reduced rate for non-U.S. Persons resident in treaty
countries (Form W-8BEN). Non-U.S. Persons that are Certificate Owners residing
in a country that has a tax treaty with the United States generally can obtain
an exemption or reduced tax rate (depending on the treaty terms) by filing Form
W-8BEN. Form W-8BEN may be filed by the Certificate Owners or their authorized
agents.
Exemption for U.S. Persons (Form W-9). U.S. Persons can obtain a
complete exemption from the withholding tax by filing Form W-9 (Payer's Request
for Taxpayer Identification Number and Certification).
U. S. Federal Income Tax Reporting Procedure. The Certificate Owner of
a Global Security files by submitting the appropriate form to the person through
whom it holds (the clearing agency, in the case of persons
A-3
<PAGE>
holding directly on the books of the clearing agency). A Form W-8BEN on which
the Certificate Owner of a Global Security provides a U.S. taxpayer
identification number generally remains in effect until a change in
circumstances causes any of the information on the form to be incorrect. A Form
W-8BEN on which a U.S. taxpayer identification is not provided and a Form W-8ECI
generally remain in effect for three calendar years, absent a change in
circumstances causing any information on the form to be incorrect.
The term "U.S. Person" means (i) a citizen or resident of the United
States, (ii) a corporation, partnership or other entity treated as a corporation
or partnership for United States federal income tax purposes organized in or
under the laws of the United States or any state thereof or the District of
Columbia (unless, in the case of a partnership, Treasury regulations provide
otherwise) or (iii) an estate the income of which is includible in gross income
for United States tax purposes, regardless of its source, or (iv) a trust if a
court within the United States is able to exercise primary supervision over the
administration of the trust and one or more United States persons have authority
to control all substantial decisions of the trust. Notwithstanding the preceding
sentence, to the extent provided in Treasury regulations, certain trusts in
existence on August 20, 1996, and treated as United States persons prior to such
date, that elect to continue to be treated as United States persons will also be
a U.S. Person. This summary does not deal with all aspects of U.S. Federal
income tax withholding that may be relevant to foreign holders of the Global
Securities. Investors are advised to consult their own tax advisors for specific
tax advice concerning their holding and disposing of the Global Securities.
A-4
<PAGE>
PROSPECTUS
--------------------------------------------------------------------------------
Residential Asset Funding Corporation Asset-Backed Securities
Sponsor Issuable in Series
--------------------------------------------------------------------------------
YOU SHOULD READ THE SECTION ENTITLED "RISK FACTORS" STARTING ON PAGE 3 OF THIS
PROSPECTUS AND CONSIDER THESE FACTORS BEFORE MAKING A DECISION TO INVEST IN THE
SECURITIES.
Retain this prospectus for future reference. This prospectus may not be used to
consummate sales of securities unless accompanied by the prospectus supplement
relating to the offering of the securities.
--------------------------------------------------------------------------------
The Securities
o will be issued from time to time in series,
o will consist of either asset-backed certificates or asset-backed notes,
o will be issued by a trust or other special purpose entity established by
the sponsor,
o will be backed by one or more pools of mortgage loans or manufactured
housing contracts held by the issuer, and
o may have one or more forms of credit enhancement, such as insurance
policies or reserve funds.
Neither the Securities and Exchange Commission nor any state
securities commission has approved 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, INC.
The date of this prospectus is September 9, 1999
<PAGE>
TABLE OF CONTENTS
<TABLE>
<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
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C>
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>
iii
<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.
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.
1
<PAGE>
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".
<PAGE>
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.
2
<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.
3
<PAGE>
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.
4
<PAGE>
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
5
<PAGE>
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.
6
<PAGE>
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.
7
<PAGE>
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,
8
<PAGE>
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
9
<PAGE>
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.
10
<PAGE>
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.
11
<PAGE>
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 20% 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
12
<PAGE>
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.
13
<PAGE>
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;
14
<PAGE>
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;
15
<PAGE>
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.
16
<PAGE>
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;
17
<PAGE>
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
18
<PAGE>
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
19
<PAGE>
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.
20
<PAGE>
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:
21
<PAGE>
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;
22
<PAGE>
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
23
<PAGE>
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
24
<PAGE>
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.
25
<PAGE>
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.
26
<PAGE>
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
27
<PAGE>
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.
28
<PAGE>
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."
29
<PAGE>
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:
30
<PAGE>
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,
31
<PAGE>
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.
32
<PAGE>
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
33
<PAGE>
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.
34
<PAGE>
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
35
<PAGE>
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.
36
<PAGE>
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.
37
<PAGE>
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
38
<PAGE>
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.
39
<PAGE>
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.
40
<PAGE>
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.
41
<PAGE>
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
42
<PAGE>
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
43
<PAGE>
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
44
<PAGE>
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
45
<PAGE>
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
46
<PAGE>
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
47
<PAGE>
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
48
<PAGE>
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
49
<PAGE>
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
50
<PAGE>
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
51
<PAGE>
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.
52
<PAGE>
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.
53
<PAGE>
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).
54
<PAGE>
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
55
<PAGE>
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. Tfhe 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
56
<PAGE>
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
57
<PAGE>
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.
58
<PAGE>
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
59
<PAGE>
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
60
<PAGE>
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.
61
<PAGE>
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.
62
<PAGE>
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.
63
<PAGE>
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;
64
<PAGE>
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
65
<PAGE>
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
66
<PAGE>
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, Inc. 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.
67
<PAGE>
- ------------------------------------------------------------------------------
NOVASTAR MORTGAGE FUNDING TRUST, SERIES 2000-2
NOVASTAR MORTGAGE, INC.
SELLER AND SERVICER
RESIDENTIAL ASSET FUNDING CORPORATION
DEPOSITOR
$334,220,000
ASSET-BACKED CERTIFICATES,
SERIES 2000-2
------------------
Prospectus Supplement
------------------
FIRST UNION SECURITIES, INC.
------------------
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.
<PAGE>
[LOGO]
$161,840,000
(APPROXIMATE)
CREDIT-BASED ASSET SERVICING AND
SECURITIZATION LLC
SELLER
LITTON LOAN SERVICING LP
SERVICER
RESIDENTIAL ASSET FUNDING CORPORATION
DEPOSITOR
C-BASS MORTGAGE LOAN ASSET-BACKED CERTIFICATES, SERIES 2000-CB4
------------------
PROSPECTUS SUPPLEMENT
------------------
FIRST UNION SECURITIES, INC. BEAR, STEARNS & CO. INC.
You should rely only 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 C-BASS Mortgage Loan Asset-Backed Certificates,
Series 2000-CB4 in any state where the offer is not permitted.
We do not claim that the information in this prospectus supplement and
prospectus is accurate as of any date other than the dates stated on the
respective covers.
Dealers will deliver a prospectus supplement and prospectus when acting as
underwriters of the C-BASS Mortgage Loan Asset-Backed Certificates, Series
2000-CB4 and with respect to their unsold allotments or subscriptions. In
addition, all dealers selling the C-BASS Mortgage Loan Asset-Backed
Certificates, Series 2000-CB4 will be required to deliver a prospectus
supplement and prospectus for ninety days following the date of this prospectus
supplement.
December 7, 2000
